Management Decision - Volume 43 Issue 4 (2005) - Special Issue: Chinese management: reflections, trends and opportunities

md cover (i).qxd

10/05/2005

10:18

Page 1

ISBN 1-84544-135-4

ISSN 0025-1747

Volume 43 Number 4 2005

Management Decision incorporating the Journal of Management History

Chinese management: reflections, trends and opportunities Guest Editor: Professor ShouQing Wang

www.emeraldinsight.com

Management Decision

ISSN 0025-1747 Volume 43 Number 4 2005

Chinese management: reflections, trends and opportunities Guest Editor Professor ShouQing Wang

Access this journal online _________________________

471

Editorial advisory board __________________________

472

Editorial _________________________________________

473

An organizational learning model based on western and Chinese management thoughts and practices Guoquan Chen ________________________________________________

479

Benefits that foreign AEC firms derive when undertaking construction projects in China Florence Yean Yng Ling_________________________________________

501

Study on staff management practice of multinational company affiliates in China Yuanqiang Zhou, Lei Lu and Bo Jiang _____________________________

516

Modern-day lean construction principles: some questions on their origin and similarities with Sun Tzu’s Art of War Low Sui Pheng and Teo Hui Fang ________________________________

Access this journal electronically The current and past volumes of this journal are available at:

www.emeraldinsight.com/0025-1747.htm You can also search more than 100 additional Emerald journals in Emerald Fulltext (www.emeraldinsight.com/ft) and Emerald Management Xtra (www.emeraldinsight.com/emx) See page following contents for full details of what your access includes.

523

CONTENTS

CONTENTS continued

Development of management philosophy for Chinese business environment Tat Y. Lee____________________________________________________

542

Dynamics of strategic management in the Chinese construction industry Charles Y.J. Cheah and David A.S. Chew ___________________________

551

Ownership reform among state firms in China and its implications Ji Li, Kevin Lam and Jane W. Moy ________________________________

568

Dispute resolution management for international construction projects in China Edwin H.W. Chan and Henry C.H. Suen____________________________

589

Value management in China: current state and future prospect Guiwen Liu and Qiping Shen _____________________________________

603

Housing price bubbles in Beijing and Shanghai Yue Shen, Eddie Chi-man Hui and Hongyu Liu ______________________

611

Applying lean assessment tools in Chinese hi-tech industries Shahram Taj__________________________________________________

628

www.emeraldinsight.com/md.htm As a subscriber to this journal, you can benefit from instant, electronic access to this title via Emerald Fulltext and Emerald Management Xtra. Your access includes a variety of features that increase the value of your journal subscription.

Additional complimentary services available

How to access this journal electronically

E-mail alert services These services allow you to be kept up to date with the latest additions to the journal via e-mail, as soon as new material enters the database. Further information about the services available can be found at www.emeraldinsight.com/alerts

To benefit from electronic access to this journal you first need to register via the internet. Registration is simple and full instructions are available online at www.emeraldinsight.com/admin Once registration is completed, your institution will have instant access to all articles through the journal’s Table of Contents page at www.emeraldinsight.com/0025-1747.htm More information about the journal is also available at www.emeraldinsight.com/md.htm Our liberal institution-wide licence allows everyone within your institution to access your journal electronically, making your subscription more cost-effective. Our web site has been designed to provide you with a comprehensive, simple system that needs only minimum administration. Access is available via IP authentication or username and password.

Key features of Emerald electronic journals Automatic permission to make up to 25 copies of individual articles This facility can be used for training purposes, course notes, seminars etc. This only applies to articles of which Emerald owns copyright. For further details visit www.emeraldinsight.com/ copyright Online publishing and archiving As well as current volumes of the journal, you can also gain access to past volumes on the internet via Emerald Fulltext and Emerald Management Xtra. You can browse or search these databases for relevant articles. Key readings This feature provides abstracts of related articles chosen by the journal editor, selected to provide readers with current awareness of interesting articles from other publications in the field. Reference linking Direct links from the journal article references to abstracts of the most influential articles cited. Where possible, this link is to the full text of the article. E-mail an article Allows users to e-mail links to relevant and interesting articles to another computer for later use, reference or printing purposes. Emerald structured abstracts New for 2005, Emerald structured abstracts provide consistent, clear and informative summaries of the content of the articles, allowing faster evaluation of papers.

Your access includes a variety of features that add to the functionality and value of your journal subscription:

Research register A web-based research forum that provides insider information on research activity world-wide located at www.emeraldinsight.com/researchregister You can also register your research activity here. User services Comprehensive librarian and user toolkits have been created to help you get the most from your journal subscription. For further information about what is available visit www.emeraldinsight.com/usagetoolkit

Choice of access Electronic access to this journal is available via a number of channels. Our web site www.emeraldinsight.com is the recommended means of electronic access, as it provides fully searchable and value added access to the complete content of the journal. However, you can also access and search the article content of this journal through the following journal delivery services: EBSCOHost Electronic Journals Service ejournals.ebsco.com Huber E-Journals e-journals.hanshuber.com/english/index.htm Informatics J-Gate www.j-gate.informindia.co.in Ingenta www.ingenta.com Minerva Electronic Online Services www.minerva.at OCLC FirstSearch www.oclc.org/firstsearch SilverLinker www.ovid.com SwetsWise www.swetswise.com TDnet www.tdnet.com

Emerald Customer Support For customer support and technical help contact: E-mail [email protected] Web www.emeraldinsight.com/customercharter Tel +44 (0) 1274 785278 Fax +44 (0) 1274 785204

MD 43,4

EDITORIAL ADVISORY BOARD David Ballantyne Associate Professor of Marketing, University of Otago, New Zealand Laurence Barton PhD President and Chief Executive Officer, The American College, Bryn Mawr, PA, USA

472

Wang ShouQing Deputy Head, Department of Construction Management, School of Civil Engineering, Tsinghua University, Beijing, China

Mike Berrell Head, School of Business, James Cook University, Australia

Amrik S. Sohal Department of Management, Monash University, Melbourne, Australia

David M. Boje PhD Department of Management, New Mexico State University, USA

David Tranfield Professor of Management, Director of Research and Faculty Development, Cranfield School of Management, Cranfield, UK

Mike Bourne Cranfield School of Management, Centre for Business Performance, Cranfield, UK

Joao Vieira da Cunha MIT Sloan School of Management, Cambridge, USA

Catherine Cassell Professor of Organizational Psychology, University of Sheffield Management School, Sheffield, UK Mark Dodgson Director, Technology and Innovation Management Centre, University of Queensland, Brisbane, Australia Mario Emiliani Professor of Management, Rensselaer at Hartford Lally School of Management and Technology, USA

Claus von Campenhausen Accenture, Mu¨nchen, Germany Ingo Walter Charles Simon Professor of Applied Financial Economics, New York University, USA Charlie Weir Aberdeen Business School, Robert Gordon University, Aberdeen, UK Ray Wild Principal, Henley Management College, Henley-on-Thames, UK

Stan Glaser Fred Emery Institute, Melbourne, Australia

Richard Wilding Cranfield School of Management, Cranfield, UK

Christian Gro¨nroos Professor, Swedish School of Economics, Helsinki, Finland

Mohamed A. Youssef Eminent Scholar and Chairman, Norfolk State University, Norfolk, Virginia, USA

John C. Groth Professor of Finance, Texas A&M University, USA Professor Angappa Gunasekaran Department of Management, Charlton College of Business, University of Massachusetts, North Dartmouth, USA

JOURNAL OF MANAGEMENT HISTORY – EDITORIAL ADVISORY BOARD

William D. Guth Harold Price Professor of Entrepreneurship and Strategic Management, New York University, USA

Bernardo Batiz-Lazo PhD Senior Lecturer in Banking, Accounting and Finance Division, London South Bank University, London, UK

Sam Ho Dean. Hang Seng School of Commerce, Hong Kong

Shawn M. Carraher PhD Centre for Emerging Technologies and Entrepreneurial Studies, Cameron University School of Business, Lawton, OK, USA

Jay Kandampully Ohio State University, Columbus, USA Magda Elsayed Kandil Senior Economist, International Monetary Fund, Washington DC, USA Aneel Karnani School of Business Administration, University of Michigan at Ann Arbor, USA Erdener Kaynak Professor of Marketing, Pennsylvania University of Harrisburg, USA Tauno O. Kekale University of Vaasa, Finland Yoshio Kondo Professor Emeritus, Kyoto University, Japan Hao Ma PhD Professor of Management & EMBA Director, Peking University, People’s Republic of China Nigel F. Piercy Cardiff University, UK Michael A. Roberto Assistant Professor, Harvard Business School, Boston, MA, USA Management Decision Vol. 43 No. 4, 2005 p. 472 # Emerald Group Publishing Limited 0025-1747

Joseph Sarkis Clark University, Worcester, MA, USA

Jennifer Rowley Head, School of Management and Social Sciences, Edge Hill University College, UK

Regina A. Greenwood Associate Professor, Industrial and Manufacturing Engineering and Business Department, Kettering University, Flint, MI, USA Jonathon R.B. Halbesleben PhD Department of Health Management and Informatics, School of Medicine, University of Missouri-Columbia, USA John Humphreys Eastern New Mexico University, College of Business, USA Satish Mehra PhD CPIM Professor of Production Operations Management, Fogelman College of Business and Economics, The University of Memphis, Memphis, USA John-Christopher Spender PhD MA BA FRSA 411 East 57th Street, New York, USA Julia Teahen Professional Development Workshop Chair, Management History Division, Baker College, Flint, MI, USA Daniel A. Wren Curator, Bass Business History Collection, Bizzell Memorial Library, University of Oklahoma, Norman, USA

Editorial Chinese management: reflections, trends and opportunities When Professor Low Sui Pheng, the Regional Editor (Asia Pacific) of Management Decision and my former colleague at the National University of Singapore, recommended me to Dr John Peters to guest-edit a special issue of Management Decision focusing on “Chinese management: reflections, trends and opportunities”, I was initially hesitant as I do not have much experience editing a journal. And, frankly speaking, I am only a self-professed expert on Chinese management. Nevertheless, I was both honored and glad to accept the challenge especially when I read Dr Peters’ e-mail which said “please take this as an open offer from me and Emerald to provide all necessary support to put this special issue together”. What then is Chinese management? Obviously, there are bound to be differences in its definition and understanding given the long history of Chinese civilization and the unique characteristics of Chinese culture. However, I think most people will agree with the International Association of Chinese Management Research’s definition (http://www.iacmr.org/bylaw.htm) which broadly defined this to mean the management of: . Chinese organizations operating within the Chinese mainland; . Chinese businesses operating outside of the Chinese mainland; and . multinational corporations operating in any of the above Chinese contexts. With the above definition in mind and with timely inputs from Professor Low, Dr Peters and Ms Kate Snowden, I eventually conceptualized that the scope of this special issue should appropriately reflect the fast economic growth in China in the past, present and near future. Very importantly, it should encompass the following areas: . Impacts of China’s ascension into the WTO and the 2008 Beijing Olympic Games. . Changes in industry policies, e.g. that relating to the infrastructure, real estate and urban development in China. . Reform of China state owned enterprises. . Management of joint ventures or wholly foreign owned companies in China, e.g. issues that deal with cultural, organizational and managerial conflicts; human resource management; strategy and policy issues; problem solving and proactive programs; and tactics for turning around companies when faced with a crisis. . In-depth studies of major management issues in Chinese companies: operations management, financial management, motivation, entrepreneurship, risk management, health, safety and environment issues. . Management philosophy in China. . Chinese management history, reflections and trends. . Case studies of management decision making in China.

Editorial

473

Management Decision Vol. 43 No. 4, 2005 pp. 473-478 q Emerald Group Publishing Limited 0025-1747

MD 43,4

474

When the Call for Papers for this special issue was sent, I was very surprised by the extremely good responses and interests received. Forty six papers were received. After the double blind review process, 15 papers could be accepted for publication based on the reviewers’ comments. I have to make a really hard decision here. Eventually, I was prompted to select only 11 papers, which I think were able to cover the above scope very well and explain the intricacies of Chinese management from various aspects and angles. With the development of the Chinese economy, especially with China’s admission into the WTO and Beijing’s success in bidding for the 2008 Olympic Games, most enterprises exporting from China have to respond to certain basic requirements of the global market. Typically, many buyers require the manufacturers to obtain certification to ISO 9001, HACCP, or the like. All these certifiable management standards emphasize a systems approach to controlling and ensuring the quality of a product or service. The systems approach to management is a new concept to entrepreneurs with limited exposure to the western business environment. While systems management has exerted positive impacts on quality and productivity and widened the exposure of business leaders and managers in China, it would appear that the local people would not like to lose their cultural identity and in the process, forget the traditional management wisdom which they are familiar with. In China, the philosophies of great thinkers such as Confucius, Lao Tzu and Sun Tzu are about the management of people. Through continuous development and enrichment, there is a rich element on how to rule a country and manage people within the context of the traditional Chinese philosophy. Many entrepreneurs and management experts, both in China and abroad, were trying to derive new management concepts from this source of wisdom. It is believed that combining the best of modern management practices and traditional Chinese wisdom will lead to greater success in the increasingly competitive global marketplace. Lee’s paper “Development of management philosophy for Chinese business environment” brings in Malcolm Baldrige National Quality Award criteria which are considered to be the most comprehensive management principles in today’s business practices. By attempting to interpret the criteria in the light of the philosophies of Confucius, Lao Tzu and Sun Tzu, he endeavors to enrich the contents and increase the adaptability of these criteria. This is a good start but a lot of work is required to complete the task. In addition, a large-scale field study will be needed to prove the effectiveness of this approach to management in a Chinese as well as other cultural environment. In addition, there are many changes in ownership of former state-owned enterprises (SOEs). The paper “Ownership reform among state firms in China and its implications” by Li et al. tests the effects of changing ownership on the strategy and performance of former SOEs in China. In accordance with past research and together with an analysis of empirical data from 587 former SOEs, this paper suggests that the partial state ownership may not be the most important issue for improving performance among the former SOEs. Instead, how to build an effective control and monitoring system, including an appropriate accounting system, is more important for a transitional economy such as China. Value management (VM) is a relevant, if not important, aspect to be incorporated in Chinese management. The paper “Value management in China: current state and future prospect” by Liu and Shen provides an overall picture of VM in China. Their

survey, using the construction and manufacturing industries as examples, shows that the use of value management is at an initial stage. They revealed, by a comparison analysis, the major differences in the approaches practised in China and abroad. They also explored the challenges and opportunities for both local and overseas VM practitioners to conduct value management studies and concluded that the prospect of VM in China is promising after China’s ascension to the WTO. However, necessary actions must be taken to face the challenges such as the limited scope of current applications, over-emphasis on mathematical techniques, and inappropriate promotion measures. Cooperation with overseas VM institutions and practitioners may allow China’s VM practitioners to improve their VM approaches. At the same time, it creates opportunities for overseas VM practitioners to extend their business into China. In addition to VM, many modern-day strategic and management treatises were presented from the West over the last few decades. The question to ask is this: are these supposedly new strategic and management treatises entirely new? Having reviewed the Thirty-six Chinese Classical Strategies of War, Emeritus Professor Michael Thomas from the Department of Marketing, University of Strathclyde articulated a timely reminder that the Chinese have been contributing to the literature on strategy (and by extension, management) for at least 1,500 years. Modern-day strategic and management treatises therefore purportedly serve only to complete the fashion cycle as there is really very little that is new under the sun that have not already been covered by the Chinese over the past 1,500 years. Another strategic treatise that originated from ancient China and is closely allied with the Thirty-six Chinese Classical Strategies of War is the profound Art of War written by Sun Tzu some 2,500 years ago. Apart from its focus on military strategies, Sun Tzu’s Art of War also provides valuable lessons for logistics and supply chain management in the conduct of warfare. Sun Tzu long recognized that supply routes must remain opened during an outbreak of a war as these are essential to reinforce troops and replenish food and water supplies. The same concepts would likewise be applicable for modern-day management in any sectors of the economy. In the context of the modern-day construction industry, lean principles were increasingly propagated to help increase quality and productivity. The paper “Modern-day lean construction principles: some questions on their origin and similarities with Sun Tzu’s Art of War” by Low and Teo compares modern-day lean construction principles with the precepts of Sun Tzu’s Art of War and suggests that there are many similarities between the two conceptual frameworks. Like Emeritus Professor Michael Thomas, this raises the interesting question of whether the origin of lean construction principles can be traced to the strategic principles formulated by Sun Tzu some 2,500 years ago. Business organizations nowadays are facing an increasingly complex and dynamic environment. It is therefore crucial for them to continuously improve their organizational learning capabilities to cope with rapid environmental changes and maintain their sustainable competitive advantage. By studying and integrating both western and Chinese management thoughts and practices in his paper “An organizational learning model based on western and Chinese management thoughts and practices”, Chen developed a comprehensive organizational learning system model that consists of nine interrelated organizational learning sub-systems including “discovering”, “innovating”, “selecting”, “executing”, “transferring”, “reflecting”, “acquiring knowledge from environment”, “contributing knowledge to

Editorial

475

MD 43,4

476

environment”, and “building organizational memory”. The paper provides us with the evidence in several famous Chinese traditional and cultural classics (including Great Learning, Doctrine of the Mean, The Analects of Confucius, Book of Change, Tao-Te-Ching, The Art of War and Chuan-Xi-Lu) that support the rationale of the model. It is also interesting that the author summarizes the four characteristics of the philosophy of the model as “four unities” in the Chinese way – Unity of Knowing and Doing, Unity of Exploiting and Exploring, Unity of Taking and Giving, and Unity of Heaven and Humanity. The paper, just like the earlier one by Low and Teo does make us realize that some Chinese traditional thoughts and some western modern management theories actually address the same issue although sometimes in different ways. I believe the paper can serve as a valuable bridge to link western and Chinese management thoughts and practices together. Developing a trans-cultural management model and tool like the one proposed by Chen is really important for leaders in the global business and political environment. As more and more multinational companies do business in China, human resource management is becoming one of the more critical and common issue for foreign companies to grapple with because of cultural differences and other influences. Zhou et al. therefore carried out a survey with staff management of three multinational company affiliates in China, whose corresponding parent companies’ headquarters were located, respectively, in the United States of America, Japan, and Europe. They concluded in their paper “Study on staff management practice of multinational company affiliates in China” that the multi-cultural management approach, when applied to Chinese staff management, not only pose universal answers across different cultures worldwide (such as on cultural differences, effective communication, performance evaluation and retaining staff) but also different unique features in real life when different culture-based companies operate in China. They claimed that localization of the management team is necessary for good management in China, due to the invisible force of culture, the underdeveloped internationalisation of the community and the insufficient international awareness of staff. In most developing countries, the construction industry contributes to a large portion of the GDP and also plays an important role in spurring the overall economic growth in other sectors. It is more so for China where investments in construction are now ranked fourth in the world with a fast, double-digit growth. China’s ascension to the WTO and a record FDI have also made the construction industry one of the most competitive in the world. Given the dynamics of the industry structure, aspects of corporate management are set to become increasingly important, where engineering and construction enterprises need to understand better the opportunities and threats posed by the greater environment. Based on a review of the Western strategic management theories and the unique characteristics of the Chinese construction industry, the paper “Dynamics of strategic management in the Chinese construction industry” by Cheah and Chew proposes an overarching framework for corporate strategy that would help engineering and construction enterprises evaluate and improve their competitive position. Two brief case illustrations sum up the development of competitiveness as interpreted through the proposed framework. Non-construction enterprises will also benefit from this paper by having a better understanding of the supply side of the equation especially in marketing and procuring engineering and construction services.

With the rise of China, should foreign architectural, engineering and construction (AEC) firms be involved in Chinese management by undertaking construction projects in China? Ling studied 35 foreign AEC firms that have completed projects in China to find the benefits of managing projects in China. She presents her findings in the paper “Benefits that foreign AEC firms derive when undertaking construction projects in China” which suggest that foreign AEC firms in China do indeed reap many benefits. In terms of monetary benefits, foreign firms reported significant sales growth and expansion, and higher profits. Managing projects in China also give rise to technical benefits. Foreign firms in China are able to acquire new technology, further enhance their core competence, establish leadership or niche and acquire capability in new areas. However, these benefits do not come by chance but through effective management. Foreign AEC firms would be able to manage projects in China more successfully if they already possess superior management capabilities. They should not treat China as some backwater to dump outdated technology, but strive to offer excellent product and service quality. Not unexpectedly, foreign firms’ research and development capabilities are still not featured strongly in Chinese management. Chinese management also embraces topics relating to culture, international construction projects, disputes and dispute resolution. These are all familiar subjects in the international construction industry. Would these be any different for construction projects in China? What are the influences from Chinese culture? Would Chinese and foreign participants in these construction projects in China perceive disputes and manage disputes differently? Chan and Suen’s paper on “Dispute resolution management for international construction projects in China” attempts to address these issues. Their research data offer an invaluable reference for international AEC firms who are interested in these projects in China. The paper includes a concise summary of key cultural factors and characteristics of international projects, with particular reference to dispute resolution management. Their study identifies the more popular methods for resolving disputes in construction projects in China. China’s fast economic growth is accompanied by rapid development of the housing market. Housing prices nationwide have risen quickly in recent years, especially in large cities such as the economic hubs of Beijing and Shanghai. Rapid housing price hikes have induced anxieties over whether the housing bubble would burst. Government officials and economists have urged the two cities to be wary of signs that could indicate price bubbles in the housing market. Are housing prices in these two cities on the right track as determined by market fundamentals? Can we interpret the recent price hike in the housing market as “bubbles”? And if housing price bubbles do indeed exist, how do we then measure them? The paper on “Housing price bubbles in Beijing and Shanghai” by Shen et al. reports the empirical findings that address these questions. These findings would be helpful for investors to better understand the Chinese housing market and to make better investment decisions in these two cities. Many global companies have established or are establishing production facilities in China, which is fast becoming one of the leading manufacturing hubs in the world. Chinese companies have become powerful rivals and fierce competitors to non-Chinese multinational companies not only within China but also throughout the world. Several Chinese companies have created brands that have snatched the market share from stronger rivals in Asia, Europe, and the United States. Taj in his paper on “Applying lean assessment tools in Chinese hi-tech industries”, points out that competitive forces

Editorial

477

MD 43,4

478

are also challenging manufacturers to produce products of higher quality at a lower price. Competition is very critical for Chinese companies as they are producing and marketing their own brands globally and even launching manufacturing facilities in the western hemisphere. In order to maintain the competitive edge, manufacturing operations must become lean and more efficient. Lean manufacturing improves material handling, inventory control, quality, scheduling, personnel and customer satisfaction. Relying on accounting metrics alone is inadequate for managing and improving manufacturing operations. Managers should use lean assessment tools to investigate, evaluate, and measure key areas of manufacturing to understand major issues, problem areas, root causes, and potential solutions. Applications and usefulness of lean assessment tools have been demonstrated in several manufacturing plants in China. They show significant gaps from the lean targets, but have also identified opportunities for improvements. In conclusion, it is hope that the papers in this special issue would serve to whet the appetite of readers for them to want to know more about and better understand the historical roots and complexities of the Chinese style of management. This is particularly pertinent in a dynamic global market where China is increasingly playing a more important role in re-defining how the world trading system is to be played. Change and dynamism are the only key constants in this rapidly changing world that is fuelled incessantly by quantum jumps in technological innovations, particularly in the area of information technology. The findings presented in these papers would, in themselves, need to be revised as the Chinese become more international in outlook and participate more actively in global affairs of the world. I should therefore close by saying that another special issue of Management Decision be again devoted to Chinese management. ShouQing Wang Tsinghua University, Beijing

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

An organizational learning model based on western and Chinese management thoughts and practices

An organizational learning model 479

Guoquan Chen School of Economics and Management, Tsinghua University, Beijing, People’s Republic of China Abstract Purpose – This paper aims to establish an organizational learning system model based on both western and Chinese management thoughts. Design/methodology/approach – The approach is a conceptual model which is based on research within the field. Findings – The model consists of nine interrelated organizational learning sub-systems including “discovering”, “innovating”, “selecting”, “executing”, “transferring”, “reflecting”, “acquiring knowledge from environment”, “contributing knowledge to environment”, and “building organizational memory” ones. The evidences in some famous Chinese traditional cultural classics (including Great Learning, Doctrine of the Mean, The Analects of Confucius, Book of Change, Tao-Te-Ching, The Art of War and Chuan-Xi-Lu) that support the rationale of the model are described and analyzed. Originality/value – Several propositions are developed and it is hoped that the model is applicable in both eastern and western business environments. Keywords National cultures, Knowledge management, Learning organizations, China, Western hemisphere Paper type Research paper

Introduction Nowadays business organizations are facing increasingly complex and volatile environment (especially in China), therefore it is very important for them to know how to constantly improve their organizational capabilities of learning and self-rejuvenation to cope with the rapid environmental changes and keep sustainable competitive advantage. Since 1990s, more and more attentions have been paid to the concepts of organizational learning and learning organization from both academic and business circles, and a lot of progresses have been achieved in this area by many scholars (Argyris and Schon, 1978, 1996; Daft and Weick, 1984; Levitt and March, 1988; Senge, 1990; Huber, 1991; Argyris, 1993; Dodgson, 1993; Garvin, 1993, 2000 and so on). Western researchers have developed different models of organizational learning and learning organization during the past years (Argyris and Schon, 1978; Senge, 1990; Goh, 1998; Popper and Lipshitz, 1998, 2000a, b; Lipshitz, 2000; Peters, 1996 and so on). Since the beginning of China’s open door policy and economic reform over 20 years ago, many domestic and international companies in China have ever achieved The author would like to thank Natural Science Foundation of China for its financial support (Project No: 70272007).

Management Decision Vol. 43 No. 4, 2005 pp. 479-500 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510593503

MD 43,4

480

great success. Some of them have been keeping sustainable competitive advantage all the time. The secret of these sustainable successful companies is their great organizational learning capabilities in the changing business environment of China. More and more attentions have been paid to Chinese traditional culture (especially the Confucian thought and philosophy) by western scholars and practitioners due to the rise of Asian Four Little Dragons in 1990s and high economic growth rate in Mainland China during the recent years. Therefore, developing a different organizational learning model by taking into account not only western management theories and practices but also Chinese traditional management thought, culture and practices, may have great implications not only for both Chinese and western companies to keep sustainable competitive advantage, but also for both Chinese and western scholars to integrate both eastern and western management theories and culture together to develop more comprehensive modern management theories which can be used to explain and cope with increasingly complex business phenomena and situations. It is true that up to now there is no organizational learning model developed by Chinese researchers. In the following paper, first, an organizational learning system (OLS) model consisting of nine sub-systems will be proposed and described. Second, the rationale for each of the nine sub-systems is explained based on western management literatures and case studies of both Chinese and international companies/organizations. Third, evidences in some famous Chinese traditional cultural classics (including Great Learning, Doctrine of the Mean, The Analects of Confucius, Book of Change, Tao-Te-Ching, The Art of War and Chuan-Xi-Lu) that support the rationale of the model will be described and analyzed. Fourth, several propositions on the model have been developed. Finally, contributions, limitations and future research are discussed. The OLS model: the whole framework and rationale There are dozens of different definitions for organizational learning. In the most general sense, organizational learning refers to the process that an organization, under certain circumstances and culture, builds and ameliorates its knowledge and management systems to improve its adaptation and competitiveness by using some tools and methods (Argyris and Schon, 1978, 1996). By adapting and refining from this definition, we propose the following one: Organizational learning refers to the process in which an organization continuously adjusts and/or changes itself by utilizing and enriching organizational knowledge resources in an effort to adapt to both external and internal environmental changes to maintain a sustainable competitive advantage. Here, we emphasize the following points: (1) the ultimate purpose of organizational learning is for an organization to adapt to both external and internal environmental changes in order to maintain sustainable competitive advantages; (2) the most important asset for organizational learning is its knowledge (stored in organizational memory), which will be both acquired from outside and created from inside, stored and exploited, as well as contributed to outside during the learning process; and (3) learning is a continuous and ongoing process. Here, we view organizational learning from the perspective of system instead of process as several western scholars. We believe that every organization possesses an

OLS, which is composed of several organizational learning sub-systems (OLSS). Using our definition of organizational learning, we have the following definition of OLS: OLS is the one embedded in an organization’s human resource, structure, process, policy and culture which can make the organization possess the possibility to continuously adjusts and/or changes in order to adapt to both external and internal environmental changes to maintain a sustainable competitive advantage. Obviously, the higher the capability of an organization’s OLS, the higher the possibility for it to maintain sustainable competitive advantage. Every organization possesses its own OLS, but the capability of different organization’s OLS is different. Based on the analysis of theoretical literatures and practical examples of real organizations, we believe that the OLS is composed of the following nine OLSS as shown in Figure 1. (1) “discovering” (D-OLSS); (2) “innovating” (I-OLSS);

An organizational learning model 481

Figure 1. The whole framework of OLS and its four “unities”

MD 43,4

482

(3) (4) (5) (6) (7) (8) (9)

“selecting” (S-OLSS); “executing” (E-OLSS); “transferring” (T-OLSS); “reflecting” (R-OLSS); “acquiring knowledge from environment” (A-OLSS); “contributing knowledge to environment” (C-OLSS); and “building organizational memory” (B-OLSS).

The four “unities” along the biggest circle in Figure 1 represent the balanced relationship among each OLSS, and also the correct ultimate purpose and developmental direction of the whole learning system. The four unities reflect both dialectical and moral views of the OLS model. The rationale for each OLSS and the four unties will be analyzed in detail as follows. OLSS 1: “discovering” sub-system Just as the Greek philosopher Heraclitus said in BC 500, “you cannot step twice into the same river, for other waters are continually flowing on”, the world is changing every moment. The ultimate reason for an organization to learn comes from various changes in its both external and internal environment. However, in reality, people in an organization will not have the awareness and perception of the ongoing changes automatically. It is essential for an organization to build up discovering system which enables itself to sense, monitor and discover various changes, problems, challenges and opportunities in its both internal and external environment, especially to find the “early warning” signals that give clues to shifting trends and patterns (Morgan, 1996). Only through conscious and systematic monitoring and analyzing activities would an organization be able to retain its sensitivity to environmental changes. Problems can be identified immediately and new opportunities will arise. The organizational sense-making process emphasized by Weick (2001) is also very important for building organizational discovering system that is the precondition for an organization to learn. Here, the most difficult and also very important thing is to see the emerging change or what is unfolding in the environment at the very early stage so that an organization can take effective action in time to deal with them. Excellent companies are very sensitive to various emerging changes. De Geus (1997) claimed, “Long-lived companies were sensitive to their environment. Whether they had built their fortunes on knowledge (such as DuPont’s technological innovations) or on natural resources (such as the Hudson Bay Company’s access to the furs of Canadian forests), they remained in harmony with the world around them . . .. . . Yet they managed to react in timely fashion to the conditions of society around them”. There are some examples. P&G (China) sends out employees to live with Chinese families in order to obtain information on the changes of their washing habits. McDonald (China) has been investigating the changes of the Chinese food culture in order to adapt its services to the changing requirements of Chinese customers. In China’s Legend Computer Company, special employees are assigned to research the internet for data and other related benchmarks that may influence the development of the company. Often, Legend purchases important database from International Data Group (IDG) for better decision-making. China’s Haier Company has been paying much more attention

to investigating and understanding customers’ satisfaction and needs than ever before. GE has established a learning culture called “learning from your employees”. Welch said, “GE polls 10,000 employees every year”. Hence, GE understood how to capture and value information from employees and management. OLSS 2: “innovating” sub-system Obviously, it is not enough for an organization only to discover various kinds of changes. It has to innovate and find new ways to deal with them. In “The Living Company”, De Geus (1997) says, “Either as individuals or as a community, the species has the capacity (or at least the potential) to invent new behavior. They can develop skills that allow them to exploit their environment in new ways”. The same applies to an organization. In order to survive and retain a sustainable competitive advantage, an organization has to build up core competencies and incessantly develop new products and services, thereby focusing on improving management process and systems (Prahalad and Hamel, 1990). Nonaka and Takeuchi (1995) emphasized that company should be knowledge creating. Hargadon studied how a company becomes an innovation factory. Many companies even put “innovation” as an important element of their core values. For example, the company 3M declares that it “never kills a new product idea”. The tremendous success that P&G has achieved in Chinese market can be attributed to its frequent and quick product innovations. GE usually encourages its employees to do things in a different way. GE requires all employees to attend a “Six Sigma” training course and use the principles and methods to improve the quality of their daily work. To monitor and summarize the achievements, employees are required to hand in a report every year. Six Sigma requires everyone to innovate his/her own ways to achieve progress. Motorola (China) encourages its employees to form teams to think about how to improve work processes and systems to increase quality and productivity. Total customer satisfaction (TCS) teams and teaming for excellence (TFE) teams are major learning and innovation units at Motorola, which have brought tremendous achievements for its business in China. OLSS 3: “selecting” sub-system In addition to discovering and innovating, an organization must build up a selecting system that enables itself to make the right choice from various innovative ideas. In other words, an organization should develop sound selecting methodologies, processes, activities and capabilities, therefore better and optimal business decision can be achieved, and more qualified and suitable people could be recruited and promoted. According to Darwin’s theory, the existence and development of any species is the successful consequence of external environmental selection. Levinthal (1991) studied the relationship between organizational adaptation and environmental selection. We believe, only when there is a selecting system for optimization within an organization, can it build the capacity to adapt to external environmental selection and maintain surviving and competitive. “Selecting” also refers to “unlearning” and “comparison”. It means that an organization discards inappropriate ways (even if it had achieved great success in the past) or infeasible and impractical ideas (even though it sounds attractive for the future), and finally makes the right decision. Sound selection mechanism and system can ensure an organization to keep vigorous, young

An organizational learning model 483

MD 43,4

484

and energetic, therefore guarantee high potential for continuous learning and sustainability. Here, we would like to emphasize that today’s organizations are at an era of information explosion and globalization, and are facing an extraordinary amount of opportunities and temptations. For example, it can be seen that organizations are getting more and more information from various channels, possessing more and more new ideas, having more and more opportunities to develop, in a need to screen more and more candidates to make correct decision on recruiting and promotion, and so on. How to make the right decision and avoid the decision trap is crucial for an organization to learn and to keep competitive advantage (Russo and Schoemaker, 1990). There are some “selecting” examples. Microsoft may assign two teams to develop the same new product at the same time, allow them to do it concurrently, and finally select the better ideas from the two teams. In China’s Haier Company, all the internal management positions are open for public competition. People both inside and outside the company could have chances to acquire the positions. It has established a recruiting team to assess different candidates and vote to find the correct person for promotion. GE adopts a performance evaluation system, assesses employees’ performance every year and makes reward, promotion and training decision based on the result of the annual evaluation. In addition, to get the right CEO successor after Jack Welch, GE got several candidates openly and finally chose Jeffrey R. Immelt through a formal selection process. OLSS 4: “executing” sub-system Obviously, organizational learning may occur only when the newly selected ideas can be executed and put into practice effectively. Organizational learning not only includes changes of perception, but also includes changes of behavior. Organizational learning is incomplete if we only have “discovering”, “innovating” and “selecting” but no action. We believe that no action, no organizational learning at all. However, to make new things happen is not an easy task either. Pfeffer and Sutton (1999) found that there is a gap between knowing and doing everywhere (in individual, group and organization). Watkins and Bazerman (2003) also coined the term “predictable surprise” and argued that part of the reasons why it happened in some organizations (such as collapses of Enron and WorldCom) and countries (such as 9.11 in US) were not because people there did not discover the signals or auspices to the disasters, but because people did not act! Therefore, some researchers are extremely concerned about how to really get things done and how to turn knowledge into action (Pfeffer and Sutton, 1999; Bossidy and Charan, 2002). It is interesting that the title of Bossidy and Charan’s (2002) book is “execution!” Hence, “Executing” sub-system is very important for organizational learning. True learning organizations are not only good at learning by eyes, ears and brains, but also excellent at learning by mouths, hands and legs. The successful organization is the one that can make things really happen and use knowledge learned to make a difference. For example, Six Sigma is really difficult to implement. However, it became very successful due to Jack Welch’s strong commitment and determination, reforming of corporate evaluation, incentive and promotion system, and major cultural change. To effectively implement an employee suggestion system called IR (namely “I Recommend”). Tianjin Manufacturing Plant of Motorola (China)’s has set up an IR

committee which reviews all the recommendations from employees on a monthly basis, gives feedback to them, rewards the contributing employees, and also celebrating the success of the system. The reason why the employee suggestion system in Motorola is more successful than those in other companies is that it has an effective executing system. OLSS 5: “transferring” sub-system At the beginning, the activities of “discovering”, “innovating”, “selecting” and “executing” discussed above may take place locally in an organization (for example, with an individual, team or department). In order to realize organizational learning rather than only individual or team learning, we should transfer individual learning into team learning (Senge, 1990) and organizational learning (Kim, 1993), and transfer team learning into organizational learning (Edmondson, 2002). Best ideas, practices and experiences obtained by individuals, teams or departments should be transferred to the rest of the organization. However this is not easy. Edmondson (1999) found that psychological safety is crucial for transferring individual to team learning. Ancona and Caldwell (1992) found that sometimes groups could not communicate with other people in an organization. Edmondson (2002) concluded that learning in organizations often remains local – driven by goals and concerns of individuals and groups rather than serving organizational goals. However researchers have been doing work to deal with the obstacles. Senge (1990) believed that dialogue is a good technique to transfer individual to team learning. Kim (1993) developed a model that links individual and organizational learning through mental models. Edmondson (2002) tried to link team learning to organizational learning based on the belief that different teams may have different learning goals and learning types to serve the whole organization. Some teams did the radical learning such as producing new ideas and capabilities for the organization, and other teams did incremental learning such as continuing to improve efficiency and quality. Carlile (2002) also studied how knowledge be transferred through boundary in organization during the process of new product development. We believe that establishing transferring sub-system is really crucial to implement organizational learning and build learning organization. Excellent companies are good at this. For instance, Xerox encourages each maintenance worker to keep a work diary and write down major issues encountered during maintenance work for customer. These personal journal entries are then available through a corporate-wide intranet. Since any employee can access the database, problem solving is made easier because employees share from their peers’ experiences and are able to solve similar problems more smoothly and efficiently. This is how individual knowledge and experience are being transferred to the whole organization. Another case is from the China’s Legend Company, when a product division of Legend organized a team to solve the problem of forecasting inaccuracy. After conducting a comprehensive investigation and analysis, the team came up with a proposal that the a “bottom-up” forecasting model should replace the “top-down” forecasting approach used previously. To be specific, during this new “bottom-up” forecasting process, local distributors in different districts of China should first make their own predictions on sales for the next year. Then, the division at the headquarters collects all the local forecasted data and sales predictions, makes some

An organizational learning model 485

MD 43,4

adjustments, and decides on the total forecasting. Because this approach fully exploits the local distributor’s knowledge about local market needs, it brings about higher accuracy. As a result, the new forecasting model has improved both the efficiency and effectiveness of the division. Finally, the Legend’s headquarters decided to transfer the new model to other divisions so that the local best practices and knowledge could be shared at the corporate level.

486 OLSS 6: “reflecting” sub-system The purpose to build “reflecting” sub-system is for organization to learn from its past experience. It does not matter whether the experience is successful or not, the most important thing is that organization can use this formal reflecting sub-system to get knowledge and lessons from the experience and make better decision for the future. Reflecting not only means “learning from failure” or “failure is the mother of success”, but also means “learning from success” or “success is the mother of failure”. However, learning from experience is not easy, researchers have paid a lot of attentions on this issue (Argyris and Schon, 1978, 1996; March et al., 1991; Carroll et al., 2002; Garvin, 2000; Edmondson, 1996; Isaacs, 1993; Haunschild and Sullivan, 2002; Russo and Schoemaker, 1990). Argyris and Schon (1978, 1996) introduced the concept of single-loop learning and double-loop learning. Single-loop learning occurs when the mismatch is corrected by altering behavior or actions to meet organizational norms, goals, values and assumptions. It involves detecting mismatches without questioning underlying policies and methods to improve what is already there. Behavior is adjusted to fixed goals, norms, values and assumptions. Double-loop learning occurs when the underlying values are changed and then new actions follow. It involves questioning and changing governing conditions or values and testing the assumptions underlying what is being done. Goals, norms and assumptions are also changeable. Isaacs (1993) introduced “triple-loop learning”, which refers to learning and examining the way in which one learns and consequently learns differently. In short, single-loop learning is to do things right; however double-loop learning is to do the right things, and triple-loop learning is to do the right learning. Haunschild and Sullivan (2002) studied how US commercial airline firms learned from prior accidents and incidents. Variation in firm learning was investigated by examining whether firms learn more from errors with heterogeneous or homogeneous causes. Here, learning was measured by a reduction in airline accident and incident rates. It was found that heterogeneity was generally better for learning, as prior heterogeneity in the causes of errors decreases subsequent accident rates, producing a deeper, broader search for causality than simple explanations like “blame the pilot”. There are some practical examples, after action review (AAR) is used to analyze the result of every action. In certain intervals, reflecting and reviewing can make improvement for next time. According to Garvin (2000), the US Army is one of the organizations that established the reflecting system as a part of culture. The discussion during the AAR process always revolves around the following four questions: What did we plan to do? What actually happened? Why did it happen? What are we going to do next time? Another example is Morgan Stanley that has successfully implemented a firm-wide 3608 performance evaluation system for professional employees. The feedback for each employee is solicited from superiors, peers, subordinates, and “internal clients”.

The objective of the annual performance evaluation process is to provide every employee with quality performance feedback. We believe that this system can provide each employee with great potential for continuous learning and personal development as he/she gets complete feedback from people around him or her. OLSS 7: “acquiring knowledge from environment” sub-system To survive, organization should be a kind of open system between which and environment there is continuous exchange of matter, energy as well as information and knowledge. Not only should organization learn from its own experience, but also from environment. This acquiring system is crucial for organization to learn faster and build competitive advantage. Zellner and Fornahl (2002) believed that in a fast changing innovative environment, organization should established three kinds of knowledge acquisition channels that include the recruitment of people, the external informal networks of employees, and formal cooperation of the firm with other institutional agents. Inkpen (1999) found that joint venture (JV) is becoming an increasingly important organizational form in international business, and valuable opportunities for acquisition of knowledge may be created for the JV partners. After studied over 100 international companies in Singapore and Hong Kong, Tsang (2002) found that these international companies acquired knowledge from their counterparts through the channels of both the overseeing effort and management involvement. Vermeulen and Barkema (2001) even emphasize learning through acquisitions. Cohen and Levinthal (1990) not only emphasize getting information and knowledge from outside, but also the absorptive capacity for a firm to assimilate and apply them for commercial purposes. GE has a good example of acquiring knowledge from other companies. We all know that GE is famous for its Six Sigma quality program, however GE learned this from Allied Signal and Motorola Company first, but GE has implemented it very well. In 1980s, GE funded research through a group of leading international business schools to look at examples of change and understand the reason why the change was successful or not. From this research, GE and the business schools derived what they called “The principles of successful change”. GE created the change acceleration process (CAP) model from these principles. CAP tools can help people in the company to pay attention to the factors that the research indicated are important for achieving successful change. The development of CAP is a good case of GE’s acquiring knowledge from business schools. The above two examples are evidences for Jack Welch’s philosophy that all the knowledge in this world may “belongs to” GE, and will acquire it as long as it is useful for his company, it does not matter who invents it or where it is invented. OLSS 8: “contributing knowledge to environment” sub-system As mentioned before, there should be exchange of matter, energy as well as information and knowledge between organization and its environment. Not only should organization acquire knowledge from outside, but also contribute to. For some organizations, such as educational and consulting ones (for examples, universities, schools, consulting firms, and so on), providing knowledge service is the very reason for their existence. Other organizations such as manufacturing firms conduct this too. Contributing knowledge can improve organization’s reputation, and from the

An organizational learning model 487

MD 43,4

488

perspective of learning, this can make the organization have chance to listen to and get feedback from outside about its own management and performance. An organization will never be a real learning organization unless it can contribute its learning and knowledge to society. However there is very little western literature that directly addresses how organization enhances its learning capability through contributing knowledge to environment. Chinese traditional philosophy, however, emphasizes that one must firstly contribute something (including knowledge) to other people before taking it from them. Consequently, if an organization wants to continuously acquire knowledge from outside, it should have both the willingness and capability to contribute. There are examples in reality. Motorola (China) has greatly improved its employees’ awareness and capability of continuous quality improvement by various means. Internal quality management, Six Sigma, employee training programs and annual TCS / TFE team competitions all fall into this category. Motorola extended almost all these quality programs and initiatives to its suppliers in China. Motorola (China) believed that the quality of its products could not be guaranteed unless the quality of its suppliers’ products is guaranteed. Here, organizational learning is extending from one organization to another. In other words, Motorola (China) builds its competitive advantage through contributing its own knowledge to its environment (suppliers). Another example is NASA. NASA’s mission is to explore outer space for the mankind; however, it does not forget to educate people. It has developed a lot of means, programs and activities to contribute its knowledge to the public, which includes web site, site tour, magazine, film and different kind of simulation experience. From the perspective of contributing knowledge to environment, Disneyland’s business is not only entertainment, but also contributing knowledge (such as science, technology, space, film and so on) to people especially children by means of entertainment which may be one of the best ways for people to learn. OLSS 9: “building organizational memory” sub-system Up to now, we have discussed eight sub-systems of organizational learning. The last one, but not the least one, is the “building organizational memory” sub-system. Organization learning should not only be process of “discovering”, “innovating”, “selecting”, “executing”, “transferring”, “reflecting”, “knowledge acquiring from environment”, and “knowledge contributing to environment”, but also be a process of building organizational memory (Cross and Baird, 2000; Hansen et al., 1999; Nonaka and Takeuchi, 1995; Peters, 1996) to make it easier for organization to accumulate knowledge from and export to the eight processes just mentioned above. Peters (1996) put forward six learning syllabuses, one of which is that “developing an organizational memory – the ability to capture, store and retrieve knowledge and expertise”. It is obvious that knowledge is created during each of the above eight OLSS. If an organization fails to establish organizational memory and some mechanisms to retain knowledge, it will be a great loss – organizational learning cannot be a constantly upgrading process and further learning cannot be built on a higher point in the sense that good experience cannot be exploited and failure case may be repeated. We find that in China, some fast-growing companies, although possessing excellent past experiences, are so busy dealing with current demands of markets and customers that they cannot find enough time or people to collect and accumulate these precious

experiences and knowledge. It is difficult for these companies to learn and improve from past experiences. If we look at computer and will easily find that it cannot solve complicated problems without a memory, also a person cannot learn intricate knowledge without a brain (memory). With the increasing complexity and dynamics of the environment which organization faces, organizational memory is increasingly needed. While knowledge generated during the eight processes is stored in organizational memory, the stored knowledge will also have impact on the eight processes on the other hand. There are several issues in building organizational memory as indicated in knowledge management literatures. First, knowledge typology. Nonaka and Takeuchi (1995) believed that there are two types of knowledge in organization: tacit knowledge and explicit knowledge. Tacit knowledge is personal, context-specific and therefore hard to formalize and communicate. Explicit or “codified” knowledge, on the other hand, refers to knowledge that is transmittable in formal, systematic language. There are four kinds of knowledge conversions between implicit and explicit knowledge, which are socialization, externalization, combination, and internalization. Socialization is the process through which knowledge transfers from tacit to tacit, and it is a process of sharing experiences and thereby creating tacit knowledge such as a shared vision and technical skills. Externalization is a process of articulating tacit knowledge into explicit concepts. It is a quintessential knowledge-creation process in which tacit knowledge becomes explicit. Combination is a process of synthesizing concepts into a knowledge system. This mode of knowledge conversion involves combining different bodies of explicit knowledge. Internalization is a process of embodying explicit knowledge into tacit knowledge. Second, knowledge management methodology. Hansen et al. (1999) identified two kinds of knowledge management methods. One is codification, which means knowledge is carefully codified and stored in a database, which [where]it can be accessed and used easily by anyone in the company. Anderson Consulting and Ernst & Young adopt this strategy. The other is personalization in which knowledge is closely tied to the person who developed it and is shared mainly through direct person-to-person contacts. Bain, Boston Consulting Group and McKinsey emphasize this strategy. Third, security and knowledge protection (Norman, 2001, 2002). It is obvious that an organization also needs to protect its core competence and knowledge; therefore certain mechanisms, processes and systems must be established. Many large companies, such as P&G, Motorola, HP, and China’s Legend have established quite convenient intranet and e-learning system by taking advantage of their knowledge databases. Harvard Business School and Harvard Business School Press are also excellent examples for building organizational knowledge memory – The world’s most famous case database. Professors in HBS study the most recent business cases (best practices and problems), and write them in the form of cases, teaching notes as well as papers, all of which are well stored, classified and managed in order for students to learn and for educators to use in their teaching and studies. The supportive evidences to the learning system model from Chinese traditional cultural thought Although the above OLS model is proposed mainly based on the western management theories and case studies from both Chinese and western companies, the evidences that

An organizational learning model 489

MD 43,4

490

support the rationale of the model have been found in some famous classics on Chinese traditional cultural thought. The classics selected here include Great Learning, Doctrine of the Mean, The Analects of Confucius, Book of Change, Tao-Te-Ching, The Art of War and Chuan-Xi-Lu. Each of these books focuses on different topics. However, we could find that the importance of each OLSS is emphasized in certain place inside them as follows. Table I shows the support of Chinese traditional cultural thought to nine OLSSs. Great Learning Great Learning (Yuan et al., 2001) is a book teaching people how to continuously learn and develop both individually and collectively. At the very beginning of it is the statement – “The goal of Great Learning is to teach and transfer lofty virtue from people to people, to renovate people and to make people attain the highest excellence”. Apparently this short sentence emphasizes not only the ultimate vision of learning, but also the importance of innovating (or developing) and transferring (or inheriting), which are two important learning sub-systems in the model. Then the way of innovating and transferring are also illustrated as follows. According to Great Learning, people can continuously innovate themselves by obeying the following six stages – “The point where to rest being known, the object of pursuit, is then determined, and, that being determined, a calm unperturbedness may be attained to. To that calmness there will succeed a tranquil repose. In that repose there may be careful deliberation, and that deliberation will be followed by the attainment of the desired end”. The sequence of the above six stages is very much emphasized in Great Learning as follows – “Things have their root and their branches. Affairs have their end and their beginning. To know what is first and what is last will lead near to what is taught in the Great Learning”. Also, according to Great Learning, people can transfer their learning or knowledge to other people by following the eight stages below: “The ancients, who wished to illustrate illustrious virtue throughout the kingdom, first ordered well their States. Wishing to order well their States, they first regulated their families. Wishing to regulate their families, they first cultivated their persons. Wishing to cultivate their persons, they first rectified their hearts. Wishing to rectify their hearts, they first sought to be sincere in their thoughts. Wishing to be sincere in their thoughts, they first extended to the utmost their knowledge. Such extension of knowledge lay in the investigation of things”. “Things being investigated, knowledge became complete. Their knowledge being complete, their thoughts were sincere. Their thoughts being sincere, their hearts were then rectified. Their hearts being rectified, their persons were cultivated. Their persons being cultivated, their families were regulated. Their families being regulated, their States were rightly governed. Their States being rightly governed, the whole kingdom was made tranquil and happy”. In summary, Great Learning emphasizes the unity of transferring and innovating; that is to say, it emphasizes not only inheriting excellent traditional ideas and virtues from other people, but also developing new ideas or virtues in the new time.

Great Learning Doctrine of the Mean The Analects of Confucius Book of Change Tao-Te Ching The Art of War Chuan-Xi-Lu

Title of the Chinese traditional classics (books)

p p p

p p

p p p

p

p p p

p p p

p

p p p p

p

p p p

Discov-OLSS Innov-OLSS Select-OLSS Exec-OLSS Trans-OLSS Refl-OLSS Acquir-OLSS Contrib-OLSS Build-OLSS

p Support of Chinese traditional cultural thought to each OLSS ( means support)

An organizational learning model 491

Table I. The support of Chinese traditional cultural thought to nine OLSSs in the model

MD 43,4

492

Doctrine of the Mean Doctrine of the Mean (Yuan et al., 2001) is a book teaching Confucius’ philosophy to people. However, there are some points on learning. For example, the importance of discovering changes is emphasized in the following way, “In all affairs, those that are predicted and prepared will be achieved, while those that are not predicted and prepared will be abandoned”. Besides, the importance of acquiring, reflecting, selecting and executing are also mentioned in the following two paragraphs – “A person should learns from extensive channels (namely acquiring), inquires in great details, thinks and reflects rationally (namely reflecting), clarifies the distinction and makes the right choice (namely selecting), and implements it with great commitment (namely executing)”, and furthermore, “If there is something he has not learned, or having learned be unable to do, he does not file it away in the archives; if there be a question he has not asked, or to which, after research, he has not found an answer, he does not consider the matter at an end; if he has not thought of a problem, or, having thought, has not resolved it, he does not think the matter is settled; if he has tried to make a distinction but has not made it clear (as between things or categories), he does not sink into contentment; if there be a principle which he has been unable to put in practice, or if practicing, he has not managed to practice with energy or vigor, he does not let up on it. If another man gets there with one heave, he heaves ten times; if another succeeds with a hundred efforts, he makes a thousand. Proceeding in this manner even a fellow who is a bit stupid will find the light, even a weak man will find energy”. In summary, Doctrine of the Mean emphasizes discovering, acquiring, reflecting, selecting and executing in the model. The Analects of Confucius The Analects of Confucius (Yuan et al., 2001) is a book recording the words of Confucius and his students. It involves extensive topics including philosophy, ethics, politics, economics, education (namely learning) and so on. By carefully studying the whole items of the book, we can find the following ones that emphasize the importance of the different learning sub-systems (in the bracket at the end of each sentence) in the model. . Item 1.1 “The Master said: ‘To learn something and regularly practice it – is it not a joy?’” (acquiring, executing) . Item 1.4 “Master Zeng said: ‘I daily thrice examine myself. In counseling men, have I not been wholeheartedly sincere? In associating with friends, have I not been truthful to my word? In transmitting something, have I not been proficient?’” (reflecting) . Item 2.11 “The Master said: ‘He who keeps reviewing the old lessons and acquiring the new is fit to be a teacher’”. (acquiring, reflecting) . Item 2.15 “The Master said: ‘Learning without reflective thinking is fruitless; reflective thinking without learning is perplexing’”. (acquiring, reflecting) . Item 4.17 “The Master said: ‘On seeing a worthy man, think of equaling him; on seeing an unworthy man, examine yourself inwardly’”. (acquiring, reflecting) . Item 4.24 “The Master said: ‘The gentleman wishes to be slow in speech but brisk in action’”. (executing)

. .

.

.

.

Item 5.20 “Ji Wen-zi contemplated thrice before acting”. (selecting) Item 6.3 “Duke Ai asked: ‘Which of your disciples loves learning?’ Master Kong replied: ‘There was one Yan Hui, who loved learning. He never raised his anger or repeated a mistake’”. (reflecting) Item 6.27 “The Master said: ‘A gentleman who is extensively learned in culture and restrains himself with the rituals is not likely to betray’”. (acquiring) Item 7.2 “The Master said: ‘To memorize silently, learn insatiably, and instruct others indefatigably – what difficulty do they present to me’”. (acquiring, contributing) Item 7.21 “The Master said: ‘When three men walk together, I can surely find my teachers. I choose their merits to follow and their imperfections to correct’”. (acquiring, reflecting)

In summary, The Analects of Confucius emphasizes acquiring, reflecting, contributing, selecting and executing in the model. Book of Change The Book of Change (Yuan et al., 2001) is a book about the law of change in human society. It views the change of the world in a dialectical way. The book emphasizes people’s capability to discover and cope with change in the following way, “The gentleman should discover both the big and tiny changes, execute the solution to cope with the changes in both soft and hard ways”. Apparently this statement emphasizes both discovering and executing in the model. There are two kinds of capabilities of discovering – discovering the big change is just like the Chinese idiom “gao-zhan-yuan-zhu” which means that people should have the capability of standing highly and therefore see things that are very far away, and discovering the tiny change is just like another Chinese idiom “ming-cha-qiu-hao” which means that people should have the capability of seeing things that are very tiny. There are 64 hexagrams that describe different situations in the world. By carefully studying the whole 64 hexagrams in the book, two hexagrams are found related to the model. Meng (Youthful Folly) Hexagram (No.4 in the 64 hexagrams) is about how to learn and acquire knowledge from other people and also how to teach and contribute knowledge to other people, so it emphasizes the importance of acquiring and contributing in the model. Ge (Revolution) Hexagram (No.49 in the 64 hexagrams) is about how to innovate and execute the new ideas and solutions, so it emphasizes the importance of innovating and executing in the model. In summary, The Book of Change emphasizes discovering, acquiring, contributing, innovating and executing in the model. Tao-Te Ching Tao-Te Ching (Chan, 1963) is also a book that views the world in a changing and dialectical way. For example, the importance of discovering changes in the early stage is especially emphasized in Chapter 64, “What remains still is easy to hold. What is not yet manifest is easy to plan for. What is brittle is easy to crack. What is minute is easy to scatter. Deal with things before they appear. Put things in order before disorder arises”.

An organizational learning model 493

MD 43,4

494

The importance of accumulating knowledge and building organizational memory is emphasized indirectly in the following sentences in Chapter 64 – “A tree as big as a man’s embrace grows from a tiny shoot. A tower of nine stories begins with a heap of earth. The journey of a thousand kilometers starts from where one stands”. The dialectical relationship between acquiring and contributing knowledge is emphasized indirectly in the last sentence of Chapter 36, “In order to contract, it is necessary first to expand. In order to weaken, it is necessary first to strengthen. In order to destroy, it is necessary first to promote. In order to take, it is necessary first to give”. In consequence, if people want to acquire knowledge from outside, it should contribute knowledge to outside; if an organization can contribute knowledge to outside, it can acquire knowledge from outside. Since acquiring and contributing are mutually supported, one cannot succeed without another. In summary, Tao-Te Ching emphasizes the importance of discovering, acquiring, contributing and building organizational memory in the model. The Art of War The Art of War (Cheng and Zhang, 1993) by Sun Zi is the greatest martial classics in ancient China. In this book, the importance of discovering change, both external and internal ones, is emphasized in the following way, “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle”. In summary, Tao-Te Ching emphasizes the importance of discovering in the model. Chuan-Xi-Lu Chuan-Xi-Lu (Wang, Ming Dynasty, n.d.) is the book recording the ideas and reflections of Chinese famous thinker Wang Yangming. In this book, Wang put forward the theory of “unity of knowing and doing” (zhi-xing-he-yi), which emphasizes that knowing is doing, and doing is knowing. That means people should implement what he knows, and should understand what they do, there should be no gap between their knowledge and action. So, this famous statement emphasizes acquiring and executing. In summary, Chuan-Xi-Lu emphasizes the importance of acquiring and executing in the model. Four characteristics of the OLS model: four unities based on Chinese traditional cultural thoughts Now we have proposed and built the OLS model supported by both the western and Chinese management thoughts, theories and practices. For people to use the model correctly, we have developed formal definitions of the function and capability for each of the nine OLSSs in Table II. We believe that in today’s complex and dynamic environment, organizational learning capability is vital to organizational performance and sustainable competitive advantage. As a result, we propose that the higher the capability of each OLSS, the higher the organizational performance and sustainable competitive advantage. And also, each OLSS may positively impact the other OLSSs. In order to improve the capability of OLS as a whole, we need to make the nine OLSSs match each other to achieve synergy among them, and also make OLS match its

Title of each OLSS

Description of function/capability of each OLSS

Discovering-OLSS

To scan, sense, predict and discover the emerging and unfolding changes, problems, challenges and opportunities in both external and internal environment To create and innovate new ideas to deal with the discovered changes, problems, challenges and opportunities in both external and internal environment To make feasible, practical and optimal choice from various alternatives (such as innovative ideas or people) to deal with discovered changes, problems, challenges and opportunities in both external and internal environment To execute, apply and realize new ideas and knowledge to deal with discovered changes, problems, challenges and opportunities in both external and internal environment To transfer useful idea, experience, lesson, knowledge and practice originated from one place (such as an individual, a team or department) to relevant place within organization To evaluate, seek feedback, review and reflect on the work already finished, and mine knowledge from past experience To identify, acquire and absorb necessary knowledge from external environment To identify and contribute meaningful knowledge to external environment To identify, capture, accumulate, codify, classify, store and retrieve knowledge and expertise

Innovating-OLSS Selecting-OLSS

Executing-OLSS Transferring-OLSS Reflecting-OLSS Acquiring knowledge-OLSS Contributing knowledge-OLSS Building organizational memory-OLSS

ultimate purpose which is for organization to improve organizational performance and keep sustainable competitive advantage. The broader meaning for sustainable competitive advantage means that an organization can achieve three bottom lines (profit, people, planet: three Ps) together – make profit to survive by adopting scientific management system, make people (employee, customer, supplier and people in the community) happy by adopting humane management system, and make the planet (the Earth) healthy by adopting environment-friendly products, services and processes. If organization can achieve the three bottom lines (profit, people and planet) together, it will have highest probability to keep alive all the time. That means truly sustainable competitive advantage. Accordingly, an organization should have correct learning direction that is achieving the three bottom lines (profit, people and planet) together. Otherwise, organization will be out of balance and lose its competitive advantage even though it learns very efficiently but not effectively. All these synergies can be summarized as four characteristics of the model which include four unities (Figure 1): Unity of Knowing and Doing (zhi-xing-he-yi), Unity of Exploiting and Exploring (chuan-chuang-he-yi), Unity of Taking and Giving (qu-yu-he-yi), Unity of Heaven and Humanity (tian-ren-he-yi). The first and fourth are cited from Chinese traditional culture, the second and third are coined by the author of the paper, but also based on Chinese culture. Unity 1, 2 and 3 represent the balanced relationship among each OLSS. Unity 4 represents the correct ultimate purpose and developmental direction of the whole learning system.

An organizational learning model 495

Table II. The definitions of function/capability of the nine OLSSs

MD 43,4

496

(1) Unity of Knowing and Doing (zhi-xing-he-yi). Based on this OLS model, organizational learning involves not only change of cognition (knowledge), but also behavior (action). The two kinds of learning should be balanced to make learning really happen and fit the changing environment. This is exactly what Wang Yangming’s philosophy – “Unity of Knowing and Doing” (zhi-xing-he-yi). (2) Unity of Exploiting and Exploring (chuan-chuang-he-yi). Based on this OLS model, organizational learning involves not only exploiting the knowledge and behavior already existed, but also exploring new knowledge and behavior. The two kinds of learning should be combined together to truly [really] improve both organizational effectiveness and efficiency. (3) Unity of Taking and Giving (qu-yu-he-yi). Based on this OLS model, organizational learning involves not only acquiring knowledge from outside, but also contributing knowledge to outside, the two are interdependent and should be balanced. (4) Unity of Heaven and Humanity (tian-ren-he-yi). Based on this OLS model, the ultimate purpose of organizational learning is not only for money (profit), but also for healthy society (people) and environment (planet). An organization can keep truly sustainability only if it can achieve the three bottom lines together. This vision and status is just the same as “the highest excellence” proposed in Chinese traditional classics Great Learning (i.e. The goal of Great Learning is to teach and transfer lofty virtue from people to people; to renovate people; and to make people attain the highest excellence), and is called as “Unity of Heaven and Humanity” (tian-ren-he-yi) put forward independently by three leading New Confucian thinkers – Qian Mu in Taiwan, Feng Youlan in mainland China, and Tang Junyi in Hong Kong. Tian-ren-he-yi reflects the highest vision and ethical standard for people and society in Chinese traditional culture. Conclusions Based on the above analysis, we have the following propositions: P1.

An OLS is composed of nine OLSSs including “discovering”, “innovating”, “selecting”, “executing”, “transferring”, “reflecting”, “acquiring knowledge from environment”, “contributing knowledge to environment” and “building organizational memory” ones as shown in Figure 1.

P2.

Each of the nine OLSSs positively correlated with organizational performance and sustainable competitive advantage.

P3.

Each OLSS positively correlated with the other OLSSs.

P4.

In order to improve the capability of OLS as a whole, we need to make the nine OLSSs match each other to achieve synergy among them, and also make OLS match its ultimate purpose to achieve synergy among them.

P5.

The four characteristics of the model is the four unities: Unity of Knowing and Doing (zhi-xing-he-yi), Unity of Exploiting and Exploring (chuan-chuang-he-yi), Unity of Taking and Giving (qu-yu-he-yi), Unity of Heaven and Humanity

(tian-ren-he-yi). Unity 1, 2 and 3 represent the balanced relationship among each OLSS. Unity 4 represents the correct ultimate purpose and developmental direction of the whole learning system. In order to keep competitive advantage, organization should practice these four unities. P6.

The model may be applicable in both Chinese and western business environment.

Contributions, limitations and future research In addition to the above six propositions, the following four contributions are made in this paper: (1) This model links traditional organizational learning process and knowledge management process together and therefore possesses a comprehensive, dynamic and spiral view on organizational learning and learning organization. (2) The model emphasizes that the balanced relationship among each OLSS should be established and the ultimate purpose and developmental direction of the whole learning system should also be correct. That is to say, in order to keep sustainable competitive advantage, organization should implement these four unities such as Unity of Knowing and Doing (zhi-xing-he-yi), Unity of Exploiting and Exploring (chuan-chuang-he-yi), Unity of Taking and Giving (qu-yu-he-yi), Unity of Heaven and Humanity (tian-ren-he-yi). This provides people with both dialectical and moral views on organizational learning. (3) The paper provides practitioners with a lot of successful examples of management practices that may be used to enhance their organizational learning capabilities and build true learning organization. (4) The model is an innovative and comprehensive one which tries to integrate both the Chinese and western management theories and practices together. However, the model in this paper is new and there may be several limitations that further research should address. Only qualitative research methods are used in the study. Without further empirical testing, we should be cautious for the generalization of the model and the five propositions. So, the immediate further research will include developing the measures for each of the nine OLSS, and then using quantitative methods to test the relationship between each OLSS and organizational performance, the relationship among the nine OLSSs, and its applicability in both Chinese and western business environments. More case studies both in western and Chinese environment should be done. Finally, the organizational learning might be industry-specific. Further research (both qualitative and quantitative) could be conducted in different industries. References Ancona, D. and Caldwell, D. (1992), “Bridging the boundary: external activity and performance in organizational teams”, Administrative Science Quarterly, Vol. 37, pp. 634-55. Argyris, C. (1993), “Education for leading-learning”, Organizational Dynamics, Winter, pp. 5-18.

An organizational learning model 497

MD 43,4

498

Argyris, C. and Schon, D.A. (1978), Organizational Learning: A Theory of Action Perspective, Addison-Wesley, Reading, MA. Argyris, C. and Schon, D.A. (1996), Organizational Learning II: Theory, Method and Practice, Addison-Wesley, Reading, MA. Bossidy, L. and Charan, R. (2002), Execution: The Discipline of Getting Things Done, Crown Business, New York, NY. Carlile, P. (2002), “A pragmatic view of knowledge and boundaries: boundary objects in new product development”, Organization Science, Vol. 13 No. 4, pp. 442-55. Carroll, J.S., Rudolph, J.W. and Hatakenaka, S. (2002), “Learning from experience in high-hazard organizations”, Research in Organizational Behavior, Vol. 24, pp. 87-137. Chan, W.T. (1963), The Way of Lao Tzu: Tao-Te Ching (in Chinese), Macmillan Publishing Company, New York, NY. Cheng, Y. and Zhang, H.S. (1993), Translation on The Art of War (in Chinese), Hunan Publishing House, Changsha. Cohen, W.M. and Levinthal, D.A. (1990), “Absorptive capacity: a new perspective on learning and innovation”, Administrative Science Quarterly, Vol. 35, pp. 128-52. Cross, R. and Baird, L. (2000), “Technology is not enough: improving performance by building organizational memory”, Sloan Management Review, Spring, pp. 69-78. Daft, R.L. and Weick, K. (1984), “Toward a model of organizations as interpretive systems”, Academy of Management Review, Vol. 9 No. 2, pp. 284-95. De Geus, A. (1997), The Living Company, Harvard Business School Press, Boston, MA. Dodgson, M. (1993), “Organizational learning: a review of some literatures”, Organization Studies, Vol. 14 No. 3, pp. 375-94. Edmondson, A. (1996), “Learning from mistakes is easier said than done: group and organizational influences on the detection and correction of human error”, The Journal of Applied Behavioral Science, Vol. 32 No. 1, pp. 5-28. Edmondson, A. (1999), “Psychological safety and learning behavior in work teams”, Administrative Science Quarterly, Vol. 44 No. 2, pp. 350-83. Edmondson, A. (2002), “The local and varigated nature of learning in organizations: a group-level perspective”, Organization Science, Vol. 13 No. 2, pp. 128-46. Garvin, D.A. (1993), “Building a learning organization”, Harvard Business Review, July-August, pp. 78-91. Garvin, D.A. (2000), Learning in Action: A Guide to Putting the Learning Organization to Work, Harvard Business School Press, Boston, MA. Goh, S.C. (1998), “Toward a learning organization: the strategic building blocks”, SAM Advanced Management, Vol. 63 No. 2, pp. 15-20. Hansen, M.T., Nohria, N. and Tierney, T. (1999), “What’s your strategy for managing knowledge”, Harvard Business Review, March-April, pp. 106-16. Haunschild, P.R. and Sullivan, B.N. (2002), “Learning from complexity: effects of prior accidents and incidents on airlines’ learning”, Administrative Science Quarterly, Vol. 47 No. 4, pp. 609-43. Huber, G.P. (1991), “Organizational learning: the contributing processes and the literatures”, Organization Science, Vol. 2, pp. 88-115. Inkpen, A.C. (2000), “Learning through joint ventures: a framework of knowledge acquisition”, The Journal of Management Studies, Vol. 37 No. 7, pp. 1019-44.

Isaacs, W.N. (1993), “Taking flight: dialogue, collective thinking and organizational learning”, Organizational Dynamics, Vol. 22 No. 2, pp. 24-39. Kim, D.H. (1993), “The link between individual and organizational learning”, Sloan Management Review, Fall, pp. 37-50. Levinthal, D. (1991), “Organizational adaptation and environmental selection – interrelated process of change”, Organization Science, Vol. 2 No. 1, pp. 140-5. Levitt, B. and March, J.G. (1988), “Organizational learning”, Annual Review of Sociology, Vol. 14, pp. 319-40. Lipshitz, R. (2000), “Organizational learning in a hospital”, The Journal of Applied Behavioral Science, Vol. 36 No. 3, pp. 345-61. March, J., Sproull, L. and Tamuz, M. (1991), “Learning from samples of one or fewer”, Organization Science, Vol. 2 No. 1, pp. 1-13. Morgan, G. (1996), Images of Organization, Sage, Newbury Park, CA. Nonaka, I. and Takeuchi, H. (1995), The Knowledge Creating Company: How Japanese Companies Create the Dynamics of Innovation, Oxford University Press, Oxford. Norman, P.M. (2001), “Are your secrets safe? Knowledge protection in strategic alliances”, Business Horizons, Vol. 44 No. 6, pp. 51-60. Norman, P.M. (2002), “Protecting knowledge in strategic alliances – resource and relational characteristics”, Journal of High Technology Management Research, Vol. 13 No. 2, pp. 177-202. Peters, J. (1996), “A learning organization’s syllabus”, The Learning Organization, Vol. 3 No. 1, pp. 4-10. Pfeffer, J. and Sutton, R.I. (1999), The Knowing-Doing Gap: How Smart Companies Turn Knowledge Into Action, Harvard Business School Publishing, Boston, MA. Popper, M. and Lipshitz, R. (1998), “Organizational learning mechanisms: a structural and cultural approach to organizational learning”, The Journal of Applied Behavioral Science, Vol. 34 No. 2, pp. 161-79. Popper, M. and Lipshitz, R. (2000a), “Installing mechanisms and instilling values: the role of leaders in organizational learning”, The Learning Organization, Vol. 7 No. 3, pp. 135-44. Popper, M. and Lipshitz, R. (2000b), “Organizational learning: mechanisms, culture and feasibility”, Management Learning, Vol. 31 No. 2, pp. 181-96. Prahalad, C.K. and Hamel, G. (1990), “The core competence of the organization”, Harvard Business Review, Vol. 68, pp. 79-81. Russo, J.E. and Schoemaker, P.J.H. (1990), Decision Traps: The Ten Barriers to Brilliant Decision-Making and How to Overcome Them, Simon & Schuster, New York, NY. Senge, P.M. (1990), The Fifth Discipline: The Art and Practice of the Learning Organization, Doubleday Currency, New York, NY. Tsang, E.W.K. (2002), “Acquiring knowledge by foreign partners for international joint ventures in a transition economy: learning-by-doing and learning myopia”, Strategic Management Journal, Vol. 23 No. 9, pp. 835-54. Vermeulen, F. and Barkema, H. (2001), “Learning through acquisitions”, Academy of Management Journal, Vol. 44 No. 3, pp. 457-76. Wang, Y.M. (n.d.), (Ming Dynasty), Chuan-Xi-Lu, Beijing. Watkins, M.D. and Bazerman, M.H. (2003), “Predictable surprises: the disasters you should have seen coming”, Harvard Business Review, March, pp. 72-80.

An organizational learning model 499

MD 43,4

500

Weick, K.E. (2001), Making Sense of the Organization, Blackwell Publishing, Oxford. Yuan, Z.S. (2001), Translations on Four Books and Five Classics (Si-Shu-Wu-Jing) (in Chinese), Xiangzhuan Press, Beijing. Zellner, C. and Fornahl, D. (2002), “Scientific knowledge and implications for its diffusion”, Journal of Knowledge Management, Vol. 6 No. 2, pp. 190-8. (Guoquan Chen is a professor of organizational behavior in School of Economics & Management, Tsinghua University, Beijing, China. He was a Fulbright visiting research scholar in MIT Sloan School of Management from 2003 to 2004 and visiting scholar in The Judge Institute of Management Studies, Cambridge University in 1997. He teaches organizational behavior and leadership for MBA, EMBA and Executive Training Program. His research is on organizational learning, knowledge management, team management, leadership, organizational system analysis and design. He has published over 30 papers in both Chinese and international academic journals. He won several School Teaching Awards and Tsinghua University Young Professor Academic Award.)

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

Benefits that foreign AEC firms derive when undertaking construction projects in China

Benefits that foreign AEC firms derive 501

Florence Yean Yng Ling Department of Building, National University of Singapore,Singapore Abstract Purpose – The objectives of this paper are to investigate the reasons that motivate foreign architectural, engineering and construction (AEC) firms to undertake projects in China; whether foreign AEC firms derive significant benefits after working in China; and the strengths that foreign AEC firms need to possess in order to work in China. Design/methodology/approach – The objectives were achieved through a postal survey, using a structured questionnaire. Data were collected from American and Singaporean firms. Findings – Firms do indeed derive many benefits when undertaking projects in China. These include geographical diversification, monetary benefits, technical benefits and deepened relationships. Foreign AEC firms should possess strengths such as excellent track record, superior management capability and high product and service quality. Research limitations/implications – The main limitation of this research is that it addresses motivations and benefits, but does not explain how to win and manage projects in China. Further research in these areas will be conducted. Practical implications – Foreign practitioners should not ignore China market, but invest in China on a long term basis to reap many rewards. Originality/value – This paper is original because it quantifies the benefits that foreign AEC firms will reap if they undertake projects in China. Keywords China, Construction industry, International business, Globalization Paper type Research paper

Introduction In 2002, global inflow of foreign direct investment was US $651 billion, of which US $53 billion flowed into China, making it the world’s biggest host country for foreign investment (UNCTAD, 2003). Globalization has many advantages, among them, creating wealth for all nations through specialization, which increases trade; reducing inflation because of cost efficiencies; beneficial to customers because of price reduction owing to cost efficiencies; better allocation of resources; and reducing corruption because of free market trade (Ricardo, 1967). With China being a member of the World Trade Organization (WTO), and hosting several international events such as the Olympic Games, there are many opportunities for foreign architectural, engineering and construction (AEC) firms to undertake construction projects in China. However, hitherto, it is not known if the forays by foreign AEC firms into China have been successful, and whether they have benefited from working in China. The objectives of this paper are to investigate:

Management Decision Vol. 43 No. 4, 2005 pp. 501-515 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510593512

MD 43,4

502

(1) the reasons that motivate foreign AEC firms to undertake projects in China; (2) whether foreign AEC firms derive significant benefits after working in China; and (3) the strengths that foreign AEC firms need to possess in order to work in China. A priori, international construction is different from domestic construction in several areas. The international construction process is marked by the combination of business and project management skills with both mobile factors of production and location-bound support industries (Enderwick, 1993). Besides the typical risks of a domestic project, international projects have a complex and subtle web of political, economic and cultural risks (Lee and Walters, 1989; Han and Diekmann, 2001). In this study, foreign or international AEC firms refer to non-Chinese firms that have undertaken and completed projects in China. This study is important because if the benefits of working in China are not significant, foreign AEC firms should not waste time and energy trying to clinch projects there, and should concentrate on other locations in the world. Reasons for venturing abroad Globalization is a necessity because of four factors: political; technological; social; and competitive (Lasserre, 2003). Under the political factor, WTO membership, demands progressive opening of markets to foreign investments. Technological progress has pushed globalization because of lower cost of transport and communication and the lowering of unit cost of production through economies of scale. With the convergence of consumer needs, a product can be standardized and appeal to masses of consumers in all countries, giving rise to globalization. Competitors are undergoing international expansion and firms need to adopt a similar strategic posture if they wish to survive. The basis for international trade is often inspired by economic benefits to increase sales (Wild et al., 2000). At the national level, the export of expertise, goods and services provide foreign income and improve the balance of payments that in turn contribute to national wealth (Howes and Tah, 2003). Brake et al. (1995) found that a firm chooses to venture overseas due to economic factors such as intense competition in the domestic market, inability to achieve economies of scale due to saturated domestic market and the existence of strong potential foreign demand backed by strong purchasing power. Han and Diekmann (2001) found that although international construction projects are more risky, they are more profitable than domestic projects. This is a major factor that entices a firm to venture overseas. In order to achieve growth, it is important to identify new markets to achieve expansion (Howes and Tah, 2003). Compared to the home country, the export destination may provide the least attractive work conditions. Welfare work such as the provision of shelters to victims of natural disasters, the challenge and opportunity to work with foreign contractors may trigger some firms to take action and export their services (Lucas, 1986). From the literature review, the reasons that firms may have to export their services are identified and shown in Table III. Hitherto, no study on whether these benefits are achieved by foreign AEC firms when operating in China has been conducted. This study therefore, aims to fill this gap in knowledge.

Research method This paper presents a part of a major research project which investigated the performance levels, enablers, barriers, entry modes, international business strategies, aims and benefits of international construction. The research design was a structured questionnaire survey adapted from Ofori et al.’s (2001) earlier research. There were three parts in the questionnaire, the first part requiring respondents to provide information about themselves and their firms for the purpose of data classification. The second part sought information about a representative international project that their firm had recently completed. Information such as project type, approximate contract sum, project location, and procurement method adopted were asked. Respondents were to indicate the success level of their projects in nine areas on a seven-point Likert scale (see Table II: item 7). The third part, comprising various sections, asked respondents to indicate the enablers and hindrances that they faced, market entry modes used, international business strategies adopted, reasons for exporting and their strengths. This paper concentrates on three sections of Part 3. In the first section, respondents were required to rate on a seven-point scale if the factor caused their firms to export services, where 1 ¼ not at all and 7 ¼ very strong motivator. In section 2, respondents were also asked to rate if the firm achieved a specific benefit after exporting their services; where 1 ¼ did not achieve benefit and 7 ¼ benefit was very well achieved. In Section 3, the respondents were asked to rate the strength of their firms, where 0 ¼ not applicable; 1 ¼ very weak; 4 ¼ average; and 7 ¼ excellent. A pilot study was first conducted and led to a few minor adjustments to the questionnaire. The finalized package consisted of the questionnaire and a cover letter explaining the study’s purpose. It was self-administered, which precluded verification of responses. Because of time and cost constraints and the author’s contacts, American and Singaporean firms were targeted. Questionnaires were sent by post to top USA-based contractors and designers ranked by the Engineering News Record in 2001 and 2002, who undertook international work. All Singaporean firms who were known to undertake overseas projects were sent a copy of the questionnaire. Data sample characteristics Questionnaires were sent to 300 AEC firms based in Singapore and US who undertook international work. Seventy-three responses were received (24 percent response rate). This paper focuses on the 35 firms that reported about their projects in China. Details of the respondents and projects are given in Tables I and II, respectively. Most respondents are from the top management and have 20 þ years of industry experience. More than one-third of the firms have more than 20 percent of their revenue derived from overseas projects. The majority of the projects are private sector. Because China is still transitioning to a market economy, many public sector projects are still executed by its own state-owned enterprises (SOEs). Foreign AEC firms therefore undertook projects developed by foreign and/or private clients. A large percentage of the projects is general building, procured through selective bidding and based on design-bid-build system. This underscores the importance of developing business relationships in China rather than relying on open bid invitations.

Benefits that foreign AEC firms derive 503

MD 43,4

Characteristics

504

Designation Top management Middle management Professionals Years in industry 1-10 years 11-20 years .20 years Mean Median

Table I. Characteristics of respondents and their firms

Frequency

Percentagea

21 12 2

60.0 34.3 5.7

4 11 20 23.3 years 26 years

11.4 31.4 57.1 – –

Workforce 10-100 employees 101-200 employees 201-500 employees .500 employees Information not provided Mean Median

7 8 8 8 4 643 207

20.0 22.9 22.9 22.9 11.4 – –

Revenue (US$) Up to $50 million $51-$100 million .$100 million Information not provided Mean Median

16 4 11 4 $1.62 billion $30 million

45.7 11.4 31.4 11.4 – –

International revenue 1-10 percent of total revenue 11-20 percent of total revenue 21-30 percent of total revenue .30 percent of total revenue Information not provided Mean Median

13 6 5 4 7 19.6 percent 12 percent

37.1 17.1 14.3 11.4 20.0 – –

Respondents’ home country Singapore USA

20 15

57.1 42.9

Nature of firm (predominant) Design and consultancy Construction and management

19 16

54.3 45.7

Note: aRounding off error may have occurred

Statistical analyses As the 35 data-sets were supplied by both US and Singapore firms, an independent-samples t-test was first undertaken to check whether there is significant difference between the performance of projects undertaken by the US (n ¼ 15) and Singapore (n ¼ 20) firms. The t-test result showed that there is no significant difference between the performance of China projects undertaken by the

No.

Project characteristics

1

Location in China Beijing Shanghai Guangzhou Hong Kong Others Contract sum (US$) Up to $25 million $26-$50 million . $50 million Information not provided Ownership Public Private Types of project General building Manufacturing Power Industrial process Petroleum Transportation Procurement method Design-bid-build Design-build Build-operate-transfer Management contracting Bidding procedure Open competitive bidding Selective bidding/prequalification Negotiation Project performance Cost performance Time/schedule performance Technical quality Functional quality Workmanship quality Architectural or aesthetic quality Equipment quality Owner satisfaction Profit level of your firm

2

3 4

5

6

7

Frequency

Percentagea

3 10 4 5 13

8.6 28.6 11.4 14.3 37.1

14 8 8 5

40.0 22.9 22.9 14.3

13 22

37.1 62.9

22 2 2 2 1 6

62.9 5.7 5.7 5.7 2.9 17.1

24 6 3 2

68.6 17.1 8.6 5.7

6 22 7 Mean 3.875 3.563 4.656 5.031 4.813 4.938 4.938 5.375 4.500

17.1 62.9 20.0 Max; Min 7; 1 6; 1 6; 1 7; 4 7; 1 7; 1 7; 3 7; 3 7; 1

Note: aRounding off error may have occurred

US and Singapore firms ðp # 0:05Þ: Therefore, it is appropriate to put the projects together for further data analysis. T-test of the mean was carried out with the help of the statistical package for social sciences software (SPSS). The purpose was to find out whether the population would agree that a variable: (1) is a significant reason that motivated foreign AEC firms to undertake projects in China;

Benefits that foreign AEC firms derive 505

Table II. Project characteristics

MD 43,4

506

(2) is a significant benefit that foreign firms derived after working in China; and (3) is a significant strength that foreign firm that undertook project in China possessed. For each variable, the null hypothesis that the variable did not play a significant role, and the alternative hypothesis that the variable played a significant role are set out below. Null hypothesis H 0 : m # m0 : Alternative hypothesis H 1 : m # m0 ; where m was the population mean. The decision rule was to reject H0 when p , 0:05: In this study, m0 is the critical rating above which the attribute was considered important. In this study, m0 was fixed at 4 because by definition given in the seven-point rating scale, 4 is the mean. This meant that if the calculated p value is smaller than 0.05, the null hypothesis was rejected and the alternative hypothesis was accepted. It was then concluded that the variable is a reason for exporting, is beneficial to a firm or the firm has strength in the attribute mentioned, as the case may be. Four analysis of variance (ANOVA) were carried out to compare if there is any significant difference between the following: . ANOVA 1: what firms hope to achieve (motives) and what they actually achieved (benefits) after exporting; . ANOVA 2: motives of consultants and contractors; . ANOVA 3: benefits obtained by consultants and contractors; and . ANOVA 4: strengths of consultants and contractors.

Results The statistical t-test results (Table III, columns 3-5) show that out of 13 reasons for exporting construction services, only six motivated foreign AEC firms to enter China. These relate to diversifying business location (M2), sales growth (M3), increase profits (M4), enhancing core competence (M7), establishing leadership (M8) and international reputation (M12). As regards benefits obtained after undertaking projects in China, Table III (columns 6-8) shows that in all the six instances stated above, AEC firms achieved the benefits that they hoped for. The ANOVA results show that sales growth (B3) and increase corporate profit (B4) are not as good as hoped for ðp , 0:05Þ: Interestingly, many more benefits were derived, even though these did not originally motivate foreign AEC firms to export their services. For example, they benefited in terms of diversifying business activities (B1), following clients overseas (B11), forming joint ventures (B13), and acquiring new technology (B6) and capability (B9). ANOVA 1 results showed that except for items 3 and 4, there is no significant difference between the motives for exporting, and the benefit obtained (see Table III, columns 9-10). These two exceptions are discussed in the next section. ANOVA 2 results showed that there is no significant difference between the motives of consultants and contractors ðp # 0:05Þ (see Table III, columns 11-12). ANOVA 3 results showed that there is no significant difference between the benefits derived by consultants and contractors ðp # 0:05Þ; except for establishing leadership in China (item 8) (see Table III, columns 13-14). Both groups perceived that they obtained this

Diversification Diversify business activities Diversify business location Monetary benefits Sales growth and expansion Increase corporate profit Become more competitive at home Technical benefits Acquire new technology Further enhance core competence Establish leadership or niche in China Acquire capability in new/key areas Extend life of existing technology or equipment Fostering relations Follow clients to China Establish international reputation Formation of long term joint venture

Reason for exporting (2)

Note: * Significant at 5 percent level

11 12 13

10

6 7 8 9

3 4 5

1 2

No. (1)

1.688 6.214 23.636 12.519 20.430 20.723 6.523 7.786 20.458 21.947 1.233 6.488 20.824

6.600 6.257 3.827 3.743 5.629 5.800 3.829 3.314 4.486 5.800 3.714

Motive (M) T-value (4)

4.714 5.857

Mean (3)

0.113 0.000* 0.792

0.970

0.763 0.000* 0.000* 0.675

0.000* 0.000* 0.665

0.051 0.000*

p (5)

5.222 5.647 4.680

4.120

4.840 5.618 5.412 4.720

5.800 5.314 4.583

5.720 5.906

Mean (6)

3.966 6.702 2.652

0.355

2.402 6.668 6.197 2.257

7.666 4.332 1.595

6.743 7.041

Benefit (B) T-value (7)

0.001* 0.000* 0.007*

0.363

0.012* 0.000* 0.000* 0.017*

0.000* 0.000* 0.062

0.000* 0.000*

p (8)

0.491 0.716 0.109

1.577

0.000 0.205 3.205 0.298

9.520 7.137 1.205

2.341 1.612

0.486 0.401 0.743

0.216

1.000 0.652 0.078 0.588

0.003* 0.009* 0.278

0.133 0.209

ANOVA 1: Motive vs benefit F p (9) (10)

0.677 0.172 2.776

0.845

0.000 1.364 1.436 0.328

0.042 0.839 1.662

0.105 0.670

0.677 0.326 0.460 0.901 2.778 0.219 3.999 5.626 1.681 0.617 1.678 1.876 0.095

0.838 0.366 0.206 0.986 0.251 0.239 0.570 0.365 0.417 0.681 0.105

0.209 0.184 0.760

0.440

0.644 0.054 0.024* 0.204

0.502 0.349 0.108

0.419 0.572

ANOVA 3: Benefits (consultants vs contractors) F p (13) (14)

0.747 0.419

ANOVA 2: Motives (Consultants vs Contractors) F p (11) (12)

Benefits that foreign AEC firms derive 507

Table III. Results for motives and benefits of exporting construction services to China

MD 43,4

508

benefit, except that consultants appeared to have established significantly more leadership from exporting to China than contractors. Table IV shows the results of the strengths of foreign AEC firms that undertook projects in China. Foreign AEC firms have significant strengths in 12 out of the 13 areas ðp , 0:05Þ: They are not strong in one area: research and development (R&D) (S11). ANOVA 4 results showed that there is no significant difference between the strengths of consultants and contractors ðp # 0:05Þ; except for R&D (item S11) (see Table IV). The two statistical test results suggest that AEC firms are not strong in R&D, with contractors being significantly weaker than consultants in this aspect. One possibility is that traditional design-bid-build procurement method is prevalent (69 percent) and contractors build according to consultants’ drawings. There is less scope for them to propose major design changes from their R&D findings. The results are now discussed. Reasons and benefits for entering china The 13 reasons for foreign firms to undertake projects in China are categorized into four factors: diversification; monetary benefits; technical benefits; and fostering relationships. This section discusses the findings which are shown in Table III, unless otherwise specified. Diversification Foreign AEC firms may undertake projects in China to diversify their business activities and business locations. Diversify business activities. The results show that foreign AEC firms did not set out to undertake international business for the sake of diversifying business activities (M1). This is the correct move, as firms should focus on their core competencies, and

No. S1 S2 S3 S4 S5 S6 S7 S8 S9 S10 S11 Table IV. Strengths of foreign AEC firms that export services to China

S12 S13

Strengths Quality Quality of professional staff Quality of workmen and/or technical staff Product quality Service quality Capability Management quality Strategic planning Financial resources Technological supremacy Equipment, computing resources Efficiency and productivity Research and development Track record International track record Track record in home country

Note: * Significant at 5 percent level

Mean

T-test T-value p

ANOVA 4 F-value p

5.914 5.743 6.029 6.200

10.101 10.516 10.889 13.093

0.000* 0.000* 0.000* 0.000*

1.213 0.091 0.021 1.200

0.279 0.764 0.884 0.281

5.800 5.286 5.438 5.912 5.543 5.743 4.471

10.126 5.495 5.131 8.502 6.722 9.666 1.370

0.000* 0.000* 0.000* 0.000* 0.000* 0.000* 0.090

0.331 3.720 0.440 0.881 0.173 0.077 12.068

0.569 0.062 0.512 0.355 0.680 0.783 0.001*

5.400 6.514

5.257 17.437

0.000* 0.000*

1.953 0.781

0.172 0.383

even if they want to diversify business activities, they should test their capability in their home markets first. Diversify business location. One of the reasons for investing in a particular country is that it has location-specific advantages. These are advantages that arise from using resource endowments or assets that are tied to a particular foreign location and that a firm finds valuable to combine with its own unique assets (Dunning, 1988). China is a well known and fast growing market, and provides good opportunities for foreign AEC firms to invest, because it has location-specific advantages. Due to its location-specific advantages, foreign firms would invest in China to exploit resource endowments or assets that are location-specific. The results show that foreign AEC firms were motivated to enter China in order to diversity business location (M2), and they did indeed reap this benefit (B2). Geographic diversification is important because it lets firms maintain stable sales and earnings when the domestic economy or industry goes into a slump (Ball and McCulloch, 1999). Firms that venture overseas are able to avoid a saturated or intense competition in the domestic market (Wild et al., 2000). Another advantage of diversifying business into China is that AEC firms could quickly amortise research and development expenditures by launching their new services at the same time in the home market, China, or other overseas major markets in order to be able to recoup their investments (Lasserre, 2003). Monetary benefits Monetary benefits from internationalization may include sales growth, increased profits, and becoming more competitive at home. Sales growth and expansion. The results in Table III show that foreign AEC firms were motivated to undertake projects in China to achieve sales growth and expansion (M3). This is consistent with Howes and Tah’s (2003) finding that to achieve growth, it is important to identify new markets to achieve expansion. By rapidly building sales volume for a standardized product, international expansion can assist a firm in moving down the experience curve. This comes about from systematic reductions in production costs that have been observed to occur over the life of a product (Hall and Howell, 1985). The results also show that foreign AEC firms did realize sales growth after undertaking projects in China (B3). This confirms that one of the bases for international trade is inspired by economic benefits (Wild et al., 2000). For many foreign AEC firms, it has become more and more difficult to continue to grow by operating only in domestic market, especially for small countries such as Singapore. Therefore, companies need to engage in international business to increase sales (Wild et al., 2000). The ANOVA results show that there is significant difference ðp ¼ 0:003Þ between what firms hope to achieve (M3: mean¼ 6.600), and what they actually achieved (B3: mean ¼ 5.800), indicating that the sales growth, though robust, is not as good as they hoped for. This may be because foreign firms sometimes have difficulty clinching projects in China, but this situation is expected to improve when China complies more fully with WTO requirements. Increase corporate profit. Table III shows that foreign AEC firms entered China with the hope of increasing corporate profits (M4). Greater profits can be obtained

Benefits that foreign AEC firms derive 509

MD 43,4

510

by increasing revenue or reducing costs. Firms can obtain greater revenue by simultaneously undertaking construction work in foreign markets and their domestic markets. Increasing sales will reduce R&D costs per unit and also make other economies of scale possible (Ball and McCulloch, 1999), leading to higher profits. The results also show that foreign AEC firms did indeed achieve higher corporate profits (B4). Globalization can lead to increased profits because of economies of scale owing to product/process standardization, increased bargaining powers over suppliers, ability to organize a logistic and sourcing network based on location factors (Lasserre, 2003). Han and Diekmann (2001) found that although international construction projects are more risky, they are more profitable than the domestic projects. This is a major factor that entices a firm to venture overseas. The ANOVA results show that firms’ hope for increasing profits (M4: mean ¼ 6.257) is significantly lower than what they actually achieved (B4: mean ¼ 5.314) at p ¼ 0:009: This may be because China is a relatively new market to foreign AEC firms and they were therefore unable to fully reap monetary benefits such arbitraging benefits, to obtain higher profits. Arbitrage benefits occur when companies use resources in one country for the benefit of another country subsidiary, leading to cost advantages (Lasserre, 2003). Become more competitive at home. One of the benefits of undertaking international work is that the AEC firm learns valuable skills from its exposure to foreign markets that can be transferred back to the home country. This is a form of resource-transfer effect, whereby the firm can learn about superior management techniques and superior products and process technologies (Hill, 2003). These resources are then transferred back to the home country, leading to the firm being more competitive at home. The results show that firms did not enter China with the hope of becoming more competitive at home (M5: mean ¼ 3.827) and they also did not significantly achieve this benefit after working in China (B5: mean ¼ 4.583, p ¼ 0:062). One possibility is that foreign firms need to incur extra expenses in setting up subsidiaries in China and this high entry cost made them less competitive. Technical benefits Five technical benefits may be derived when firms undertake projects overseas. These are acquiring new technology, further enhancing core competence, establishing leadership, acquiring new capability in key areas, and extending life of existing technology or equipment. Acquire new technology. Companies are known to invest overseas to acquire technology and management know-how (Ball and McCulloch, 1999). Table III shows that foreign firms were not motivated to enter China to acquire new technology (M6: mean ¼ 3.743), perhaps because they felt that their own technology is superior to China’s. Remarkably, after working in China, they realized that this benefit was accrued (B6: mean ¼ 4.840). This confirms that globalization leads to learning benefits which accrue from the coordinated transfer of information, best practices and people across subsidiaries (Lasserre, 2003). The transfers eliminate the need to reinvent the wheel and give rise to coordinated transfer of best practices. Further enhance core competence. The concept of core competency, as explained by Hamel and Prahalad (1994), is a special company ability or skill that competitors find

extremely difficult or impossible to match or imitate. Core competencies are the bedrock of a firm’s competitive advantage. The results show that foreign AEC firms were motivated to enter China to further enhance their core competencies (M7: mean ¼ 5.629) and they did indeed achieve this benefit (B7: mean ¼ 5.618). This shows that AEC firms should not be complacent with their existing capabilities and think that China has nothing to teach them. By operating in China, firms can reduce the cost of value creation and/or create perceived value in such a way that their core competencies are enhanced, and premium pricing is possible. Establish leadership or niche in China. The results show that firms were motivated to enter China to establish leadership or niche (M8: mean ¼ 5.800), and after working there, they discovered that they were successful in doing so (B8: mean ¼ 5.412). Foreign AEC firms are able to establish leadership if they have core competencies which indigenous competitors lack. The potential for creating value is greatest when the skills are unique, when the value placed on them by the client/consumer is great, and when there a very few capable competitors with similar skills in the foreign market (Hill, 2003). Acquire new capability. A firm can create additional value by identifying valuable skills created within its foreign subsidiaries and leveraging those skills within its global network of operations (Gupta and Govindarajan, 2000). The results show that foreign AEC firms were not motivated to enter China to acquire new capability (M9: mean ¼ 3.829). This is not surprising as Hill (2003) had noted that managers need to have the humility to recognize that valuable skills can arise anywhere within the firm’s global network, not just at the corporate centre. Consistent with Hill’s (2003) idea, foreign AEC firms did indeed acquire new capability after working in China (B9: mean ¼ 4.720, p ¼ 0:017). This confirms that skills can be created anywhere within a multinational’s global network of operations, wherever people have the opportunity and incentive to try new ways of doing things (Gupta and Govindarajan, 2000). Extend life of existing technology or equipment. The international product life cycle theory states that a company will begin by exporting its products and later undertake foreign direct investment as the product moves through its life cycle (Vernon and Wells, 1991). This means that there is a progressive adoption of products over time according to the level of economic and scientific development of countries. Excess production capacity and resources that sit idle in the home country could therefore be brought to China, so that a firm can spread its costs over a greater number of units produced, thereby lowering cost per unit and increasing profits (Wild et al., 2000). The results show that foreign AEC firms were not motivated to enter China in order to extend the life of existing technology or equipment (M10: mean ¼ 3.314) nor did they achieve this benefit after working in China (B10: mean ¼ 4.120, p ¼ 0:363). This is consistent with Lasserre’s (2003) argument that the international product life cycle theory is no longer valid when industries globalize, as waiting too long to launch a product can be fatal, especially if the product has a short life cycle. The implication is that when firms have a new technology, it should be applied worldwide immediately, instead of being tested out in the home country, and gradually being shifted to a foreign market.

Benefits that foreign AEC firms derive 511

MD 43,4

512

Fostering relationships Foreign firms may undertake international business to foster relationships such as being closer to clients, establishing international reputation, and forming long term joint ventures. This is because businesses are not conducted in an impersonal way. The Network Theory of Embeddedness states that economic transactions also include social obligations and social connections (Granovetter, 1985). Follow clients to China. In some industries, firms follow their clients who decide to expand overseas. For example, in industries where many component parts are obtained from suppliers with whom a manufacturer has a close working relationship, companies that supply one another’s inputs will congregate in a certain geographic region (Wild et al., 2000). Following customers overseas also prevent competitors from gaining access to those customers, and enable firms to have a guaranteed customer base (Ball and McCulloch, 1999). The t-test results show that foreign AEC firms who decided to enter China did not do so because they were following their clients there (M11: mean ¼ 4.486, p ¼ 0:113). This may be because China is vast, and there are many opportunities to pursue, without firms having to be dependent on their home country clients. Interestingly, the results show that even though firms were not motivated to enter China by following their clients, they did achieve this benefit (B11: mean ¼ 5.222). This indicates that when home country clients enter China and need a facility, they may turn to the AEC firms from their same home countries to help them develop the facility. This means that AEC firms should continue to network with home country clients even after they have set up shop in China. Establish international reputation. Reputation is defined as other people’s opinion of an individual’s trustworthiness, image, professionalism, and competence (Granovetter, 1985). The results show that AEC firms entered China with the hope of establishing international reputation (M12: mean ¼ 5.800), and after working there, they perceived that their international reputation had indeed been established (B12: mean ¼ 5.647). The results should encourage other foreign AEC firms to conduct business in China because reputation is an important aspect of any business transaction. The parties to a transaction prefer to rely on the reputation of someone instead of some generalised morality or institutional arrangements to guard against trouble. With an international reputation, firms may find it easier to clinch new contracts. Formation of long term joint venture. Foreign firms that enter China may want to form local alliances or joint ventures with Chinese firms. For foreign firms, they can increase market penetration and make profits, while Chinese local partners can increase know-how, receive a flow of dividends and other indirect cash flow (Lasserre, 2003). Interestingly, foreign AEC firms indicated that they were not motivated to form long term joint ventures when they decided to enter China (M13: mean ¼ 3.714). This may be due to problems with local joint-venture partners who are inexperienced, opportunistic, or operate according to different goals (Hill, 2003). However, after working there, foreign AEC firms did benefit from this (B13: mean ¼ 4.680). The benefits accrued because joint ventures help firms form guanxi (relationships or connections), which is an important influence in getting things done and enforcing business agreements in China (Peng, 2000). Joint ventures help in cultivating a guanxiwang (relationship network). Reciprocal obligations are the glue that hold such networks together.

Strengths of foreign firms that work in China Respondents who have completed projects in China were asked to rate the strengths of their firms on 13 areas. Table IV shows the means of the AEC firms’ strengths. The top three strengths of foreign AEC firms that work in China are: (1) having an excellent track record in home country (S13); (2) having high service quality (S4); and (3) having high product quality (S3). The t-test results show that these firms have significant strengths ðp , 0:05Þ in 12 of the 13 areas. The only area that they are weak in is research and development (S11). It is not surprising that AEC firms do not embark on significant R&D, as their core competence is in construction and design. Moreover, new product development is a high-risk, albeit potentially high-return activity. However, according to Porter’s (1990) national competitiveness advantage theory, competitiveness in an industry depends on the capacity of the industry to innovate and upgrade. R&D is important when competition is intense (Porter, 1990). The strengths of these foreign AEC firms centre on a few areas. First, high quality: in the form of product quality (S3), service quality (S4), and quality of staff (S1 and S2). Among budget, schedule and quality, the most important is still quality. This is because several years after the project is completed, budget and schedule overruns may be forgotten, but poor quality is something that the client lives with, so long as he continues to use the facility. It is therefore recommended that firms that want to undertake AEC business in China concentrate on improving their service and product quality. The second area is foreign AEC firms’ superior capability, manifested by their technological supremacy (S8), efficiency and productivity (S10), equipment and computing resources (S9), financial resources (S7), and management ability (S5 and S6). Bartlett and Ghoshal (1989) found that the best strategy for a firm to pursue often depends on a consideration of the pressures for cost reductions and for local responsiveness. These can be achieved if firms have superior capabilities. The third area is excellent track record, both in the home country (S13) and internationally (S12). Good track record of performance includes satisfactory previous conduct, sound business judgment, honesty and keeping away from fraud and unfair dealings (Russell, 1990). There are several reasons for selecting AEC firms with excellent track record. One is that past performance is a valid predictor of future behaviour and/or future performance based on the Consistency Principle. The Consistency Principle states that past behaviour and/or past performance is the best predictor of future behaviour and/or performance (Epstein, 1979). People who have made achievement a habit are unlikely to stop trying to achieve (Hough, 1984). Conclusion This study investigated the reasons foreign AEC firms undertake projects in China, the extent to which they derived benefits after working in China, and the strengths that they possess. Arising from this study, new areas for research are uncovered. Further research will be undertaken to investigate the ways to clinch construction projects in

Benefits that foreign AEC firms derive 513

MD 43,4

514

China, the more effective market entry modes to be adopted, and business strategies that will bring about project success. The results show that there are four main reasons for exporting construction services to China: diversification, monetary benefits, technical benefits, and fostering relationships. While not all of the reasons are applicable to foreign AEC firms, the results show that firms achieved most of the benefits, whether they intended it to be so or not. The main benefits for undertaking construction services in China include diversification of business location, sales growth and expansion, higher profitability, enhancing core competency, acquiring new capability, and forming relationships with joint venture partners and clients from home countries. Among the 13 possible benefits, only two were not achieved: becoming more competitive at home; and extending the life of existing technology and equipment. To thrive in China, foreign AEC firms should possess many strengths. Among these, they should offer high product and service quality, superior capability and excellent track record. With these strengths, they can beat their competitors, win projects, and earn higher profits. The findings have several implications for practitioners. The first is that foreign practitioners who have not already entered China should seriously consider doing so because they can reap many benefits. However, it is necessary for potential and new entrants to study the market carefully and evaluate their chances of making profits and sustaining growth in the AEC market of China. The second implication is that foreign practitioners should invest in China on a long term basis, so that initial investments can be amortized over a longer period of time. They should not expect quick benefits, but must go into China for the long haul so that there is significant return on their investments. The third implication is that foreign practitioners should also not view China as a backwater for dumping outdated technology, equipment, or service. Foreign new entrants must adjust their expectations, and not expect the Chinese to adjust to their foreign culture and practices.

References Ball, D.A. and McCulloch, W.H. Jr (1999), International Business: The Challenge of Global Competition, Irwin McGraw-Hill, Boston, MA. Bartlett, C.A. and Ghoshal, S. (1989), Managing Across Borders, Harvard Business School, Boston, MA. Brake, T., Walker, D. and Walker, T. (1995), Doing Business Internationally, Richard D. Irwin, Burr Ridge, IL. Dunning, J.H. (1988), Explaining International Production, Unwin Hyman, London. Enderwick, P. (1993), “Multinational contracting”, in Suavant, K.P. and Mallampally, P. (Eds), Transnational Corporations in Services, Vol. 12, The United Nations Library on Transnational Corporations, Routledge, New York, NY, pp. 186-203. Epstein, S. (1979), “The stability of behavior: on predicting the most of the people much of the time”, Psychological Bulletin, Vol. 37, pp. 1097-126. Granovetter, M. (1985), “Economic action and social structure: the problem of embeddedness”, American Journal of Sociology, Vol. 91 No. 3, pp. 481-510.

Gupta, A.K. and Govindarajan, V.J. (2000), “Knowledge flows within multinational corporations”, Strategic Management Journal, Vol. 21, pp. 473-96. Hall, G. and Howell, S. (1985), “The experience curve from an economist’s perspective”, Strategic Management Journal, Vol. 6, pp. 197-212. Hamel, G. and Prahalad, C.K. (1994), Competing for the Future, Harvard Business School Press, Boston, MA. Han, S.H. and Diekmann, J.E. (2001), “Approaches for making risk-based go/no-go decision for international projects”, Journal of Construction Engineering and Management, Vol. 127 No. 4, pp. 300-8. Hill, C.W.L. (2003), International Business: Competing in the Global Marketplace, 4th ed., McGraw-Hill Irwin, Boston, MA. Hough, L.M. (1984), “Development and evaluation of the ‘accomplishment record’ method of selecting and promoting professionals”, Journal of Applied Psychology, Vol. 69 No. 1, pp. 135-46. Howes, R. and Tah, J.H.M. (2003), Strategic Management Applied to International Construction, Thomas Telford, London. Lasserre, P. (2003), Global Strategic Management, Plagrave Macmillan, New York, NY. Lee, J. and Walters, D. (1989), International Trade in Construction, Design, and Engineering Services, Ballinger, Cambridge, MA. Lucas, C.L. (1986), International Construction Business Management: A Guide for Architects, Engineers and Contractors, McGraw-Hill, New York, NY. Ofori, G., Goh, B.H., Zhu, J., Ting, S.K., Tiong, R., Alum, J., Wong, S.C.L., Wong, H.Y., Koh, L.J., Das, J. and Toh, E.S. (2001), “The potential of developing world-class Singapore construction and construction-related firms with strong export capability”, unpublished research report, Department of Building, National University of Singapore, Singapore. Peng, M.W. (2000), Business Strategies in Transition Economies, Sage, Thousand Oaks, CA. Porter, M.E. (1990), The Competitive Advantage of Nations, Free Press, New York, NY. Ricardo, D. (1967), The Principles of Political Economy and Taxation, Irwin, Homewood, IL. Russell, J.S. (1990), “Surety bonding and owner-contractor prequalification: comparison”, Journal of Professional Issues in Engineering, Vol. 116 No. 4, pp. 360-74. UNCTAD (United Nations Conference on Trade and Development) (2003), World Investment Report – FDI Policies for Development: National and International Perspectives, United Nations, New York, NY and Geneva. Vernon, R. and Wells, L.T. Jr (1991), Economic Environment of International Business, Prentice-Hall, Upper Saddle River, NJ. Wild, J.J., Wild, K.L. and Han, J.C.Y. (2000), International Business: An Integrated Approach, Prentice-Hall, Upper Saddle River, NJ. (Florence Yean Yng Ling, PhD, MRICS, MSISV, obtained her BSc (Building) (First Class Hons) degree from the National University of Singapore, master’s degree in international construction management from the Nanyang Technological University and a PhD from the National University of Singapore. She is an assistant professor at the Department of Building, National University of Singapore. She worked as a consultant quantity surveyor from 1987 to 1995 before becoming engaged in teaching and research activities at the National University of Singapore. She was a Visiting Scholar at the University of California, Berkeley’s Civil and Environmental Engineering Department in 2002. Her research interests include improving project performance, waste management, innovation, safety management and international construction.)

Benefits that foreign AEC firms derive 515

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

MD 43,4

Study on staff management practice of multinational company affiliates in China

516

Yuanqiang Zhou Office of International Cooperation and Exchange, Tsinghua University, Beijing, People’s Republic of China

Lei Lu University-Industry Cooperation Committee, Tsinghua University, Beijing, People’s Republic of China, and

Bo Jiang Department of Construction Management, Tsinghua University, Beijing, People’s Republic of China Abstract Purpose – More and more foreign companies, including multinational companies, open business in China. The staff management under the local culture of China is one of the critical points affecting the success of foreign invested companies in China. This paper aims to illustrate the effective methods of staff management for foreign invested companies in China. Design/methodology/approach – For this purpose, a survey on concrete practices of staff management was conducted among three multinational company affiliates in China, whose parent companies are located in the USA, Japan, and Europe, respectively, by the in-depth interviews with the high-level executives of the affiliates. Findings – It was found that although the staff management experiences of the surveyed affiliates show differences in operation, the affiliates have a common sense on how to balance culture difference, how to effectively communicate with staff, and how to appraise the performance. The active and passive factors of these experiences were further analysed from the needs level under current Chinese economic situation and from the invisible impacts on human behaviour of Chinese culture. Research limitations/implications – This study surveyed only three multinational company affiliates in China and therefore, the understanding obtained is limited in scope. The comprehensive knowledge of the subject depends on more case studies. Practical implications – The analysis reveals that the active factors and localization, especially localization of the management team, are very important to the staff management of foreign invested companies in China. Originality/value – The paper contributes to the research on effective methods for staff management in multinational companies. Keywords Multinational companies, China, National cultures, Employees Paper type Case study

Management Decision Vol. 43 No. 4, 2005 pp. 516-522 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510593521

More and more foreign companies, including multinational companies, open business in China and enter Chinese market along with the globalisation of world economy and China’s entrance into WTO. In China, the foreign invested companies newly set up in 2003 amount to 41,081, with a 20 per cent increase over the figure of the previous year, and the accumulated number of approved foreign invested companies has reached

465,277 by the end of 2003 (Ministry of Commerce, 2004). The essential feature of management of multinational company is the diversity of culture and therefore, the cross-cultural management. Culture difference is the major factor to affect the business success or failure of multinational company (Zhuang, 2003). The management failure resulted from improper culture fusing accounted for one-third of the business failures (Kitching, 1973). As for multinational company affiliates in China (MNCAC), this essential feature turns to be the management under Chinese cultural background, and sometimes even turns to be the management in the environment of local culture of certain region of China. The staff management is a critical issue for MNCAC as well as for other companies invested in China by small and middle foreign companies. The experience of successfully operated MNCAC is worthy of study and useful for reference. In this paper, a survey on staff management was conducted with the cooperation of high-level executives of three MNCACs. Their corresponding parent companies are companies listed in Fortune 500 with headquarters located in the US, Japan, and Europe, respectively. Since this paper tries to observe the practical operation in staff management rather than to comment on the performance of specific companies, the names of the surveyed companies are not stated in the paper, instead they named American Company, Japanese Company and European Company. Survey on practical operation of staff management of MNCAC Human resource is one of the most essential resources of an organization and plays a critical role to promote the competitiveness for it. Theories and researches on human resource management, performance management and cross-cultural management have a generic guiding significance for the businesses in China of multinational companies. These studies, however, reported few in-depth case studies on the concrete practice of staff management under Chinese cultural background by MNCAC, and the related studies have very limited impacts on practical operation concerned (Jiang, 2004). In this paper, from the perspectives of culture and human behaviour, it is proposed that staff management of MNCAC should pay attention to four aspects of management activities: how to handle culture difference, how to effectively communicate with staff members, how to evaluate performance fairly and objectively, and how to acquire and retain high calibre and motivated staff. Mainly concentrated on these four aspects, the interviews with high-level executives of American Company, Japanese Company and European Company were conducted in May and June of 2004. The American Company considers that training is a way to make the staff members to recognize the company culture, but the gradual and subtle influence on staff members naturally is of great importance, and at the same time a company itself should also absorb as much as possible souls of different cultures and make its culture full of common features of human beings. Communication is effective to bridge the gap of difference, which is a two-way process consisting of conveyance and feedback. Through management by walking around, the communication is conducted at real time. The communication skill and communication target are emphasized for attention. With combination of the good welfare and individual self-development opportunities, the company becomes an attractive choice for elite. The company also needs to understand and meet the requirement of the staff members. The major reason for a staff to leave the company is the choice of the individual and should be attributed mostly to improperly matching the culture of the company. In this company, the 3608

Study on staff management practice 517

MD 43,4

518

(i.e. all-perspective) evaluation is adopted for the staff performance assessment. The tip of avoiding untruthful comments from other staff members to the staff being evaluated is that, the other staff members are required to state the matters of fact only. Managers will also take their daily observation as a reference. The Japanese company thinks that culture fusing is not a mandatory requirement, but is a win-win relationship between the company and employees. Solving the culture conflict should appeal to two-way face-to-face communication, and it must be carried out by using different methods for different individuals. What to earn and what to do are the two factors to attract staff members, in which the latter one, that is, the content of the work, will be final. Therefore, the content of work should enable staff to feel self-satisfaction through fully exerting the staff’s capacity. Empowerment is very flexible according to individual’s capability. This company does not use the 3608 evaluation, but rather adopts the one-way top-down evaluation with reference to comments from others. The requirement for performance evaluation is objective and comprehensive. In the European Company, culture identification emphasizes culture fusing through training and providing opportunities, such as business travels, making people be affected and letting employees appreciate different cultures. A mature management system and its strict implementation will help a lot to avoid many misunderstandings to some extent between the managers and the staff members. Communication is the most effective way to solve such misunderstanding problems. Regular skilled communication is necessary. Through face-to-face communication, the company objectives are conveyed to the staff and individual thoughts are understood, and hence problems will be easy to solve through discussion. The attractive points to talents lie in the company brand, perfect management system, favourable working environment and learning opportunities, and good salary. In this company, the major reason to demission is the not harmonious relationship for a staff with his/her direct boss. So a culture well matching staff, welfare, and leadership of management is considered to be essential to keep a stable workforce. In this company, the empowerment will be adjusted against the economic situation, which will be broadened in better economic environment and otherwise in hard time. All-perspective manner is adopted to evaluate performance, the evaluation on each other among staff members, however, is rarely conducted. Comparison of different practical management styles The three companies mentioned have a common sense on the culture identification. It is generally acknowledged that culture identification should be realized through training and daily subtle influence rather than mandatory manners. Training should focus on company culture and enable staff members to get familiar with the culture and identify with it thereafter step by step. The details such as working environment, working manners and communication and cooperation among colleagues will also embody the feature of the company culture. Through working together, staff members will experience such daily details and will be gradually influenced. All the three companies pay high attention to communication, which is considered as a very effective manner to solve culture conflict and difference. Each company makes efforts to promote and seek for smooth communications between managers and staff members. Communication will be helpful to enable managers and employees to keep the same understanding on objectives and share right management ideas. Each

company has its own characters in detailed communication manners. The American company takes a philosophy of “management by walking around”. Employees could reach manager and communicate at any time. In the Japanese company, employee and manager could make appointment with each other to discuss issues and problems. In the European company, manager and employee will have meeting and communicate every two or three months periodically. These companies repeat their experience on communication in a cross culture environment: Communication has its own body of knowledge; Different communication manners must be adopted for different individuals so as to learn the thought or concern of the communication targets; Communication skills will affect communication results and effects. Performance evaluation should reflect the facts objectively. The American Company and the European company prefer all-perspective evaluation manner, while the Japanese company chooses the one-way manner, i.e. employees are evaluated by their direct superior. Each company notices Mianzi (a Chinese word which means face, representing personal relationship or reputation in Chinese culture) will be an influencing factor for the evaluation result. The American company takes the evaluation by each other among staff members, but two aspects are added to avoid impartial evaluation results. One is that manager should pay attention to observe employee’s behaviour in daily work so that the results generated from mutual evaluation among employees could be balanced into a conclusion based on all-round information. On the other hand, when mutual evaluation is conducted, it should be designed to require employees to describe facts only instead of comments. Such way of mutual evaluation will reduce the influence of personal feeling or relationship. In the Japanese company, there is not the issue of Mianzi in its performance evaluation system. In the European company, an employee will evaluate colleagues, when necessary as aforementioned, with, however, anonymous manner, which will also reduce the influence of Mianzi. All the surveyed companies make similar conclusion on the attractiveness of multinational companies to talented people, i.e. welfare and opportunity. The welfare of MNCAC ranks in China above middle level at least, which is very attractive. Meanwhile, MNCACs provide better training and promotion chances and a wide self-career-development space for staff members. Such opportunities like overseas training and international business travel are rare in China. In practice, each company has its own concentration. For example, the American company focuses on combination of welfare and opportunity, the Japanese company concentrates on working content, and the European company emphasizes perfect management system and broad resource platform. With regard to the empowerment, both American company and Japanese company appreciate enough trust granted after initial transitional and observational period of a new position. In the European company, empowerment will vary against different economic conditions and will be adjusted accordingly, i.e. empowerment would be encouraged under a good economic environment and the empowerment would be shrunk while in hard time. Regarding the reason for demission, the American company attributes it to culture. If the employee has shared value and passion with the company culture, he/she would like to be a member and devote himself/herself to the company. The Japanese company thinks that the most important reasons for demission are disappointment on welfare

Study on staff management practice 519

MD 43,4

520

and work satisfaction. In European company’s opinion, there are two reasons for an employee to choose to leave the company, first is the improper relationship with direct boss, and second is not fitting well to the company’s culture. Whereas, all the three companies recognize that the requirement of employees should be fully concerned and they consider that the job change is a natural phenomenon in one’s career. Discussion As described above, welfare, working environment, job satisfaction, and self-realization are the motivating factors to the staff. These factors can be divided into two categories as active and passive. The first two belong to passive category, while the latter two are hereby called as active factors. To manage different kinds of people at different stages, different factors should be considered accordingly, but in general, active, instead of passive ways, are recommended in staff management of MNCAC. (1) Given the current Chinese economic situation, passive factors like welfare could be provided now by many companies in China, for example, local private company, state-owned company, especially MNCAC. In the current Chinese market economy, it is a question of fund, not a question of policy. Therefore, passive factors could be satisfied at certain moment, but could be replaced easily. The ties between company and employees are very loose and weak if welfare is used as base only. These money related factors belong to the lowest level for basic physical needs. At the initial stage, these factors will be necessary to motivate the staff effectively. Once they are met, staff members desire for other needs in the upper levels, i.e. the needs for respect, for self-realization and achievement. It has been pointed out that, especially to senior executives, welfare is a minor factor compared with job satisfaction and self-realization. The high position a person takes, the more concerns on job satisfaction, self-realization and future career development he will pay attention to. To this kind of elites at this stage, more active factors should be taken into account in the activities of human resource management and development. (2) The human resource management style, which expects to attract talents mainly relying on welfare or working environment, is based on the presumption such as that most people work for basic needs and will choose to do what will earn greatest profits. This management style, which relies on passive factors, does not much fit the management team especially in the relatively mature management system of MNCAC. On the other aspect, however, work could be a satisfaction or a punishment. What is it on earth? It depends on the environment, and depends on the management style. To expect more and active contributions from staff members to company, satisfaction would be a natural choice, i.e. passive factors are necessary foundation which considers more management, while active factors are value added part which considers more development and contribution. Although the interviewed high-level executives of the surveyed three MNCAC are all original Chinese, although multinational company likes to absorb as much as possible souls of different cultures, and although many MNCACs declare that they are Chinese company, localization of company culture and management team is important for MNCAC to consider.

(1) Human resource is the critical and most active factor in a business. And consequently it contributes to a profitable business and the productivity-development of the society as a whole. Individuals, however, are inevitably stamped by some generic features of culture, convention or the criteria (shared value). These generic features are taken for granted by the people living in the culture environment and embody through individuals’ behaviour. Applying to staff management of MNCAC, it basically requires the manager and employee to understand each other what he or she likes and dislikes, which kind of words or gestures are friendly or hostile, even what manners through them to express the meanings will be appreciated or welcomed, etc. Further, it is complicated and subtle that certain “invisible rules” accepted through long time common practice are working more efficiently than regulations and principles on table. These “invisible rules” producing “invisible effects” often give more reasonable answers about the behaviours of local employees from the point of view of foreign executives. In this sense, we have to say, the company culture should be localized according to culture and tradition of China. (2) The said “invisible rules” producing “invisible effects” require localization of the management force. First, in general no other than the local persons who are stamped with the culture, convention and value criteria will naturally or unconsciously take these features as background body of knowledge. Secondly, local senior executives are the most powerful convincing facts that the local individuals could be possible and have the opportunities to be a top leader. Finally, the factors such as cost requirement, language, living habit, etc. also call for the localization of the major management force of MNCAC. In fact, localization of management team is the main part of localization of company culture. Conclusion and suggestion The following conclusions could be drawn through comparison on staff management experiences of the surveyed three MNCACs. Although these MNCACs’ parent companies locate their headquarters in the US, Japan, and Europe, respectively, which means different original backgrounds of these companies culture, they have similar opinions on certain common issues on the staff management in China, such as how to encounter and react on culture conflict and gap, how to effectively communicate with staff, how to ensure performance evaluation objectively, and how to acquire and retain a workforce of high calibre. Whereas, each company has its own tips proved effective in practice due to different culture backgrounds. With the knowledge obtained through this survey and author’s other understandings and insights, the following suggestions are presented to MNCAC as well as to other companies invested in China by small and medium foreign enterprises for reference on their staff management in China. (1) Besides the Chinese culture background, the underdeveloped internationalisation of Chinese community and the insufficient international awareness of Chinese staff are the other two important factors that should be taken into consideration cautiously and patiently. (2) The subtle daily influence of company culture on staff through working environment or working manners should be emphasized. Let the employee

Study on staff management practice 521

MD 43,4 (3)

522 (4)

(5)

(6)

understand, melt into and identify with the company culture through daily influence and co-develop with the company. Training should be taken as an auxiliary manner. Adopt effective communication manner and ensure periodic, necessary and smooth communication. With such a mechanism, managers will give supervision and instruction duly, while employees will reach to their managers in time when problems arise. Good communication skills are important. In performance evaluation, even though different manners can be adopted, the content of evaluation should be based upon facts. Taking Chinese culture characters into account, let employees describe facts other than comments in performance assessment as much as possible. Welfare, individual career development, and company brand are three attractive aspects. Provide satisfactory welfare package, learn and try to meet the employee’s requirement, create chance for self-improvement and wide space for self-development. Strengthen company image in China and make employees to work in the company proudly. The active way of management is very important, especially for the case of management team. Owing to Chinese culture environment, the underdeveloped internationalisation of Chinese community and the insufficient international awareness of Chinese staff, Chinese elites, who have both education and work experience in both China and overseas, have a significant predominance. Giving a wide platform to them will benefit the company much in staff management as well as business of the company. Localization of management team is final and crucial for good management.

In this study, the samples of case are limited. The comprehensive knowledge of the subject depends on further study of more cases. Future case studies could also be carried out in terms of industry sectors or in terms of culture backgrounds, which should be helpful to reveal the characteristics concerned. Since staff management is a practice-oriented topic, the cases and suggestions in this paper is worthwhile for reference only. References Jiang, B. (2004), “Performance management on staff at multinational company affiliates in China”, BSc dissertation, Tsinghua University, Beijing. Kitching, J. (1973), “Acquisition in Europe: causes of corporate success and failure”, Business International, No. 2, pp. 20-35. Ministry of Commerce, PRC (2004), “Status of using foreign direct investment from January to December of year 2003 over the country”, Statistical Data, available at: www.mofcom.gov. cn/tjzl.shtml Zhuang, E.P. (2003), “Cultural synergy in multinational corporation management and intercultural business communication study”, Journal of Shanghai University (Social Science), Vol. 10 No. 2, pp. 88-93.

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

Modern-day lean construction principles Some questions on their origin and similarities with Sun Tzu’s Art of War

Modern-day lean construction principles 523

Low Sui Pheng School of Design and Environment, National University of Singapore, Singapore, Singapore, and

Teo Hui Fang Department of Building, National University of Singapore, Singapore, Singapore Abstract Purpose – Lean construction looks into the possibility of bringing successful lean production theories into the construction industry. It was believed that lean production principles could also be influenced by the essence of military strategies, specifically that of Sun Tzu’s Art of War (ST) when these were introduced many years ago. This study looks into the practices of lean construction in the industry and the similarities in the two sets of statements from lean construction principles and Sun Tzu’s strategic principles. Design/methodology/approach – Surveys and interviews of 40 project managers in the construction industry were conducted. Findings – The study suggests that there are some agreements between lean construction principles and Sun Tzu’s strategic principles. Research limitations/implications – This study raises the interesting question of whether the origin of lean construction principles can be traced to the strategic principles formulated by Sun Tzu some 2,500 years ago. Practical implications – It is recommended that the strategic principles formulated by Sun Tzu be tapped upon for the further extension of lean principles (LP) in construction. Originality/value – The value of this paper lies in its reflections of ST to better understand the possible origin of current lean construction principles and practices. Keywords Lean production, Military actions, Project management, Construction industry Paper type Research paper

Introduction Owing to the uniqueness of its nature of production, there are several problems which are inherent within the construction industry. These include low productivity, poor safety and inferior working site conditions and lack of quality which result in a 3D industry that is demanding, dirty and dangerous (Construction Industry Steering Committee, 1999). Throughout the years, many researchers have been trying to develop solutions to alleviate these problems that are peculiar to the construction industry. Lean construction seems to have been accepted as an essential component of best practices on the recommendation of the Egan Report (Egan, 1998). The future trend for the construction industry is to encourage organizations to evolve into lean enterprises

Management Decision Vol. 43 No. 4, 2005 pp. 523-541 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510593530

MD 43,4

524

so that the contractors can move towards “industrializing” the construction process (Construction Industry Steering Committee, 1999). The concept of lean construction is an adaptation from the lean production philosophy which has long been in existence in the manufacturing sector. The application of Sun Tzu’s Art of War (ST) has long been used in the military science and business environment. More recent research works have even brought in the application of Sun Tzu’s warfare principles into the construction industry (Low and Yeo, 1992; Tan, 1991). The background to ST will be discussed later in this paper. Although it may seem that lean construction is relatively new in the industry, it is believed that the existing practices by contractors may contain elements of lean principles (LP) during their operations in one-way or another. It also appears that LP have common goals with strategic principles from ST. The hypothesis formulated in this study is as follows: “lean principles are operationalized in current industry practices, some of which are in agreement with Sun Tzu’s strategic principles”. The aim of this paper is to determine if LP are in agreement with Sun Tzu’s strategic principles. The objectives of this study are as follows: (1) through a literature, to identify the LP that can be adopted by contractors; (2) to examine how LP are operationalized in construction practices; and (3) to determine where LP are in agreement with Sun Tzu’s strategic principles. Lean construction principles Lean thinking was created in a manufacturing environment and several authors have studied its interpretation for the construction process (Koskela, 1992; Egan, 1998; Howell, 1999; Tommelein and Li, 1999; Vrijhoef and Koskela, 1999). The ideas of “lean thinking” were originally encapsulated within the Toyota Manufacturing System and are well articulated by Womack et al. (1990). Lean thinking subsequently became the generic term to describe its universal application beyond manufacturing (Womack and Jones, 1996). The ideas of lean thinking comprise a complex cocktail of ideas including continuous improvement, flattened organization structures, teamwork, elimination of waste, efficient use of resources and cooperative supply chain management (Green, 2000). Within the construction industry, the language of lean thinking has since become synonymous with best practice. Confidence of these ideas remains so high that “lean construction” is an established component of construction best practice (Green, 2000). As Melles (1997) has observed, LP are not really new principles of management techniques; rather they are a combination of existing principles. It has been argued that buildings are different from other manufactured goods in several aspects which affect the extent to which new production processes can be deployed (Gann, 1996). Salient differentiating features include the large size of the building, the immobility of the constructed product, the high degree of complexity in the number and range of component parts and linkages, and the expensive cost of production to produce quality and durable goods. However, these physical characteristics of constructed products should not limit the deployment of new techniques. Gann (1993) observed that construction has been innovative in developing new approaches to organize processes and integrate new technologies, and that the impetus for transferring techniques used in the manufacture of consumer goods to housing is to reduce the impact of physical conditions found on sites.

The purpose for reviewing the LP above is to gain an understanding for incorporating them into one section of the questionnaire survey used in this study. Koskela (1997) has summarized lean thinking into 11 principles which are discussed below. (1) Reduce the share of non value-adding activities (waste). Koskela (1992) defined non value-adding activities as those that take time, resources and space but do not add value while value-adding activities convert materials and/or information towards that which is required by the customer. (2) Increase output value through systematic consideration of customer requirements. Fulfilling customers’ requirements generates value for every project but in many cases, customers’ requirements have never been identified nor clarified (Koskela, 1992). (3) Reduce variability. Koskela (1992) identified two reasons for reducing process variability. First, a uniform product is better from the customer point of view. Secondly, variability increases the amount of non value-adding activities. (4) Reduce cycle times. The different ways to reduce cycle times include the implementation of Just-in-Time principles to eliminate stock inventory and decentralization in the organizational hierarchy (Koskela, 1992). (5) Simplify by minimizing the number of steps, parts and linkages. Koskela (1992) suggested that by reducing the number of components in a product and the number of steps in a material or information flow help to simplify the construction process. (6) Increase output flexibility. Koskela (1992) pointed out that using modularized product designs, reducing the difficulty of setups and changeovers and training a multi-skilled workforce help to increase output flexibility. (7) Increase process transparency. The objective to make the construction process transparent and observable is for the facilitation of control and improvement to all employees (Koskela, 1992). (8) Focus control on the complete process. It is suggested that by allowing autonomous teams to exercise control over the process and building long term co-operation with suppliers will optimize total workflow (Koskela, 1992). (9) Build continuous improvement into the process. The effort to build continuous improvement into the construction process is to reduce waste and carry out value-adding activities continuously (Koskela, 1992). (10) Balance flow improvement with conversion improvement. The relationship between flow and conversion improvement is interrelated because better flows require less equipment investment and have more control to implement conversion technology easily (Koskela, 1992). (11) Benchmark. Benchmarking includes knowing the strengths, weaknesses, opportunities and threats of the organization, knowing the industry leaders and their best practices, incorporating the best practices into the organization and carving a niche by combining existing strengths with the best external practices (Koskela, 1992). The philosophy behind lean production is to reduce waste in production companies. Melles (1997) believed that some elements of lean production are already used

Modern-day lean construction principles 525

MD 43,4

526

in construction. Dulaimi and Tanamas (2001) observed that some features of lean construction have already been implemented in Singapore although the cultural resistance hindered the extent of its implementation. If this is so, then it would appear that contractors in Singapore probably have a rough idea of what being lean entails. The project managers and the project team in construction are responsible for the overall success of delivering the owner’s physical development within the constraints of cost, schedule, quality and safety requirements (Edum-Fotwe and McCaffer, 2000). Flow, as described by Koskela (1992), refers to production activities between conversions that exist in all production systems. The conceptualization of the construction project process as an information flow specifies and controls materials flow on site to gradually reduce the uncertainty of the project over time (Winch et al., 1998). To ease the flow of the construction process, it is important for the project manager to make sure that the project team properly facilitates the communication flow and ensures coordination of works. Common et al., (2000) have suggested that attempts to improve efficiency and reduce conflicts require partnering between suppliers and contractor. For the contractors, maintaining long term relationships with suppliers, such as subcontractors for labour and materials, provide some extent of control over their supply chains. This helps to achieve standardization and inter-changeability of designs that is necessary if a wide range of different component parts are to be assembled in an arrangement of different permutations to satisfy customer demands (Gann, 1996).

Sun Tzu’s strategic principles Written some 2,500 years ago in ancient China, ST is recognized as one of the oldest and most profound Chinese classics on military treatise and warfare (Sawyer and Sawyer Lee, 1996). The development of ST was meant to provide a discussion of the principles and tactics necessary to overcome psychological obstacles, environmental obstacles, personal opposition and organizational contention (Lo et al., 1998). Given the conciseness of the book, Sun Tzu’s strategic principles only provide an idea of what ought to be done and what ought not to; thus allowing the details to be expanded based on the creativity of the reader (Khoo, 1992). Most of the works in the growing literature on the application of ST focus its use in the business environment and have especially been discussed rigorously in the business management context (Foo and Grinyer, 1995; Khoo, 1992). For the interpretation of Sun Tzu in the construction context, the contractor’s organization is always referred to as the State, the general as the project manager and the ruler as the client and sometimes, even the owner of the contracting firm. The army refers to the subordinates that work under the project manager for the owner and the organization. The winning of the war would be equivalent to the completion of the project that earns profit for the contracting organization. Terrain means the conditions of the situation that project stakeholders adhered to and in construction, the contract binds all parties to the clauses and the regulatory authority sets the conditions within which all parties can act. The term “enemy”,

however, has flexible connotations when it is used in different situations which may both be external or internal to an organization. From the literature, the relevant Sun Tzu’s strategic principles which are applicable for this study in lean construction were identified (Khoo, 1992). These are discussed below based on Lo et al. (1998) and Khoo’s (1992) interpretations. (1) The skilful general does not require a second levy of conscripts or more than one provisioning (Khoo, 1992). A project manager who is competent and has proficient knowledge will effectively deploy the number of staff and workers allocated by the organization for his project. During construction, he should monitor the use of material resources so that material wastage can be reduced as much as possible. (2) Conformation of the terrain is the soldier’s best ally (Khoo, 1992). The contract binds all the project stakeholders together to a project, thus ensuring their commitment throughout the construction process. Contract documents such as drawings and specifications state the client’s requirements, and terms in the contract set out the scope of work, responsibility of the contractor and clauses requiring adherence to government regulations. The project manager, who works for the benefit of the organization, should therefore conform to the requirements of the contract. (3) Know your enemy and know yourself; in a hundred battles you will never fear the result (Khoo, 1992). The ability to understand external factors in the market facilitates control for the organization. Similarly, when the project manager understands the use of new market trends and utilizes them to his advantage, he will be able to reduce the costs of the project. (4) Speed is the essence of war (Khoo, 1992). It is essential for the project manager to deliver the project as quickly as possible within the completion date. (5) Put your men in positions where there is no escape and even when facing death, they will not run (Khoo, 1992). While the project manager should effectively delegate duties to his staff and workers, equivalent authority should also be given to them. This helps to facilitate decentralized decision making and reduce the number of vertical layers in the hierarchy. (6) As water shapes its flow in accordance with the ground, so an army manages its victory in accordance with the situation of the enemy (Khoo, 1992). The project manager should think of suitable construction methods that best fit the site conditions, i.e. using the concept of buildability. Being flexible in using his skills and knowledge provide alternative ways to construct the same building more efficiently. (7) A general is like the spoke of a wheel. If the connection is tied and complete, the wheel will be strong and so will the State; if the connection is defective, then the State will be weak (Khoo, 1992). The project manager who gets everyone involved in every project meetings will be able to closely monitor the activities of construction on site. He plays an important role to ensure whether his team has mutual understanding of their scope of work so that there is proper coordination.

Modern-day lean construction principles 527

MD 43,4

528

(8) If we cannot fathom the designs of our neighbouring States, we cannot enter into alliances in advance (Lo et al., 1998). Strategic alliances help the project manager to control workflows and activities on site. In addition, the ease of communication between the project manager and the supplier enhances the ease of negotiation that provides flexibility in terms of delivery on demand and change of orders. (9) Treat your men kindly, but keep strict control over them to ensure victory (Khoo, 1992). While the project manager guides and assesses his workers, he must also ensure that they do not deviate from the project’s requirements and commit even more mistakes on site. Staff and workers should also be given the opportunity to initiate ideas and solutions to improve and solve problems which they encounter on site. (10) An army cannot survive without its equipment, food and stores (Khoo, 1992). Staff must be proficient to use the infrastructure in the organization and workers must be competent enough to use the equipment. To have an imbalance of skills and technology will eventually cause the loss of market share to the organization. (11) When campaigning, be swift as the wind; in leisurely march, majestic as the forest; in raiding and plundering, like fire; in defending, firm as mountains (Lo et al., 1998). Whenever there are any new construction practices, an organization should seek to look into the possibility of appropriately tapping it for implementation. As Knuf (2000) noted, benchmarking basically helps the organization to gain knowledge by referencing it to peer experience that is deemed to be the best practice. Matching the two sets of principles The purpose of matching lean construction principles and Sun Tzu’s strategic principles is to explore the agreements between these two sets of principles and to expound the prima facie relevance of LP and Sun Tzu’s strategic principles for the construction industry. From the literature review of both the LP and Sun Tzu’s strategic principles presented above, two sets of 11 statements can be derived. Table I compares lean construction principles with Sun Tzu’s strategic principles. Following this matching exercise, an interpretation of the corresponding LP that are in agreement with Sun Tzu’s strategic principles from the point of view of the project manager is presented in the third column of Table I. Research methodology The empirical part of this study made use of survey questionnaires. A decision was made to self-administer the survey questionnaires. Self-administered questionnaires were the most expedient way to gather information from the industry. The snowball sampling method was used, whereby the questionnaires were passed to the project managers who are in turn, asked to pass these on to their acquaintances for the researchers to follow up. The target respondents were project managers from contracting firms practising in Singapore. Project managers were chosen because they oversee the planning, organizing, executing and

S/no. Lean principles

Sun Tzu’s Art of War

Interpretations

1

The competent project manager does not require an additional team of workers nor more than one provision of resources

Assuming that a project manager is competent, he would not use more manpower than what he actually need on site. Idling workers and resources do not increase productivity and may even slow down work processes when they compete for workspaces. A competent project manager would be able to control waste minimization and reduce defective works and reworks that would use up more than the budgeted resources The contract stipulates the customer’s requirements and considerations of the constructed product. Therefore, if the project manager complies with the contract, he should be able to provide customer satisfaction out of the value created from the product Prefabricated and standardized products are manufactured with built-in quality considerations not affected by the construction site. The use of standardized products controls the variances of quality to ensure that a good quality end product (building) is achieved The sequence of activities and its duration are planned according to the Master Programme, allowing no time to be wasted. Any delays from the activities could lead to possible liquidated damages which are costs to the contractor. It is very important to identify clearly, at the planning stage, the breakdown of activities and reduce abortive works to the minimum

Reduce the share of non value-adding activities (also called waste) increases productivity

2

Increase output value through Conformation with the contract is the project systematic consideration of customer requirements creates manager’s best strategy value to fulfil customers’ requirements

3

Prefabrication and standardization with controlled quality considerations reduce variability during activity duration

4

Speed is the essence for the Reduce cycle times by eliminating non value-adding project activities and compression of total cycle time save time and costs

Know your external environment and know your capability; being able to control in every aspects of project will ensure success

(continued)

Modern-day lean construction principles 529

Table I. Matching the two sets of principles

MD 43,4

S/no. Lean principles 5

530

6

7

8

Table I.

Sun Tzu’s Art of War

Interpretations

When the staff and workers are given responsibility and adequate authority to make decisions in their area of work, it helps to reduce the time for information flow and workflow. Waiting time for decisions to pass through the layers of organization structure impedes the workflow. Subsequently, it would delay the other trades that follow the activity The use of modularized design As water shapes its flow in Modularized product design accordance with the ground, in the project provides the with minimal set-up so the project team manages project team with flexibility in difficulties increases output constructing the end product. its victory in accordance flexibility with the requirements of the Where the walls of the building use modularized project bricks, for example, the quantity of bricks and bricklayers required can be estimated more accurately A project manager is like the The project manager is the Entrusting responsibility to leader of the team and thus, he spoke of a wheel. He gets everyone involved increases plays an important role in everyone involved in the process transparency coordinating the works of all project and stays connected team members. To facilitate to the entire team the coordination role means the construction process must be transparent to everyone. Everyone involved are responsible to know each other’s scope of work The project manager will have If project managers cannot Maintaining long-term understand the nature of their knowledge of the profile of the relationship with suppliers supplier or subcontractor after allows control on the complete suppliers, they cannot enter working with the same into alliances in advance process supplier or subcontractor for a few projects. Maintaining this long-term relationship with the supplier or subcontractor allows the project manager to have control over their activities to a certain extent Decentralized decisionmaking minimizes the number of steps, parts and linkages by eliminating vertical and horizontal division of labour

Put your men in positions where they are responsible and have the authority to make decisions

(continued)

S/no. Lean principles 9

10

11

Sun Tzu’s Art of War

Interpretations

The team members and workers must initiate efforts for continuous improvements to constantly improve the quality of work. These efforts for improvement must also be assessed and controlled against possible mistakes The level of skills attained by Skills level of workers must be An army cannot survive the project team and workers without its equipment, food competent with the level of determines the reliability of and stores, just as a worker technology in the company must have the necessary skills workflow of construction activities. However, having a and tools highly skilled workforce that is well versed in the latest technology is insufficient. The organization should also be equipped with the state of technology in terms of equipment and machinery to carry out the construction work Benchmarking practices from When there is a new market Benchmarking best practices practice, be swift to learn; in by peer review promotes a external and internal learning culture and such adopting the practice, be environment helps practices must be cultivated in confident to venture; in organizational learning organizations which are practicing, be aggressive; when market share is attained, receptive to new practices and implementation. When the emphasize in the core organization has gained its competence competitive edge, efforts must be put in to maintain its foothold in the market Build continuous improvement into the process to upgrade quality requirements that meet customers’ needs

Allow your workers to make improvements to the project but keep strict control against deviation

monitoring of the entire project. They have a full understanding of the various stakeholders in order to strike a balance between their needs and the realities of the projects. The first part of the questionnaire provided general details of the respondents. This is to ensure that the right person intended for the study (i.e. the project manager) was the one completing the questionnaire. The second part of the questionnaire was structured to elicit the general awareness and opinions of the respondents towards the topic of this study. The main part of the questionnaire comprised of two sections. The first was a list of LP, which the respondents are required to rank the possibility of their application. In the second section, the respondents were requested to rank the 11 statements from

Modern-day lean construction principles 531

Table I.

MD 43,4

532

Sun Tzu’s strategic principles in terms of their applicability. The seven-point Likert scale was adopted to indicate the extent to which the respondents agree or disagree with LP and Sun Tzu’s strategic principles in terms of their relevance in the construction industry. The data collected from the survey were analyzed using the statistical package for social sciences (SPSS). The various statistical techniques applied included the paired comparison (or dependent) T-test and the Cronbach’s alpha reliability analysis test. A total of 40 completed survey questionnaires from project managers in contracting firms were gathered. These project managers were identified and contacted through personal contacts and referrals. A pilot test was conducted, following which the full-scale fieldwork was conducted. The main part of the survey was structured based on the statements of LP and Sun Tzu’s strategic principles as presented earlier in Table I. The results of the fieldwork are presented in the following section. Profile of respondents Out of the 40 respondents, . seven project managers have less than five years of experience; . nineteen project managers have five to ten years of experience; . eight of them have ten to fifteen years of experience; and . six of them have fifteen to twenty years of experience. A majority (82.5 per cent) of the project managers surveyed have more than five years of experience in project management. This suggests that most project managers were experienced and has a thorough knowledge of project management practices. Out of the 40 respondents, . seven project managers have handled less than five projects; . seventeen of them have handled five to ten projects; . eight have handled ten to fifteen projects; . five have handled fifteen to twenty projects; and . three have handled more than twenty projects. At least five projects have been handled by 82.5 per cent of the project managers. This suggests that most of them have a good understanding of construction processes. Only 23 per cent of the project managers have heard of lean construction while the remaining 77 per cent have not heard of it. This could be because the concept of lean construction is still relatively new in the local construction industry. Even for the project managers who have heard of lean construction, they may not have a thorough knowledge of lean construction principles. Twenty-nine respondents (72 per cent) have heard of ST. This could be explained by the fact that most of the project managers interviewed were Chinese and the growing number of business management textbooks that focused on the use of ST have perpetuated in the recent years. Perceptions of LP The respondents were asked to rate their perceptions on the applicability of LP in project management in the Singapore construction industry. The Likert scores adopted

were from 1 “totally disagree” to 7 “totally agree”. The average Likert scores were calculated by summing up the rankings from all respondents and the result divided by the number of respondents. The formula to compute the average score is given as: Average Likert score ¼

X x=n

where x is the summation of all individual Likert scores; and n the total number of respondents. Statements were ranked in descending order, beginning with the statement representing lean principle with the highest Likert score. The ranking of respondents’ perceptions of LP is shown in Table II. The average scores for all the statements were five and above which seems to suggest that generally all the respondents agreed with the applicability of LP in project management. Statement number 5 has the lowest score of 5.675 and statement number 10 has the highest score of 6.275.

Ranking

LP statement no.

1

10

2

1

3

9

4

3

5

11

6

2

7

7

8

4

9

6

10

8

11

5

Statements from LP Skills level of workers must be competent with the level of technology in the company Reduce the share of non value-adding activities (also called waste) increases productivity Build continuous improvement into the process to upgrade quality requirements that meet customers’ needs Prefabrication and standardization with controlled quality considerations reduce variability during activity duration Benchmarking practices from external and internal environment helps organizational learning Increase output value through systematic consideration of customer requirements creates value to fulfil customers’ requirements Entrusting responsibility to everyone involved increases process transparency Reduce cycle times by eliminating non value-adding activities and compression of total cycle time save time and costs Modularized product design with minimal set-up difficulties increases output flexibility Maintaining long-term relationship with suppliers allows control on the complete process Decentralized decision-making minimizes the number of steps, parts and linkages by eliminating vertical and horizontal division of labour

Modern-day lean construction principles 533

Average Likert scores

6.275 6.225 6.200 6.175 6.050 6.000 5.900 5.850 5.850 5.800

5.675

Table II. Ranking of respondents’ perceptions of LP

MD 43,4

534

The ranking of the LP suggests that project managers perceived the skills level of the workers, and the state of technology to be equally important. The top five statements have all focused on conditions and approaches that lead to the completion of a project efficiently and effectively. Perceptions of Sun Tzu’s strategic principles From the ranking of the statements shown in Table III, the average Likert score for all the statements is five and above which indicates that the respondents generally appear to agree with the application of Sun Tzu’s strategic principles for project management. The ranking of the Sun Tzu’s strategic principles suggests that the competency of the team of professionals and workers is crucial to the success of the projects. The top-ranked statement shows the importance for project managers to lead and manage people, besides possessing exceptional technical skills (Zimmerer and Yasin, 1998). The four subsequent statements reveal the need for a skilful and flexible workforce and the level of technology available which are similar to LP. Ranking

Table III. Ranking of respondents’ perceptions of Sun Tzu’s strategic principles

ST statement no.

Statements from Sun Tzu’s Art of War (ST)

1

7

2

10

3

11

4

5

5

6

6

3

7

8

8

9

9 10

4 2

11

1

A project manager is like the spoke of a wheel. He gets everyone involved in the project and stays connected to the entire team An army cannot survive without its equipment, food and stores, just as a worker must have the necessary skills and tools When there is new market practice, be swift to learn; in adopting the practice, be confident to venture; in practicing, be aggressive; when market share is attained, emphasize in the core competence Put your men in positions where they are responsible and have the authority to make decisions As water shapes its flow in accordance with the ground, so the project team manages its victory in accordance with the requirements of the project Know your external environment and know your capability; being able to control in every aspects of project will ensure success If project managers cannot understand the nature of their suppliers, they cannot enter into alliances in advance Allow your workers to make improvements to the project, but keep strict control against deviation Speed is the essence for project Conformation of the contract is the project manager’s best strategy The competent project manager does not require an additional team of workers or more than one provision of resources

Average Likert scores

6.550 6.525

6.275 6.250

6.175 6.175 6.175 6.025 5.825 5.400 5.150

Reliability test The two sets of variables, i.e. the respondents’ perceptions of the lean (LP variables) and ST (ST variables) strategic principles, were separately subjected to reliability assessments. The SPSS reliability analysis procedure was used to check the internal consistency and reliability of the variables within the set (Norusis, 1994; SPSS, Inc., 1995). The answers to a reliable survey will differ when respondents have different opinions (SPSS, Inc., 2000). Hence, there is a need to find the Cronbach’s alpha for the measurement of the true reliability of the survey (Cronbach, 1951). It was found that the Cronbach’s alpha values for the LP and ST variable sets were 0.815 and 0.607, respectively, indicating a good level of reliability of the scales for LP variables and acceptable for ST variables. Sekaran (1994) considers a reliability of less than 0.6 as poor, in the range of 0.6-0.7 as acceptable and over 0.8 to be good.

Modern-day lean construction principles 535

Perceptions towards both sets of principles In order to test the agreement between LP and Sun Tzu’s strategic principles, the Paired Comparison (or Dependent) T-test is used. The test is used to compare the means of two variables (columns) and examine if the means of the two variables differ. For the analysis of the data, statements from LP and Sun Tzu’s strategic principles were taken to be two separate variables, i.e. Statement No. 1 from LP and Statement No. 1 from Sun Tzu’s strategic principles are taken to be a matched pair. Table IV shows the findings of the paired samples correlations with the significance level taken at the 5 per cent level. Table IV shows that: . All the paired statements are positively correlated, except for LP3 and ST3 which is negatively correlated. . Six paired statements are significantly correlated. These are Pair No. 1 (LP1 & ST1), No. 2 (LP2 & ST2), No. 8 (LP8 & ST8), No. 9 (LP9 & ST 9), No. 10 (LP 10 & ST10) and No. 11 (LP11 & ST11). . The associated P-values for the six pairs are very small (less than 5 per cent), indicating a strong agreement between the LP and the ST principles. For the “P ” values shown in Table IV that are below 0.05, Lo et al. (1998) suggested that this value can be considered significant as it indicates the rejection of a zero Paired samples

Correlation

Pair Pair Pair Pair Pair Pair Pair Pair Pair Pair Pair

0.319 0.418 20.205 0.308 0.163 0.273 0.115 0.364 0.706 0.492 0.396

1 LP1 & ST1 2 LP2 & ST2 3 LP3 & ST3 4 LP4 & ST4 5 LP5 & ST 5 6 LP6 & ST 6 7 LP7 & ST7 8 LP8 & ST8 9 LP9 & ST9 10 LP10 & ST10 11 LP11 & ST11

P-values 0.045 0.007 0.204 0.053 0.315 0.089 0.482 0.021 0.000 0.001 0.011

Table IV. Correlation values of paired statements

MD 43,4

536

correlation test of hypothesis. The associated small P-values also implied that there is a strong agreement between the pair of statements (SPSS, Inc., 2000). Pairs in agreement A summary of the LP and ST principles that are in agreement is given in Table V and discussed below. Pair No. 1 has a positive correlation value of 0.319 and its P-value is 0.045. This suggests project managers agree that LP1, which stresses on controlling and minimizing waste in terms of human labour and materials, is in agreement with ST1, which emphasizes on the effective use of resources. Pair No. 2 has a positive correlation value of 0.418 and its P-value is 0.007. This suggests that LP2 agrees well with ST2 because the project managers felt that they can create more value to satisfy the clients if they achieve the clients’ requirements in the contracts. Pair No. 8 has a positive correlation value of 0.364 and a P-value of 0. 021. While LP8 entails maintaining long-term relationship with suppliers, ST8 stresses the importance of having a thorough knowledge of the suppliers before entering into alliances. This highlights Sun Tzu’s foresight in forming strategic alliances which is applicable in the construction industry. Pair No. 9 has the highest correlation value of 0.706. LP9 and ST9 are in agreement and has a negligible P-value. LP9 specifies that improvements must be built continuously and ST9 complements LP9 where it stresses that the approaches to improvements must be assessed and controlled to avoid further mistakes. Pair No. 10 has a correlation value of 0.492. LP10 and ST10 are in agreement and has a very small P-value of 0.001. The agreement between LP10 and ST10 implies that the skills level of the staff and workers must be in balance with the state of technology in the organization. This is consistent with Sun Tzu’s principle that a skilful army must also have its weapons and food ready to fight in the war. Pair No. 11 has a correlation value of 0.396. LP11 and ST11 are in agreement and have a P-value of 0.011. LP11 encourages organizations to adopt benchmarking and ST11 stresses the attitude which organizations should inculcate for benchmarking. Pairs not in agreement The possible reasons why some LP and ST principles were not in agreement are explained below. LP3 and ST3 have a negative correlation. LP3 stipulates that the use of prefabrication will help to reduce variability during construction while ST3 is about having a good knowledge of the external environment as well as one’s own strengths in order to ensure project control. The negative correlation appears to come about because LP3 focuses only on prefabrication which is only one component in the construction supply chain while ST3 ventures beyond prefabrication to cover the many facets of an external environment. There is low correlation between LP4 and ST4. LP4 deals with the reduction of cycle times through the elimination of non value-adding activities to save on time and costs. ST4 emphasizes that speed is the essence for a project. While LP4 specifically targets the elimination of non value-adding activities, ST4 is broader in that it covers speedier

operations that may or may not encompass the elimination of non value-adding activities. LP5 and ST5 have a low correlation of 0.163. LP5 emphasizes decentralized decision-making and ST5 proposes the granting of authority to staff members for them to be responsible for the decisions made. The low level of agreement between LP5 and ST5 seems to occur when it is unclear to what level of the organization should authority be granted for decentralized decision making. It appears that some respondents may feel uncomfortable with delegating such authority to those who are in the lower rungs of the organizational hierarchy. LP6 and ST6 have low correlation. LP6 proposes the use of modularized products to enhance output flexibility. However, ST6 argues that the project team should be flexible just as water shapes its flow according to the ground conditions. The use of modularized products does not appear to accord well with the far higher degree of flexibility emphasized through the changing shapes of water as it flows in accordance with the ground. LP7 and ST7 have a low correlation of 0.115. LP7 is centred on entrusting responsibility to everyone as a means to increase transparency. ST7 describes the project manager as someone who gets everyone involved in the project and who stays connected to the entire project team. The low correlation appears to be attributed to LP7 being focused on entrusting responsibility while ST7 emphasizes the connecting role played by the project manager, both of which deal with different aspects of organizational management. Conclusion and recommendations To reiterate, the hypothesis formulated for this study is that: “lean principles are operationalized in current industry practices and are in agreement with Sun Tzu’s strategic principles”. Upon analysing the survey findings and interviews with the project managers from different contracting firms, it appears that some lean construction principles are in agreement with Sun Tzu’s strategic principles. There are six pairs of representative statements from LP and Sun Tzu’s principles which suggest that some agreements do exist in the perceptions of project managers towards LP and Sun Tzu’s principles. These are LP1 & ST1, LP2 & ST2, LP8 & ST8, LP9 & ST9, LP10 & ST10 and LP11 & ST11 as summarized and interpreted in Table V. Nevertheless, the wider strategic treatise in ST suggests that there may be further strategies that can be adopted in lean construction. The following conclusions can be noted. (1) The level of awareness of Sun Tzu’s strategic principles is higher than LP. The project managers generally felt that Sun Tzu’s strategic principles are applicable in construction, as these have already been applied in business management. However, it should be noted that lean construction is still a relatively new concept in the local industry and has not yet been fully exploited. (2) There are some agreements between LP and Sun Tzu’s strategic principles when applied in construction in terms of management at the organization and project levels. These similarities were summarized earlier in Table V. (3) Every project manager has his own perception of what being lean is because the cost implications can affect the economic performance of every project.

Modern-day lean construction principles 537

Highlights the optimum use of resources to control and minimize waste at all times

ST1: the competent project manager does not require an additional team of workers nor more than one provision of resources ST2: conformation with the contract is the project manager’s best strategy

LP1: reduce the share of non value-adding activities (also called waste) increases productivity LP2: increase output value through systematic consideration of customer requirements creates value to fulfil customers’ requirements LP8: maintaining long-term relationship with suppliers allows control on the complete process

Suggests that project managers create value for the projects through the considerations of clients’ requirements in the contracts Proposes that a good understanding of the ST8: if the project manages cannot understand suppliers prior to forming strategic alliances the nature of their suppliers, they cannot enter enhances the maintenance of a favourable into alliances in advance long-term supplier and contractor relationship ST9: allow your workers to make improvements Stresses that continuous improvements have to LP9: build continuous improvement into the be carried throughout the construction process to the project, but keep strict control against process to upgrade quality requirements that deviation meet customers’ needs States that the skills level of the human resource LP10: skills level of workers must be competent ST10: an army cannot survive without its with the level of technology in the company equipment, food and stores, just as a worker must and the level of technology in the contracting firms are equally crucial to achieve time, cost and have the necessary skills and tools quality targets in every project Advocates that contracting firms should LP11: benchmarking practices from external and ST11: when there is a new market practice, be inculcate a positive attitude towards benchmark internal environment helps organization learning swift to learn; in adopting the practice, be confident to venture; in practicing, be aggressive; practices in order to gain competitive advantages when market share is attained, emphasize in the core competence

Interpretations

Table V. Summary of principles that are in agreement Sun Tzu’s Art of War strategic principles

538

Lean principles

MD 43,4

However, cost savings alone do not constitute lean practices. For example, to recycle timber formwork more times than it can be used will ultimately affect the final quality of the products. It was felt that the list of 11 LP can still be extended. It is therefore, recommended that Sun Tzu’s strategic principles be tapped upon for the extension of LP. The interpretation of what is written in ST can be extensive. Some additional Sun Tzu’s tactics and strategies that can be further considered for LP include the following. (1) To identify and deploy staff and workers to team up with autonomous multi-functional groups that can work to its best advantage. This can be inferred from Sun Tzu who had said that a skilled commander should not waste his men but select them according to their talents and use them to exploit the situation (Khoo, 1992). (2) To formulate strategies that can be applied strategically in the changing marketplace using lean construction so as to overcome the problems of low productivity, poor safety, lack of quality and dangerous site conditions. Sun Tzu had suggested there were only the direct and indirect methods of fighting, but their combinations give an endless series of maneuvers (Khoo, 1992). This implies that rationalization of the construction process would be more and more important. (3) To develop ways and approaches for the implementation of lean philosophy into the organization. Sun Tzu had mentioned that order or disorder depended on the organization so long as the army was organized in its proper sub-divisions (Khoo, 1992). Therefore, the success of cultivating lean philosophy must first be incorporated into the organization’s philosophy. This would also depend a lot on the effective management of the staff and workers. In conclusion, this study posits that lean construction is rarely viewed from a strategic perspective. It was felt that lean construction has now matured to a stage whereby the next phase of its development could be centred on strategic issues. Hence, this paper hopes to draw attention to the need to strategize relevant lean construction principles. Although this study adopted Sun Tzu’s Art of War as the framework for strategizing lean construction principles, it should be noted that other strategic treatises could equally be relevant for the comparative analysis. It was also hoped that this study will help to prompt construction firms into thinking about strategic issues, through drawing appropriate lessons from Sun Tzu’s Art of War. These lessons would particularly benefit international construction firms operating in China where the Art of War originated from. Following China’s recent entry into the World Trade Organization (WTO) and Beijing’s successful bidding of the 2008 Olympic Games, understanding Sun Tzu’s Art of War would pave the way for international construction firms to better understand the Chinese attitude towards strategic lean construction management in the first instance. In this context, Low (2003, 2004) has shown that understanding Chinese business principles and the Chinese cultural system would benefit the competitiveness of international firms who have ventured or are contemplating venturing into China. Finally, while the survey findings do suggest some agreements between lean construction principles and Sun Tzu’s strategic principles, the pathway is now open for

Modern-day lean construction principles 539

MD 43,4

540

a more informed interpretation and comparison of the principles in both philosophies. This area is recommended for further study. In addition, this present study adopted an established set of LP for the survey. It is recommended that the more contemporary LP be reviewed for comparison and analysis with Sun Tzu’s strategic principles to further extrapolate their agreements, if any. In the mean time, the interesting research question of whether the origin of modern-day lean concepts can be traced to Sun Tzu’s strategic principles, formulated some 2,500 years ago in China, remains. Are LP entirely new concepts or are they really a combination of existing principles that ride on Sun Tzu’s strategic principles for warfare? This research question is recommended for further research. References Common, G., Johansen, E. and Greenwood, D. (2000), “A survey of the take-up of Lean Concepts among UK construction companies”, Proceedings of the 8th Annual Conference of the International Group for Lean Construction Brighton, available at: www.sussex.ac.uk/spru/ imichair/iglc8/10.pdf, pp 1-10. Construction Industry Steering Committee (1999), Re-inventing Construction: Construction 21, Ministry of Manpower and Ministry of National Development, Singapore. Cronbach, L.J. (1951), “Coefficient alpha and the internal structure of tests”, Psychometrika, Vol. 16 No. 3, pp. 297-334. Dulaimi, M.F. and Tanamas, C. (2001), “The principles and applications of lean construction in Singapore”, Proceedings of the 9th International Group for Lean Construction ConferenceSingapore, 6-8 August. Edum-Fotwe, F.T. and McCaffer, R. (2000), “Developing project management competency: perspectives from the construction industry”, International Journal of Project Management, Vol. 18 No. 2, pp. 111-24. Egan, J. (1998), Rethinking Construction: The Report of the Construction Task Force, Department of Environment, Transport and Regions, London. Foo, C.T. and Grinyer, P.H. (1995), Sun Tzu on Management. The Art of War in Contemporary Business Strategy, Butterworth-Heinemann Asia, Singapore. Green, S.D. (2000), “The future of lean construction: a brave new world”, Proceedings of the 8th Annual Conference of the International Group for Lean Construction, pp. 1-11, Brighton, available at: www.sussex.ac.uk/spru/imichair/iglc8/22.pdf. Gann, D.M. (1993), “Innovation in the built environment”, unpublished PhD thesis, University of Sussex, Brighton,. Gann, D.M. (1996), “Construction as a manufacturing process? Similarities and differences between industrialized housing and car production in Japan”, Construction Management and Economics, Vol. 14 No. 3, pp. 437-50. Howell, G.A. (1999), “What is lean construction?”, in Tommelein, I. (Ed.), Proceedings of the 7th Annual International Conference for Lean Construction, University of California, Berkeley, CA, pp. 1-10, available at:www.ce.berkeley.edu/ , tommelein/IGLC-7/PDF/ Howell.pdf Khoo, K.H. (1992), Sun Tzu and Management, Pelanduk Publications (M) Sdn Bhd, Kuala Lumpur. Knuf, J. (2000), “Benchmarking the lean enterprise: organizational learning at work”, Journal of Management in Engineering, Vol. 16 No. 4, pp. 58-71.

Koskela, L. (1992), “Application of the new production philosophy to the construction industry”, CIFE Technical Report No. 72, Centre for Integrated Facility Engineering (CIFE), Stanford University. Koskela, L. (1997), “Lean production in construction”, in Alarcon, L. (Ed.), Lean Construction, A.A. Balkema, Rotterdam, the Netherlands, pp. 1-9. Lo, V.H.Y., Ho, C.O. and Sculli, D. (1998), “The strategic insights of Sun Tzu and quality management”, The TQM Magazine, Vol. 10 No. 3, pp. 161-8. Low, S.P. (2003), “Understanding the mind of the Chinese: a historical perspective”, in Kidd, J.B. and Richter, F. (Eds), Corruption and Governance in Asia, Palgrave Macmillan, Basingstoke, pp. 86-106. Low, S.P. (2004), “Tao Zhugong’s Chinese business principles (770-221 BC): a convergence with modern-day construction and real estate practices”, in Kidd, J.B. and Richter, F. (Eds), Trust and Anti-trust in Asian Business Alliances: Historical Roots and Current Practices, Palgrave Macmillan, Basingstoke, pp. 151-80. Low, S.P. and Yeo, K.K. (1992), “Sun Tzu’s Art of War and its strategic relevance for construction project management”, Paper No. 25, The Royal Institution of Chartered Surveyors, London. Melles, B. (1997), “What do we mean by lean production in construction?”, in Alarcon, L. (Ed.), Lean Construction, A. A. Balkema, Rotterdam, the Netherlands, pp. 11-16. Norusis, M.J. (1994), SPSS Professional Statistics 6.1, SPSS, Inc., Chicago, IL. Sawyer, R.D. and Sawyer Lee, M.C. (1996), The Complete Art of War, Westview Press, Boulder, CO. Sekaran, U. (1994), Research Methods for Business: A Skill-Building Approach, 2nd ed., Wiley, Chichester. SPSS, Inc. (1995), SPSS Exact Tests TM6.1 for Windows TM, Prentice-Hall, Chicago, IL. SPSS, Inc. (2000), SPSS Base 10.0 Applications Guide, Prentice-Hall, Chicago, IL. Tan, B.K. (1991), “Politics in project management: application of Sun Tzu’s War management tactics and strategies”, unpublished MSc (Project Management) thesis, School of Building and Real Estate, National University of Singapore. Tommelein, I.D. and Li, A.E.Y. (1999), “Just-in-time concrete delivery: mapping alternatives for vertical supply chain integration”, in Tommelein, I.D. and Ballard, G. (Eds), Berkeley,Proceedings of the 7th Annual. Conference of the International Group for Lean Construction, CA, pp. 159-70. Vrijhoef, R. and Koskela, L. (1999), “Role of supply chain management in lean construction”, in Tommelein, I. (Ed.), Proceedings of the 7th International Conference for Lean Construction, University of California, Berkeley, CA, pp. 1-14, available at: www.ce.berkeley.edu/ , tommelein/IGLC-7/PDF/Vrijhoef&Koskela.pdf Winch, G., Usmani, A. and Edkins, A. (1998), “Towards total project quality: a gap analysis approach”, Construction Management and Economics, Vol. 16 No. 2, pp. 193-207. Womack, J.P., Jones, D.T. and Roos, D. (1990), The Machine that Changed the World, Rawson Associates, New York, NY. Womack, J.P. and Jones, D.T. (1996), Lean Thinking, Simon and Schuster, New York, NY. Zimmerer, T.W. and Yasin, M.M. (1998), “A leadership profile of American project managers”, Project Management Journal, Vol. 29 No. 1, pp. 31-8.

Modern-day lean construction principles 541

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

MD 43,4

Development of management philosophy for Chinese business environment

542

Tat Y. Lee Technology Support Centre, The University of Hong Kong, Hong Kong, People’s Republic of China Abstract Purpose – This paper aims to explore how management approaches are adopted in the modern Chinese business environment. Design/methodology/approach – A questionnaire survey was conducted among the companies based in Hong Kong with manufacturing processes in China and supplying their products to the global market. The results of the survey are analyzed in conjunction with traditional Chinese philosophy, Malcolm Baldrige National Quality Award Criteria and ISO 9001 requirements. Findings – The findings confirm that most companies operating in the capacity of original equipment manufacturer (OEM) suppliers will use ISO 9001 to set up their management systems. With the development of business, the companies will move from OEM to original design manufacturer (ODM), and some of them to original brand manufacturer. The management approach used at the OEM stage is basically ISO 9001; however, more comprehensive management approaches such as MBNQA criteria would be used when the company developed into OEM and particular ODM. In the Chinese business environment, the values of traditional Chinese philosophy are often shared by the senior leaders of the company. Originality/value – This paper confirms that different management approaches should be used at different stages of business development. Furthermore, the management approach adopted should reflect the culture of the people concerned. Traditional Chinese philosophy is a rich source of management concepts from which foreign investors in China will be benefited. Keywords ISO 9000 series, Quality awards, Oriental philosophy, Hong Kong, China Paper type Research paper

Management Decision Vol. 43 No. 4, 2005 pp. 542-550 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510593549

Introduction China is implementing deeper and deeper economic reforms ever since its new-won membership in the World Trade Organization. This represents great opportunities for many enterprises, but also fierce competitions and threats for others. The key is how far an enterprise is able to catch up with the development of the market. Having developed from an original equipment manufacturer (OEM) background, many factories are facing an increasing pressure of cutting cost. In fact, to lower the cost is the only tool for survival for most OEMs. Some manufacturers diversify into the capacity of original design manufacturer (ODM) that adds value to the customers through innovation and design. Many more established manufacturers realize, however, that they have to build their own brand names and trade in the capacity of original brand manufacturer (OBM) in order to get a more secure position in the highly competitive global market. The route from OEM to ODM to OBM is well reckoned. However, how shall the leadership and management system support the development of an organization in this

development process is an interesting area of study. This paper endeavors to explore the current management systems used by enterprises in China and the problems they face. It will then discuss the leadership and management system that is adopted by well-established enterprises in the more developed countries. The issue of making Chinese culture an integrating part of the system will be explored.

Development of management philosophy

A questionnaire survey Objective Since 1980s many manufacturers in Hong Kong have shifted their production operations to Pearl River Delta and most of them are OEM suppliers. Facing the ever-increasing price competition, some enterprises gradually move into ODM businesses in recent years. A few of them have moved into OBM through merger and acquisition of world brand names. The study of this paper was done in Hong Kong and the following discussion will focus on Hong Kong and the associated investment in Pearl River Delta. A questionnaire survey was conducted among enterprises based in Hong Kong in January 2004. The objective of the survey was to determine the management issues that are important to the Hong Kong enterprises having operations in China. In particular, the study attempted to provide an answer to the question: what should be the management approaches suitable for enterprises in China, a home base rich in Chinese culture, that face the challenge of global competition?

543

Approach The questionnaire requested the company to identify the industry it belongs to, number of employees in Hong Kong and China, and the revenue in 2003. The company was then asked to select from a list the management systems they had used and the benefits obtained. The company was asked its goals for the coming one to three years and how would it rate the importance of a list of management issues that would be important in achieving these goals. The last question showed a list of Chinese philosophies, western philosophies and management principles. The company was invited to indicate the philosophies that would help to elevate the leadership effectiveness. The questionnaire was mailed to a sample of well-established organizations and small and medium enterprises. Response and results A total of 350 questionnaires were sent out and 54 companies replied, a return rate of 15.4 percent. Out of these 54 companies, half of them have operations in China. Since this paper concerns about the companies having operations in China only, the data reported and discussed in the paper will focus on this group of questionnaire feedback. As mentioned above, 27 companies have operations in China. Total number of employees working for these companies in China was 26,141 people and the revenue for 2003 was HK $3.3 B. A list of 11 most popular management tools/approaches is shown on the questionnaire for the companies to indicate their preferences. ISO 9001 is by far the most popular management approach adopted by the companies. Eighty-nine percent (89 percent) of the companies are ISO 9001 certified. Following ISO 9001,

MD 43,4

544

Business Process Re-engineering (PBR), 5S, and Performance Criteria for Quality Award are adopted by more than half of the responding companies. Table I shows the percentages of companies that have adopted the management tools. The companies are then asked to assess the benefits achieved through implementing the management tools. All of the companies (100 percent) indicate that the work processes are improved. Over 90 percent of the companies claim that they have established a good management system, improved product/service quality, elevated team spirit, and increased customer confidence. Full details are shown in Table II. The answer to the question what are the goals for the coming one to three years is not so definite. Top on the list is “To improve service quality” (67 percent), followed by “To increase market share” and “To establish clear corporate vision, mission and values” (both 56 percent). Seven goals are suggested in the questionnaire and a full account of the response is shown in Table III. The companies are then invited to rank the importance of seven factors that are considered to be essential for achieving the goals. The company can rank each factor from most important (ranked 1) to less important (ranked 7). “To better understand customer requirements” is ranked the highest with an average ranking of 1.33 and “To improve leadership and decision quality of senior management” the second highest with an average ranking of 1.41. Table IV shows the ranking for all the seven factors. Management systems

Table I. Management systems adopted by the companies

ISO 9000 Business process re-engineering 5S Quality award performance criteria Benchmarking ISO 14000 Quality control circles Total quality management Balanced scorecard Q-mark Six sigma

Improvement

Table II. Improvement achieved by the companies

Improve work process Establish management system Improve product/service quality Elevate team spirit Increase customer confidence Improve staff quality Better control of suppliers Increase efficiency Lower costs Increase profitability

Percentage 89 63 55 52 48 41 41 41 33 30 22

Percentage 100 96 96 93 93 85 74 74 67 59

The last question is related to management philosophy. The company is asked to show the philosophies and thoughts that it believes will help improve the quality of management. Besides western management theories and Japanese management theories, typical traditional philosophies that are familiar to Chinese people are also included. Sun Tzu’s “The Art of War”, Confucianism, Taoism, Legalism, and Buddhism are on the list. Figure 1 shows that the companies consider western management theories most helpful for improving quality of management. “The Art of War” and Japanese management theories come next.

Development of management philosophy 545

Analysis ISO 9001 has become a basic requirement for most OEM contracts nowadays, there is no surprise why majority of companies have implemented this quality management system. The ISO Survey (ISO, 2002, www.iso.org/iso/en/iso9000-14000/pdf/ survey12thcycle.pdf) reports top ten countries for ISO 9001:2000 certificates in December 2002 (Figure 2) and China is top on the list by having issued nearly 41,000 certificates. As reflected by the survey results in this study, ISO 9001 will generally bring such advantages as improved work processes, established management system, and improved product/service quality. However, the company will need more than these when competition becomes fiercer and especially when it endeavors to develop its business into ODM or OBM status. For the more established companies such as Haier Group, ISO 9001 certification is a basic strategic step but not the destination (Yi and Ye, 2003). In management the most difficult part is on people. Perhaps this is why most companies set “To improve service quality” as their one-to-three-year goal. Service quality relates more to people as service is provided by people for people. Success

Corporate objectives Improve service quality Increase market share Establish clear corporate VMV Increase profit Improve product quality Develop new product/service Build company-owned brand name

Factors Understand customer requirements better Improve leadership and decision quality of senior management Develop employees’ creativity and potential Know more about business environment/government policy Understand competitors better Improve global vision of senior management Improve EQ of senior management

Percentage 67 56 56 52 48 48 44

Table III. Main objectives for the next one to three years

Rating (average) 1.33 1.41 1.93 2.00 2.08 2.19 2.69

Table IV. Important factors for achieving the objectives (1 – most important to 7 – unimportant)

MD 43,4

546

Figure 1. Response to the question “Can these philosophies help improve leadership and management of the company?”

Figure 2. Top ten countries for ISO 9001:2000 certificates

stories of new comers in many industries, such as Haier in white goods and Dell (1999) in personal computers, reflect that service is the key. In order to align the employees to work toward the common goal, many companies establish and communicate clear corporate vision, mission and values (VMV) throughout the organization. In the VMV, most companies will clearly define who are the target customers and what are the service standards. Two factors are identified to be most important for achieving corporate goals, namely to better understand customer requirements and to improve leadership and decision quality of senior management. The first factor is obvious and is a forever challenge to all companies. The second factor reflects that the senior leaders are conscious about their own weaknesses and keen to seek improvement. Three major “tools” are identified to be useful for improving quality of management. They are western management theories, The Art of War, and the Japanese management theories. Both the western management theories and Japanese management theories represent management concepts of their own right. It is believed that these two management theories reflect the western and eastern cultures, respectively. Sun Tzu’s The Art of War, on the other hand, has been regarded an enlightening wisdom for strategic planning in business sectors over the world.

Development of management philosophy 547

Discussion ISO 9001 As mentioned above, many companies in China started their businesses as OEM suppliers. It is most important for them to demonstrate their ability in meeting quality requirements to their customers, in most cases the customers are international buyers. Being an internal standard, ISO 9001 is by far the most recognized management system that is essential to international orders. On the basis of ISO 9001 certification, the companies will find it easy to extend to ISO 14001 or other safety, health, hygiene, human rights standards that are increasingly in demand. Malcolm Baldrige National Quality Award criteria Established by Public Law in 1988 in the USA, Malcolm Baldrige National Quality Award criteria (MBNQA) are regarded the key guidelines for performance excellence. The Commerce Department’s National Institute of Standards and Technology (NIST) in the USA has conducted a stock performance study of the award winners for seven years since 1995. The findings show that the award winners group stock has significantly outperformed the S&P 500 (ISIXSIGMA, 2001, http://isixsigma.com/ library/content/c010426a.asp; NIST, 1998). The results are shown in Table V.

Year

MBNQA outperforms S&P 500

2001 2000 1999 1998 1997 1996 1995

4.4-1 5-1 2.6-1 3-1 3.5-1 4-1 6.5-1

Table V. Stock performances of the MBNQA winners compared with S&P 500

MD 43,4

548

In principle, only the companies in USA are eligible for the MBNQA. However, the award criteria have been adopted in other countries and cities with or without modification. In Hong Kong, for example, Hong Kong Management Association (HKMA) has organized the quality award based on the same judging criteria since 1991. The experience of companies with different backgrounds shows that individual companies can benefit from a management framework set out by MBNQA even if they do not enter the award competition (Vokurka and Lummus, 2003). Simplified checklists are available for companies to test how ready they are in meeting the MBNQA standard (Lee, 2000). The MBNQA criteria can be used as a guideline and checklist for a performance-based management framework. It does not provide solutions but guides the company to critically review its leadership and management system. The underlining principles are total quality management with emphasis on business results. This is why the winners of the award are able to maintain outstanding profitability. The MBNQA criteria are not a management methodology. To solve their management and organizational problems, some companies may adopt such management tools as business process re-engineering, balanced scorecard, or six sigma. As far as assessing the successfulness of management approaches is concerned, MBNQA criteria provide a benchmarking reference. Though MBNQA is not only for big companies, many well established companies have won the award. In the USA, such renowned names as 3M, AT&T, Xerox, Boeing, Corning, IBM, etc. are on the list of past winners. In Hong Kong, past winners of the HKMA award include Island Shangri-La, MTR, COSCO, Ricoh, and McDonald’s, just to name a few. It is reasonable to believe that for the companies that aim to exceed ISO 9001 will find MBNQA criteria a good reference. Sun Tzu’s The Art of War The Art of War was first introduced to Japan in 1716 and translated into French for the first time in 1772 (Griffith, 1963). The work has attracted immediate attention and received complimentary reviews since then. It is still a popular course in both business and military studies in western countries. The Art of War is best known for its enlightening concepts on strategy formation. People find new ideas for their business strategic planning through visiting and revisiting Sun Tzu’s teaching. Taken as an example, Sun Tzu said, “Anciently the skilful warriors first made themselves invincible and waited the enemy’s moment of vulnerability. Invincibility depends on one’s self; the enemy’s vulnerability on him.” (Chapter 4 of The Art of War, see Griffith (1963)). Most well established companies nowadays place great emphasis on quality and continuous improvement. This is exactly trying to make the company invincible. However, products and services of good quality cannot automatically defeat its competitor. It has to wait until the competitor becomes weak by itself. The Art of War is much more than a strategy book. In Chapter 1, Sun Tzu said, “By command I mean the general’s qualities of wisdom, sincerity, humanity, courage, and strictness”. Here people find traces of Confucianism because it stresses the importance of being kind to warriors (people). This hints that The Art of War is not only about strategies and tactics. Human factors are a major concern. Human factors

include the values and belief of the leader, the quality of the followers, and the effectiveness of the management system. The discussion of human factors is very rich in traditional Chinese philosophies. Confucianism believes in benevolence, righteousness, and social norms. Trough role modeling of the leaders and educating the people, an ideal management system will be maintained. Taoism proposes that the leader (sage) should “manage his affairs without ado, and spread his teaching without talking” (Wu, 1989). Legalism emphasizes the use of law, methods of governing, and authoritative power (Sato, 2003). It is believed that modern leaders of enterprises will be able to gain food for thought from all these traditional wisdoms. This is an interesting area of study that has been attracting attention in recent years. Taken as an example, the relationship between ISO 9001 and Toaism, Confucianism and Legalism has been explored (Lee, 2001). Traditional culture and modern management It is widely recognized that modern management has close links with tradition values and cultures. Many studies have been carried in this field though most of them tend to focus on the behaviors of Chinese businessmen rather than trace back to traditional cultures. See for example, Graham and Lam (2003). There are ample examples that can be quoted to explain how traditional Chinese philosophies can be related to the MBNQA criteria. Criterion 1.1 of MBNQA questions “How do senior leaders create an environment for empowerment, innovation, and organizational agility?” (MBNQA, 2004) This emphasizes the importance of empowerment, innovation and agility, but it does not tell what approach should be adopted. A senior leader armed with belief and values in Confucianism, Toaism, or Legalism, can easily find his/her way to address this question. Being an examiner for HKMA quality award for eight years, the author has seen different approaches adopted by companies with good results. However, the more popular approach is through role modeling of the senior leaders and providing intensive training and education for the staff, which is quite a Confucian management style. Also in criterion 1.1, it asks “How do senior leaders translate organizational performance review findings into priorities for continuous and breakthrough improvement of key business results and into opportunities for innovation?” This makes us recall The Image of Chien in I Ching, it says “The movement of heaven is full of power. Thus, the superior man makes himself strong and untiring.” (Baynes, 1989). Criterion 1.2 requests that a company should support its key community. It asks, “How does your organization actively support and strengthen your key communities?” In his teachings, Mencius once said, “When poor, they (the superior men) tried to better their own condition. When in power, they tried to better the condition of the whole world as well” (Zhao et al., 1999). We can see how closely the MBNQA criterion can be linked to Mencius teaching. Many other examples can be quoted and this is an interesting area of further research. Besides thoroughly understanding the strengths of western management theories, there is a need to develop management theories that suits the Chinese culture better. It is believed that traditional Chinese philosophies will provide us with enlightenment in this aspect. The new management model is yet to be established and we can perhaps call it the Chinese management of excellence (CME) model for the time being.

Development of management philosophy 549

MD 43,4

550

A development model The business development journey of progressing of from OEM to ODM to OBM can be mapped with the management approaches from ISO 9001 to MBNQA to CME. A few Chinese brand names such as Haier and Legend have established foothold in the international market now. On the other hand, an increasing number of existing brand names have come under the control of Chinese entrepreneurs through acquisition. There is an urgent need for these companies to enhance their management through adopting such performance-based management system as MBNQA. For the companies to excel in the global market, CME will be the goals for not too long a future. Conclusion ISO 9001 is the most popular management system adopted by OEM companies in China. This meets the requirements of most customers and sets the foundation for further development of management approaches to cope with the need for upgrading the capacity of the OEM to ODM and OBM. MBNQA criteria are frequently referred to as guidelines and checklists for performance excellence but no specific management approach is prescribed. This provides opportunity for combining the MBNQA criteria with traditional Chinese wisdom to form a CME model that suits the specific business environment in China. References Baynes, C.F. (1989), I Ching or Book of Change, Arkana Penguin Books, New York, NY. Dell, M. (1999), Direct from Dell: Strategies that Revolutionized an Industry, Harper Business, New York, NY. Graham, J.L. and Lam, N.M. (2003), “The Chinese negotiation”, Harvard Business Review, October, pp. 82-91. Griffith, S.B. (1963), Sun Tzu: The Art of War, Oxford University Press, New York, NY. Lee, T.Y. (2000), Booklet on Quality Awards and Self-Assessment, City University of Hong Kong. Lee, T.Y. (2001), “Toaism, confucianism, legalism and ISO 9000: a management perspective”, International Journal of Management, Vol. 18 No. 4, pp. 515-22. MBNQA (2004), Criteria for Performance Excellence, Baldrige National Quality Program, United States Department of Commerce, MD. NIST (1998), available at: www.nist.gov/public_affairs/releases/stock.htm Sato, M. (2003), The Confucian Quest for Order; The Origin and Formation of the Political Thought of Xun Zi, Brill, Boston, MA. Vokurka, R.J. and Lummus, R.R. (2003), “Better supply chains with Baldrige”, Quality Progress, pp. 51-7. Wu, J.C.H. (1989), Lao Tzu: Tao Teh Ching, Shambhala, London. Yi, J.J. and Ye, S.X. (2003), The Haier Way – The Making of a Chinese Business Leader and a Global Brand, Homa & Sekey Books, NJ. Zhao, Z., Zhang, W., Zhou, D. and Yang, B. (1999), Mencius, Hunan People’s Publishing House and Foreign Languages Press.

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

Dynamics of strategic management in the Chinese construction industry Charles Y.J. Cheah and David A.S. Chew

Dynamics of strategic management 551

School of Civil and Environmental Engineering, Nanyang Technological University, Singapore

Abstract Purpose – To provide a structured and integrated framework of corporate strategy in order to help practitioners and researchers identify critical issues related to the Chinese construction industry and analyze its dynamics from a holistic viewpoint. Design/methodology/approach – A brief review of the major themes of strategy mostly developed by western researchers is first presented. This is then supplemented by a review of the pertinent characteristics of the construction industry in general, and those related to China’s context in specific, which affect management decision-making. Two case studies are used to illustrate the concepts implied by the proposed framework. Findings – The cases of Guangsha and the Shanghai Construction Group demonstrate that there is no hard and fast rule in developing a coherent strategy. This is even truer considering the fact that China’s circumstances are still evolving. Practical implications – The critical elements identified in the proposed framework serve as a good starting point for individual firms to further develop a more detailed execution plan. Originality/value – This paper bridges a management gap that exists between mainstream management researchers, who have few precedence of studying the construction industry, and traditional construction management researchers, who tend to focus on project-level issues rather than corporate-level issues. Keywords Strategic management, Construction industry, China Paper type Research paper

Introduction Strategic management as a formal field of academic inquiry is said to emerge only since the 1960s (Rumelt et al., 1994). Over the years, management studies building on either empirical or anecdotal evidence related to the construction industry appear to be lacking. This seemingly lack of interest given by mainstream strategic management researchers could be due to three primary reasons: (1) The construction industry encompasses a broad range of sub-sectors (residential, industrial, environmental, infrastructural construction – just to name a few) and involves multiple parties who are bound by specific contractual arrangements in any given project procurement system. The complexities and “messiness” involved might have raised the barriers for researchers of a more generalist nature to conduct insightful studies. (2) Construction is sometimes portrayed as a “low-growth, low-tech” industry, thus lessening its appeal as a research context.

Management Decision Vol. 43 No. 4, 2005 pp. 551-567 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510593558

MD 43,4

552

(3) Industries such as automobile and pharmaceutical consist of large, dominant organizations with concentrated market shares (Oster, 1999). The prominence of these organizations usually implies that their strategies, actions and outlooks are widely covered by many public sources. On the other hand, construction is a highly fragmented industry and information on individual firms is relatively limited. This adds to the difficulty of conducting management studies on construction firms. Meanwhile, many construction management professionals – researchers and practitioners alike, are too entrenched in a project management tradition (Chinowsky, 2000). The importance of corporate-level management issues is often downplayed when most firms are content to stay afloat one project at a time. Alas, recent demises of premier companies such as Stone & Webster in the U.S. (established in 1889) and Philipp Holzmann in Germany (established in1849) vividly exemplify that technically competent firms can still fail if they do not have a coherent and long-term corporate strategy. A direct and consequential result of omission by both schools of intellectuals is a lacuna of corporate-level management issues specific to construction. The importance of these issues is elevated in the case of China where the construction market and the general industrial environment are in a flux. Whether it is for the sake of current survival or future competitiveness, the Chinese construction enterprises need to look beyond project and corporate boundaries. In China, contribution of the construction industry to the country’s GDP has risen from 3.8 percent in 1978 to 6.7 percent in 2002 (National Bureau of Statistics of China, 2002). In 2002, the gross output value of construction reached 1852.7 billion Renminbi (RMB) with a year-on-year growth rate of 20.6 percent. Direct contributions to the country’s economy aside, strong infrastructural systems also serve as the backbone of growth for other industrial sectors in general. Although there have been some speculations that China’s high GDP growth rate is not sustainable, it is believed that the construction industry will be less affected since a large part of the country is still blighted by the lack of basic infrastructure and facilities. The Chinese construction industry itself is undergoing a major evolution and transition (Li, 2001). First, governance and administrative system of the industry has changed (Luo and Gale, 2000). Second, as reform of state-owned enterprises continues (Sha and Lin, 2001), China’s accession to the WTO in 2001 means that domestic firms have to confront the rivalry of foreign firms who largely possess better financial strength and technological prowess. Against this backdrop, a framework that helps construction enterprises examine various strategic concerns in a broad sense is essential. Prior to this, an overview of some unique characteristics of the construction industry – both in general and also specific to China’s context, is essential. Characteristics of construction industry affecting management decisions General aspects In general, the construction industry has low barriers to entry coupled with a high degree of fragmentation. To provide a rough picture of this highly competitive and fragmented nature of the industry, consider the US market which had a total construction spending of approximately US$ 889 billion in 2002 (Tulacz, 2003). The three largest players, Bechtel, Fluor Corporation, and Kellogg Brown & Root, had a collective stake of less than 1.5 percent of this market volume in 2002. Likewise, there

were about 100,000 construction enterprises in China as of 2002. The numerous competitors in construction, including some who are indeed not profit-driven, have heightened the rivalry intensity in this industry. Price is also far from being the only determining success factor (Macomber, 1999). Moreover, exit costs in construction are generally high due to obligations under existing contracts and capital investments that have very limited transfer value (i.e. high level of asset specificity). Despite influential forces of globalization and deregulation, the construction business still requires a huge amount of local knowledge and relies substantially on domestic networks and relationships. This somewhat creates a “multi-domestic” setting, following Porter (1998) parlance. Since the production activities are mostly conducted onsite, there are limited economies of scale. The usual “learning-curve” effect is weakened due to the geographical dispersion of projects. Human capital represents a key asset in many operations, especially for engineering services. There is also a heavy reliance on labor for the physical construction process, although automated construction methods are constantly pioneered by some – such as the Japanese contractors. In a typical project, it is a challenging task to ensure smooth exchanges of information among various parties – client, architects, engineers, contractors, suppliers, surveyors, and miscommunications are not uncommon. This indirectly leads to a litigious business environment. Insurance and various types of bonds (bid, payment, and surety) serve as some important tools for risk sharing, transfer and avoidance. Next, consider the simplified value system shown in Figure 1 which is typical for many sectors of the industry. Except for the upstream suppliers’ operations which are product-based, other activities within the value system are primarily service-oriented. The differences between product-based and service-oriented industries could be crucial in terms of operational, marketing and technological strategies. Certain models such as Porter (1985) value chain cannot be applied without modification – for example, “inbound and outbound logistics” do not have clear-cut meanings for most engineering and construction firms. Lastly, project delivery and procurement systems, such as design-bid-build and build-operate-transfer, critically govern the rules of the game and affect firms’ rivalries and strategies (Miller, 2000). Figure 2 summarizes the general strategic aspects of the industry that have been discussed.

Dynamics of strategic management 553

Figure 1. Value system of typical sectors within the construction industry

MD 43,4

554

Figure 2. Characteristics of the construction industry with strategic implications

Context of the Chinese construction industry Construction enterprises in China are commonly categorized into three groups: state-owned enterprises (SOEs), urban and rural collective owned enterprises (COEs), and rural construction teams (RCTs) (Chen, 1998; Low and Jiang, 2003). As a result of China’s accession to the WTO, China’s economy has gradually been transformed from a centrally-planned to a market-oriented setting. The opening up of China’s market invites more liberal participation by foreign contractors and consultants who were previously limited to undertake only World Bank and Asian Development Bank projects, foreign direct investment projects, specialized technology projects, and “authorized” form of joint ventures. In fact, for construction, the issuance of Decree 113 and 114 essentially hastened this process two years earlier than it was legally required under the WTO Accession Treaty (Ren and Khong, 2004). The growing presence of foreign enterprises rightfully adds to a fourth category of enterprises, which needs to be taken into account when one studies the dynamics of strategic management in the Chinese construction industry. Coupled with the government’s drive for integration with the global economy, international alliances and joint ventures are gradually being forged between Chinese and foreign contractors to undertake both domestic and international construction projects (Chew, 2001; Luo, 2001; Shen et al., 2001; Xu et al., 2004; Xu and Chew, 2004). The Engineering News Record classifies construction activities into eight major industrial sectors: general building, transportation, manufacturing, industrial process, petroleum, power, environmental and telecommunications. Broadly speaking, the Chinese construction enterprises dominate the general building and manufacturing sectors. Not surprisingly, foreign firms initially found themselves involved in large infrastructure projects (such as power plants and toll roads) and construction of plants involving high-technology or complex industrial processes. In China, the governance structure of the construction industry is multi-layered and fragmented. Broadly, the administration hierarchy related to construction consists of: (1) The central government involving the State Council, the National Development and Reform Commission, the Ministry of Construction and other related ministries.

(2) Construction Committees at the provincial and municipal levels. (3) Construction Bureaus at the prefecture and county levels. The last two categories are under the purview of the Ministry of Construction and the local governments. Since entities are interconnected by both vertical and horizontal channels, many departments have overlapping enforcement responsibilities and power of control over construction works in one particular location. Conflicting orders and guidelines from different authorities are not uncommon, and the consequent legal and regulatory implications are complex (Zhu et al., 2001). Moreover, unlike in the Western societies, the judicial system in China has traditionally been government-oriented and playing a role of keeping social rather than economic order intact (Lu, 2003). In China, the effects of low entry barrier, fragmentation, and high exit cost as depicted earlier in Figure 2 are mutually reinforcing. High exit barrier, in particular, is due to both market and institutional factors such as: . Lack of a matured resource market for asset transfer thus magnifying Williamson’s (1975) notion of transactional costs. . Lack of comprehensive legislations to protect failed companies to exit through bankruptcy, mergers or liquidation of assets. . An added role of enterprises to provide employment for local community, therefore government authorities may simply bail out certain enterprises to maintain the stability of the society. Despite the economy’s progress towards “market socialism” (Naughton, 1995), until such changes fully take place, demise of underperforming construction enterprises is unjustifiably prolonged. Surplus of production capacity creates excessive competition among players, but it does not lead to the type of perfect market that economists would like to envision. For example, some SOEs and design institutes have utilized “over-competition” as an excuse to usher the government to prevent potential competitors from entering their local markets (Lu, 2003). There are other problems and issues specific to the Chinese construction market. On project delivery and procurement systems, projects were assigned in the past when local protectionism and corruption potentially influenced decision-making in contract award. Other outstanding issues, including the high default rate of payment obligations along the client-contractor-subcontractor-supplier-worker supply chain and the abuse of power by some government authorities, act to the detriment of efforts to transform the Chinese construction industry into one that is as effective and transparent as those in the developed countries. On the bright side, signs of reform of tendering practices are shown with the enactment of The Construction Law of the People’s Republic of China (PRC) (1997), The Contracts Law of the PRC (1999), and The Call Tender and Tendering Law of the PRC (2000) (Wang, 2001). Gradual changes are also observed since China’s accession to the WTO in the construction legal system. For example, the two Regulations promulgated in 2002, The Foreign Investment Design Enterprises Regulations and The Foreign Investment Construction Enterprises Regulations, help to open up market access to foreign enterprises. For the first time, wholly foreign-owned design and construction enterprises can now be legally established in China. The caveat, however, is that their establishments are still

Dynamics of strategic management 555

MD 43,4

556

subjected to the approval of specific government agencies, along with other constraints such as the type of projects that may be undertaken. Applicability of Western strategic management theories Previous reviews of the industry’s unique characteristics in both a generic sense and specific to China’s context affirm the daunting task of conceptualizing a strategic framework for the different categories of construction enterprises. In their study of the internationalization process of Chinese construction enterprises, Low and Jiang (2003) found that firms’ experience do not seem to fit traditional multinational enterprise theories. Still, with more than four decades of academic intellect, it would be a mistake to totally ignore what Western scholars have to offer to solve the strategic puzzle. A number of typologies exist for different perceptions of strategy depending on the content of strategy, the process of strategy development, and the contexts (corporate and environmental) that house both content and process (Elfring and Volberda, 2001). As a point of reference, Whittington (2001) classification scheme is chosen to facilitate discussion presented in this section. In his framework, Whittington found that the distinct schools of thought can essentially be mapped along two axes: outcomes of strategy and the processes by which it is made. The first axis examines the degree of variation of strategic intent and outcomes produced. This may represent profit maximization per se at one extreme, or accommodation for other complex priorities such as social responsibilities at the other end of the spectrum. The second axis considers whether such outcomes are derived through deliberate planning, calculation and formulation, or simply as an emerging product of accidents, chance, and social and organizational inertia. The radically different implications on strategy are hence read off from the relative positions along these two axes, resulting in four generic perspectives of strategy: Classical, Evolutionary, Processual, and Systemic. Readers may refer to Whittington (2001) for further details of the characteristics of each perspective and Cheah and Wong (2004) for a summary of the strengths and weaknesses of each field. The real world is obviously more complex than what could be analyzed through static reliance on a single field of theory. Shenkar and von Glinow (1994) testified that theories vary in terms of their applicability to the Chinese context, but making necessary adjustments to such theories are likely to lead to positive developments in our understanding of the Chinese organizations. Thus, whether it is Whittington’s four generic perspectives or Mintzberg et al.’s (1998) ten schools of thought, the different theoretical fields within each classification framework should be viewed as complementary rather than mutually exclusive. For one, Oliver (1997) had combined both institutional and resource-based views to derive a series of interesting propositions concerning sustainable competitive advantage. It goes without saying that an open mindset helps to match theories with circumstantial evolvements in the real world. This philosophical construct is even more crucial when the industrial dimensions of construction (Figure 2) are considered concurrently. Blending theory and practice – conceptualization of framework In short, the complexity of the industry’s contextual variables and diversity of academic theories cannot be overemphasized – arguments and propositions can be framed in a meaningful perspective only with due consideration of these factors.

For example, while SOEs and wholly owned foreign enterprises (WOFEs) in China require different treatments, each theoretical field stands to add valuable insights to form parts and puzzles of the overall strategic mandate. In studying the Chinese construction industry, Kang et al. (2004) recommended a structured top-down approach by segmenting the analysis of the industry into three levels: (1) China’s macroeconomic environment; (2) Industrial economics of construction including issues of demand, taxation, labor productivity, project quality, industry fragmentation and average asset turnover; (3) Industrial structure and rivalry among firms. All three levels are linked to the internal operations of firms in one way or another. By cross-referencing to Whittington’s classification framework, Kang et al. found that each level of the analytical methodology can draw insights from different streams of the academic theories. For example, the first level, which focuses on broad issues and the external environment, is mostly related to the Systemic view; the second level may require contributions from the Classical stream (which is occupied with models developed by industrial economists); the third level would utilize collective insights from different streams ranging from market positioning (a Classical tactic), minimization of transactional costs (an Evolutionary theme), development of core competencies (a Processual approach) and establishment of “Guanxi” among firms (a Systemic notion). Based on a similar premise, the conceptual framework proposed in this paper does not subscribe to any single theoretical stream. Figure 3 provides an outline of the overall framework. China’s accession to WTO implies that the links between the industrial context and academic theories are largely in a flux. With the ingress of foreign enterprises and the continuing reform, restructuring and internationalization of Chinese construction enterprises (Low and Jiang, 2003), China has become more integrated with the global economy. The central tenet of corporate strategy lies with striking a delicate balance between both external and internal aspects. These aspects are separated by virtually “fluid” boundary lines as depicted in Figure 3 (drawn with the intention to emphasize the dynamic interactions between the two). While firms can dictate their modus operandi by controlling, structuring and implementing internal corporate functions, they would have less control over the development of external aspects – notwithstanding the fact that they may exert indirect influence by lobbying the government to adopt policies that benefit their businesses. Firms align their internal functions with the external development by adopting different modes, including “quasi-firms” (Eccles, 1981), networking (Nohria and Eccles, 1992), Guanxi (Tsang, 1998; Park and Luo, 2001), partnering, joint ventures (Luo et al., 2001), strategic alliances, mergers and acquisitions. Details of the external and internal aspects in the framework will be duly addressed in sequence. Government policies Externally, the construction industry is closely tied to the economic growth of China, which in turn is affected by monetary and fiscal policies. The impact of governmental policies in instigating industrial growth usually channels downstream and affects construction in one way or the other. Already, the development of new facilities in

Dynamics of strategic management 557

MD 43,4

558

Figure 3. Strategy development framework for Chinese construction enterprises

booming industries that enjoy easy credit loans spurs strong demand for construction. Recent reports also indicate some signs that China’s growth is pulled back by a lack of sound infrastructure systems throughout the country – which means that more investments are foreseen in this area (Financial Times, 2003; Kynge, 2004b, 2004c). As discussed earlier in the paper, legislation of new construction laws critically affects procurement and functioning of construction projects. New development in legal and regulatory issues is therefore another key external factor for firms to monitor. Lam and Chen (2004) provided a good overview of the past and recent development of the construction legal system in China. Conditions of capital markets, other industrial markets, commodity and resource markets There are three major types of markets the conditions of which would affect fundamental business and project operations of construction. First, the conditions of capital markets dictate both the extent and costs of funding that enterprises could secure. In China, it is not uncommon that clients or developers defer progress payments to the contractors for a much longer period than what is commonly practiced in developed countries. The short term implication is that contractors would require a substantial amount of working capital to move a project forward. In the long term,

competitive advantage can be derived from the presence of financial strength to bridge gaps between cash inflows and outflows and also occasional events of default by clients. For larger firms which are either listed or eyeing for initial public offering, the stock market becomes an important source to raise capital in order to pursue a growth strategy through acquisitions, as witnessed in the case of the Guangsha Group. Second, as a service industry, the conditions of other industrial markets, such as the level of fixed investments, are precursors of demand for construction activities. This is especially significant in the case of China when the country now attracts more than US$ 50 billion in foreign direct investments (Kynge, 2003). Third, commodities such as steel bars, and resources such as equipment and labor, serve as basic inputs to the construction process. Consequently, the conditions of these markets directly affect the operating costs of contractors (obviously, for upstream suppliers and subcontractors, the conditions affect their revenue rather than cost). China’s steel production amounted to 220 million tonne in 2003 and eclipsed those of the US and Japan combined (Kynge, 2004a). In 2003 it consumed 40 percent of world’s cement output and in 2004 it became the world’s second largest importer of oil (Kynge, 2004b). It is important to note that the resource markets create both opportunities and threats to construction. For example, shortages of coal, electricity and clean water imply imminent investments in these areas that require construction of power plants, water treatment plants and environmental remediation facilities. On the flipped side, feverish expansion and imports in sectors such as steel, aluminum, cement and property may signal a “boom-to-bust” crisis (Xu, 2004).

Trends of new technologies and local and regional growth By and large, construction is a labor intensive operation and it is more so in China since labor cost is low. Still, in the aspects of planning, design, and engineering, Chinese engineers are technically well trained to develop new technologies. The Shanghai Construction Group (SCG), for example, relies on technological innovation to provide solutions in many of its projects which finally led to prestigious awards such as the National Technology Advancement Award. Although the development of new technologies are likely to emerge from more established firms, utilization of more generic and common technologies such as the internet is fast gaining ground among the Chinese, with some 80 million people now being regular internet users (The Economist, 2004). How firms equip themselves as either developers or users of new technologies would affect their corporate stance. As a large country with huge disparities in economics, geography, culture and ethnic characteristics, local and regional differences are prominent in China (Child and Stewart, 1997). Firms are often subjected to a varying degree of influence by the trends of local and regional growth. Trends, characteristics and nature of construction projects in the fast-growing special economic zones, eastern and coastal regions are different from those taking place in secondary provincial cities, which in turn differ from the prospects of construction in rural regions. While certain location factors are important for large companies – especially those having operations that extend across many regions, they may be less relevant to firms that concentrate on a smaller operating radius.

Dynamics of strategic management 559

MD 43,4

560

Unique circumstances A plethora of articles and publications are devoted specifically to the study of Chinese management simply because the context is unique. Notwithstanding China’s progress towards open trade and an increased influence of global standards or styles of management, many enterprises in China are still donned with unique political, social and cultural mandates. To certain extent, the authors believe that it is less appropriate to consider many modernized Chinese enterprises as “total institutions” (Goffman, 1961) following Shenkar and von Glinow (1994) descriptions a decade ago – these are probably more relevant to Mao Zedong’s era. Still, it is agreeable that special contextual and institutional mandates do remain in some areas. For example, in rural construction projects, modern practices are likely to be subjugated by local specificities as these places are relatively isolated from the high growth regions where most regional and international competitions are taking place. Strategic fields and organizational mechanisms The internal aspects shown in Figure 3 will now be addressed. The external environment in China previously discussed can be regarded as turbulent. SubbaNarasimha (2001) claimed that dynamic competence or variety-generating capability of knowledge is an important antecedent of superior performance in such turbulent environments. What firms really desire is an organic configuration rather than a mechanistic one. To capture the spirit of “variety-generating capability”, seven strategic fields and two organizational mechanisms are proposed as key internal variables of a strategic plan especially in the long haul. Details of the scope, definitions and descriptions of each strategic fields and organizational mechanisms are given in Cheah (2002) and Cheah and Garvin (2004) and will not be repeated here. Instead, the key points of these variables are summarized in Table I. Some may express concern over the degree of which firms could really treat the proposed strategic fields and organizational mechanisms as “variables” in the context of China. For example, under the influence of both Confucianism and Maoism, organizational structure would be framed by culture and ideology (Starr, 1979; Shenkar, 1984), thereby rendering its adjustments a formidable challenge. On the other hand, construction enterprises that are active in both domestic and international arena and adopt a longer term perspective may truly work towards an efficient form of structural fit with the environment in order to compete against rivals during this period of market transition. In many ways, the degree of variability is really a question of the corporate identity, the external context concerned and the planning horizon selected by a firm. Imperatives, resources and competencies While strategic fields and organizational mechanisms steer the overall directions, they need to be translated into more explicit business imperatives which are achieved through the development of key resources and core competencies. For construction, critical decisions boil down to four main areas: targeted markets; project management performance; reputation and branding; and management of human assets. The choice of targeted markets can be categorized along two primary dimensions: market segment and geography. With respect to market segment, the differences between “diversification” and “integration” may not be obvious in some circumstances.

Scope, definitions and key aspects Strategic fields Business Finance

Operation

Technology Information and knowledge

Human resource Marketing

Organizational mechanisms Organizational structure Corporate culture

Generic strategies of business units: differentiation versus cost Market segmentation: focus versus diversified Products/services that firm could offer, should offer, and target to offer Investment decisions and project evaluations: NPV; decision analysis; optimization techniques; portfolio analysis; real options Financing decisions: capital structure – layers of equity and debt; cost of capital; tax issues; dividend policy Risk management: surety and payment bond; insurance policies Special project financing arrangements: BOT; turnkey Engineering design Site management: inbound and outbound logistics; resource planning Project works scheduling and materials procurement Construction methods: conventional RC; steel; precast; composite Adoption policy: pioneer versus follower Innovation policy: autonomous versus systemic; in-house versus off-the-shelve solutions; basic versus applied research Organizational learning Knowledge transfer from one project to another: codified versus tacit knowledge IT investment policies: internalization versus outsourcing Personnel: recruitment; training programs; job rotation Industrial relations: union-management relationship Compensation policies: incentives; reward systems Branding and reputation building Value added to clients: foresee clients’ needs; signaling value to clients Relationship marketing: Guanxi

Four dimensions: functions; markets; geographies; clients Formal versus informal structures Power centralization versus delegation of authority Social control systems and normative order Artifacts; espoused values; tacit assumptions in an organization Interaction with industrial and national cultures

For example, when a building contractor merges its operations with another contractor that specializes in industrial construction, whether this represents a case of diversification or integration is far from crystal clear. The authors recommend thinking along Porter’s (1985) notion of “value system” as depicted in Figure 1. Expansion of operations along the value system is clearly an example of “vertical integration”. Any expansion beyond the original value system can be regarded as “horizontal diversification” since each sector within construction has its unique characteristics that require a different set of core competencies. As for the geographical dimension, distinguishing between local, regional and international markets is more straightforward. Herein lies the critical assessment of whether firm-specific advantages are adequate to overcome the immobility of location-specific advantages as firms venture out of their established network (Dunning, 1993).

Dynamics of strategic management 561

Table I. Scope, definitions and key aspects of strategic fields and organizational mechanisms

MD 43,4

562

For contracting (rather than design engineering) firms, project management remains a key function. This simply means ensuring that a project is completed on time, within budget and with a desirable level of quality. The entrenched project management tradition (Chinowsky, 2000) in the civil engineering profession signifies an abundance of models and theories associated with ways to improve on cost, scheduling and quality measures. Confronted with the unique characteristics of construction (e.g. low entry barrier) and specific Chinese environment (e.g. clients’ unwillingness to pay a premium for higher quality), it is harder to excel solely in these three measures to create a sustainable competitive advantage. Too often, construction enterprises aim to stay afloat from one project to the next and undercut one another in pricing to secure a particular project. The end result is a large group of homogeneous competitors with a lack of long-term initiatives. In contrast, Figure 3 postulates that project management performance should germinate as a fruit of long-term directions in strategic fields such as operation, technology, knowledge and human resources, coupled with a supportive corporate culture. One way to eschew the trap of homogeneity is the establishment of reputation and brand name. While in the Western context this is closely linked to marketing strategy, in China the process is more subtle when contract award is influenced by the client’s perception of the extent of “value added” by a particular construction enterprise. Other than technical excellence, it may also include a firm’s reputation of “cooperativeness” and “trustworthiness” especially for projects with special mandates. Lastly, a key form of capital, other than the financial capital, is human assets. For small and medium construction enterprises in China, entrepreneurial thinking is essential to drive a low-tech and labor intensive operation to a higher level. For larger firms, the scarcity of truly professional managers means that these people have become the lynchpin of complex and sophisticated projects. In recent days, a large number of middle and senior level managers are sent for overseas training with Singapore being one of the destinations. Overall, construction workers need to be trained in various skill sets since many were previously farmers. In international construction, the importance of human capital has never been more pronounced since the Chinese contractors are generally outperformed by their Western competitors in the area of human resource management. Case studies of Guangsha and Shanghai construction To demonstrate the applicability of the conceptual framework discussed, case studies of two leading Chinese construction enterprises of distinctly different backgrounds are briefly presented. They are the non-state-owned Guangsha Group and the state-owned Shanghai Construction Group. It should be pointed out that while the cases are not meant to be the main focus of this paper (which explains the brevity), they highlight the diversity of strategy adopted by Chinese construction enterprises. The cases also demonstrate that although Figure 3 captures important elements of corporate strategy for construction enterprises, it is necessary to concentrate only on selected elements while ensuring a “seamless” strategic fit among these components. Guangsha group Headquartered in Hangzhou, Guangsha has grown from a small construction company into a giant diversified group over the past decade. It was the first construction company to be listed in the Shanghai Stock Exchange in 1997. Founded as a

construction small and medium enterprise (SME) by an ex-SOE employee – Lou Chongfu, it grew rapidly into a conglomerate, owning 58 subsidiaries, with 30,000 employees and an annual output of RMB 5.5 billion in 2002. This remarkable growth can be traced to the entrepreneurial leadership of the founder, who practiced strategic corporate management at a time when China was rapidly transiting into the market-oriented economy and gaining entry into the WTO. Currently Guangsha has six strategic business units (SBUs) under its corporate staple – Holdings, Construction, Property, Trading, Investment, and International. Since its inception in 1992, the founder envisioned that the group will grow into a multinational construction giant by 2010, rivaling the best in the world. As an entrepreneur, Mr Lou focused on building the human asset of the organization, the “Guangsha Ren”. His management culture is people-centred, with imperatives to empower his managers and granting autonomy to the various SBUs. The six SBUs are organized interdependently, reinforcing and supporting each other to attain overall competitive advantage. Within Guangsha Construction, the company grew rapidly through a series of acquisitions which strengthen its technology and human resource capability and expand its market reach. Using its financial prowess, it built up its R&D expertise and quality management system and created a brand name for itself in project performance. It had won a number of construction “Luban” quality awards given by the Ministry of Construction. By integrating its construction expertise with the Property and Investment SBUs, it provided a total service package to its domestic clients, a competency which gave it a competitive advantage in the industry. Through partnering and strategic alliances, the International SBU had successfully penetrated into ten regional and international markets, offering industrial park and infrastructure services to international clients. Guangsha’s success obviously exemplifies selected components of Figure 3. First, the importance of human assets is represented by the entrepreneurship and foresight of the founder in expanding the firm and the emphasis placed on the development of “Guangsha Ren”. Second, its largely autonomous structure (the SBUs) is shaped to exploit the firm’s acquisitions strategy and react to the dynamism of the capital market. Third, Guangsha built up a strong foundation in vertical integration (R&D; Property and Investment) prior to geographical expansion into regional and international markets. On this point, the company has rightfully utilized different modes of alignment since the risk exposure varies. Last, the firm’s success has led to various awards that further strengthened its reputation. Shanghai Construction Group Shanghai Construction Group (SCG) is a state-owned construction corporation whose majority shareholder is the Shanghai Municipal Government. As part of the restructuring of the municipal construction administration, SCG was corporatised in 1994 and assumed a market-oriented mode of operation. The management is given free rein in operational autonomy and minimum interference from the municipal authority. Nonetheless, SCG has received strong support from its municipal parent as far as projects in Shanghai are concerned, where 80 percent of keystone projects and symbolic buildings were built by SCG, including the 88-storey Jinmao Building and the Shanghai Grand Theatre.

Dynamics of strategic management 563

MD 43,4

564

The rapid growth of SCG is tied closely to the development of Shanghai as the financial centre for China and a major city to spearhead the economic growth of China. SCG is currently the second largest construction enterprise in China, achieving a business turnover of RMB 20 billion in 2002. It is the best-performing construction company listed in the Shanghai Stock Exchange, ranking 37th in market capitalization. Through joint ventures and alliances, SCG strengthens its competitive edge in regional markets in China. Internationally, SCG is positioned 78th in the Top 225 International Contractors according to Engineering News Record in 2001. Through acquisitions and other equity investments, it gains access to more than ten countries and regions including Hong Kong, Singapore, the Middle East, the US and Japan. The external environment, which includes central and municipal governments’ support with favorable policies, and the presence of foreign multinationals with attendant capitals, technology, human expertise and worldwide market connectivity, is instrumental for the remarkable growth of SCG. Internally, the top management is led by a team of internationally trained executives who are determined to turn SCG into a world-class construction group. The corporate portfolios of SCG consist of four main businesses: Construction, Manufacturing, Property and Investment. With 21 wholly-owned subsidiaries and 270 affiliated companies, the group offers construction and construction-related services such as general contracting, property development, civil engineering construction, building services installation, interior decoration, building material manufacturing, logistics and distribution, trading and commerce, and equity participation. Essentially, SCG is well placed to provide a totally integrated, one-stop service for construction and related projects to clients including financial services in build-operate-transfer and Turnkey projects. Furthermore, its unique IT and R&D capabilities have led to high performance in a wide range of projects such as high-rise intelligent buildings, long-span suspension bridge, subway tunnel, museum and theatre, TV station tower etc. Not surprisingly, the group has a strong reputation. Having won numerous awards, SCG is now a brand entity in the Chinese construction industry. SCG’s strategic posture is quite different from the case of Guangsha. The strong support garnered from the central and municipal governments implies that SCG is donned with unique political and social mandates. The “horizontal dimension” of SCG’s operations is more pronounced than Guangsha’s since the former has its hands in diversified sectors. With large political and financial backing, SCG also has more options to explore different combinations of the elements in Figure 3. However, the opposite side of the argument implies that such “freedom” can be limited by its unique circumstances and mandates. Finally, it should be noted that both Guangsha and SCG retained construction as their core business and diversified into construction-related activities principally within the China market. Notwithstanding their international expansion, overseas market contributed only a small portion of their overall revenue and in the case of SCG, revenue from international operations accounted for only 10 percent of group turnover (Low and Jiang, 2003). Conclusions It goes without saying that the landscape of strategic management for Chinese construction enterprises has many layers. The topic has largely been neglected by

mainstream strategy and construction management researchers, but its importance clearly emerges when Chinese construction enterprises need to confront a volatile market in their homeland. By itself, the industrial context of construction has a unique blend of characteristics that require atypical treatment compared to strategy in many other industries. Dynamic interactions among issues such as project delivery methods and human aspects refute a short-listing of generic strategies that might be more feasible for other industries. Peculiar Chinese contextual variables further add to the complexity. With a review of theories and context, a framework summarizing more critical elements of strategy for construction enterprises is presented amidst these complexities. In this framework, external and internal aspects are coupled together by several modes of alignment. Within the internal aspects, business imperatives, core competencies and resources are in turn cultivated by a proper alignment between strategic fields and organizational mechanisms. As with many other strategic models, interactions among various internal and external components create a perpetual loop. The cases of Guangsha and SCG briefly demonstrate that there is no hard and fast rule to understand and develop a coherent strategy. This is even truer considering the fact that China’s circumstances are still dynamically evolving. References Cheah, Y.J. (2002), “Fundamental analysis and conceptual model for corporate strategy in global engineering and construction markets”, PhD dissertation, Department of Civil and Environmental Engineering, Massachusetts Institute of Technology, Cambridge, MA. Cheah, C.Y.J. and Garvin, M.J. (2004), “An open framework for corporate strategy in construction”, Engineering, Construction and Architectural Management, Vol. 11 No. 3, pp. 176-88. Cheah, C.Y.J. and Wong, W.F. (2004), “Management studies of the Chinese construction industry: which field of theories?”, paper presented at 20th Annual Conference of the Association of Researchers in Construction Management, Edinburgh, 1-3 September, pp. 949-56. Chen, J.J. (1998), “The characteristics and current status of China’s construction industry”, Construction Management and Economics, Vol. 16 No. 6, pp. 711-9. Chew, A.S. (2001), “Relationship marketing for Sino-Singapore joint ventures of industrial parks in China”, Unpublished doctoral dissertation, Faculty of Business, University of Southern Queensland, Queensland. Child, J. and Stewart, S. (1997), “Regional differences in China and their implications for Sino-foreign joint ventures”, Journal of General Management, Vol. 23 No. 2, pp. 65-86. Chinowsky, P.S. (2000), Strategic Corporate Management for Engineering, Oxford University Press, Oxford. Dunning, J.H. (1993), Multinational Enterprises and the Global Economy, Addison-Wesley, Wokingham. Eccles, R.G. (1981), “The quasifirm in the construction industry”, Journal of Economic Behavior and Organization, Vol. 2 No. 4, pp. 335-57. The Economist (2004), “Road rage, web rage”, The Economist, 29 January. Elfring, T. and Volberda, H.W. (2001), “Schools of thought in strategic management: fragmentation, integration or synthesis”, in Volberda, H.W. and Elfring, T. (Eds), Rethinking Strategy, Sage Publications, London.

Dynamics of strategic management 565

MD 43,4

566

Financial Times (2003), “China special report: focus on the economy, politics, foreign policy and telecoms”, 16 December. Goffman, E. (1961), Asylums, Penguin, London. Kang, J., Cheah, C.Y.J. and Chew, D.A.S. (2004), “Analysis of the Chinese construction industry: a structured approach”, paper presented at 4th International Conference on Construction Project Management, Singapore, 4-5 March, pp. 81-9. Kynge, J. (2003), “China lures $52.7 bn in FDI news digest”, Financial Times, 15 January. Kynge, J. (2004a), “Price of Chinese steel bars on the slide”, Financial Times, 2 April, p. 2. Kynge, J. (2004b), “The chinese boom is bound to end in tears. But it might not end for another 10 years. . .with bumps along the way”, Financial Times, 24 March. Kynge, J. (2004c), “China’s frenzied growth reaches physical limits”, Financial Times, 12 April. Lam, Y.T. and Chen, Z. (2004), “The development of the construction legal system in China”, Construction Management and Economics, Vol. 22 No. 4, pp. 347-56. Li, S. (2001), “China’s construction industry in transition”, Building Research & Information, Vol. 29 No. 4, pp. 259-64. Low, S.P. and Jiang, H. (2003), “Internationalization of Chinese construction enterprises”, ASCE Journal of Construction Engineering and Management, Vol. 129 No. 6, pp. 589-98. Lu, Y. (2003), “Is construction industry in China on right track?”, paper presented at Second International Conference on Construction in the 21st Century, Hong Kong, 10-12 December, pp. 376-82. Luo, J. (2001), “Assessing management and performance of sino-foreign construction joint ventures”, Construction Management and Economics, Vol. 19 No. 1, pp. 109-17. Luo, J. and Gale, A. (2000), “The evolution of the Chinese construction industry”, Building Research & Information, Vol. 28 No. 1, pp. 51-8. Luo, J., Gale, A. and He, X. (2001), “Investing in the Chinese construction industry via joint ventures”, Building Research & Information, Vol. 29 No. 4, pp. 277-85. Macomber, J.D. (1999), “Yes, the internet changes everything – (Don’t be left in the techno-dust)”, Construction Business Review, Vol. 8 No. 1, pp. 38-41 and 45. Miller, J.B. (2000), Principles of Public and Private Infrastructure Delivery, Kluwer Academic Publishers, Boston, MA. Mintzberg, H., Lampel, J. and Ahlstrand, B.W. (1998), Strategy Safari: A Guided Tour Through the Wilds of Strategic Management, Free Press, New York, NY. National Bureau of Statistics of China (2002), China Statistical Yearbook – 2002, China Statistics Press, Beijing. Naughton, B. (1995), Growing out of the Plan: Chinese Economic Reform 1978-1993, Cambridge University Press, Cambridge. Nohria, N. and Eccles, R.G. (1992), Networks and Organizations, Harvard Business School Press, Cambridge, MA. Oliver, C. (1997), “Sustainable competitive advantage: combining institutional and resource-based views”, Strategic Management Journal, Vol. 18 No. 9, pp. 697-713. Oster, S.M. (1999), Modern Competitive Analysis, 3rd ed., Oxford University Press, Oxford. Park, S.H. and Luo, Y. (2001), “Guanxi and organizational dynamics: organizational networking in Chinese firms”, Strategic Management Journal, Vol. 22, pp. 455-77. Porter, M.E. (1985), Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, New York, NY.

Porter, M.E. (1998), “Competing across locations: enhancing competitive advantage through a global strategy”, in Porter, M.E. (Ed.), On Competition, Harvard Business School Press, Boston, MA. Ren, R. and Khong, P.W. (2004), “Minimize barriers to international trade: e-Business in construction industry”, Proceedings of 4th International Conference on Construction Project Management, Singapore, 4-5 March, pp. 475-84. Rumelt, R.P., Schendel, D.E. and Teece, D.J. (1994), Fundamental Issues in Strategy: A Research Agenda, Harvard Business School Press, Boston, MA. Sha, K. and Lin, S. (2001), “Reforming China’s construction state-owned enterprises”, Building Research & Information, Vol. 29 No. 4, pp. 270-6. Shen, L.Y., Wu, G.W. and Ng, C.S.K. (2001), “Risk assessment for construction joint ventures in China”, ASCE Journal of Construction Engineering and Management, Vol. 127 No. 1, pp. 76-81. Shenkar, O. (1984), “Is bureaucracy inevitable? The Chinese experience”, Organization Studies, Vol. 5 No. 4, pp. 289-306. Shenkar, O. and von Glinow, M.A. (1994), “Paradoxes of organizational theory and research: using the case of China to illustrate national contingency”, Management Science, Vol. 40 No. 1, pp. 56-71. Starr, J.B. (1979), Continuing the Revolution: The Political Thought of Mao, Princeton University Press, Princeton, NJ. SubbaNarasimha, P.N. (2001), “Strategy in turbulent environments: the role of dynamic competence”, Managerial and Decision Economics, Vol. 22, pp. 201-12. Tsang, E.W.K. (1998), “Can Guanxi be a source of sustained competitive advantage for doing business in China?”, Academy of Management Executive, Vol. 12 No. 2, pp. 64-73. Tulacz, G.L. (2003), “New global spending forecast highlights: risks and rewards”, Engineering News Record, 30 June. Wang, S.Q. (2001), “The structure, legal framework of China construction industry and China’s tendering law”, Proceedings of Seminar on Penetrating China’s Construction Industry: Today and Tomorrow, Singapore Confederation of Industries, Singapore. Whittington, R. (2001), What is Strategy – and Does It Matter?, Thomson Learning, London. Williamson, O.E. (1975), Markets and Hierarchies: Analysis and Antitrust Implication, Free Press, New York, NY. Xu, S. (2004), “Tax cuts will steady China’s growth”, Financial Times, 2 April. Xu, T. and Chew, A.S. (2004), “Entry strategies of foreign contractors in China”, Proceedings of 4th International Conference on Construction Project Management, Singapore, 4-5 March, pp. 145-54. Xu, T., Smith, N.J., Bower, D.A. and Chew, A.S. (2004), “Development strategies for Chinese design institutes”, ASCE Journal of Management in Engineering, Vol. 20 No. 2, pp. 62-9. Zhu, H., Hu, X. and Wang, Y. (2001), “China’s construction regulatory systems”, Building Research & Information, Vol. 29 No. 4, pp. 265-9.

Dynamics of strategic management 567

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

MD 43,4

Ownership reform among state firms in China and its implications

568

Department of Management, School of Business, Hong Kong Baptist University, Kowloon Tong, Hong Kong, People’s Republic of China

Ji Li Kevin Lam School of Accountancy, The Chinese University of Hong Kong, NT., Hong Kong, People’s Republic of China, and

Jane W. Moy Department of Management, School of Business, Hong Kong Baptist University, Kowloon Tong, Hong Kong, People’s Republic of China Abstract Purpose – To test the effects of ownership structure on the strategy and performance of former state-owned enterprises (SOEs) in China. Design/methodology/approach – Based on a sample of the former state-owned manufacturing firms listed on the Chinese Stock Exchanges before 1995, we study the ownership effects on firms’ diversification strategies and their performances. Findings – Diversifiers actually have a lower level of state ownership. However, firms’ financial performance and other performance dimensions such as new product development and overseas investment are actually better for single-product producers. Hence, firms with lower state-ownership tend to be more likely to pursue unrelated diversifications. Research limitations/implications – The study uses a cross-sectional design, which makes it difficult to assess the causality of the variables and to study the changes of firm behavior over the years. Practical implications – The results highlight the need for the improvement of control system in transitional economy such as China before embarking on ownership changes. Without the changes in the control systems, the ownership reform alone seems insufficient to improve the performance of the former SOEs. Originality/value – This study provides evidence on the effect of ownership control, diversification strategy and performance on formerly SOEs in China. It has important policy implications for reformers in the developing economies engaging in privatizing their SOEs. Keywords Public sector organizations, Business performance, China Paper type Research paper

Management Decision Vol. 43 No. 4, 2005 pp. 568-588 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510593567

The reform of state-owned enterprises (SOEs) is an important issue in China, as it may decide the success of economic reform in this world’s largest emerging market. Many authors have conducted qualitative studies on SOEs in China (Boisot and Child, 1988, 1996; Child et al., 1997; Nee, 1991). However, several important issues remain unclear. For example, what are the effects of changing ownership on the strategy and performance of former SOEs? What is the moderating effect of institutional environment on the relationship between firm ownership change and firm behavior? Finally, what is the implication of this ownership reform for the development of accounting theory and accounting research in a transitional economy such as China?

This study addresses these issues by investigating the effects of ownership change in China’s SOEs. The study is significant because it will help to improve our understanding of the effects of changing ownership and institutional factors on organizational behavior. Some authors have suggested that the current reform in China was too slow in shifting state ownership, and the ineffectiveness of strategic management, such as overdiversification, would not be improved until the further diffusion in state ownership (Young and McGuiness, 2001). On the other hand, based on the observation of the SOEs’ reform in the former Soviet Union and East European Bloc countries, some other authors have argued that changing state ownership overnight might actually prevent the former SOEs from learning effectively, and these firms might not be able to improve their performance (Newman, 2000). In other words, the latter suggested that an incremental ownership reform was better than a fast privatization of SOEs. Little empirical evidence has been obtained to show which of the arguments is more reasonable. In this paper, from a point of view of accounting and other control systems, we argue that the most critical issue may not be whether the privatization of state firms should be conducted overnight, but whether we can build effective control systems, including the accounting one, that meet the demands of the ownership reform. In the current paper, we will test this argument with empirical data. The current study will contribute to both academic research and managerial practice. As Newman (2000) points out, current research on these issues has mainly been conducted in western societies where institutional environments change little and slowly. It remains unclear how organizations will learn and perform given the change of ownership in a society where the institutional environment itself is rapidly changing. Empirical data from such a rapid changing environment will provide new knowledge on the issue. In the following sections we first review the relevant literature. After that, several hypotheses for empirical testing are proposed. Finally, we report a study of 587 former SOEs to test the hypotheses. Literature review The relationship between ownership and firm behavior A very influential but controversial paradigm in corporate governance and control theory is agency theory (Fama, 1980). Developed from neoclassical economics, the theory naturally assumes that firm management has a tendency of opportunism (Eisenhardt, 1989). For its own interests, for example, firm management may act defensively and adopt decisions that are not in the best interests of shareholders. For example, firm management may establish anti-takeover defenses (Agrawal and Mandelker, 1990), conduct corporate restructuring (Bethel and Liebeskind, 1993), or implement business strategies of over-diversification (Baysinger and Hoskisson, 1990). Accordingly, even in a publicly listed western firm without state ownership, the above-mentioned agency problems, such as over-diversification, may still be observed. Agency theory suggests that effective monitoring and controlling can help reduce the propensity of firm managers to serve their own interests (Mallette and Fowler, 1992). However, research has also shown that effective monitoring is often difficult. This is especially true when a large stock investor have too many firms to monitor. Given the complexity of the firms’ operations, the investor’s ability to collect and process relevant information may be insufficient. Therefore, it is not in the interests of

Ownership reform among state firms 569

MD 43,4

570

shareholders to allow their firms to overly diversify. In a transition economy such as China, this issue is even more relevant because of insufficient codified information, such as reliable accounting data (Boisot and Child, 1988). Researchers have defined over-diversification as product diversification beyond the level optimal for shareholders (Markides, 1992). By beyond the optimal level we mean that such diversification may be beneficial to managers in the sense that it may increase their power, job security and compensation, but may not be optimal for the investment return of shareholders (Baysinger and Hoskisson, 1990). For example, high product diversification may lead to poor strategy formulation in other areas such as technology strategy and debt control (Hoskisson and Hitt, 1988). Over-diversification can result from ineffective corporate governance. Governance structures, including boards of directors, ownership, and managerial incentives, are often inadequate to prevent high product diversification (Bethel and Liebeskind, 1993; Gibbs, 1993). For example, boards of directors with little equity ownership are unlikely to monitor firm strategy in a significant way unless firm performance suffers significantly (Johnson et al., 1993). Small outside owners, i.e. those holding only very small blocks of firm equity, also do not have sufficient incentive to monitor firm strategy (Harrison, 1987). In other words, when ownership becomes dispersed among a large number of small owners, and collective monitoring costs will increase because individual owners are unlikely to be fully committed to monitoring managerial behavior than they would be were they to hold more equity (Hill and Snell, 1988). This is especially true in the case of unrelated diversification, because it is a mechanism to maintain firm growth and thereby increase managerial compensation, which has a positive relationship with the firm size increased through diversification (Tosi and Gomes-Mejia, 1989). Over-diversification is often created through acquisitions, which are usually supported by a financial strategy of borrowing or increasing the firm’s risk of debt (Hitt et al., 1990). Moreover, high product diversification may create the tendency of risk-avoidance among division managers, which in turn may prevent the firms from conducting research and developing new products (R&D) (Baysinger and Hoskisson, 1990). All of the research reviewed above can help us to understand the relationship between firm ownership and firm behavior in western societies. However, it remains unclear whether the theories are applicable to firms in transitional economies such as China, where institutional environments are very different. Many authors have suggested the importance of considering the effects of culture when study organizational behaviors in the east. For example, after showing that the Japanese family is an institutional logic for Japanese corporate networks and Japanese management practices, Bhappu (2000, p. 414) argued that “in order to further our understanding of culture as it relates to management, more work is needed to identify the culturally rooted institutional logics that shape organizations around the world”. Biggart (1991) also pointed out that it is the oriental cultural tradition that produces the distinctive institutional factors that influence firm behaviors in the east. Finally, discussing the commonality in the East Asian development model, Nee (1992) pointed out a consistent cultural tradition in the economic development of China, Japan, South Korea, Taiwan, and Singapore – strong government involvement.

The Asian cultural tradition of heavy government involvement in firm activities can also be observed in China. Several authors have suggested the effects of government involvement in their studies on Chinese firms (Boisot and Child, 1988; Nee, 1992). Moreover, because of China’s large size and regional differences, the involvement of government in China often has a unique characteristic, namely, direct local government involvement or indirect central government involvement. For example, according to Boisot and Child (1988), the dominant transaction structure in pre-modern China was a fief-like structure. In this structure, firm activities were heavily influenced by the hierarchical co-ordination of local governments rather than by that of the central government. One important character of this fief-like government structure is the lack of codified information, including reliable accounting data, in China. Without these data, it would be difficult to implement law and control policies in China. For example, the capital of a firm may be sent to an account abroad by a corrupt firm manager without being known until the manager herself/himself has successfully emigrated (He, 1998). In the processing of shifting state ownership to other ownership, these two factors, i.e. heavy local government involvement and insufficient codified information, are influencing the relationship between China’s ownership reform and firm behavior and performance. We discuss this issue in next section. Ownership change in China’s SOEs and the effects of institutional environment As Boisot and Child (1996) suggested, rapid economic growth in China over recent decades has been stimulated by two major developments: the shift of ownership and property rights, and the increasing role that is played by market transactions, including a growing integration with the world economy (Boisot and Child, 1996, p. 600). Both developments influence the environment in China and have significant implications for the reform of state firms. Following is a brief discussion of this issue. The shift of ownership first occurred in China’s agricultural sector. Soon after China undertook reform in 1978, land ownership was shifted from People’s Communes to individual families. Although land was still collectively owned in name, each family made decisions on how and with what the land should be planted. This reform led to the rapid development of China’s rural economy. From 1978 to 1985, China’s agricultural output increased by 8-10 percent annually (Mckinnon, 1992). After this success in the countryside, the Chinese government began experiments to shift ownership from the state to other shareholders in the 1980s. By the end of the 1990s, many approaches to shifting state ownership, such as privatization and employee ownership, had been tested (Lin et al., 1998), and some seemed to have become institutionalized (Tse and Lau, 1999). The most popular approach to the shifting of state ownership in China today is the creation of so-called joint (shared) stock firms. These firms are limited liability joint stock (JS) companies. Different from other forms of share ownership in China, the number of shareholders in a joint-stock firm is unlimited, which means that the firm is allowed to issue stocks, and the stock can be transferred freely. The state may hold a majority of shares (e.g. China Mobile Phone and Sinopec, which is an oil and chemical producer) or a minority of shares (e.g. Shanghai Forever, which is a bicycle producer). The idea of the JS firm is not new in China. Before 1949, there were a significant number of JS firms listed on the Shanghai stock exchange. These firms disappeared after China adopted a planned economic system in 1949. After China’s economic reform

Ownership reform among state firms 571

MD 43,4

572

in 1978, JS firms re-appeared with the establishment of the Bao-an County Investment Company in November, 1982. Although this firm was a JS firm that raised capital from the public, it had not previously been a state-owned firm. Rather, it was a newly established firm in the Shenzhen Special Economic Zone, where firms benefited from the implementation of special state policy. The first case of transforming a state-owned firm into a JS firm occurred in 1984, when Beijing Tian Chiao Department Store shifted part of its ownership to other firms and legal entities (47.56 percent) and to individuals, including the firm’s managers and employees (41.18 percent). After that, the number of similar cases steadily increased. By the end of 1997, the number of joint-stock firms had reached 9,200, which accounted for about 25 percent of all large and medium sized state firms in China (Smyth, 1998). Since then, the number of joint-stock firms has continued to increase. At the same time, the state has been reducing its shares in these firms, and private firms are allowed to become publicly listed firms by buying the controlling shares of already listed firms (McCallum, 2001). According to the reform plan of the Chinese government, after selling shares to the public, the former state firms are expected to compete in the market in the same manner as do publicly listed firms in the west (Chen, 1999). Since 1990, there have been an increasing number of JS firms being listed on China’s stock markets, which were established at the beginning of the 1990s. For example, the first JS firm mentioned above, i.e. the Bao-an County Investment Company, was listed in June, 1991, in China’s Shenzhen Stock Exchange. By listing these firms, the state tries to find a new way for China to move to a true market economy. In other words, the transformation of state firms into JS firms is considered a conversion of managerial mechanism in China, or a conversion of dependent instruments of the state plan into independent market-oriented entities (Chen, 1999). Another purpose has been to improve the firms’ accounting performance and to reduce state financial subsidies to former state-owned firms (Chen, 1999). According to some scholars, total personal savings in China were 3,852 billion RMB in 1996, and this amount has been increasing. These savings alone are about four times the total capitalization of state firms. If both Chinese and international investors were allowed to buy shares in the state firms, then the state would not have to subsidize them heavily (Child, 1998). Partially because of this reason, the maxim “get help from the (stock) market, not from the mayor” (zhao shichang, buyao zhao shizhang) became common in the Chinese media at the end of the 1980s. However, from the very beginning, this shift of ownership was influenced by China’s institutional environments, which have made the successes of this shift questionable. Research has already documented many unique characteristics of the Chinese environment, including the lack of codified information, such as reliable accounting data, and emphases on Guanxi (connections) among firms and between firms and local governments (Boisot and Child, 1988, 1996). For example, as central government policy can be more or less ignored by local governments, networks between local governments and the state firms in their territories are often more influential when firms shift their ownership. For example, without sufficient control and monitoring systems, such as those that help implement law and appropriate accounting policy, the shift of state ownership has in fact become an opportunity for local government officials and state firm managers to steal state property. Even in those most economically-developed areas in China, such as in China’s Guangdong

province, there have been many cases in which the local governments helped cook the books directly or indirectly in order to get their local firms listed (Xinhua News Agency, 1994). The most commonly changed accounting data have been total assets, return on assets (ROA), return on capital and total sales. For example, a state firm in Guangdong had a return on capital below 7 percent for three years before listing. In order to meet the criterion to go public, the firm management worked with an accounting firm to increase the size of capital by three times. The firm’s capital changed from 170 million RMB (the Chinese currency unit) to 79 million RMB in six months, but the local government never asked a question on this issue when it checked the accounting data and approved the firm to go public (He, 1998). By cooking the books, both local government officials and managers of the former state firms may obtain lots of financial benefits, such as shares in the listed firms and cash. Moreover, the institutional environments in China may prevent effective monitoring of these former state firms after they become JS firms. While China has decided to codify and harmonize its accounting with international standards with the promulgation of Accounting Regulation for Listed Companies on 1 January 1998, Chen et al. (2002) find that a lack of effective financial reporting infrastructure, as exacerbated by accounting manipulation and lack of quality auditing had thwarted its effort. Without reliable accounting information, it is often difficult to effectively monitor the firms, which partially explains the recent scandals that exposed the looseness of control systems in the Chinese SOEs (Gilley, 2002). Moreover, firm management may be asked to appoint the board members of its own firm (Tse and Lau, 1999). Consequently, board members often have some Guanxi or connections with the management, which makes effective monitoring of the firm management questionable. Without an effective control and monitoring system, it is questionable whether the shift from state ownership to a JS one can really help improve the strategy and performance of those former state firms. It has been suggested that a firm’s control system should be tailored to support a firm’s strategy and especially to constrain managers to focus on what the firm can and must do best (Langfield-Smith, 1997). It would be interesting to test the consequences of this shift of state ownership on firm strategy and firm performance. Therefore, in next section, we propose some testable hypotheses according to the commonly available literature. Research hypotheses Hypotheses can be developed for empirical testing according to the literature. First, we predict that among the former state firms that have been transformed into JS firms, the proportion of shares that is still controlled by the state may have a significant effect on the decision to diversify. Specifically, according to the argument of some authors, state ownership was the main factor causing diversification (Young and McGuiness, 2001). Therefore, we propose, H1. Among former state firms in China, the greater the proportion of state share ownership, the higher will be the degree of diversification. Moreover, as research in the west has suggested (Bethel and Liebeskind, 1993; Gibbs, 1993), the more that management holds the shares of its firm, the less likely it is to adopt a strategy of diversification (Hitt et al., 1990). The reason is that this share

Ownership reform among state firms 573

MD 43,4

ownership may make the management more responsible to the long-term performance of the firm. The management may be more willing to learn how to build long-term competitiveness for their firms. In this learning process, they may study the research results that have been obtained in the west and ascertain the negative effects of over-diversification. If this learning process does exist, then we predict:

574

H2. Among former state firms in China, the greater the proportion of management share ownership, the lower will be the degree of diversification. Moreover, large block share ownership may have a significant effect on the selection of diversification strategy (Johnson et al., 1993). The more shares that these large block shareholders control, the more likely that they are to avoid over-diversification because such over-diversification can increase the difficulty in monitoring firm management and firm performance. To protect their interests with more effective monitoring, large block shareholders may want a simple product portfolio. Therefore, former state firms with high proportions of large block private share ownership are less likely to adopt strategies of diversification. H3. Among former state firms in China, the greater the proportion of large block private share ownership, the lower will be the degree of diversification. Similarly, we predict that the proportion of shares which is owned by overseas investors has a significant effect on the firms’ diversification because overseas investors are also large block shareholders (e.g. mutual funds and pension funds). Compared with small investors, these fund managers have more resources, such as time, to monitor their investments, and they are more experienced than Chinese investors in selecting and monitoring listed firms. If a former state firm diversifies too much to be monitored effectively, then these foreign investors are likely to sell their shares in the firm, which will reduce the proportion of foreign shares in the firm’s ownership structure. Therefore, we predict: H4. Among former state firms in China, the greater the proportion of large overseas investor ownership, the lower will be the degree of diversification. Employee ownership in the firms may also help prevent over-diversification. Management and workers may have a stronger sense of responsibility toward improving firm performance when they are co-owners (Dyck, 1997). In China, studies have also shown that the organizational commitment and motivation of employees are higher in co-owned firms than in non co-owned firms (Lu and Bjorkman, 1997). This may lead to better monitoring of firm management. Accordingly, we predict: H5. Among former state firms in China, the greater the proportion of employee share ownership, the lower will be the degree of diversification. Research has also tested how firm performance is influenced by diversification. Firm performance can be measured by both financial-based performance (accounting performance) and stock market price performance (market performance). It has been argued that accounting performance assesses firm performance in the past, while stock market performance measures the expected future value of firms (Hoskisson et al., 1994). Both approaches are useful in assessing firm performance.

Diversification may have negative effects on firm stock market performance. For example, one study has shown a significant negative path from diversification through accounting performance to stock price performance (Hoskisson et al., 1993). Over-diversification may make it difficult for a firm to focus its resources on building competitive advantages. Consequently, diversifiers may have slower growth (in terms of market share or profit) than do firms that adopt a strategy of concentrative growth. This slower growth will lead to lower stock prices and poorer performance. Therefore, we predict: H6. Other things being equal, the higher the firms’ level of diversification, the poorer will be their stock market performance. Moreover, according to previous research (Hoskisson et al., 1993), diversification will lead to poorer accounting performance. Diversifiers may have insufficient knowledge and experience in managing or co-ordinating the activities of different businesses, which can lead to low efficiency. Furthermore, to finance their diversification, these firms may have to borrow money, which increases their interest costs. All of these factors may affect accounting performance. This problem can also be true in China. Some authors have already pointed out that many state firms have lost money due to their failure to realize economies of scale (Liew, 1999). Moreover, with over-diversification, the monitoring of firm management by shareholders can become more difficult. In other words, when a firm diversifies into too many industries, its board members often do not have sufficient information and expertise to predict the results of the firm’s strategy, which in turn may affect their performance (Hoskisson et al., 1994). This problem can be more serious for joint-stock firms in China because their board members and managers often do not have sufficient training or experience in managing firm strategy in a market economy. Accordingly, we predict: H7. Other things being equal, the higher the firms’ level of diversification, the poorer will be their accounting performance. Method Sample The sample for this study consisted of the former state-owned manufacturing firms that were listed on the two Chinese Stock Exchanges before 1995 ðN ¼ 578Þ. According to the category system that is used by the State Statistical Bureau of China (SSBC), these firms were from 11 different industries[1]. Each industry could be further divided into between 3 and 25 sub-industries. For example, the Chinese electronics industry was divided into 23 sub-industries, such as TV, telecommunication equipment, and the computer industry. Other data sets, such as those that are reported in China’s Industrial Markets Yearbook (which is published by the City University of Hong Kong), also use this classification system. Based on this system, we treated a firm in one industry that had products in more than one of its sub-industries as having been involved in related diversification. An example is an electronics firm that produced TVs and mobile phones at the same time. If a firm was operating in two unrelated industries, such as electronics and real-estate development, then we considered this firm as having been involved in unrelated diversification.

Ownership reform among state firms 575

MD 43,4

576

The average age of the firms was 5.7 years. They were located in provinces or cities throughout China: 315 were located in the coastal provinces, and 263 were located in inner-China provinces. These 578 firms competed in 11 different industries or 118 sub-industries in China. Information about these firms came from three sources. First, we obtained the data from the Taiwan Economic Journal Database, which contains the accounting information of listed firms in China. Second, we used three research assistants, who knew nothing about the purpose of this study, to check the data from the database against annual reports and web site information of the firms. At the same time, the research assistants were also asked to code information that pertained to product diversification, new product development, international operation, and purchase or acquisition activities from annual reports and web sites (see the more detailed discussion in the next section). To control for the industrial differences among these firms, we also obtained data from China’s Industrial Markets Yearbook published by the City University of Hong Kong. The data set provided industrial-level information about Chinese firms, including average assets, average debt/assets, average number of employees, and average ROA in the firms’ industries. We applied this data set in our data analysis to control for the differences among industries. Measurement We consider two sets of variables. Set one consists of the variables that are meaningful to firms across industries. These variables include ownership variables and the stock market performance of firms. Set two include variables that can be affected by industrial differences, such as firm size and ROA. Set one, measurement without control for industrial difference State ownership was measured by the ratio of shares that were controlled by the state to the total outstanding shares of a given firm. Using a similar approach, we measured ownership by employees, by firm management, by individuals in the top ten shareholder list, and by overseas investors[2]. All of these data were obtained from 1996 annual reports, which reported firm activities in 1995. Diversification strategy was a piece of information difficult to obtain in China. Few Chinese listed firms disclose the information about their diversifications as detailed as do firms in the United States. As a result, the data about the proportion of sales from each industry, which has been commonly used by researchers to measure diversification, are not available in China. The unavailability of precise data itself can be seen as a piece of evidence of the relatively primitive stage in China’s accounting and control systems. To overcome this difficulty, we had to measure diversification according to the information coded from the annual reports of the firms. Specifically, if a firm focused on a single product, then we gave it a score of one. If it was a related diversifier, i.e. it operated in two or more related sub-industries, then the score was two. Finally, if the firm was an unrelated diversifier, i.e. it operated in two unrelated industries (e.g., a manufacturing industry as well as the real-estate industry), then the score was three. We used the 1995 data to code the firms’ product diversification. Although this measurement is not very precise, we believe that this information could still be used to measure the level of diversification among the Chinese firms. Given the fact that the listed firms in China had very short history (i.e. the average age

of these firms was 5.7 years), the sales data might actually under-estimate the firms’ level of diversification. For example, a Chinese diversifier might have expended many resources in developing a new product, but the sales of the product were small at the beginning. Accordingly, although the lack of sales data is a limitation of our measurement, we believe that such data may not be very critical given the fact that our sample was still in the early stages of diversification. Finally, we coded the following variables from the firms’ annual reports from 1996 to 2000. Specifically, New product development was measured by the number of new products that were mentioned in the annual report or the web site of a given joint-stock firm. Purchasing other firms was measured by the number of acquisitions that were completed by a given joint-stock firm in the same period. International investment was measured by the number of countries in which a firm was making investments. International marketing was measured by the number of markets to which a firm was exporting. Inter-rater correlations were computed among the scores from the three research assistants. Each of the three measures showed a reliability a of higher than 90 percent. Finally, stock performance or return (SP) was computed by the following formula: P ¼ ½ðstock price at the end of year þ dividend received during the yearÞ= stock price in the beginning of year
2 1: After computing this variable for each year, we computed an average of the variable over four years (i.e. 1996-2000). We used this average to control for speculation in the Chinese Stock Exchanges. The assumption was that while a firm may have been able to manipulate its stock price over a short period of time, it would have been difficult to keep the price high or low for four years. For the same reason, when we considered the ROA of firms we used a four-year average from 1996-2000. Set two, measurement with control for industrial difference Some measures vary across industries. For example, average firm size as measured by the amount of total sales each year can be large in some industries such as car manufacturing, while it can be small in other industries such as clothing and textiles. To control for industrial differences, we computed some variables as comparable measures in this study. Take ROA as an example. Price control by the central government can affect the profit level of different industries. To control for this effect, we generated a variable, comparable ROA, which was computed by the following formula: C – ROA ¼ ðfirm 2 ROAÞ 2 ðindustry 2 ROAÞ We checked the products of unrelated diversifiers before they became listed firms. For example, if an unrelated diversifier was historically a TV producer, then we adopted data from China’s TV industry to compute its C-ROA. In this way, we controlled not only the industrial differences among the firms, but also the differences that resulted from government policies, which have been different in different industries over the years. With a similar approach, we also measured the comparable firm size, comparable firm assets, and comparable debt/asset ratios of the firms.

Ownership reform among state firms 577

MD 43,4

578

The measurements reported above can be justified by their high validities. First, they have high face validity because they have been the measures commonly used in accounting and financial analyses, such as ROA and SP. Second, since the measures are not based on self-reporting questionnaire items, the convergent and discriminative validities are not a problem, and the common method bias can also be avoided. Finally, all these measures have been used by other researchers dealing with similar issues before (Hoskisson et al., 1994). According to their research findings, the predictive validity of measurements is high. Results Table I presents the descriptive statistics of the data. Some interesting findings can be obtained from these data. First, the international investment of the firms was positively correlated with their stock price returns and the number of their new products ðp , 0:01Þ, but negatively correlated with their size. This suggests that diversified firms are normally larger in firm size than are their counterparts that produce single products. Second, among the Chinese firms, stock market performance was positively correlated with international investment and marketing ðp , 0:01Þ. This result indicates that Chinese investors favor firms that have the ability to compete internationally. Finally, the risk of debt was negatively correlated with firm international marketing ðp , 0:01Þ, with stock return ðp , 0:05Þ, and with firm size ðp , 0:05Þ. According to this result, international marketing and diversification both increase the risk of debt, which may affect the stock market return of joint-stock firms. Table II reports the results of ANOVAs that were conducted to test our hypotheses. The data provide support for our hypotheses. First, the data support H4 ðp , 0:001Þ, which predicted a negative relationship between foreign ownership and the level of diversification. Table II also shows a significant difference between diversifiers and single-product producers in state ownership ðp , 0:05Þ, which suggests something different from H1, i.e. diversifiers actually had a lower level of state ownership. Table III compares some dimensions of performance among the three groups of firms. First, it shows a significant difference in their stock market returns over three years (1997-1999). It seems that the stock markets preferred firms that focused on a single product. However, in terms of debt ratio, ROA, and assets growth, there is no significant difference between the single product producers and the diversifiers. It is interesting to note that, regardless of their strategies, the profitability of joint-stock firms was lower than their industrial averages. This is understandable considering the fact that local firms were normally less competitive than overseas firms in the same industry (Li et al., 2001). Although these local firms were listed recently, they might have needed time to improve their profitability. Finally, the data in Table III suggest that the diversifiers and the single-product producers differed significantly on two other dimensions, i.e. new product development and overseas investment. These results may suggest that, in the long run, single-product producers will gain more competitive advantages than will diversifiers. To further understand the relationship between firm ownership and diversification, we conducted a multinomial logistic regression analysis. We selected this approach because our dependent variable, diversification, had three categories. In this analysis, data about the firms’ ownership structure and two control variables, i.e. industrial ROA and firm size, were entered at the same time. Table IV shows the results of the analysis.

0.12 0.13 0.84 0.92 15,963,054.06 7.30 3.41 0.72 2.60 £ 102 04 6.24 £ 102 02 0.10 0.29 2.42 £ 102 04 0.71

1.42 £ 102 02 1.63 £ 102 02 0.62 0.53 25,434,532 2 66.97 2 2.02 0.65 8.98 £ 102 05 2.96 £ 102 02 3.69 £ 102 02 0.32 2.15 £ 102 05 1.75 M. 1.42 £ 102 02 1.63 £ 102 02 0.62 0.53 25,434,532 2 66.97 2 2.02 0.65 8.98 £ 102 05 2.96 £ 102 02 3.69 £ 102 02 0.32 2.15 £ 102 05 1.75

1 Overseas investment 2 Overseas marketing 3 Stock return 4 New products 5 C. size 6 C. debt/assets 7 C. ROA 8 Acquisition 9 Large holder S. 10 Employee S. 11 B. S. 12 State S. 13 Management S. 14 Diversification (1-3)

Variables 1 Overseas investment 2 Overseas marketing 3 Stock return 4 New products 5 C. size 6 C. debt/assets 7 C. ROA 8 Acquisition 9 Large holder S. 10 Employee S. 11 B. S. 12 State S. 13 Management S. 14 Diversification (1-3)

10

1 20.12** 20.09 20.04 0.12**

1 20.06 0.00 20.09 0.92** 0.03

1 0.18** 0.03 0.02 20.14** 0.00 0.05 20.01 20.04 20.00 20.03 0.00 0.07

2

9

1 20.02 0.20** 0.18** 20.17** 20.02 0.05 20.08 20.04 20.00 0.07 0.03 20.01 0.06

1

Notes: One-tailed significance; *p , 0:05; **p , 0:01; ***p , 0:001

SD 0.12 0.13 0.84 0.92 15,963,054.06 7.30 3.41 0.72 2.60 £ 102 04 6.24 £ 102 02 0.10 0.29 2.42 £ 102 04 0.71

SD

M.

Variables

1 2 0.05 0.08 0.04

11

1 0.34** 2 0.01 2 0.15** 0.01 0.11 0.04 2 0.12 0.07 2 0.06 0.12 0.20**

3

1 20.10* 20.07

12

1 0.02 0.05 20.11* 20.02 20.05 0.06 20.01 20.02 20.01 0.15**

4

1 20.00

13

1 20.10* 0.01 0.02 0.03 20.11* 0.03 20.01 0.01 0.03

5

1

14

1 2 0.50** 2 0.01 2 0.05 0.03 2 0.02 0.02 2 0.08 0.05

6

8

1 0.92** 20.04 0.08 20.10* 0.03 0.00

7

1 0.03 0.01 2 0.00 0.07 2 0.01 0.02 0.09

Ownership reform among state firms 579

Table I. Descriptive statistics

MD 43,4

580

The data in Table IV challenge H1 ðp , 0:05Þ and suggest a negative relationship between the level of diversification and state ownership. In other words, the data do not support the argument that state ownership leads to firm diversification. Instead, firms with less state ownership seem to be more likely to diversify. We believe that this finding suggests the effect of China’s institutional environments and highlights the need to improve control systems. This issue will be discussed further in later sections. Finally, the number also supports H4 ðp , 0:05Þ, which predicted that an increase in foreign ownership would lead to a decrease in the level of diversification. The hypotheses about the effects of other forms of ownership were not supported. Finally, we conducted hierarchical regressions to test the effects of diversification on firm performance. First, a main dimension of firm performance, i.e. the firms’ average ROA from 1997 to 1999 (ROA) was entered as the dependent variable. Diversification was entered first as two dummies (model 1). Specifically, related diversification was coded as 1 if a firm adopted this strategy and 0 otherwise. Similarly, unrelated diversification was coded as 1 if a firm adopted this strategy and 0 otherwise. Two control variables, i.e. international operation and firm size, were entered later (model 2). Using a similar approach, we also tested the effect of diversification on the firms’ average return on owners’ equity (ROE) and the firms’ stock market performance (from 1997 to 1999). Table V shows the results of the analyses. First, the data suggest that diversification had no significant effects on ROA. However, unrelated diversification had a significant effect on ROE. This is true even after the control variables were entered. These results partially support H7, which predicts a negative relationship between diversification and accounting performance. Moreover, the data also support H6, which predicts a negative relationship between diversification and stock market performance. Discussion and conclusions The establishment of JS firms is a popular approach to the reform of SOEs in China today. However, it remains a question whether Chinese governments (both central and local ones) should adopt the “big-bang” approach to switch their ownership to other ownerships. Researchers, as we have discussed above, have different opinions on this issue. The finding in the current paper suggests that the answer to this question depends on how fast China can overcome the difficulty of codified information and build effective control systems. As the data in this paper suggested, without such systems, the change of ownership alone seems insufficient to improve the strategy or performance of the former SOEs. For example, without accounting data that allow effective monitoring the diversification among the Chinese firms and assessing the consequences of this strategy, those JS firms may simply adopt the strategy of diversification to increase the power of the management. Moreover, diversification also makes it difficult to monitor firm management, which may partially explain the corruptions found among the listed firms today. Another issue is that, given China’s institutional environments today, privatizing state firms overnight may make it even difficult to control and monitor firm management. One Chinese scholar has cited a case. In a private firm, the general manager was found to embezzle 30,000 RMB cash. However, the current Chinese law cannot punish him because his firm has no state share. In other words, the manager did

4.23 1.04 3.51 4.44 0.32

Notes: *p , 0:05; **p , 0:01; ***p , 0:001

Management S. (percent) Large bloc holders’ S. (percent) Employees’ S. (percent) Foreign investors’ S. (percent) State-owned S. (percent)

£ £ £ £

102 5 102 4 102 2 102 2

Single product only ðN ¼ 238Þ 1.87 7.68 2.43 3.00 0.28

£ £ £ £

102 6 102 0.5 102 2 102 2

Related diversification ðN ¼ 252Þ 2.45 6.64 4.83 9.37 0.23

£ £ £ £

102 5 102 0.5 102 2 102 3

Un-related diversification ðN ¼ 88Þ

0.55 1.06 0.02 5.42** 8.47**

F-value (Sig.)

Ownership reform among state firms 581

Table II. Ownership and diversification ðN ¼ 578Þ

Table III. Differences in performance among three types of firms ðN ¼ 578Þ 0.67 4.44 £ 102 7 2.10 £ 102 2 2.52 £ 102 2 0.80 266.98 22.17 70.43

Notes: *p , 0:05; **p , 0:01; ***p , 0:001

New products Acquisition of other firms Overseas investment Overseas market expansion Stock market return (percent) C-debt/assets ratio (percent) C-ROA (percent) Assets growth (percent)

582

0.39 5.09 £ 102 7 7.94 £ 102 3 7.83 £ 102 3 0.46 266.96 21.87 77.68

0.43 7.74 £ 102 7 1.43 £ 102 2 4.50 £ 102 8 0.54 269.86 21.75 71.23

19.17*** 1.16 7.95*** 0.32 6.07** 0.83 3.85* 3.17

Single product only ðN ¼ 238Þ Related diversification ðN ¼ 252Þ Un-related diversification ðN ¼ 88Þ F-value (Sig.)

MD 43,4

Model fitting information Model Intercept only Final Parameter estimates Diversification 1.00 Intercept State ownership Large block private ownership Management ownership Foreign ownership Employee ownership Three-year average industrial ROA Firm size 2.00 Intercept State ownership Large block private ownership Management ownership Foreign ownership Employee ownership Three-year average industrial ROA Firm size

2 2 Log Likelihood Chi-square 1186.929 1099.948 86.981 B 17.388 22.564 272.421 20.611 26.435 0.387 20.287 1.224 17.388 23.398 2194.324 21.719 25.269 2.788 20.261 1.812

S.E. 0.733 1.007 144.118 1.042 2.279 1.728 2.011 12.007 0.733 1.074 137.133 1.035 2.298 1.588 1.778 11.062

Df 14 Wald 562.175 5.667 0.251 0.345 7.974 0.050 0.049 0.331 562.175 10.01 2.011 2.760 5.259 0.041 0.039 0.352

Ownership reform among state firms

Sig. 0.000 df 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Sig. Exp (B) 0.000 1.221 0.017* 12.991 0.616 1.096 0.558 1.842 0.005** 623.488 0.827 0.679 0.699 0.593 0.771 10.232 0.000 1.221 0.001*** 29.897 0.156 1.113 0.069 5.579 0.027* 194.194 0.733 0.615 0.643 0.553 0.674 9.232

Notes: *p , 0:05; **p , 0:01; *** p , 0:001

not steal state or public money, so the current law system is not very applicable to him (He, 1998). There have been also many reports in China showing that, the more a firm’s management can reduce the state share to an insignificant level, the more benefits it will gain from this ownership restructuring. One famous example is the first Sino-overseas JS firm listed in Shenzhen Stock Exchange in 1990. Through several steps of ownership restructuring, the firm management was able to reduce the state share to only 1.4 percent. In this process, without investing his own money, the general manager of the firm was able to send millions of dollars abroad and shift the ownership of the firm to another firm under his control. Although this general manager was later arrested from abroad and put on trial in November 1995, the sentence was very light – being expelled from China (He, 1998, pp. 31-5). After all, without effective monitoring and control systems, the ownership reform among China’s state firms today may simply increase the personal wealth of corrupt government officials and firm managers, without any improvement of firm strategy and performance. On the other hand, the more the firms lost their state ownership, the more they seem to prefer diversification. This may suggest the effects of the current institutional environments in China. As many authors have already pointed out (Boisot and Child, 1996), given the institutional environment in China, networks or connections (i.e. Guanxi) are very important to firms. Of all these connections, those with the government are the most important. As state shares decrease or disappear in the JS firms, government connections and support are also likely to decrease or disappear. The government would become very reluctant to help those firms in which it has little or no shares. As the goal of reform has been to force all firms to compete fairly in the market, these former state firms cannot expect that the government will continue to take care of them by providing information and other resources. Facing this reality, the

583

Table IV. Results of multinomial logistic regression

MD 43,4

584 Table V. Hierarchical regression, the effects of diversification on firm performance

Independent variables Un-related diversification Related diversification Controlled variables International operation or not 1995 comparative firm size Overall model F Adjusted R 2 Standard error

ROA Model 1 Model 2

ROE Model 1 Model 2

Stock price performent Model 1 Model 2

20.072 20.073

2 0.13** 2 0.05

2 0.12** 2 0.04

2 0.11* 2 0.12*

4.38* 0.02 0.29

2 0.07 0.09* 3.99** 0.02 0.28

1.85 0.00 6.72

20.08 20.07 20.15*** 0.03 4.07** 0.02 6.85

3.85* 0.02 0.25

2 0.12* 2 0.13** 2 0.18*** 0.143** 8.27*** 0.06 0.24

Notes: *p , 0:05; **p , 0:01; ***p , 0:001

former state firms will have to build non-government connections and obtain resources from non-government sources. In doing this, diversification seems to be a helpful strategy. By diversifying into related or unrelated businesses, the former state firms, which normally produced only a single product before the reform, can build more connections and reduce their dependence on a single market or a single source of resources. In other words, the more that a former state firm has lost its government connections, the more uncertainties that it may perceive, and the more likely it will be to adopt a diversification strategy to build connections and obtain resources from other non-state parties. All of these actions may help the firms to reduce uncertainties that result from the reduction of state ownership. After all, for a market-oriented reform to succeed in China, there should be new control systems, including a new accounting system, to help the formal state firms to compete in the market. The Chinese government is hoping to improve the performance of state firms by transforming the state firm into JS firms, but this hope may not be realized if control systems, including accounting system, are incapable of reducing agency costs. The reason is that, if the firm mangers adopt over-diversification for their own interests, the benefits from the shifting of ownership, such as faster managerial reactions to market change, may be offset by the negative consequences of this diversification. This will be especially harmful to joint-stock firms with China’s entry to the World Trade Organization, which means the step by step removal of state protection. Without state protection, diversified firms that fail to develop competitiveness in their core business may be incapable of competing with multinational enterprises. This argument is consistent with research findings from former East European socialist countries (Newman, 2000). After all, a change of ownership should be matched with appropriate accounting and other control systems that encourage the firms to be more aggressive and more focused on building their competitive advantages. Also, as our current paper shows, China’s current institutional environments, especially its cultural characteristics, have significant effects on firm behavior and firm strategy. With different institutional environments, some relationships, which have been tested in the west, may become inapplicable. For example, in the Chinese environment, management ownership and large block private ownership do not seem to prevent firms from pursuing unrelated diversification. This situation may also be

true in other Asian societies. Empirical observation of conglomerates in Hong Kong, Japan, Korea, Taiwan and Singapore suggests a relationship between Confucian family values and firm preferences for diversification. While there are a number of studies examining the moderating effects of national culture on management control systems (Harrison and McKinnon, 1999), to the best of our knowledge, none has studied the interaction among cultural factor, control system and corporate strategy and this may be an interesting topic to explore. This study also has other implications for academic researchers. When firms adopt the diversification strategy in China, for example, they seem to be influenced by both external environmental factors, such as China’s economic and political systems, and internal factors, such as firm ownership. However, it remains a question which set of factors, i.e. the external ones or internal ones, have the most important effect on the firms’ decision to diversify. Future study should test this issue so that we can have a better understanding of the factors influencing firm strategy and firm performance. Finally, it should be pointed out that the current study has some limitations. First, it uses a cross-sectional design, which makes it difficult to assess the causality of the variables. Although the inclusion of industrial data allowed for some control over the differences among the industries, these cross-sectional data make it difficult to study the changes of firm behavior over the years. Specifically, given the cross-sectional data in the current study, it will be difficult to control for the industrial differences that are changing over the years. For example, the Chinese government has different policies for different industries, and these policies are changing every year and affect firm behaviors differently. Without focusing on a homogeneous sample, it will be difficult to control this environmental factor across the industries. Future studies should consider the effect of this factor and develop more powerful and comprehensive measurements for controlled variables. For example, new dummy variables, such as whether a given firm can enjoy a certain tax benefit, can be added to allow control for the differences in government policies towards different industries. In addition, because of data limitation in China, the current study failed to obtain data on sales proportion to measure diversification. As a result, the measurement of diversification in this study is not as precise as those reported in the western studies. Future studies should try to improve the measurement of diversification. For example, a sample of the firms may be selected to respond to a questionnaire measuring their strategy of diversification. In this way, the quality of testing diversification can be improved. Finally, more theoretical development should be conducted to further our understanding of pros and cons related to the diversification strategy in China. In China’s institutional environment, the diversification strategy may help firms to control more resources and increase their chance of survival. The current study has mainly shown the negative consequents of diversification strategy, and the positive effect of this strategy has yet to be tested. In future studies, more empirical data should be collected to test the advantage of diversification strategy for firms operating in China.

Notes 1. For a detailed discussion of this system, see, The Organization and Implementation of the Third National Industrial Survey by SSBC, 1996.

Ownership reform among state firms 585

MD 43,4

586

2. In 2001, China began to allow its citizens to buy B shares, which had previously been available to overseas investors alone. However, as we use data from before 2000, our results are not affected by this change of government policy. References Agrawal, A. and Mandelker, G. (1990), “Large shareholders and the monitoring of managers: the case of anti-takeover charter amendments”, Journal of Financial and Quantitative Analysis, Vol. 25 No. 2, pp. 143-61. Baysinger, B.D. and Hoskisson, R.E. (1990), “Diversification strategy and R&D intensity in large multiproduct firms”, Academy of Management Journal, Vol. 32, pp. 310-32. Bethel, J.E. and Liebeskind, J. (1993), “The effects of ownership structure on corporate restructuring”, Strategic Management Journal, Vol. 14, pp. 15-32. Bhappu, A. (2000), “The Japanese family: an institutional logic for Japanese corporate networks and Japanese management”, Academy of Management Review, Vol. 25 No. 2, pp. 409-15. Biggart, N.W. (1991), “Explaining Asian economic organization: toward a Weberian institutional perspective”, Theory and Society, Vol. 20, pp. 199-232. Boisot, M. and Child, J. (1988), “The iron law of fiefs: bureaucratic failure and the problem of governance in the Chinese economic reforms”, Administrative Science Quarterly, Vol. 33, pp. 507-27. Boisot, M. and Child, J. (1996), “From fiefs to clans and network capitalism: explaining China’s emerging economic order”, Administrative Science Quarterly, Vol. 41, pp. 600-28. Chen, Q.T. (1999), The Road of State-Owned Enterprises to the Market, Chinese Development Press, Beijing. Chen, S., Sun, J. and Wang, Y. (2002), “Evidence from China on whether harmonized accounting standards harmonize accounting practices”, Accounting Horizons, Vol. 16 No. 3, pp. 183-97. Child, J. (1998), “Management and organizations in China: key trends and issues”, working paper, Chinese Management Centre, University of Hong Kong. Child, J., Yan, Y. and Lu, Y. (1997), “Ownership and control in Sino-foreign joint venture”, Beamish, P.W. and Killing, J.P. (Eds), Cooperative Strategies: Asian Perspectives, New Lexington Press, San Francisco, CA. Dyck, I.J.A. (1997), “Privatization in Eastern Germany, management selection and economic transition”, American Economic Review, Vol. 874, pp. 565-97. Eisenhardt, K.M. (1989), “Agency theory: an assessment and review”, Academy of Management Review, Vol. 14 No. 1, pp. 57-74. Fama, E.F. (1980), “Agency problems and the theory of the firm”, Journal of Political Economy, Vol. 88 No. 2, pp. 288-307. Gibbs, P.A. (1993), “Determinants of corporate restructuring: the relative importance of corporate governance, takeover threat, and free cash flow”, Strategic Management Journal, Vol. 14, pp. 51-68. Gilley, B. (2002), “China’s bankers: rotten to the top”, Far Eastern Economic Review, Vol. 165 No. 4, pp. 30-6. Harrison, J.R. (1987), “The strategic use of corporate board committees”, California Management Review, Vol. 30 No. 1, pp. 109-25. Harrison, G. and McKinnon, J. (1999), “Cross-cultural research in management control systems design: a review of the current state”, Accounting, Organizations and Society, Vol. 24, pp. 483-506.

He, Q. (1998), The Pit of Modernization – Economic and Social Problems in China Today, China Today Press, Beijing. Hill, C.W.L. and Snell, S.A. (1988), “External control, corporate strategy, and firm performance in research intensive industries”, Strategic Management Journal, Vol. 9, pp. 577-90. Hitt, M.A., Hoskisson, R.E. and Ireland, R.D. (1990), “Acquisitive growth and commitment to innovation in M-form firms”, Strategic Management Journal, Vol. 11, pp. 29-47. Hoskisson, R.E. and Hitt, M.A. (1988), “Strategic control systems and relative R&D investment in large multiproduct firms”, Strategic Management Journal, Vol. 9, pp. 605-21. Hoskisson, R.E., Hitt, M.A. and Hill, C.W.L. (1993), “Managerial risk taking in diversified firms: an evolutionary perspective”, Organization Science, Vol. 2, pp. 296-313. Hoskisson, R.E., Johnson, R.A. and Moesel, D.D. (1994), “Corporate divestiture intensity in restructuring firms: effects of governance, strategy, and performance”, Academy of Management Journal, Vol. 37 No. 5, pp. 1207-33. Johnson, R.A., Hoskisson, R.E. and Hitt, M.A. (1993), “Board of director involvement in restructuring: the effects of board versus managerial controls and characteristics”, Strategic Management Journal, Vol. 14, pp. 33-50. Langfield-Smith, K. (1997), “Management control systems and strategy: a critical review”, Accounting, Organizations and Society, Vol. 22 No. 2, pp. 207-32. Li, J., Lam, K. and Qian, G. (2001), “Does culture affect behaviour and performance of firms: the case of joint venture in China”, Journal of International Business Studies, Vol. 32 No. 1, pp. 115-31. Liew, L. (1999), “The impact of the Asian financial crisis on China: the macroeconomy and state-owned enterprise reform”, Management International Review, Vol. 39, pp. 85-95. Lin, J.Y., Cai, F. and Zhou, L. (1998), “Competition, policy burdens, and state-owned enterprise reform”, The American Economic Review, Vol. 88 No. 2, pp. 422-7. Lu, Y. and Bjorkman, I. (1997), “HRM practices in China-Western joint ventures”, International Journal of Human Resource Management, Vol. 8 No. 5, pp. 614-28. McCallum, K. (2001), “Chinese IPOs to include state-owned stock”, The Asian Wall Street Journal, Vol. 25, p. M8. Mckinnon, R.I. (1992), “Spontaneous order on the road back from socialism: an Asian perspective”, The American Economic Review, Vol. 8 No. 2, pp. 31-7. Mallette, P. and Fowler, K.L. (1992), “Effects of board composition and stock ownership on the adoption of poison pills”, Academy of Management Journal, Vol. 35 No. 5, pp. 1010-35. Markides, C.C. (1992), “Consequences of corporate refocusing: ex ante evidence”, Academy of Management Journal, Vol. 35, pp. 398-412. Nee, V. (1991), “Social inequalities in reforming state socialism: between redistribution and markets in China”, American Sociological Review, Vol. 56, pp. 267-82. Nee, V. (1992), “Organizational dynamics of market transition: hybrid forms, property rights, and mixed economy in China”, Administrative Science Quarterly, Vol. 37, pp. 1-27. Newman, K.L. (2000), “Organizational transformation during institutional upheaval”, Academy of Management Review, Vol. 25 No. 3, pp. 602-19. Smyth, R. (1998), “Toward ‘the modern corporation’: recent developments in the institutional reform of state-owned enterprises in Mainland China”, Issues and Studies, Vol. 34 No. 8, pp. 102-31. Tosi, H. and Gomez-Mejia, L. (1989), “The decoupling of CEO pay and performance: an agency theory perspective”, Administrative Science Quarterly, Vol. 34, pp. 169-89.

Ownership reform among state firms 587

MD 43,4

Tse, D.K. and Lau, C.M. (1999), “New ownership forms in transitional economies: emergence, characteristics and performance of China’s joint stock companies”, CMC working paper, CMC1999-003-01, The University of Hong Kong. Xinhua News Agency (1994), “Compiled Shenzhen Information”, Xinhua News Agency, 7 July. Young, M.N. and McGuiness, P.B. (2001), “The missing link: why stock market have been ineffective in Chinese SOE reform”, Business Horizons, July-August, pp. 55-62.

588 Further reading Broadman, H.G. (1999), “The Chinese state as corporate shareholder”, Finance & Development, Vol. 36 No. 3, pp. 52-5. Fama, E.F. and Jensen, M.C. (1983), “Separation of ownership and control”, Journal of Law and Economics, Vol. 26, pp. 327-49. Jensen, M.C. (1993), “The modern industrial revolution, exit, and the failure of internal control systems”, Journal of Finance, July, pp. 831-80. Jensen, M.C. and Meckling, W.C. (1976), “Theory of the firm: managerial behavior, agency costs, and ownership structure”, Journal of Financial Analysis, Vol. 3, pp. 305-60. Rumelt, R.P. (1974), Strategy, Structure and Economic Performance, Harvard Business School, Boston, MA. Smyth, R. (2000), “Asset stripping in Chinese state-owned enterprises”, Journal of Contemporary Asia, Vol. 30 No. 1, pp. 3-16. Tung, R. (1995), “Market-oriented reform of state-owned enterprises in Mainland China”, Issues and Studies, Vol. 31 No. 2, pp. 1-20.

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

Dispute resolution management for international construction projects in China Edwin H.W. Chan and Henry C.H. Suen Department of Building and Real Estate, The Hong Kong Polytechnic University, Hong Kong SAR, People’s Republic of China

Dispute resolution management 589 Received September 2004

Abstract Purpose – Unfamiliar with the Chinese culture and ways of doing business, foreign architects/engineers/contractors (AEC) firms will encounter differences with the local parties. With reference to the characteristics of Chinese culture on disputes, this paper studies the problem areas of dispute and of resolving disputes in international construction projects in China. The objectives are to: examine the fundamentals of Chinese culture and ways of doing business; examine the characteristics of international projects and investigate any differences in the dispute problems arising from China International Projects; identify the most popular dispute resolution mechanism(s) for international projects in China; and recommend possible ways to reduce and resolve disputes of these projects. Design/methodology/approach – After literature review, a questionnaire was designed for face-to-face interviews with 40 practitioners to collect their opinions. Findings – The results show that the problem areas giving rise to disputes are mainly related to contractual matters. To reflect the characteristics of international projects in China, cultural and legal matters are also found to be the sources of problem. Arbitration is the most popular method, after negotiation, for resolving disputes in international construction projects in China. Research limitations/implications – The number of interviewees in this study could be improved and further study could include experts in Mainland China. Originality/value – There is not much literature on dispute resolution management for international construction projects in China, with particular reference to cultural differences. This paper offers an invaluable reference for those foreign AEC firms interested in joining international projects in China. Keywords China, National cultures, Construction industry, Dispute resolutions Paper type Research paper

Introduction The business of construction has changed a great deal resulting from the effects of growing globalization and competition (Ofori, 2000). The fast-growing international trade and developments, such as the World Trade Organization agreements (WTO, 2004) and the Asia-Pacific Economic Cooperation forum (APEC, 2003) have provided new opportunities to the construction industry. Facilitated by sophisticated communication technologies, advanced project management, and by profits attraction, large-scale projects are no longer local events but international affairs involving parties of different nations (Chan, 1997; Ofori, 2000). The development of the Beijing 2008 Olympic Games Sports Venues and Related Facilities Project is an The work described in this paper was substantially supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. PolyU-5103/03E). The authors are grateful to all the experts who had taken part in the interviews.

Management Decision Vol. 43 No. 4, 2005 pp. 589-602 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510593576

MD 43,4

590

excellent example. Foreign architects/engineers/contractors (AEC) firms with a strong financial capability and broad experience in developing, managing and operating large-scale public infrastructure projects are eligible to participate in the tendering (Olympic Games Organizing Committee, 2004). Since the adoption of “open-door policy” in the late 1980s, the Chinese Government have introduced a series of measures to boost the economy, including the building and construction industry, such as the Sino-foreign Joint Venture (SFJV), Foreign Direct Investment (FDI) and the Special Economic Zones (SEZs) (Cheng and Qiu, 2002). Collectively, they have made China one of the largest recipients of foreign investments in the world, with a total trade of US $505 billion (Sekhar, 2003). Such impressive economic growth in China has resulted in an immense demand for housing, shopping malls, commercial buildings, factories, sports facilities, bridges, roads, etc. These provide many business opportunities for both foreign and local Chinese AEC firms. Unfamiliar with the Chinese culture, local legal system, and ways of doing business, foreign AEC firms would normally team up with local Chinese AEC firms to form Sino-Foreign Joint Ventures or other forms of collaboration. As a team, they have to learn to deal with their differences and be able to resolve disputes in an effective manner. The effects of construction disputes are detrimental. If disputes are not properly managed, they may cause project delays, undermine team spirit, increase project costs, and, above all, damage business relationships (Cheung and Suen, 2002). With the increase in the number of participants in a construction project, more business interactions and arguments end up with an increase in the number of construction disputes (Kumaraswamy and Yogeswaran, 1998). Research in preventing and resolving disputes supports the effort for better understanding and harmonization of the different cultures (Loosemore, 1999). It was rightly stated “without understanding there can be no friendship. If one wishes to understand a people one must identify oneself with them. One must study their language, customs and culture. . . and they will be one’s friend” (Broster, 1976, p.6) Therefore, understanding the Chinese culture, the nature of international construction disputes, and the effective management of disputes are of great importance in the study of international construction projects in China which are undertaken by foreign AEC firms solely or jointly with local partners (hereafter known as “International Projects”).

Aim and objectives of this study In light of the above, together with the increasing number of International Projects resulting from the China’s entry to the WTO and the Beijing 2008 Olympic Games, this paper aims to examine the problem areas of disputes and the resolution of disputes in International Projects. In so doing, the following objectives are included: . to examine the fundamentals of Chinese culture and ways of doing business; . to examine the characteristics of international projects and investigate any differences in the dispute problems arising from China International Projects; . to identify the most popular dispute resolution mechanism(s) for international projects in China; and . to recommend possible ways to reduce and resolve disputes of these projects.

The works of Chan (2002) in the international construction projects in China, Howlett (2003) in the Chinese arbitration and law, Lau (1979) in the teachings of Confucius, Liu and Fellow (1999) in the Chinese organizational culture, Kumaraswamy and Yogeswaran (1998) in the sources of construction disputes, Uff (1998) in addressing multi-tierrd dispute resolution methods in large infrastructure projects, and Mitropoulos and Howell (2001) in the prevention and resolution of construction disputes, provide the excellent background and references for this study. Chinese culture relating to disputes For various reasons, the Chinese Government has been slow to accept the developments in the world. For the new China, it was not until its open-door policy in the late 1980s that brought force to break such barrier. International trades, including international construction activities, have helped to mould the new Chinese economy and ways of doing business. Despite the large amount of international economic activities and the more open-minded new generation, the Chinese people are still deeply influenced by the teachings of Confucianism and Taoism, which have been promulgated in the Chinese society for over 2,500 years and the teachings are meant to lead to moral acts. Confucianism Confucianism is developed from the teachings of Confucians who was born in ancient China in 551 BC . Confucianism is not in any way a religion but a way of life that ) of individuals. The self-cultivation of an emphasizes “self-cultivation” ( ), is the ideal moral charter in individual that leads to a “gentlemen” ( Confucianism terms. Professor Lau (1979, p.12) succinctly summed up: “behind Confucius’ pursuit of the ideal moral character lies the unspoken, and therefore, unquestioned, assumption that the only purpose a man can have and also the only worthwhile thing a man can do is to become as good a man as possible. This is something that has to be pursued for its own sake and with complete indifference to success or failure. Unlike religious teachers, Confucius could hold out no hope of rewards either in this world or in the next. As far as survival after death is concerned, Confucius’ attitudes can, at best, be described as agnostics”. For the Chinese people, it is a great pride at least to be able to quote, if not to practice, the Confucians’ teachings. Indeed, the essences of Confucian philosophy can be found in many official documents and teachings. Some of the more salient principles are (Chan, 2002): . submitting to authority; . respecting the concept of “big family”; . “middle way” ( ) and amicable to preserve harmony in one community; and . maintaining harmonious relationships with neighbours. Taoism Exerting equal influence on the Chinese culture is the “Taoism”. Same as Confucianism, Taoism is not a religion. The founder is Lao Zi, a contemporary of Confucius, born in 571 BC . The bible of Taoism, “Tao Te Ching” is full of cryptic language that lends itself to many different interpretations. Yet, the central theme is

Dispute resolution management 591

MD 43,4

592

surrounding the “tao” ( ) meaning “the way of life” which carries very similar meaning to the “Way” in the Confucianism. While Confucianism sees “tao” in a more down-to-earth and humanistic sense, Taoism often uses “tao” to indicate the order of Nature. Taoism stresses that by following Nature, one will acquire contentment, enlightenment and peace. The human life is part of Nature and therefore, humans should accept change as being the way of everything in the universe. The two great philosophies, Confucianism and Taoism, are both based on the same essential words, “tao” ( ) meaning the correct way of life and “te” ( ) meaning virtue. Confucianism represents the classical approach and requires a very positive attitude to live up to the “Way” and to achieve virtue. Taoist represents the romantic approach and adopts an ). The Taoist philosophy, similar to effortless and natural approach ( Confucianism, emphases on harmony and is very much adopting an amicable attitude in living (Chan, 2002). How far are the Confucian and Taoist teachings embedded in or practiced by the Chinese people in a modern business environment? It is a question that requires intensive public debate. However, it is fair to say that these teachings, to some extent, affect the way the Chinese people dealing with disputes. With reference to the influence of Confucianism and Taoism on the Chinese people, it is understandable that many Chinese claim that it is the Chinese nature of avoiding open disputes, respecting social hierarchy, and of emphasizing on maintaining harmony, order and loyalty (Chan, 2002). Characteristics of international construction projects Nature of international projects International construction projects are those projects in which the contractor, the lead consultant, or the employer is not of the same domicile, and at least one of them is working outside his or her country of origin. Previous research studies have attempted to examine the different aspects of international construction projects, which are normally large and complex, and should be undertaken only by experienced foreign AEC firms (Mawhinney, 2001). Bon and Crosthwaite (2001) reported that the greatest opportunity for international construction projects would be in the developing countries, especially in Asia. At the national and metropolitan level, their findings in the year 2001 suggested that China and cities within China are considered noteworthy. Ofori (2000) suggested that the construction industry should make good use of international construction opportunities in order to embrace the development of: materials; project documentation and procedures; human resources; technology; and institutions. Clark and Ip (1999) came to the view that international construction projects provide an opportunity to develop products using the most up-to-date expertise and knowledge in a cost effective manner. Raftery et al. (1998) regarded international projects as opportunities for the industry of developing countries to leap forward, through joint ventures with construction companies of foreign countries. These characteristics, however, could never be materialized unless contracting parties are prepared to work together in a co-operative manner (Chan and Chan, 2001). Disputes arising from international projects Numerous reports on sources of disputes have been documented (Chan, 2002; Diekmann and Nelson, 1985; Kumaraswamy and Yogeswaran, 1998). The sources of

disputes in international construction projects are largely two folds. First, the parties’ knowledge and experience in construction law and in management are not homogeneous. Foreign AEC firms have problems understanding the local construction practices, law and politics (Chan, 2002; Shilston and Hughes, 1997; White 1999). Secondly, lacking solidarity in the project team, contracting parties have conflicting goals and objectives. It is the project manager’s responsibility to align and harmonize their differences and to ensure that they work together as a team (Walker, 1989). If differences between the parties are not managed properly or speedily removed, they could develop into disputes, which in turn may lead to programme delay, increase tension, and breakdown of business relationships (Chan, 1997; Cheung and Suen, 2002; Vorster, 1993). Research methodology To identify the problem areas with disputes and dispute resolution practice in international projects, a questionnaire survey in the form of face-to-face interview was conducted with 40 practitioners, who are experts in the field. The selection of the experts was based on the following criteria: (1) practitioners who have more than ten-year experience of construction contracts management in international projects; (2) practitioners who have more than five-year experience of dispute resolution mechanisms in international projects; and (3) practitioners who have more than five-year experience of international construction projects policies in China With the help of the Hong Kong International Arbitration Centre, a list was developed containing over 70 practitioners who were interested in the topic and could be approached. The practitioners were contacted, and, in the end, a total of 40 were interviewed. The experts included 14 lawyers, 8 quantity surveyors, 8 arbitrators, 8 project managers, and 2 academics. They all hold senior positions with working experience related to the construction industry (some are senior officers of the Chinese construction authorities). It is without doubt that, with their experience and knowledge, their views would be reflective of the current situations. Problem areas of international project disputes in China Literature review The study of Kumaraswamy and Yogeswaran (1998) provided a good reference of the common sources of construction disputes. The sources of construction disputes are largely related to contractual matters, including variation, extension of time, payment, quality of technical specification, availability of information, administration and management, unrealistic client expectations and determination. On the other hand, the works of Diekmann et al. (1994) and Centre for Public Resources (1994) suggested that disputes could be caused by cultural and contractual matters, and Howlett (2003) believed that conflict of laws and jurisdictional problems could also lead to disputes, and therefore, these sources should not be overlooked. Taking into account the literature, a consolidated list of sources of disputes was developed by Chan (2002), in his study of dispute management of international construction projects. Based on the consolidated list, brainstorming among the research team members and preliminary

Dispute resolution management 593

MD 43,4

594

discussions with a few experts were carried out and 20 possible problem areas of disputes of international construction projects in China were shortlisted. The list includes variations, extension of time, payments, quality of works, technical specification, availability of information, administration/management, unrealistic client expectations, risk allocation, project scope definition, poor communication, difference in ways of doing things, lack of team spirit, previous working relationships, adversarial approach in handling disputes, unfamiliar with local conditions, conflict of laws, jurisdictional problems, lack of local legal system, and unclear contractual terms. These were subsequently categorized under three heads: contractual matters; cultural matters; and legal matters. Experts’ views and findings The list identified above formed the basis for the design of questionnaire and each expert was allowed 45 minutes to identify the major problem areas of disputes from the list, and to add any missing ones, if necessary. The findings are summarized in Figure 1. The top four places are taken by problem areas relating to contractual matters. They are, in priority order, payments (93 per cent of the 40 experts choose this item), followed by variations (83 per cent frequency), extension of time (77 per cent frequency), and quality of works (77 per cent frequency). This confirms that contractual matters remain the main source of problems in international projects, followed by cultural matters. Legal matters come last, indicating problems with lack of knowledge local legal systems (12 per cent), conflict of laws (12 per cent), and jurisdictional problems (9 per cent). However, these low figures must be understood in the context that the contractual matters, being separately considered in the study, is one major branch of legal matters. With reference to Figure 1, it is no surprise to see that the problem areas giving rise to disputes are mainly related to contractual matters, which is not much different from problems experienced in other construction projects. To reflect the characteristics of international projects in China, cultural and legal matters are also found to be the sources of problem. Although, they are not very

Figure 1. Summary of problem areas of dispute in international projects

significant in comparison with contractual matters, the practical issues such as “Unfamiliar with local conditions” (with 61 per cent frequency), “Difference in ways of doing things” (48 per cent frequency), and “Poor communication” (41 per cent frequency) are the major concerns relating to cultural matters. Even for international projects, legal matters, in terms of legal procedures and systems, do not seem to be significant in causing disputes. It justifies this study to focus on the cultural matters in understanding the ways project participants manage their project disputes.

Dispute resolution management 595

Popular dispute resolution mechanisms The questionnaire also included a list of ten dispute resolution mechanisms, which was created with reference to the previous works of a number of academic and practitioners, such as Cheung and Suen (2002), Merna and Bower (1997) and Uff (1998). In considering the possible types of dispute resolution methods for this study, due consideration was also given to the Chinese culture and the dispute resolution system for foreign-related projects in China (Chan, 1997). For example, the med-arb found by Chan (2002) as a unique dispute resolution method used for resolving domestic disputes in China has been incorporated into the list. It includes negotiation, arbitration, mediation, litigation, expert determination, adjudication, dispute resolution adviser, dispute review board, mini-trial, and med-arb. Experts’ views and findings Similarly, the experts were asked to refer to their experience and identify in ranking order the most popular dispute resolution mechanisms for resolving disputes of international projects in China. The results are shown in Figure 2. As expected, negotiation is found to be the most commonly used method (100 per cent of the 40 experts choose the method). Negotiation is not normally included in the study of formal dispute resolution methods because it can take any form, and the process and results are considered as commercial dealings that are seldom disclosed for experience sharing. After negotiation, arbitration (95 per cent frequency) is the most popular

Figure 2. The most popular dispute resolution methods used in international projects

MD 43,4

596

method, followed by mediation, litigation, expert determination, adjudication, dispute resolution adviser, dispute review board, mini-trial, and med-arb (with 3 per cent frequency only). It is important to note that the top ranking popular methods, such as arbitration, litigation and expert determination are traditionally established formal processes and they provide decisions by a neutral with authority. Mediation is widely acknowledged as part of the Chinese culture in resolving dispute through compromising in a private setting. This cultural preference has not been overwhelming received for dealing with disputes involving international project participants. Med-arb, though a popular method for domestic disputes, is a strange method and indeed unacceptable to many international practitioners. It is found to be the least popular for resolving international project disputes. Negotiation The experts suggested that negotiation should be employed as the first method to resolve disputes. Unlike mediation and arbitration, negotiation does not involve a third party in the process of resolution. Some of the identifed advanatges with negotiation are: speedy resolution; flexibility; quick and simple procedure; informality; and privacy. The disputing parties would get together to discuss the problem voluntarily and reach a mutual agreement. Resolving disputes through negotiation is an indispenable part of construction project management. It is an essential skill that senior management should learn and master. The other popular voluntary dispute resolution method is mediation which requires a third neutral party, known as a “mediator” to facilitate the parties reaching a settlement. The mediator helps drafting out the accord of settlement as a contact binding the parties. As to negotiation and mediation, they are popular alternatives and are particularly useful when the parties are bona fide and willing to discuss matters openly and constructively. Both negotiation and mediation require concerted efforts and trust from both sides. The two methods have thus far achieved great success in settling construction disputes in China (CIETAC, 2000). Only when the disputants have failed to negotiate a settlement then arbitration would be employed. Arbitration remains a better choice for international construction projects in China because of the issues of uncertainty in the legal system and courts of law. As the Chinese court rulings are, like their English counterparts, subject to appeal, which means litigation could drag on for years with the local law courts system. The problem is that people, not only the foreigners but also the locals, have reservations over the competence of judges in some of the law courts in China (Feinerman 1995). On the other hand, arbitration is highly regarded by the people. Arbitration panels are made up of a panel of experts, sometimes including experienced experts from oversees, which improves the quality of hearings and awards. Furthermore, the proceedings and rules of arbitration in China closely resemble to international arbitration rules (CIETAC, 2000). Arbitration After negotiation, arbitration is the most preferred method because of its binding effect with the backing of legislation. Many standard construction contracts in China include an “arbitration clause” stipulating that arbitration should be pursued when the parties failed to negotiate or mediate a settlement. An arbitration clause

usually specifies a choice of arbitration body, which may be located in China or abroad, and a choice of law to govern the dispute. There are two internationally respected Chinese government-approved arbitration institutions, namely the China International Economic and Trade Arbitration Commission (CIETAC) and, for maritime disputes, China Maritime Arbitration Commission (CMAC). Though not compulsory, most of the international construction contracts provide for CIETAC administered arbitration. Where CIETAC is the selected arbitration institution, parties to the contract may specify the nationality of members of the arbitration panel in contact. CIETAC has published rules, which govern the selection of a panel if the contract does not specify the choice of arbitrators. As an alternative to CIETAC, if the parties so wish, they can specify an overseas arbitration institution for the arbitration to be carried out overseas. With respect to the enforcement of an arbitral awards, in case one party fails to execute the arbitral award, the other party may apply to the competent court for enforcement. If the losing party is located within the territory of China, the other party may apply to the Intermediate People’s Court in the place where the losing party is located for enforcement of the award. If the losing party is located outside China, and the country in which the losing party is located has already acceded to the New York Convention, the other party may apply to the competent court in that country for enforcement. In 1987, China acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). Under the New York Convention, arbitral awards rendered in other signatory countries are recognized and enforceable in China. Similarly, arbitral awards by Chinese arbitration bodies are enforceable in other countries signatory to the New York Convention (CIETAC, 2000; Department of Commerce of China, 2002). Need to harmonize arbitration However, using arbitration in international projects is not a panacea for all disputes; it has its drawbacks as well, for example, problems associated with the harmonization of international arbitration laws. Cremades (1998) commented: “international arbitration is presently undergoing a process of harmonization in order to achieve a pleasing effect: the adaptation of legal system throughout the world to a global economic market”. Wetter (1995) suggests that, for international construction, the harmonisation of arbitration laws should concentrate on narrow, defined issues, such as: . the concept of the seat of arbitral tribunals; . the law governing the arbitration agreement; . a uniform delimitation of the concepts of “decision” and “award”; and . a uniform classification of rules of substance and rules of procedure On the issue of arbitrators’ jurisdictions, research in the UK (Black and Fenn, 1999) shows that 29.3 per cent of 140 arbitrators have had their jurisdictions challenged by the parties in dispute. Of the 43 samples from the same group of respondents, 76.7 per cent of them said that the challenge did cause extra cost. The study also indicated that arbitrators were overwhelmingly in favour of fast-track procedures, and were much more likely to initiate using the procedures than the disputants. If problems of such magnitude exist in a single country, the ideal of a “global law” for dispute resolution is a very distant goal indeed. When parties are at an advanced stage of dispute, they will

Dispute resolution management 597

MD 43,4

598

do whatever is necessary to achieve their objectives, including challenging the legal procedures, even if it involves extra expense. Arbitrators, on the other hand, seem to be more eager than the parties to resolve the dispute as soon as possible. More universal and harmonized rules may, however, help to plug some of these loopholes. To address the problem, traditional arbitration practices have to be modified to incorporate proactive, flexible and amicable processes (Uff, 2001). Practitioners and commentators have proposed various schemes and innovative practice. A good example of these is the enactment of new arbitration legislation. Notably, the Arbitration Act in the UK and the Arbitration Ordinance in Hong Kong have been reformed and been promulgated in the years 1995-1997. An excellent example of the harmonization of Chinese arbitration law is the “Agreement Concerning Mutual Enforcement of Arbitral Awards” between the China and the Hong Kong SAR, which was agreed on 21 June 1999. After the return of sovereignty of Hong Kong to China in 1997, the situation of enforceability of arbitration awards between Hong Kong and mainland China was in a stage of uncertainty. The “Arrangement” mirrors as close as possible the mechanism, which governed reciprocal enforcement of arbitration award prior to 1 July 1997 (the Hong Kong’s Handover). Before that day, arbitration awards were enforced as foreign awards in Hong Kong and China reciprocally under the New York Convention. However, the “Arrangement” is not perfect in that not all arbitration awards made in mainland China will be eligible for enforcement in the Hong Kong SAR. It only applies to arbitration award made in mainland China “pursuant to the PRC Arbitration Law” and “by Chinese Arbitration organizations.” Awards made by foreign arbitration bodies in mainland China such as the International Chambers of Commerce will not fall within the “Arrangement” and be enforced in Hong Kong SAR. Therefore, detail attention is required for anyone trying to make use of the new arrangement (Chan and Kwok, 1999). Discussion on ways to manage disputes The following is a summary of practical suggestions which may help reducing and resolving disputes in international projects. They are derived from the results of the questionnaire and based on advices collected from the experts during the interviews. Disputes relating to cultural and legal matters The disputants should always try to recognize the expectations and behaviour of others. Social functions could be held on regular basis to allow project participants to appreciate some essential cultural traits through interactions in activities and maintaining good communication. A half-day project charter workshop involving key project participants could be organized with the intention to synchronize their thinking so that they can lay out problems and resolve conflict with mutual trust. The objectives addressed in the project charter should include effective dispute resolution, cooperative working relationships, quality service, site safety, and timely completion. Where conflicts arise, the parties involved should always go back to the project mission, and try to make agreement that is consistent with the project goals and objectives. Some of these come within the concept of “partnering”, which has been advocated by the construction industry to promote effective communication and integration between project members.

The parties should be advised to keep afresh with the latest Chinese laws and policies. The foreign partners should be aware that they should not too eagerly enter into agreements based on promises from local officials whose approvals may be ultra vires. Intermediate People’s courts may lack authority to enforce such agreements in the provinces, especially in the case where the agreement is contrary to the WTO obligations or the Central government rules. For parties coming from the Common Law system, beware of interpretation of standard international construction contract terms under the Civil Law system in China. Very often, policy may override the law in China. Advice from local lawyers specializing in construction law and local policy would be useful. To avoid the grip of the less-than-mature local law courts system, foreign parties should insist, where possible, on having an arbitration clause and adopt international institutional arbitration rules for resolving disputes. Disputes relating to contractual matters There are many studies with recommendations on avoiding disputes caused by contractual issues in general. The following are a few specific points relating to international projects in China. The parties should, before any agreements, assess how much risks are involved for working in China with its cultural, legal and political background. These risks should be explicitly reflected in the relevant contracts. Reliable sources with reports and statistics by the Chinese officials for risk assessments will be helpful and a contingent plan for emergencies will be advisable. As to the drafting of contract terms, parties should specify exact terms, in particular for payment and performance standards and establishing a realistic timetable. China is a Civil Law country which relies heavily what have been written down in contracts and codified in legislation. There are many specific compliance requirements by various departments for China projects and a local administrator will help better to ensure every step is complied with. The parties should also pay attention to minor details, such as checking the Chinese version of the contract is consistent with the English version. Even though an internationally acceded standard form, such as the FIDIC, is used, different interpretations by various parties from the two legal systems, Common Law and Civil Law, may cause misunderstanding. In this regard, pay special attention to any change to the standard form of contract, such as penalty clause, added responsibility of contractors, and impact from local legislation and administrative rules. Prevention is always better than cure, the parties should spend some time going through the entire contract document in order to reduce chances of discrepancies and errors. As arbitration is the preferred method for resolving any dispute arising from international projects in China, the contract clauses should facilitate such preference. There are too many local arbitration commissions and institutions of various standards in China, for international projects, it is advisable to specify the arbitration to be administered through the CIETAC or reputable international institutions. Recommended future studies The problems of dispute resolution management identified in this study will change with time as interaction and understanding of different practices in China and the international communities improved. Similar study could be renewed periodically with

Dispute resolution management 599

MD 43,4

600

a larger sample size of experts for more precise prediction. In the last five years or so, partnering has received much attention. It is generally regarded as a cooperative business strategy rather than a contractual arrangement (Chan, 2002). The process may help improve understanding of cultural difference and communication. Research should explore how it can be used to reduce disputes arising from international projects. With the availability of international standards such as the UNCITRAL Model Law, the New York Conventions, ICC institutional rules, the FIDIC international standard form of contract and international conferences on experience sharing, the harmonisation of international construction law has been progressing well. However, the process is still rife with problems and much work will be required for many years to come from the participants of international projects to develop a commonality in language and law. How does the harmonisation of international construction law affect international projects in China with participation of foreign AEC firms? How far does the issue of social culture affect dispute management in international construction project? It is recommended that future research along these lines should be undertaken as an attempt to answer these questions. Conclusion The main purpose of this paper is to provide foreign as well as local Chinese AEC firms a reference of dispute resolution management in international construction projects in China, in light of its cultural characteristics relating to dispute resolution. The influence of Confucianism and Taoism on the Chinese people, the nature of international construction projects, the problem areas of disputes, and the most popular dispute resolution mechanisms are discussed so as to give a realistic overview of the opportunities and challenges to international projects. This paper concludes that, while arbitration is far from prefect, it is the most popular dispute resolution mechanism, after negotiation, for resolving disputes in international construction disputes in China, notwithstanding its culture background which favours the use of mediation for local construction projects. Arbitration is formal enough to bind contracting parties under the international arbitration law, at the same time, flexible enough to respect the Chinese nature of resolving dispute in private. Based on the qualitative feedbacks from interviews with experts, possible ways are suggested to encourage contracting parties to be proactive in the management of disputes relating to contractual matters, cultural matters, and legal matters. It seems there is no universal formulae for dispute management, except that contracting parties should always respect one another. Perhaps, the contracting system in the construction industry should learn from the profound teaching of “benevolence” ( ) by Confucius: “Do not impose on others what you yourself do not desire” (The Analects, XIL.2, XV.24). References APEC (Asia-Pacific Economic Cooperation) (2003), Mediation Rules in China, People’s Republic of China, available at: www.arbitration.co.nz/ (accessed 15 November 2003). Black, M. and Fenn, P. (1999), “Survey of domestic construction arbitration in the United Kingdom”, The Journal of The Chartered Institute of Arbitrators, Vol. 65 No. 3, pp. 25-32. Bon, R. and Crosthwaite, D. (2001), “The future of international construction: some results of 1992-1999 surveys”, Building Research and Information, Vol. 29 No. 3, 242-247. Broster, J. (1976), The Thembu: their Beadwork, Songs, and Dances, Purnell, Cape Town, p. 6.

Centre for Public Resources Wall, C.J. (1994), “Dispute prevention and resolution for design and build contracts in Hong Kong”, in Rowlinson, S. (Ed.), Proceedings of CIB W92 Symposium EAST MEETS WEST, 4-7 December 1994, Hong Kong University, Hong Kong, pp. 168-87. Chan, E.H.W. (1997), “Amicable dispute resolution in the PRC: implication for foreign-related construction disputes”, Construction Management and Economics, Vol. 15 No. 6, pp. 539-48. Chan, E.H.W. (2002), “A study of factors relevant to dispute management arising in international construction projects involving both European and East Asian cultural factors”, unpublished PhD thesis, Construction Law Centre of King’s College of University of London, London,. Chan, E.H.W. and Chan, A.P.C. (2001), “Conflict management pertaining to design information in international construction projects”, Journal of Architectural Management, No. 16, pp. 32-57. Chan, E.H.W. and Kwok, G. (1999), “Foreign participation in housing development in mainland China: legal concerns on property ownership”, Journal of Review of Urban and Regional Development Studies, Vol. 11 No. 3, pp. 154-67. Cheng, L.K. and Qiu, L.D. (2002), “China’s foreign trade, foreign direct investment and their contributions to economic growth”, The Department of Economics of the Hong Kong University of Science and Technology, Hong Kong, available at: www.bm.ust.hk/ , larryqiu/517paper.doc (accessed 15 November 2003). Cheung, S.O. and Suen, C.H. (2002), “A multi-attribute utility model for dispute resolution strategy selection”, Construction Management and Economics, No. 20, pp. 557-68. China International Economic and Trade Arbitration Commission (CIETAC) (2000), “Arbitration Awards and Procedures”, Arbitration in China, Beijing, available at: www.cietac.org.cn/ english/e_index.htm (accessed 15 November 2003). Clark, H. and Ip, A. (1999), “The Peifan – Lucky Star – a car for China”, Design Management Journal, Vol. 1999 No. 4, pp. 21-8. Cremades, B.M. (1998), “Overcoming the clash of legal cultures: the role of interactive arbitration”, Arbitration International, Vol. 14 No. 2, pp. 157-72. Department of Commerce of China (DCC) (2002), “Dispute avoidance and dispute resolution in China”, Dispute Resolution and Avoidance, Beijing, available at: http://library.lp.findlaw. com/articles/file/ (accessed 15 November 2003). Diekmann, J.E. and Nelson, M.C. (1985), “Construction claims: frequency and severity”, Journal of Construction Engineering and Management, Vol. 11 No. 1, pp. 74-81. Diekmann, J.E., Girard, M.J. and Nader, A-H. (1994), DPI – Disputes Potential Index: A Study into the Predictability of Contract Disputes, University of Colorado, CO. Feinerman, J.V. (1995), “The history and development of China’s dispute resolution system”, in Hunter, C. (Ed.), Dispute Resolution in the PRC – A Practical Guide to Litigation and Arbitration in China, Asia Law & Practice Ltd., Hong Kong, pp. 5-21. Howlett, A.M. (2003), “Construction Law: how will China’s accession to the WTO affect the construction industry in China”, Opportunities for Foreign Companies, available at: www1. jonesday.com/pubs/ (accessed 15 November 2003). Kumaraswamy, M. and Yogeswaran, K. (1998), “Significant sources of construction claims”, The International Construction Law Review, Vol. 15 No. 1, pp. 144-60. Lau, D.C. (1979), “Introduction in confucius”, in Lau, D.C. (Ed.), The Analects, Penguin Classics, London.

Dispute resolution management 601

MD 43,4

602

Liu, A. and Fellow, R. (1999), “Cultural issues, in procurement systems: a guide to best practice in construction”, in Rowlinson, S. and McDermott, P. (Eds), Procurement Systems: A Guide to Best Practice in Construction, E&FN Spon, London, p. 159. Loosemore, M. (1999), “International construction management research – cultural sensitivity in methodology design”, Construction Management & Economics, Vol. 7 No. 15, pp. 23-45. Mawhinney, M. (2001), International Construction, Blackwell Science, Oxford; Malden, MA. Merna, A. and Bower, D. (1997), Dispute Resolution in Construction & Infrastructure Projects, Asia Law & Practice Publishing Ltd, Hong Kong. Mitropoulos, P. and Howell, G. (2001), “Model for understanding, preventing, and resolving project disputes”, Journal of Construction Engineering and Management, Vol. 127 No. 3, pp. 223-33. Ofori, G. (2000), “Globalization and construction industry development: research opportunities”, Construction Management Economics, Vol. 18 No. 3, pp. 257-62. Olympic Games Organizing Committee (OGOC) (2004), Official Homepage, available at: http://en. beijing-2008.org/ (accessed 27 January 2004). Raftery, J., Passadilla, B., Chiang, Y.H., Hui, E.C.M. and Tang, B.S. (1998), “Globalization and industry development: implications of recent developments in the construction sector in Asia”, Construction Management and Economics, Vol. 16 No. 6, pp. 729-37. Sekhar, D.S. (2003), “Internationalisation and trade policy of china: changing perspectives and lessons for India”, Global Affairs, available at: http://faculty.maxwell.syr.edu/jrshiffman/ (accessed 15 November 2003). Shilston, A. and Hughes, A. (1997), “SCL Council-International Aspects of Construction Law”, in Uff, J. (Ed.), The Building of Construction Law, 10th Annual Construction Conference, Centre of Construction Law and Management, Section 1, King’ College, London, pp. 1-15. Uff, J. (1998), “Dispute resolution in large scale international construction projects”, paper presented at the International Dispute Resolution Conference, 11-13 November 1998, Hong Kong International Arbitration Centre, Hong Kong, pp. 1-10. Uff, J. (2001), “Dispute resolution in the 21st century: barriers or bridges?”, The Journal of the Chartered Institute of Arbitrators, Vol. 67 No. 1, pp. 4-16. Vorster, M.C. (1993), Dispute Prevention and Resolution, Virginia Polytechnic Institute and State University, Blacksburg, VA. Walker, A. (1989), Project Management in Construction, Granada Publications, London. Wetter, J.G. (1995), “The internationalization of international arbitration: looking ahead to the next ten years”, Arbitration International, Vol. 11 No. 2, pp. 117-35. White, A. (1999), “Success through the unwritten law of major construction projects”, in Uff, J. (Ed.), Proceedings in Twelfth Annual Construction Conference, Centre of Construction Law and Management, King’ College, London, pp. 1-6. WTO (World Trade Organization) (2004), Official Homepage, available at: www.wto.org/ (accessed 27 January 2004).

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

Value management in China: current state and future prospect

Value management in China

Guiwen Liu Faculty of Construction Management and Real Estate, Chongqing University, Chongqing, People’s Republic of China, and

603

Qiping Shen Department of Building and Real Estate, The Hong Kong Polytechnic University, Hong Kong, People’s Republic of China Abstract Purpose – To look into the current state of value management (VM) practice in China and reveal the challenges and opportunities to its future development. Design/methodology/approach – Copies of a questionnaire (2,000) were mailed to chief engineers in manufacturing companies (1,000) and construction companies (1,000). Interviews with six practitioners and two experts were followed up in leading cities of VM applications in China. Findings – Reveal awareness and applications of VM in manufacturing and construction industries, different VM method from overseas mainstream and rank the difficulties in applying VM in China. Limited scope of applications, misusing mathematical techniques in VM studies and the inappropriate measures adopted to promote VM applications were identified as three main factors blocking the development of VM in china. In order to overcome these problems, more cooperation with overseas VM practitioners is recommended. Research limitations/implications – The findings of this paper based on VM applications in China limits its usefulness elsewhere. Practical implications – This paper reveals the main problems in current VM applications in China and point out the direction to overcome the difficulties for promoting VM practice in future. It is instructive for VM practitioners, especially in the construction industry. Originality/value – This paper provides an overall understanding of the current state and future prospect of VM application in China for VM researchers and practitioners. Keywords Value chain, China, Construction industry, Manufacturing industries Paper type Research paper

Introduction Value management (VM) is a proactive, creative, systematic and team-oriented methodology, which maximises the functional value of a project by managing its development from concept to occupancy according to the value system of the client (Kelley and Male, 1993; Norton and McElligott, 1995). It evolved from value analysis, which was first developed by Lawrence Miles in the General Electrical Company (GEC) during World War II. Owing to the shortages caused by the war, GEC was forced to use substitute materials for many of their products. It was found that these substitutes often produced a result of reducing costs as well as improving performance of products. Miles discovered the mechanism behind the phenomenon and finally established a formulated function-oriented systematic method, which is now widely named as VM.

Management Decision Vol. 43 No. 4, 2005 pp. 603-610 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510593585

MD 43,4

604

China successfully joined the World Trade Organization (WTO) after many years of effort. Whereas some have highlighted the benefits of membership, it is important to note that it will also bring furious competition to many sectors of the national economy. This situation places an urgent demand on national industries to increase their competitiveness through the use of advanced management methods. A new wave of interest in using the value methodologies has been observed recently in many companies. VM is not a new concept in China. It is widely referred to as value engineering (VE) and was introduced to China’s manufacturing industry in 1978 through cooperation with Japanese manufacturers (Han, 1998). Encouraged by the successful use in the manufacturing industry and advocated by the government, VM was gradually adopted by other industries. Its applications enjoyed fast growth in the first 15 years since its entry into China. Many VM activities were carried out in the country and a large volume of VM related books were published. In 1988, the tenth year of VM application in China, President Jiang Zemin wrote to the Shanghai Value Engineering Society and highly praised the success of VM applications in China. VM applications declined sharply after China started its transition from a planned economy to a market economy in the mid-1990s. This radical transition pushed many state-owned companies, the main users of VM in China, into a difficult situation. The traditional VM practice in these companies, which was based on the planned economy, has broken down, but no replacement for using VM in the new economic environment has been established. It is widely believed by local experts that the new economic system will motivate the application of VM in the long term (Hu, 1999; Ma, 2000). However, there are many issues to be addressed to promote its use in the new environment. This paper looks into the current state of VM practice in China and reveals the challenges to its future development. The opportunities for local and foreign practitioners to cooperate are also discussed.

The research method In order to explore the current state of VM usage in China, 2,000 copies of a questionnaire were mailed to chief engineers in 1,000 manufacturing companies and 1,000 construction companies (including design institutes and contractors etc.). The sample companies were randomly selected from contact lists provided by the Information Centre of the Ministry of Construction in China and the Association of China Manufacturing Enterprises. Companies in the sample hold class A qualification, which is issued to top class companies by the government according to a number of criteria, such as the number of employees, net assets, annual value added, and turnover etc. Of the companies selected, 155 construction companies and 162 manufacturing companies have returned the questionnaires, representing a response rate of 15.5 and 16.2 percent in the two sectors, respectively. After preliminary analysis of the survey results, follow-up interviews were conducted in Beijing, Tianjing, and Guangzhou, the leading cities for VM applications in China. Besides the practitioners in the six companies, seven VM experts were interviewed in these cities. Apart from obtaining comments and elaborations on the preliminary results from the questionnaire survey, a number of additional questions were asked to gather in-depth information concerning VM applications in China.

Current state of VM applications Awareness of VM According to the survey, 79 percent of the respondents from construction and 98 percent from manufacturing had heard of the term VM or other synonymous terms such as VE, value analysis and function analysis. The high awareness level in the manufacturing industry reflects that it is the most active field for VM usage in China, and VM knowledge has been widely disseminated in this sector in the past 20 years. However, it should be pointed out that the real situation might be somewhat lower than these figures, since some respondents who had not heard of these terms might not have returned their questionnaires.

Value management in China 605

Application of VM The survey results show that only 24 percent of the respondents in construction had experience in applying VM, while the percentage was 51 percent in manufacture. Among the respondents in construction, a small proportion indicated that they had never participated in a structured VM study, but that the philosophy and techniques of VM had been used to tackle the problems encountered at work. VM activities in most manufacturing companies are based on the internal VM policy of the companies. Figure 1 illustrates a typical framework for VM implementation in the manufacturing companies in China. A VM committee, often consisting of senior managers, engineers, financial staff and VM coordinators, is formed to manage, support and supervise VM activities. Normally, a VM study goes through the following three stages: (1) VM study proposal – Any department or team within the company can submit VM study proposals to the VM committee. In a proposal, the proposers explain the objectives, reasons, costs, schedule, estimated outputs, and the preparation

Figure 1. Typical framework for VM applications in China’s manufacturing companies

MD 43,4

606

for the proposed VM study. The VM committee will evaluate the proposal against a number of criteria. If the proposal is approved, the proposed VM study will be conducted by a team of the proposers, under the management of the VM committee. (2) VM study – The VM team carries out the VM study in accordance with the VM philosophy, job plan, and techniques. However, instead of a concentrated, continuous workshop such as a 40-hour workshop, the VM team members meet irregularly to explore, develop and test alternative solutions without suspending their normal work duties. Therefore, it is common for a VM study to last several months. (3) Evaluation and implementation – The developed alternative solutions with test reports will be submitted to the VM committee. Their effects in cost reduction and value enhancement will be thoroughly evaluated before they are fully implemented. If significant improvement is made from the VM study, the VM team will be rewarded according to the savings produced. The survey also reveals that VM applications in the construction industry are seldom initiated by clients. The use of VM at the design stage depends heavily on the initiative of the design team or encouragement from the management of design institutes. The tight budget of the project is normally an important force driving designers to apply VM. Some contractors have also established VM policies to promote the use of VM in the construction stage. However, the purposes of their attempts are to find the optimum construction method and make savings for the contractors themselves, which has little to do with clients. Overseas experiences indicate that the mandatory VM requirements from clients have made an important contribution to promoting VM applications, especially in the initial development stage of VM (Dell’Isola, 1982). Educating clients seems to be a critical task for promoting widely the VM applications in China’s construction industry. Differences in the practice Follow-up interviews and discussions with local VM practitioners and experts also reveal that VM is currently practised differently in China, away from the overseas mainstream (Miles, 1989; Male et al., 1998; Green, 1994; Norton and McElligott, 1995). The major differences are summarised in Table I. Difficulties in applying VM Table II shows the difficulties of applying VM, ranked by the respondents from two industries. The top three difficulties are: lack of VM knowledge, lack of national VM standards, and lack of qualified VM facilitators, although they are ranked differently in the two sectors. Challenges and opportunities The questionnaire survey and the follow-up interviews reveal that the most significant challenges in VM development in China are the limited scope of applications, the techniques used in the studies and the measures adopted to promote its applications. It has been observed that VM applications in China are mainly confined to the manufacturing industry and seldom occur in other industries. According to Xiao

Items

Chinese practice

Overseas practice

Subjects of VM studies

Existing products/projects, often related to tactical problems

Facilitator of VM studies Timing of VM studies

In-house VM directors or engineers In design, production or construction stages In-house staff, several people familiar with the subject are involved Informal workshop adopted

Proposed and/or existing products/projects, related to both tactical and strategic problems Internal or external VM experts From the concept to completion of a project/product Relevant stakeholders, often a large number of persons are involved Concentrated, continuous workshops preferred The purpose here is to clarify clients’ requirements and to understand their value system and identify poor value Normally last for only a few days

VM team composition VM workshop style Function analysis

Duration

Using mathematical methods extensively to measure functions and to identify poor value Depending on the subject under study, possibly several months

Value management in China 607

Table I. Comparison of VM practice between China and overseas

(1998), over 80 percent of VM activities in China are implemented in the field of manufacture. Because of the overwhelming influence of the manufacturing industry, large volumes of VM literature have been written for practitioners in the manufacturing industry. VM societies in China are represented mainly by members from the manufacturing sector. Little effort has been made to extend VM applications to other fields. Whereas VM has been used in the construction industry overseas for many years and this has become one of the most active fields for VM applications, the usage in China’s construction industry is still in its early stages. In order to ensure the healthy growth of VM in China, much more effort should be made to widen the application spectrum. The use of mathematical techniques at the function analysis stage has been advocated and stressed by many influential Chinese VM authors (Li, 1998; Zou, 1998). Descriptions and illustrations of these techniques often occupy a large portion of VM books (Liu, 1998; Tang and Yang, 1996; Song, 1994). Some of these techniques and their brief descriptions are listed in Table III. The most important objective of many

Difficulties Lack of national VM standards Insufficient time to carry out VM Lack of VM knowledge Lack of qualified VM facilitators Defensive attitude of other professional teams Too expensive to carry out VM VM prolongs product/project completion time Interruption to normal work schedule

Rank (Construction) Rank (Manufacturing) Overall 2 4 1 3 7 5 6 8

1 4 3 2 5 7 6 8

1 4 2 3 5 5 5 8

Table II. Difficulties in applying VM in the construction and manufacturing industries

MD 43,4

608

techniques is to identify poor value areas in a product or a project. Discussions with VM practitioners reveal that over-emphasis on the use of these techniques has restricted VM implementation in practice. Firstly, most of these techniques were developed by academics and are too complicated to be used by practitioners in the industry. Secondly, these techniques are based on hard systems, focusing on the components of a product/project. The most important underlying assumption of these techniques is that the existing value system of the product/project as a whole is correct. This assumption leads practitioners to pay more attention to tactical rather than strategic issues, and hampers the use of VM to resolve high-level problems in China. Government support made a great contribution to VM development in the late 1980s in China (Shen, 1997). However, promotion based on administrative measures also produced a misunderstanding of VM among some users. In the old planned economy, the government administrative measures significantly affected companies’ business. In order to respond to the call of the government, some companies who did not go through proper VM training and had never used the VM methodology, labelled their simple cost-cutting exercise or something else as VM. This practice caused misunderstandings among companies. For example, some wrongly believe that “VM is just another name for traditional cost control”. In the market economy, government relations with business entities changed considerably. It is up to individual companies to decide what management tools should be used in their business. The promotion of VM applications should be focused on the proper training of VM methodology, practical group problem-solving using VM, and a VM culture in companies, rather than administrative intervention. Although there are many challenges ahead, opportunities also coexist for VM development in China. Under the rules of the WTO, China is to give all WTO members non-discriminatory access to the market and will gradually withdraw protection of its national industries in the near future. This will result in increasing worldwide competition for China’s business. One of the ways to cope with this intensifying competition is to reduce product price to obtain a competitive edge in the open market.

Techniques

Brief description

ABC Value index (VI)

Its underlying principle is Pareto’s law of mal-distribution VI ¼ FI/CI, where FI is the relative importance of the function(s) realised by a component of a product against the whole function of the product CI is the relative cost of the component A method that presents the Value Index graphically A graphical method developed by Professor Masayasu to help the selection of items for VM study A method developed by Professor Ma to measure the value of a component based on a known best value point A method ranking the relative importance of a component with numerical values A method that determines the relative importance of a component with a pair-wise comparison approach A method that determines the relative importance of a component with a defined scale range

Value graph Optimal value zones Basic point method Ranking Table III. Major techniques used to identify poor value in China

Pairwise comparison Scaling

The low prices will subsequently lead to a pressing demand to reduce the cost of the products. Another strategy is product differentiation – i.e. creating products that are different from the competitors and are perceived as value for money products by the customers. As an effective method in cost reduction and value enhancement, it is anticipated that VM will win more attention and usage from industries. The new situation provides more opportunities for local practitioners. However, globalisation and the market economy are still new concepts for many Chinese companies and individuals. The local experience of applying VM in the new environment of market economy is very limited. Because of this, cooperation with overseas VM practitioners is perhaps a commendable way to promote VM applications in China. This may create a win-win situation for both overseas VM practitioners (who can extend their work field) and China’s VM practitioners (who can learn something from communication with outside partners). In order to keep up with the rapid changes in the business environment, many Chinese are very keen to equip themselves with modern management techniques. A large number of people have unprecedented desire to obtain internationally recognised professional qualifications. This provides a good opportunity for overseas VM institutions to carry out VM-related training and certification in China. Conclusions This paper reveals the current state of VM application in China based on a survey conducted in the construction and manufacturing industries. The manufacturing industry is the most active and influential field of VM applications in China. The difference between the Chinese and overseas VM practice reveals areas for improvement in China’s VM development. Our research identified the top three difficulties encountered by China’s VM practitioners. The prospect of VM in China is promising after China’s access to WTO, but necessary actions must be taken to face the challenges such as the limited scope of current applications, over-emphasis on mathematical techniques, and inappropriate promotion measures. Cooperation with overseas VM institutions and practitioners may allow China’s VM practitioners to improve their practices. At the same time, it creates opportunities for overseas VM practitioners to extend their business into China. References Dell’Isola, A.J. (1982), VE in the Construction Industry, 3rd ed., Van Nostrand Reinhold Company, New York, NY, pp. 17-19. Green, S.D. (1994), “Beyond value engineering: SMART value management for building projects”, International Journal of Project Management, Vol. 12 No. 1, pp. 49-56. Han, R. (1998), “The development of value engineering (in Chinese)”, China Value Engineering in China Over the Past 20 Years (1978-1998), Coal Industry Press, Beijing, pp. 87-92. Hu, S.H. (1999), “A review of value engineering development (in Chinese)”, Value Engineering, Vol. 18 No. 1, pp. 9-10. Kelley, J. and Male, S. (1993), Value Management in Design and Construction: the Economic Management of Projects, E & FN Spon, London. Li, H.J. (1998), “Applying VE in drainage engineering (in Chinese)”, China Value Engineering in China Over the Past 20 Years (1978-1998), Coal Industry Press, Beijing, pp. 399-401.

Value management in China 609

MD 43,4

610

Liu, X.J. (1998), Construction Technical Economics, China Construction Industry Press, Beijing, pp. 173-91. Ma, Q.G. (2000), “The prospect of VE in China (in Chinese)”, Value Engineering, Vol. 19 No. 2, pp. 12-15. Male, S., Kelly, J., Fernie, S., Gro¨nqvist, M. and Bowles, G. (1998), The Value Management Benchmark: A Good Practice Framework for Client and Practitioners, Thomas Telford Publishing, London. Miles, L.D. (1989), Techniques of Value Analysis and Engineering, 3rd ed., Eleanor Miles Walker, Northbrook, IL. Norton, B.R. and McElligott, W.C. (1995), Value Management in Construction – A Practice Guide, Macmillan Press, London. Shen, Q.P. (1997), “Application of value management in mainland China: recent development and future prospects”, Value World, SAVE International, Dayton, OH. Song, Q.R. (1994), Value Engineering, China People Press, Beijing. Tang, H.B. and Yang, M. (1996), New Value Engineering (in Chinese), Jinan University Press, Jinan, pp. 106-11. Xiao, X.D. (1998), “A study of the current situation of value engineering in China (in Chinese)”, China Value Engineering in China Over the Past 20 Years (1978-1998), Coal Industry Press, Beijing, pp. 93-5. Zou, L.Z. (1998), “Applying VE for optimising the design of a bridge (in Chinese)”, China Value Engineering in China Over the Past 20 Years (1978-1998), Coal Industry Press, pp. 402-5.

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

Housing price bubbles in Beijing and Shanghai

Housing price bubbles

Yue Shen Institute of Real Estate Studies, Tsinghua University, Beijing, People’s Republic of China

611

Eddie Chi-man Hui Department of Building and Real Estate, Hong Kong Polytechnic University, Hong Kong, People’s Republic of China, and

Hongyu Liu Institute of Real Estate Studies, Tsinghua University, Beijing, People’s Republic of China Abstract Purpose – This study investigates whether there was a housing price bubble in Beijing and Shanghai in 2003. The existence of a bubble can be interpreted from (abnormal) interactions between housing prices and market fundamentals. Design/methodology/approach – With monthly data from the two cities, this paper employs standard econometric methodologies: i.e. Granger causality tests and generalized impulse response analysis, and the reduced form of housing price determinants. Findings – Our findings suggest that there appeared a bubble in Shanghai in 2003, accounting for 22 percent of the housing price. By contrast, Beijing had no sign of a bubble in the same year. The bubble phenomenon, of course, should not be taken without caution for the constraints of data. Nonetheless, this study has laid the ground work for further investigation into abnormal housing price phenomena in Mainland China. Originality/value – Our findings may help foreign investors better understand the Chinese housing markets and make better housing investment decisions in the two cities. Keywords Economic conditions, China, Housing, Investments Paper type Research paper

1. Introduction Over the last two decades, China has achieved rapid economic growth, accompanied with rapid development of the real estate market. Although the Asian financial crisis damaged the real estate markets in Southeast and East Asia, it had little impact on the real estate market in Beijing and Shanghai. As a result of rapid economic growth and urbanization, demands for urban land and new dwellings have increased rapidly, leading to rapid growth of housing prices. For example, Shanghai Housing Price Index (SHHPI) in the China Real Estate Index System (CREIS) was only 656 points in January 2001 and rose 63 percent to 1084 points in December 2003. The fluctuations in housing prices not only affect the fortunes of many corporations and households but also play an important role in the macroeconomic level. Changes in housing prices would generate or reinforce fluctuations in the economy in a wider context. To keep a reasonable relationship between housing prices and the macroeconomy is of great importance. We have seen the Japanese land price bubble

Management Decision Vol. 43 No. 4, 2005 pp. 611-627 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510593594

MD 43,4

612

and the Asian financial crisis in recent years and the property markets were badly affected. No doubt, the recent housing price boom has drawn much attention in China. After 2002, many government officials and economists have claimed that some cities in China should be wary of signs of housing price bubbles. As two of the “hottest” areas for real estate development in China, Beijing and Shanghai have become the key cities under discussion. Therefore the main objective of this paper is to investigate the relationship between housing prices and market fundamentals in the two cities, and to find out whether there were housing price bubbles there. If the empirical study confirms bubble existence, another task for this paper is to measure the real estate price bubbles in the two cities. The remainder of this paper is laid out as follows. Section 2 presents a review of earlier studies on bubbles; the data used in this study are described in Section 3; Section 4 explores the interactions between housing prices and market fundamentals for the two cities; the bubble term in 2003 is estimated in Section 5; Section concludes the paper. Appendix 1 discusses the econometric methodologies employed in the paper, and Appendix 2 gives the results of four vector error correction models (VECM). 2. Literature review Although the definition of bubble appears straightforward, testing for its existence could prove a difficult task. How to determine whether there are bubbles in real estate markets? The most frequently used method is to compare the price and the market’s “fundamentals”. With the review of papers about real estate bubbles, the “fundamentals” are classified into two categories: fundamental value and market fundamentals. An asset’s fundamental value, one kind of “fundamental”, is measured by three determinants: the cash flow received over time, the terminal value of the asset at the end of the holding period, and the discount rate to be used for translating future cash into current value. However, Stiglitz (1990) pointed out that all these three parts would raise problems in determining the fundamental value of an asset to be held for an extended period of time. Flood and Hodrick (1990) also claimed that it was difficult to specify the intrinsic value determined by the three determinants for the absence of data extending infinitely far into the future. Therefore the concept of an asset’s fundamental value is used in theoretical analysis rather than empirical studies. For example, Noguchi (1994) defined the bubble as the part of land price exceeding the theoretical land value and concluded that 54 percent of the land price in Tokyo was bubble in 1987. Given the difficulties in calculating the fundamental value of an asset, researchers have been looking for indirect evidence of bubbles, which leads to another kind of “fundamentals” interpreted as exogenous macroeconomic variables fundamental to the market. That is to say, the existence of price bubbles can be interpreted by the relationship between real estate prices and macroeconomic variables. If real estate prices are reconciled with variations of macro economy variables, or the price change can be explained by both fundamentals and reasonable shifts, the presence of a price bubble may be rejected. A variety of methodologies have been employed in empirical studies of real estate asset price bubbles. With an equilibrium price equation including housing price index and exogenous variables, such as GDP, stock price index and urban household consumption expenditure, Kim and Suh (1993) tested the existence of growing rational

bubbles in Korea and Japan. Peng and Hudson-Wilson (2002) conducted an empirical analysis of Tokyo office market during 1977-1999 with a pricing model that consists of two separate but related equations: income and price. The variables included net operating income (NOI), office vacancy rate, price index and general economic indicators such as GDP, CPI, interest rates and inflation rate. Kim and Lee (2000) performed a test for the existence of real estate price bubbles by conducting cointegration tests between real estate prices and major macroeconomic variables in Korea.

Housing price bubbles

613

3. The data The effectiveness of housing price index depends on the quality and appropriateness of the data. Given the need for quality control, major indices used in previous researches are those of hedonic, repeated sales and hybrid housing price indices (Henry, 1995). However, since there are always some limitations of the indices, a mismatch between the price index and the analytical objective could get misleading results. In this study, a national uniform data source that permits quality control is needed to study housing prices in the two cities. The monthly housing price index of new dwellings of Beijing (BJHPI) and Shanghai (SHHPI) in the China Real Estate Index System (CREIS) used in this paper is a kind of Laspeyres index with the base points of 1000 in Beijing in November 1994, calculated on the basis of market investigations into selling prices of typical new dwellings in different cities. As this index is based on new dwellings of similar qualities, it reflects the trends of housing prices of new dwellings much better than other real estate price indices in China. Figure 1 reports housing price indices in the two cities for January 1997 to December 2003. The BJHPI is less volatile than the SHHPI. Except housing prices index, another important variable related to the housing market is the stock of vacant new dwellings (VAC), which is an indicator of market equilibrium, that is to say, the balance between supply and demand in the space market. Variables on the side of economic fundamentals are those of disposable income of urban households (INC), local GDP and Shanghai stock price index (SHANG). Among the variables, disposable income influences the housing affordability of urban households and the demand of new dwellings, while the stock of vacant new dwellings has a direct impact on the supply side. Local GDP is the major proxy of regional industrial structure and Shanghai stock price index represents the nationwide stock market. Disposable income of urban households for either city is exponential smoothed, and so is local GDP in Beijing. The descriptive statistics of the variables for the two cities are reported in Table I. Nominal values of local GDP and disposable

Figure 1. Housing price indices in Beijing and Shanghai for January 1997-December 2003

MD 43,4

614

Table I. Descriptive statistics of the variables

Variables

Average

Standard deviation

Maximum

Beijing, January 1997-December 2003 Housing price index Disposable income of urban households (Yuan) Local GDP (100 million Yuan) Shanghai stock price index Stock of vacant new dwellings (million m2)

876.40 873.05 212.21 1,526.99 398.35

19.86 166.73 58.68 309.89 214.39

923.00 1,185.29 339.50 2,218.03 835.89

839.00 645.00 89.50 964.74 50.50

Shanghai, January 2001-December 2003 Housing price index Disposable income of urban households (Yuan) Local GDP (100 million Yuan) Shanghai stock price index Stock of vacant new dwellings (million m2)

817.39 1,113.48 459.36 1,656.71 594.28

123.83 93.53 70.26 247.79 120.52

1,084.00 1,303.30 613.66 2,218.03 843.37

665.00 936.15 326.97 1,348.30 412.27

Minimum

Notes: The data on local housing markets and economic fundamentals are gathered from numerous sources. These sources include Beijing Statistical Information Net (www.bjstats.gov.cn), Shanghai Statistical Information Net (www.stats-sh.gov.cn), China Infobank (www.bjinfobank.com) and China Securities Regulatory Commission (www.stats-sh.gov.cn)

income are used in this study as recent inflations in the two cities could be ignored and there is no great difference between the real value and nominal value. Table II reports the correlations among the selected variables of the two cities. Generally speaking, there should be strong positive correlations between housing prices and variables such as GDP and disposable income, strong negative correlations between housing prices and the stock of vacant new dwellings. However, strong positive correlation between housing price and vacant new dwellings is found for Beijing and rather weak positive correlation between housing price and disposable income is found for Shanghai, which is contradictory with the theoretical hypothesis. So it is not surprising for the public to believe that there are more or less housing price bubbles in the two cities, particularly in Shanghai. 4. Interactions between housing prices and market fundamentals Table II provides a naı¨ve view of the interactions between housing prices and market fundamentals. Although some abnormal interactions could be preliminary found, the qualitative conclusions are not enough to prove the bubble existence. What are the causal relationships between housing prices and the market fundamentals? What is the degree of the impact on housing prices from the determinants and the feedbacks? Answering these questions is of great importance, because it can give clearer insights

Table II. Correlations among the selected variables of the two cities

Variables

Beijing (January 1997-December 2003) HP INC GDP VAC SHANG

HP INC GDP VAC SHANG

1.000 0.841 0.831 0.713 0.188

0.841 1.000 0.905 0.889 0.478

0.831 0.905 1.000 0.923 0.485

0.713 0.889 0.923 1.000 0.624

0.188 0.478 0.485 0.624 1.000

Shanghai (January 2001-December 2003) HP INC GDP VAC SHANG 1.000 0.421 0.862 20.722 20.804

0.421 1.000 0.324 20.179 20.352

0.862 2 0.722 0.324 2 0.179 1.000 2 0.655 2 0.655 1.000 2 0.667 0.701

20.804 20.352 20.667 0.701 1.000

into the interactions between housing prices and the fundamentals at different horizons. Granger causality test and generalized impulse response function are employed in this section. More detailed introduction of these two econometrical methods is given in Appendix 1. 4.1 Integration and cointegration As a preliminary step of cointegration analysis, the order of integration of the variables should be tested. If the levels of time series are non-stationary, but stationary after first differencing, they are defined as being integrated of order one I(1). The Phillips-Perron (PP) integration test is employed with the log level of the respective variables. The results of the PP test indicate that the variables are stationary after first differencing, as Table III shows. Cointegration test is usually used to uncover the long run relationships between non-stationary variables. If two variables are cointegrated in the linear model with intercept but no trend (M3), certain linear combinations of the variables would make them not move too far from each other, although the individual economic variables would fluctuate considerably. In this paper cointegration test is employed to test a stable and long-run equilibrium relationship existence between housing prices and key macroeconomic variables. If equilibrium relationship existence between the variables is confirmed and there is no trend in the model specification, the possibility of a price bubble can be excluded. Although this approach is not entirely free of the problem of misspecification, the procedure is much simpler because the bubble term does not have to be estimated (Kim and Lee, 2000). Employing the well-known Johansen and Juselius (1990) procedure, the results of cointegration test between housing prices and other variables are presented in Table IV. Although housing prices are all cointegrated with the fundamental variables, half of the cointegration relationships for Beijing and all the relations for Shanghai are based on M5. In other words, with the trend term in the specifications, housing prices have moved (or would move) too far from the fundamentals, especially for the city of Shanghai. The results indicate some evidence of housing price bubbles in the two cities. 4.2 Granger causalities Since the variables are proved to be integrated and cointegrated, error correction models (ECM) could be formulated. Each pairwise combination of housing prices and one fundamental variable is tested, as shown in Appendix 2 (Tables AI-AIV). Then Granger Causality tests are employed to examine the causality relationships between housing prices and the fundamental variables, as summarized in Table V. The results indicate that disposable income of urban households Granger causes housing prices in Beijing and it does not happen in Shanghai, which means that housing price booms in Beijing are somewhat based on the growth of disposable income, while in Shanghai the recent booms of housing prices have moved much faster than the growth rate of disposable income. On the contrary, the feedback does not exist in Beijing but exist in Shanghai, which is due to the fact that persistent appreciations of housing prices in Shanghai result in capital gains. By 2002, the urban homeownership rate in China reached 80 percent and there would be a huge wealth effect with the boom of housing prices, especially in Shanghai, which would stimulate much more speculations in the housing market and lead to housing price bubbles.

Housing price bubbles

615

Table III. PP tests of the variables 20.97 (2 3.55, 23.40 (2 3.55, 22.61 (2 3.55, 23.05(2 3.55, 22.34 (2 3.55,

Shanghai for January 2001-December 2003 ln SHHPI Intercept and trend (3) ln INC Intercept and trend (3) ln VAC Intercept and trend (3) ln GDP Intercept and trend (3) ln SHANG Intercept and trend (3)

(2 1.94, (2 3.47, (2 3.47, (2 3.47, (2 2.90,

2.00 22.33 22.74 23.78 22.45

Beijing for January 1997-December 2003 ln BJHPI None (3) ln INC Intercept and trend (3) ln VAC Intercept and trend (3) ln GDP Intercept and trend (3) ln SHANG Intercept (3) 24.24) 24.24) 24.24) 24.24) 24.24)

22.59) 24.07) 24.07) 24.07) 23.51)

PP test statistic (5 percent, 1 percent c. v.)

Level

(3) (3) (3) (3)

Intercept and Trend (3) None (3) Intercept (3) Intercept (3) None (3)

Intercept Intercept Intercept Intercept None (3)

210.48 25.67 25.46 25.60 26.13

25.15 26.80 210.8 27.92 28.32

(2 3.55, (2 1.95, (2 1.95, (2 1.95, (2 1.95,

(2 2.90, (2 2.90, (2 2.90, (2 2.90, (2 1.94,

24.24) 22.63) 22.63) 22.63) 22.63)

23.51) 23.51) 23.51) 23.51) 22.59)

First difference Model specification PP Test statistic (Lags) (5 percent, 1 percent c. v.)

616

Variable

Model Specification (Lags)

I (1) I (1) I (1) I (1) I (1)

I (1) I (1) I (1) I (1) I (1)

Results

MD 43,4

34.62** 25.27** 20.41** 21.63*

1.64 2.78 1.80 0.51

Trace test r¼0 r¼1 27.69** 22.49** 18.61* 21.12*

0.30 2.78 1.80 0.51

Max-eigenvalue test r¼0 r¼1

1 1 1 1

Results

70.73** 2.67 68.05** 2.67 1 40.50** 0.74 39.76** 0.74 1 19.77* 1.27 18.50* 1.27 1 66.26** 0.08 66.18** 0.08 1 Notes: M3 means linear model with intercept but no trend, while M5 is the quadratic model with both intercept and trend; *(**) denotes rejection of the hypothesis at the 95 percent (99 percent) significance level

M5 M5 M5 M5

Shanghai for January 2001-December 2003 LnSHHPI &ln INC 9 ln SHHPI& ln GDP 9 ln SHHPI & ln VAC 9 ln SHHPI & ln SHANG 9

Model specification M3 M5 M3 M5

Lagged differences

Beijing for January 1997-December 2003 ln BJHPI & ln INC 12 ln BJHPI & ln GDP 12 ln BJHPI & ln VAC 14 ln BJHPI & ln SHANG 12

Variables

Housing price bubbles

617

Table IV. JJ tests of the variables

MD 43,4

618

Although the causality relationships between housing prices and GDP are ambiguous, high growth rate of GDP usually indicates the expectation of future economic growth and generally will cause a market boom. No causality relationships exist between housing prices and GDP in Beijing and only one-way causality from housing prices to GDP exists in Shanghai. Since the growth of local GDP in Shanghai depends more on the boom of housing prices and housing development investments, the housing market in Shanghai plays a more important role in the local economy than in Beijing. An appreciation of housing prices may mean a decline in housing affordability among most households, probably resulting in increases in vacant new dwellings. A large vacancy stock indicates an over supply in the housing market and, in theory, will decrease the average selling price of new dwellings. In Beijing the stock of vacant new dwellings Granger causes housing prices without a feedback, while in Shanghai the latter Granger causes the former with no feedback. If housing price bubbles exist in a local housing market, a price boom will stimulate market speculations and lead to a decrease in vacant new dwellings, which is happening in Shanghai now. For urban households, the housing market could be taken as the substitute for the stock market. The boom of housing prices sometimes accompanies the burst of stock market and vice versa. The findings suggest a two-way causality relationship between housing prices and Shanghai Stock Price Index in Shanghai, and housing prices Granger cause SHANG without the feedback to Beijing. That is to say, the course of housing prices in Beijing is not affected by the movement of SHANG. 4.3 Generalized impulse response analysis An impulse response function provides a different method in depicting the system dynamics by tracing the effects of the shock of an endogenous variable on the variables in the VECM. That is to say, an impulse response function shows how the variables in the VEC system respond to a standard exogenous change with another variable under investigation. Compared with Granger causality test, this methodology offers an advantage that it may indicate whether the impacts are positive or negative, and whether a temporary jump or a long-run persistence. Assuming that the endogenous systems just comprises housing prices and one of the four fundamental variables and the impacts of other economic and political forces are neglected, accumulated responses are calculated on the basis of the VECMs in Appendix 2. Figures 2-5 report the two-way generalized responses between housing prices and the selected endogenous variables in the two cities. In all the figures, one standard deviation of housing price itself would lead to positive increases in future housing Beijing Chi-square p-value

Table V. Summary of Granger causality test

INC ) HP HP ) INC GDP ) HP HP ) GDP VAC ) HP HP ) VAC SHANG ) HP HP ) SHANG

22.09 13.97 13.65 9.13 34.49 13.83 8.95 34.81

0.04 0.30 0.32 0.69 0.00 0.46 0.71 0.00

Result Y N N N Y N N Y

Shanghai Chi-square p-value 1.68 110.85 3.73 21.34 6.06 44.17 30.48 19.17

0.99 0.00 0.93 0.01 0.73 0.00 0.00 0.02

Result N Y N Y N Y Y Y

prices in the next 12 months, indicating that current changes in housing prices do affect peoples’ expectation in the short run horizon in the two cities. The accumulated response of housing prices in Beijing is less sensitive than that in Shanghai. The findings suggest that the fluctuation of the response in the 12 months is between 3 and 7 percent in Beijing, while it is between 0 and 11 percent in Shanghai. The response of housing prices to one standard deviation of the selected fundamental variables differs greatly. Generally speaking, the increase of disposable income has a positive effect on housing prices, but Figure 2(a) displays negative effects in both cities. The only possible explanation is that, housing prices are not increasing quite in parallel with disposable income. Figure 3(a) indicates in both cities, the response of housing prices to GDP is not large and this result is the same as the Granger Causality analysis. The next two figures indicate that consistent with theoretical hypothesis, the accumulated responses to vacant new dwellings (VAC) and Shanghai stock price index are both negative.

Housing price bubbles

619

Figure 2. Impulse response analyses between housing prices and disposable income

Figure 3. Impulse response analyses between housing prices and local GDP

Figure 4. Impulse response analyses between housing prices and vacant new dwellings

MD 43,4

620

The wealth effect of housing price booms in Shanghai is obvious as the response of disposable income to one standard deviation of housing prices rises 29.5 percent in the seventh month. But Figure 2(b) also predicts that this wealth effect could not last long since in the 12th month the accumulated response will burst to 2 9.00 percent. On the contrary, we find negative wealth effects in Beijing. The response of GDP in Shanghai to housing prices is similar with that of income with the maximum value of 6.2 percent in the seventh month, while the maximum response of GDP to the impulse of housing prices in Beijing is just half of that in Shanghai. The accumulated response of vacant new dwellings to the impulse of housing prices in Shanghai is somewhat complex. It reaches the first maximum value of 19.2 percent in the fifth month (Figure 4(b)). As the speculation activities are stimulated by the prices booms, the stock of vacant new dwellings will decrease to 2 10.5 percent in the ninth month, and then it will rise again. The accumulated response of vacant new dwellings in Beijing to housing prices reaches its maximum of 9.4 percent in the seventh month. Also we can measure the responses of Shanghai stock price index to one standard deviation of housing prices in the two cities, as presented in Figure 5(b). One standard deviation originating from housing prices in Shanghai produces an accumulative total of 15.1 percent increase in Shanghai stock price in the 12th month without the impact of other economic forces. However the impact of housing prices in Beijing to Shanghai stock price index differs greatly, as the accumulated response of Shanghai Stock price keeps going down to a minimum 2 30.8 percent in the 12th month. The results indicate that there are a big difference between housing prices and Shanghai stock price index in the two cities. 5. Explanations of housing price changes in 2003 Consider a competitive housing market, prices are determined by the quantities of housing supply and demand (Quigley, 1999). The interactions can be represented by PH ¼ f ðH D ; H S Þ

ð1Þ

Where PH is the housing prices, and H D and H S are the quantities of housing that are demanded and supplied. Housing demand is a function of housing prices, disposable income, local GDP, Shanghai stock price index and a vector of exogenous variables X, and housing supply is a function of prices and vacant new dwellings as well as a set of exogenous variables Y. The supply and demand equations for housing can be expressed as H D ¼ dðPH; INC; GDP; SHANG; XÞ

Figure 5. Impulse response analyses between housing prices and shanghai stock price index

ð2Þ

H S ¼ sðPH; VAC; Y Þ

ð3Þ

Substituting (2) and (3) into (1) and solving for housing prices, we can get the reduced form (equation (4)) of housing prices determination, where Z represents a vector of exogenous variables and L() is the lag operator. PH ¼ f ðLðPHÞ; INC; GDP; SHANG; VAC; Z Þ ð4Þ   b The added bubble term in the ith month DPHi can be defined as the difference of the  ) and predicted housing prices PH*i Þ: The percentage actual measured housing prices (PHi accumulated housing price bubbles PHbi could be represented as PHbi percent ¼ DPHbi =PHi ¼ ðPHi 2 PH*i Þ=PHi ¼ 1 2 PH*i =PHi

Housing price bubbles

621

ð5Þ

Table VI reports the regression models based on equation (4) for Beijing (January 1997-December 2002) and Shanghai (January 2001-December 2002). The strong autocorrelation in prices is consistent with prior research (e.g. Case and Shiller, 1990; Quigley, 1999). The coefficients of market fundamentals appear to be in accordance with the results of Granger causality test and impulse response analysis. With the two regression models we can predict the trends in housing prices of the two cities, and then by the use of equation (5), the bubble term could be estimated. Figure 6 compares the actual and predicted housing price trends in the two cities, respectively, for the year 2003. In Beijing, the housing price determined by economic fundamentals is slightly higher than the actual housing price. Therefore, there seem no housing price bubbles in Beijing where the actual housing price is in line with asset values determined by market fundamentals. But for Shanghai, the actual housing price moves much far away from the predicted. It is sure that housing price bubbles do exist in Shanghai in 2003. At the end of 2003, about 22.2 percent of the housing price should be attributed to the bubble term, as shown in Figure 7. 6. Conclusion This paper has investigated whether there was a housing price bubble in Beijing and Shanghai. If a housing price bubble exists, the market will display abnormal interactions between housing prices and market fundamentals, and vice versa. With the

Variables ln HP(2 1) ln HP(2 2) ln INC ln GDP ln SHANG ln VAC C R2 Adjusted R 2

Beijing (January 1997-December 2002) Coe. t-ratio 1.15 2 0.21 0.02 0.01 0.00 2 0.01 0.25

10.02*** 21.76* 2.35** 1.85* 1.37 23.87*** 0.97 0.98 0.98

Shanghai (January 2001-December 2002) Coe. t-ratio 0.65

3.73*** 2 1.87* 1.20 2 0.89 2 2.18** 2.49**

20.09 0.07 20.04 20.12 3.70 0.96 0.95

Notes: *,**and ***denote significance at the 90, 95 and 99 percent level, respectively

Table VI. Models of housing price determination for the two cities

MD 43,4

622

Figure 6. Actual and predicted housing price in the two cities

Figure 7. Estimated housing price bubbles for the two cities in 2003

econometrical methodologies of Granger causality test and impulse response analysis, our findings first indicate that housing prices seem to have interacted abnormally with market fundamentals (such as disposable income, the stock of vacant new dwellings and local GDP). This is particularly the case for Shanghai in most recent years. We have further estimated the bubble term by means of the reduced form equations for housing prices. The results suggest that while there being no bubble in Beijing, Shanghai seemed to have a housing price bubble in 2003, representing a sizeable 22 percent. Understandably, recent speculations in Shanghai might have caused market prices deviating from their long-run equilibrium levels. Investors thus should be cautious of any possible down-side risks in the Shanghai property market. This equally applies to Beijing, though seemingly no bubble term appearing in 2003. Attention should however be paid to abnormal interactions, particularly between housing prices and the vacant new dwellings. It is noteworthy that our calculation assumes the market before 2003 had been in equilibrium – no bubbles. We found no bubble in 2003; however which does not necessarily mean that there might not be any bubbles before 2003 in the Beijing housing market. This study has laid the ground work for further investigation into abnormal housing price phenomena in Mainland China, i.e. price bubbles. We may here suggest possible areas for future research. First, future studies may further work on different model specifications for comparison, or on direct estimation of assets’ fundamental value.

The latter proves very difficult, if not impossible, for without reliable data. The second area is to further investigate whether there was a bubble in the two cities before 2003, as stated above. Finally, we suggest a larger dataset be used, for example covering a longer period of time. This should improve the accuracy and reliability of the interpretation of findings. Now, however, this is constrained by time and resources available. We used the data set because it is available on the public domain – reliable and acceptable.

Housing price bubbles

623 References Case, K.E. and Shiller, R.J. (1990), “Forecasting pries and excess returns in the housing market”, AREUEA Journal, Vol. 18 No. 3, pp. 253-73. Engle, R.F. and Granger, C.W.J. (1987), “Cointegration and error correction representation, estimation, and testing”, Econometrica, Vol. 55, pp. 251-76. Flood, R. and Hodrick, R. (1990), “On testing for speculative bubbles”, Journal of Economic Perspectives, Vol. 4 No. 2, pp. 85-101. Granger, C.W.J. (1969), “Investigating causal relations by econometric models and cross-spectral methods”, Econometrica, Vol. 37, pp. 424-38. Henry, O.P. (1995), “Data sources for measuring house price changes”, Journal of Housing Research, Vol. 6 No. 3, pp. 377-87. Johansen, S. and Juselius, K. (1990), “Maximum likelihood estimation and inference on cointegration: with application to the demand for money”, Oxford Bulletin of Economics and Statistics, Vol. 52 No. 2, pp. 169-210. Kim, K-H. and Lee, H.S. (2000), “Real estate price bubble and price forecasts in Korea”, Proceedings of 5th AsRES Conference, Beijing. Kim, K-H. and Suh, S.H. (1993), “Speculation and price bubbles in the Korean and Japanese real estate markets”, Journal of Real Estate Finance and Economics, Vol. 6 No. 1, pp. 73-87. Noguchi, Y. (1994), “Land prices and house prices in Japan”, in Noguchi and Poterba (Eds), Housing Markets in the United States and Japan, NBER, pp. 11-28. Pesaran, H.H. and Shin, Y. (1998), “Generalized impulse response analysis in linear multivariate models”, Economics Letters, Vol. 58 No. 1, pp. 17-29. Quigley, J.M. (1999), “Real estate prices and economic cycles”, International Real Estate Review, Vol. 2 No. 1, pp. 1-20. Peng, R. and Hudson-Wilson, S. (2002), “Testing real estate price bubbles: an application to Tokyo office market”, Proceedings of 7th AsRES Conference, Seoul. Stiglitz, J.E. (1990), “Symposium on bubbles”, Journal of Economic Perspectives, Vol. 4 No. 2, pp. 13-18. Appendix 1. Granger causality test and impulse response function Granger causality test Granger (1969) puts forward the definition of causality, which is based entirely on the predictability of some series, say x. If some other series y contains information in past terms that helps in the predication of x and if this information is contained in no other series used in the predictor, then y is said to cause x. Generally speaking, if x and y are stationary series, unrestricted VAR models are usually assumed to implement the Granger causality test, and Wald chi-square tests and F tests are employed to test the null hypothesis of no Granger causality. However, if the variables are cointegrated, the bi-variate dynamic relation between them would be miss-specified if the researcher simply uses traditional vector autoregressive (VAR) model to test the existence of Granger causality. As Engle and Granger (1987) pointed out, this kind of test should be carried out with vector error correction (VEC) models.

MD 43,4

624

Impulse response function An impulse response function traces the effect of a one standard deviation shock to one of the innovations on current and future values of the endogenous variables in a VAR(VEC) model. A shock to the ith variable directly affects the ith variable itself, and is also transmitted to all of the endogenous variables through the dynamic structure of the VAR(VEC). So impulse response function can be used to describe the dynamic response of the system, which helps to analyze the two-way dynamic relations of the variables.This approach is not, however, invariant to the ordering of the variables. Generalized impulses as described by Pesaran and Shin (1998) constructs an orthogonal set of innovations that does not depend on the VAR(VEC) ordering, employed in this paper.

Appendix 2. The VECM models

Beijing: January 1997-December 2003 Coe. t-ratio Coe. t-ratio Cointegrating eq

Table AI. VECM of housing prices and disposable income

Error correction CointEq1 D(ln HP(2 1)) D(ln HP(2 2)) D(ln HP(2 3)) D(ln HP(2 4)) D(ln HP(2 5)) D(ln HP(2 6)) D(ln HP(2 7)) D(ln HP(2 8)) D(ln HP(2 9)) D(ln HP(2 10)) D(ln HP(2 11)) D(ln HP(2 12)) D(ln INC(2 1)) D(ln INC(2 2)) D(ln INC(2 3)) D(ln INC(2 4)) D(ln INC(2 5)) D(ln INC(2 6)) D(ln INC(2 7)) D(ln INC(2 8)) D(ln INC(2 9)) D(ln INC(2 10)) D(ln INC(2 11)) D(ln INC(2 12)) C t R-squared Adj. R-squared Granger causality test Wald chi-square/Prob

ln HP(2 1) ln INC(2 1) t C

1.00 2 0.15

2 11.28**

2 5.73 D(ln HP) 2 0.22 0.64 0.21 2 0.02 0.06 0.21 0.00 0.16 2 0.02 0.10 2 0.02 0.49 2 0.15 2 0.08 2 0.18 2 0.27 2 0.11 2 0.03 2 0.31 2 0.20 2 0.05 2 0.10 2 0.09 2 0.24 2 0.17 0.01

2 2.91** 4.54** 1.25 2 0.12 0.39 1.34 2 0.02 0.96 2 0.09 0.69 2 0.11 3.47** 2 1.02 2 0.83 2 1.94* 2 2.65** 2 1.07 2 0.29 2 3.32** 2 1.92** 2 0.47 2 1.02 2 1.03 2 2.37** 2 1.68* 2.48**

0.58 0.35

22.09/0.04

Shanghai: January 2001-December 2003 Coe. t-ratio Coe. t-ratio

1.00 0.19 4.52** 2 0.02 2 7.69 D(ln INC) D(ln HP) D(ln INC) 2 0.29 2 2.66** 2 0.76 2 0.66 2 7.80 0.17 0.86 2 0.10 2 0.08 10.23 0.07 0.29 0.16 0.11 9.62 2 0.24 2 1.01 0.61 0.41 10.96 0.20 0.86 1.01 0.54 12.38 0.58 2.52** 0.99 0.47 15.18 2 0.16 2 0.66 0.80 0.34 16.56 0.11 0.45 0.78 0.35 16.02 0.35 1.51 0.86 0.51 11.07 0.12 0.56 0.79 0.80 6.62 2 0.09 2 0.41 0.06 0.32 0.09 0.41 2 0.23 2 1.56 0.13 0.69 0.63 2 0.30 2 2.17** 0.07 0.39 0.13 2 0.35 2 2.44** 0.04 0.26 0.05 2 0.26 2 1.78* 0.11 0.80 2 0.28 2 0.31 2 2.26** 0.11 0.82 2 0.47 2 0.39 2 2.88** 0.08 0.51 2 0.48 2 0.21 2 1.39 0.03 0.20 0.21 2 0.21 2 1.46 2 0.05 2 0.35 0.25 2 0.43 2 3.17** 0.11 0.60 0.98 2 0.21 2 1.58 0.00 2 0.02 0.40 2.74** 0.03 3.33** 2 0.01 2 0.42 2 0.05 0.00 2 0.30 2 0.06 0.66 0.61 0.97 0.48 2 0.93 0.87

13.97/0.30

Notes: *(**) denotes significance at the 95 percent (99 percent) level

1.68/0.99

2 7.31** 9.26** 7.33** 7.91** 7.22** 7.73** 7.65** 7.72** 7.03** 7.28**

3.60** 0.84 0.35 2 2.19* 2 3.61** 2 3.37** 1.59 2.00* 5.88**

2 2.78** 2 8.01**

110.85/0.00

ln HP(2 1) lnGDP(2 1) t C

1.00 2 10.17 2 4.04** 0.10 43.29 D(ln HP) 0.00 0.22 0.48 3.03** 2 0.03 2 0.19 2 0.14 2 0.79 0.07 0.43 0.13 0.77 2 0.25 2 1.41 2 0.03 2 0.16 2 0.06 2 0.36 0.17 1.02 2 0.12 2 0.76 0.27 1.67* 2 0.30 2 1.97** 0.02 0.40 0.02 0.49 0.03 0.96 0.01 0.52 0.01 0.48 0.02 1.13 0.01 0.80 0.00 0.34 0.01 0.94 0.03 2.86** 0.01 1.35 0.01 0.59 0.00 2 1.41 0.00 1.79* 0.50 0.20 13.65/0.32 D(lnGDP) 0.19 4.02** 2 0.29 2 0.19 1.69 1.04 1.22 0.74 0.53 0.32 1.75 1.06 2 1.29 2 0.77 1.77 1.03 2 1.73 2 1.04 1.13 0.74 0.27 0.17 2 0.38 2 0.24 2 0.16 2 0.11 1.04 2.71** 0.80 2.39** 0.72 2.60** 0.52 2.08** 0.44 2.12** 0.28 1.57 0.08 0.51 2 0.02 2 0.21 2 0.25 2 2.65** 2 0.34 2 3.84** 2 0.33 2 3.27** 0.02 0.16 2 0.01 2 0.35 0.00 2 0.86 0.79 0.66 9.13/0.69

Beijing: January 1997-December 2003 t-ratio Coe. t-ratio

Notes: *(**) denotes significance at the 95 percent (99 percent) level

Error correction CointEq1 D(ln HP(2 1)) D(ln HP(2 2)) D(ln HP(2 3)) D(ln HP(2 4)) D(ln HP(2 5)) D(ln HP(2 6)) D(ln HP(2 7)) D(ln HP(2 8)) D(ln HP(2 9)) D(ln HP(2 10)) D(ln HP(2 11)) D(ln HP(2 12)) D(ln GDP(2 1)) D(ln GDP(2 2)) D(ln GDP(2 3)) D(ln GDP(2 4)) D(ln GDP(2 5)) D(ln GDP(2 6)) D(ln GDP(2 7)) D(ln GDP(2 8)) D(ln GDP(2 9)) D(ln GDP(2 10)) D(ln GDP(2 11)) D(ln GDP(2 12)) C t R-squared Adj. R-squared Granger causality test Wald chi-square/Prob

Cointegrating Eq

Coe.

1.16 0.95 1.19 1.02 1.30 0.82 1.09 1.16 1.42

0.70 0.63 0.56 0.54 0.51 0.25 0.38 0.25 0.29

0.00 0.07 0.00 0.07 0.75 2 0.24 3.73/0.93

1.18 2 2.16* 2 1.27 2 0.95 2 0.96 2 0.96 0.16 0.60 0.49 2 0.30

2 4.53**

1.00 2 3.44 0.03 13.83 D(ln HP) 0.27 2 0.83 2 0.68 2 0.49 2 0.56 2 0.51 0.09 0.34 0.25 2 0.14

4.53** 3.33** 4.36** 3.36** 3.75** 4.39** 3.11* 3.14** 2.55*

4.23 3.45 3.21 2.78 2.31 2.11 1.70 1.06 0.80

0.04 1.37 2 0.01 2 2.76 0.97 0.83 21.34/0.01

4.25** 2 3.52** 2 2.66* 2 2.16* 2 1.48 0.70 0.51 0.34 0.28 0.21

D(lnGDP) 1.51 2 2.09 2 2.21 2 1.74 2 1.35 0.57 0.43 0.30 0.22 0.15

Shanghai: January 2001-December 2003 Coe. t-ratio Coe. t-ratio

Housing price bubbles

625

Table AII. VECM of housing prices and local GDP

Table AIII. VECM of housing prices and vacant new dwellings 0.92 2.27** 2 0.73 2 1.45 2.26** 0.95 2 2.42** 0.89 2 1.39 2 0.91 0.68 2 0.07 2 1.24 1.22 2 1.28 2 0.27 2 2.47** 2 1.97** 2 0.14 2 0.43 2 1.08 0.86 2 1.59 2 1.33 2 0.89 2 1.27 2 1.09 2 1.08 2 1.05 2.21**

2 6.43 D(ln HP) 0.03 0.41 2 0.14 2 0.28 0.44 0.20 2 0.53 0.21 2 0.32 2 0.20 0.15 2 0.01 2 0.23 0.22 2 0.21 0.00 2 0.01 2 0.01 0.00 0.00 2 0.01 0.00 2 0.01 2 0.01 0.00 2 0.01 0.00 0.00 0.00 0.00 0.65 0.38 34.49/0.00

2 3.88**

1.00 2 0.06

Notes: *(**) denotes significance at the 95 percent (99 percent) level

Error correction CointEq1 D(ln HP(2 1)) D(ln HP(2 2)) D(ln HP(2 3)) D(ln HP(2 4)) D(ln HP(2 5)) D(ln HP(2 6)) D(ln HP(2 7)) D(ln HP(2 8)) D(ln HP(2 9)) D(ln HP(2 10)) D(ln HP(2 11)) D(ln HP(2 12)) D(ln HP(2 13)) D(ln HP(2 14)) D(ln VAC(2 1)) D(ln VAC(2 2)) D(ln VAC(2 3)) D(ln VAC(2 4)) D(ln VAC(2 5)) D(ln VAC(2 6)) D(ln VAC(2 7)) D(ln VAC(2 8)) D(ln VAC(2 9)) D(ln VAC(2 10)) D(ln VAC(2 11)) D(ln VAC(2 12)) D(ln VAC(2 13)) D(ln VAC(2 14)) C t R-squared Adj. R-squared Granger causality test Wald chi-square/Prob

ln HP(2 1) lnVAC(2 1) t C 3.06** 2 0.18 1.01 2 0.14 0.20 2 1.48 2 0.89 2 0.85 2 0.88 0.58 2 0.49 2 0.23 2 0.67 2 0.32 2 1.10 0.50 0.70 1.15 2 1.20 2 0.90 1.13 2 1.06 2 0.98 2 2.74** 2 0.39 2 1.07 0.99 2 1.00 0.09 2.26** 0.66 0.42 13.83/0.46

D(lnVAC) 2.06 2 0.72 4.34 2 0.59 0.87 2 6.79 2 4.29 2 4.33 2 4.52 2.85 2 2.41 2 1.06 2 2.79 2 1.31 2 4.02 0.07 0.08 0.12 2 0.13 2 0.10 0.12 2 0.11 2 0.09 2 0.26 2 0.04 2 0.11 0.10 2 0.08 0.01 0.07

Beijing: January 1997-December 2003 t-ratio Coe. t-ratio

2.15* 2.25* 2.22* 2.19* 2.26* 2.20* 2.28* 2.15* 1.57

0.59 0.60 0.55 0.45 0.42 0.34 0.27 0.21 0.12

0.18 2.28* 0.00 2.42* 0.75 2 0.25 6.06/0.73

2.27* 2 3.03* 2 2.72* 2 2.52* 2 2.40* 2 1.81 2 1.44 2 1.10 2 0.29 2 0.17

2 3.80**

1.00 2 0.48 2 0.02 2 3.22 D(ln HP) 1.39 2 2.63 2 2.64 2 2.41 2 2.24 2 1.59 2 1.12 2 0.76 2 0.17 2 0.09

0.67 2 0.49 2 0.20 2 0.45 2 1.05 2 0.90 2 0.51 2 1.01 2 0.90

0.47 2 0.04 0.51 0.74 1.90 0.94 0.38 0.69 2 0.56 2.44*

2 0.09 2 0.37 2 0.01 2 2.01* 0.94 0.72 44.17/0.00

0.54 2 0.39 2 0.14 2 0.27 2 0.58 2 0.41 2 0.18 2 0.29 2 0.21

D(lnVAC) 0.85 2 0.11 1.46 2.09 5.25 2.44 0.86 1.41 2 0.94 3.86

Shanghai: January 2001-December 2003 Coe. t-ratio Coe. t-ratio

626

Cointegrating Eq

Coe.

MD 43,4

ln HP(2 1) ln SHANG(2 1) t C

1.00 0.04 5.49** 0.00 2 7.07 D(ln HP) 2 0.39 2 3.42** 0.74 5.15** 0.15 0.86 0.18 1.09 0.32 1.89* 0.37 2.04** 2 0.02 2 0.09 0.19 0.99 0.16 0.78 0.18 0.93 2 0.11 2 0.56 0.38 1.99* 2 0.10 2 0.52 0.01 0.95 0.01 1.37 0.01 0.96 0.00 0.52 0.00 0.18 0.00 0.22 0.00 2 0.22 0.00 2 0.51 0.00 2 0.65 0.00 0.11 2 0.01 2 1.85* 0.00 2 0.32 0.00 2 1.49 0.00 1.45 0.52 0.24 8.95/0.71 D(ln SHANG) 2 2.97 2 1.85* 0.49 0.24 2 2.69 2 1.07 2.43 1.04 2 4.52 2 1.90* 1.88 0.74 2 5.23 2 2.01* 6.69 2.54** 2 5.27 2 1.87* 2 3.05 2 1.15 2 5.84 2 2.13** 2 0.23 2 0.09 2 7.14 2 2.57** 2 0.12 2 0.90 2 0.38 2 2.79** 2 0.25 2 1.79* 2 0.46 2 3.45** 2 0.23 2 1.90* 2 0.43 2 3.49** 2 0.27 2 2.27* 2 0.35 2 2.90** 2 0.19 2 1.88* 2 0.21 2 2.03* 2 0.19 2 1.94* 2 0.25 2 2.39** 0.12 3.81** 0.00 2 3.89** 0.64 0.42 34.81/0.00

Beijing: January 1997-December 2003 t-ratio Coe. t-ratio

Notes: *(**) denotes significance at the 95 percent (99 percent) level

Error correction CointEq1 D(ln HP(2 1)) D(ln HP(2 2)) D(ln HP(2 3)) D(ln HP(2 4)) D(ln HP(2 5)) D(ln HP(2 6)) D(ln HP(2 7)) D(ln HP(2 8)) D(ln HP(2 9)) D(ln HP(2 10)) D(ln HP(2 11)) D(ln HP(2 12)) D(ln SHANG(2 1)) D(ln SHANG(2 2)) D(ln SHANG(2 3)) D(ln SHANG(2 4)) D(ln SHANG(2 5)) D(ln SHANG(2 6)) D(ln SHANG(2 7)) D(ln SHANG(2 8)) D(ln SHANG(2 9)) D(ln SHANG(2 10)) D(ln SHANG(2 11)) D(ln SHANG(2 12)) C t R-squared Adj. R-squared Granger causality test Wald chi-square/Prob

Cointegrating Eq

Coe.

2 2.56* 2 3.32** 2 1.99* 2 2.76* 2 1.12 2 1.24 1.93* 2 4.58** 2 2.81*

2 0.25 2 0.24 2 0.17 2 0.22 2 0.07 2 0.08 0.12 2 0.26 2 0.19

2 0.06 2 3.45** 2 0.01 2 3.24** 0.92 0.62 30.48/0.00

2 4.42** 1.85 2.85* 2.91* 3.43** 4.20** 3.72** 3.71** 3.97** 3.99**

2 0.55

1.00 2 0.03 2 0.02 2 6.15 D(ln HP) 2 1.98 0.67 1.23 1.33 2.10 2.87 2.33 2.06 1.68 1.65

0.60 2 0.64 0.10 2 0.23 2 1.59 0.06 2 2.15* 2 0.49 2 0.15

0.22 2 0.17 0.03 2 0.07 2 0.41 0.01 2 0.54 2 0.11 2 0.04

2 0.03 2 0.49 0.02 2.18* 0.88 0.39 19.17/0.02

1.55 2 1.19 2 2.44* 2 1.27 2 1.53 2 1.20 2 1.80 2 1.90 2 1.79 2 2.33*

D(ln SHANG) 2.68 2 1.66 2 4.07 2 2.23 2 3.61 2 3.15 2 4.34 2 4.07 2 2.92 2 3.72

Shanghai: January 2001-December 2003 Coe. t-ratio Coe. t-ratio

Housing price bubbles

627

Table AIV. VECM of housing prices and Shanghai stock price index

The Emerald Research Register for this journal is available at www.emeraldinsight.com/researchregister

The current issue and full text archive of this journal is available at www.emeraldinsight.com/0025-1747.htm

MD 43,4

Applying lean assessment tools in Chinese hi-tech industries

628

College of Business Administration, University of Detroit Mercy, Detroit, Michigan, USA

Shahram Taj

Abstract Purpose – To evaluate the current state of manufacturing in some selected plants in electronics, telecommunication/wireless, and computer industries in the Republic of China. Design/methodology/approach – A spreadsheet-based assessment tool is used to evaluate nine key areas of manufacturing. Participants are asked to answer questions for each area, namely inventory; team approach; processes; maintenance; layout/handling; suppliers; setups; quality; and scheduling/control. A score is given for each response in the assessment. Scores are then totaled for each of the nine areas. The results are then displayed in the score worksheet and finally a lean profile chart is created to display the current status of the plant and the gap from their specific lean targets. Findings – Results of the lean assessment tool have revealed a somewhat significant gap from the lean manufacturing target, but have also identified opportunities for improvement. Research limitations/implications – The research findings are from some selected manufacturing plants in Chinese hi-tech industries and they should not be interpreted as an indicator of that particular sector in China. Practical implications – A very useful lean assessment tool that is easy to use by plants’ management to help them identify their current state of manufacturing and the gaps from ideal lean targets. Originality/value – This paper offers a practical and easy to use assessment tool to help manufacturing managers to make their manufacturing operations more productive. Keywords Lean production, China, Advanced manufacturing technologies Paper type Research paper

Introduction China is the fastest growing market in the world. Its GDP has grown by more than 9 percent annually between 1978 and 2002 and has the biggest consumer market in the world. Zeng and Williamson (2003) in their paper “The Hidden Dragons” discuss the emergence of Chinese companies as powerful rivals to multinational companies not only within China but also throughout the global market. Several Chinese companies

Management Decision Vol. 43 No. 4, 2005 pp. 628-643 q Emerald Group Publishing Limited 0025-1747 DOI 10.1108/00251740510593602

This research has been partially funded by a research grant from the Beijing International MBA (BIMBA) program at Peking University. The author acknowledges several organizations and people who were instrumental in this research study. The Beijing International MBA program, BiMBA, at Peking University provided a research grant to conduct this study while teaching in China. Mr Quarterman Lee, President of Strategos, Inc. gave me permission to use his lean assessment tool. The author’s students at BiMBA contacted manufacturing executives to conduct the assessments. Dr Richard Colombo, Visiting Professor at BiMBA from Fordham University helped me with his editorial suggestions. Finally, would like to thank two former research/teaching assistants, Ms Yalda Ghrorashyzadeh in United States who helped with the research proposal and Ms Selina Zhang in Beijing in with the collecting and analyzing the results.

have created brands that have taken the market share from stronger rivals in Asia, Europe, and the United States. Global companies have established many production facilities in China due to lower wage rates and the trend towards outsourcing. In order to stay competitive, companies are trying to make their manufacturing facilities more efficient and lean. Traditionally managers have heavily relied on accounting metrics. These are inadequate for managing a lean manufacturing operation. A profit and loss statement is the end result of a long chain of decisions that may go back for years or even decades. Managing a lean factory requires data that reflects what is happening upstream in these chains of events. We can apply assessment tools to obtain some key information about the status of a manufacturing facility. We demonstrate the application and usefulness of the assessment tool in several manufacturing plants in China. We contacted manufacturing executives at 65 manufacturing plants in China to fill out the lean assessment questionnaire about their plants. This study has been carried out while the author was in China for two months in 2004. The purpose of the visit was to teach an MBA course in Operations Management at the Beijing International MBA (BiMBA) program at Peking University. Ninety-one students in full time and part-time classes in two Operations Management classes were asked to contact manufacturing executives to conduct the assessment. The lean assessment tool from Strategos Inc. had been used in this research study (Lee, 2004). In the following sections, we will review the lean manufacturing literature followed by the research approach and description of the assessment tool and finally the interpretation of the result and findings for 20 selected plants in hi-tech industries. Literature review The term “lean manufacturing” or “lean production” was first used by Womack et al. (1990) in their historical book “The Machine That Changed the World”. The lean manufacturing describes the profound revolution that was initiated by the Toyota Production System against mass production system. Womack and Jones continued their research in lean production and studied the transfer of other companies into lean crusade in their second book, “Lean Thinking” (Womack and Jones, 1996). They explained that lean manufacturing is much more than a technique; it is a way of thinking, and the whole system approach that creates a culture in which everyone in the organization continuously improve operations. Liker (1997) wrote the third book in this series with the title of “Becoming Lean – Inside Stories of U.S. Manufacturers”. The most recent book about the Toyota system is also by Liker (2004) where he describes the management principles of Toyota that he claims to be the world’s greatest manufacturer. Lean means “manufacturing without waste”. Waste is anything other than minimum amount of equipment, materials, parts, and working time that are absolutely essential to production. Waste (“muda” in Japanese) has seven types: waste from overproduction, waste of waiting time, transportation waste, inventory waste, processing waste, waste of motion, and waste from product defects. Most companies waste 70-90 percent of their available resources. Even the best lean manufacturers probably waste 30 percent. Interestingly, every company has to find its own way to implement the lean method: there is no universal way that will apply to all. Despite the wide knowledge and available resources, many companies are struggling to stay “lean”.

Applying lean assessment tools

629

MD 43,4

630

The decade of 1990s was witness to many transformation of traditional manufacturing into lean approach. Many companies either transformed or created new cellular production system. For some actual and practical applications see Ellegood et al. (2000), Duda et al. (1999), Taj et al. (1998) and Cochran et al. (1998). There are also examples of how a complete factory could be designed in lean principles. Taj and Ghorashyzadeh (2003) address the strategic issues for planning lean manufacturing plants and Taj et al. (2000) show a real example of designing a factory with a future in mind. In order to improve manufacturing operations, we need to assess the state of operations at the manufacturing facilities. Assessment is a valuable tool that must be used to study the current state. Goodson (2002) has developed a tool kit that aids experts in as little as 30 minutes to “Read a plant fast” to tell if a factory is truly lean. He describes his approach as rapid plant assessment (RPA). To do this assessment you would need a team of experts to tour the plant. During the tour, the team observes all aspects of plant’s environment and looks for the evidence that the plant adheres to best practices. Lee (2004) an international renowned expert in lean manufacturing has also developed a lean assessment tool. This assessment tool helps to investigate, evaluate, and measure key areas of manufacturing. The tool is very user-friendly and the result is a deeper understanding of key issues, problem areas, and potential solutions. We have used this assessment tool in this study. Research approach Ninety-one students who enrolled in the operations management class, in the BiMBA program of the Peking University, were given the lean assessment tool. Students were given detailed information about the assessment tool and also provided with a cover letter both in English and Chinese explaining the purpose of this research. We also added a list of questions to be filled out by the manufacturing executives that identifies the industry, product lines, the name of the manufacturing plant, location, and main product line in the plant. Students’ assignments were to contact companies and request the assessment to be done by the plants’ management. The manufacturing executives were assured that information about the company’s name, location and product detail will be confidential and will not be revealed in the publication. They were informed that the lean assessment would help them identify areas of productivity lag and opportunities for improvement. Lean assessment The assessment tool used in our study is an excel spreadsheet developed by Quarterman Lee at Strategos Inc (Lee, 2004). Nine key areas of manufacturing are evaluated by this assessment; each ranks the plant’s performance as a percentage. Participants will be asked to answer three to six questions for each area, namely: (1) inventory; (2) team approach; (3) processes; (4) maintenance; (5) layout/handling; (6) suppliers;

(7) setups; (8) quality; and (9) scheduling/control. Appendix shows the assessment tool. The questions in each area attempt to focus on the key performances. In the section of inventory control, participants are asked to identify the percentage of middle and upper managers who can state from memory the turnover rate and purpose of work-in-process (WIP), finished goods and raw materials. Two other questions in this section are related to the annual inventory turnover and its ratio to industry standard. In the second area of “The Team Approach”, the first question asks about the organization type and the respondent has to choose one from the following: exploitive, bureaucratic, consultive, participative, and highly participative. There are five other questions in this section that are related to the compensation type for the shop floor workers, job security, annual personnel turnover, teambuilding training and active participation of in teams for all personnel. The third section, process, evaluates the process and it assesses how lean the production system has been designed. The first question in this area inquires about the percentage of products that go through same machines. This is cross-loading or batching that should be avoided if possible for lean approach. The second question is about the size of equipment. In a “process type layout” that is also called “departmental type layout” (Chase et al., 2004), the emphasis is on having similar machines in one area and the goal is to buy a few large-scale equipments as opposed to purchasing more of small-scale machines. The purpose is to minimize investments since the machine that has twice the rated capacity of a smaller machine may cost only 20 percent more. But in lean and cellular manufacturing, the goal is to have machines that are good match for the cell configuration. Interested readers can obtain more information about machine design requirements for lean production system from Arinez (2000). Arinez in his unpublished doctoral thesis at the Massachusetts Institute of Technology investigated the machinery design requirements for OEM from a system engineering perspective by applying the principle of system decomposition (Cochran, 1999) and axiomatic design (Suh, 1990). The third and fourth questions inquire about the product mix and volume flexibilities. Again, in a robust production system design, product mix and variation in volume within a range can be well tolerated without affecting the operation and unit cost. The question five investigates the plant target operating capacity. In a traditional manufacturing, the goal is to run equipment at almost 100 percent capacity to maximize return on investment, while the goal in lean production is to balance the flow and run equipment below their maximum capacity. The last question is to rate the overall bias of the plant’s process selection with respect to technology level. The fourth section, maintenance, evaluates the manufacturing system maintenance, equipment downtime and uptime and the rigor of preventive maintenance. Again, we have to emphasize that preventive maintenance must be even stricter in lean manufacturing, since losing any equipment due to unexpected downtime in a cell would result into stopping the operation in the cell. The fifth section, layout and handling, evaluates the space allocated to inventory, types of layout in terms of process as opposed to cell/flow-line/product type layout (Chase et al., 2004). The third question in this section inquires about material

Applying lean assessment tools

631

MD 43,4

632

movement to see if it is bulky and has complex flow patterns or small with direct flow pattern. The next question is about housekeeping to understand how well the plant is kept clean and tidy. The last question is how easy visitors can identify the processes and their sequence. This is called “Visual Factory” and it is changing many plants in the west to become more orderly. The sixth area, suppliers, looks into supply chain design/management. Questions in this section investigate the average number of suppliers for each raw material or purchased item, outsourcing, incoming inspection, where and how often supplies are delivered. The objectives of lean manufacturing and supply chain management are to: make only those items that are in core competencies and outsource the other ones, having fewer suppliers, and treat suppliers as partners or even as members or division of the same firm as in “vertical integration” but actually in “Virtual Integration” (Magretta, 1998). The seventh section, setups, measures setup time for equipments and efforts in setup time reduction. The quick setup or change over is a must for a lean production system. The eighth section, quality, investigates the statistical process control (SPC) training, portion of operations that are using the SPC, and who is doing it (operator or quality control office). The last question is about the overall defect rate. Finally, the last section is scheduling and control. The first question that could also be related to the production system design looks into the flow of the materials into processes without interruptions (no intermediate storage). The second question investigates the usage of “Kanban” as it relates to “Pull” production. Where pull means make to order while push means make to stock. The last question is about on-time delivery performance of finished goods to customers. A score between zero and four is given for each response in the assessment. Scores are then totaled for each of the nine areas. The results are then displayed in the score worksheet and finally a lean profile chart is created to display the current status of the plant and the gap from their specific lean targets. Therefore, the results are immediately available for the manufacturing executives when they complete the questionnaire. We will explain more about the score worksheet and the lean profile in the next section. Assessment results MBA students collected a total of 65 plants’ assessments in a two-week period in May 2004. This represents more than 71 percent participation by 91 students. The reason for our success is due to several factors: ease of use of the assessment tool, immediate feedback and results for plants’ executives from the score worksheet and the lean profile. Some manufacturing executives were so excited in doing the assessment that they stayed past midnight to complete the assessment to obtain the results and even requested additional feedback from us. We should mention that the students’ participation was on a voluntary basis but also the participants earned bonus points to help them to get a better grade! After collecting all the assessments, the plants were categorized according to their industry: electronics, telecommunication and wireless, computer, food and beverage, garment, chemical, oil, printing, biotechnology, and a few others. We have decided to only report on the first three industries. These are 20 plants that can be labeled as hi-tech industry. There are nine manufacturing plants in electronics, seven plants in

telecommunications and wireless, and the last four are computer plants. Some plants are joint ventures with global companies with sales exceeding billions in US dollars. The reasons for reporting on 20 selected plants in hi-tech industries are due to sizeable assessments, similar process, and their product line. We have analyzed the data for each of the three industries. Table I shows the average score for the electronics. The first column is the list of nine key areas or sections in the assessment. The second column is the section points, the total score for each section. We are using the average score for nine plants in electronics in this column, while for individual plant the scores are the actual numbers in the assessment. The third column is the number of questions in each section. The fourth column, section AVG, is calculated by dividing section points (second column) by the number of questions in that section (third column). Sections percentages (fifth column) are calculated by dividing the section average by four (the maximum possible score). The sixth column is the “strategic impact factor”. This is a very important factor that is set by the user that reflects the relative importance of the section in relation to other sections. Total of all sections should equal 100 percent. The last column in the score worksheet shows the section target, it is calculated by dividing strategic impact factor (sixth column) by the maximum number in that column. In Table I, all section targets are at 100 percent since we are using identical strategic impact factors for all sections. But user can use different strategic impact factors based on their preferences. Table I shows the score for the electronics that are based on average scores for the nine plants in the assessment. Electronics have the highest score 71 percent, in maintenance and their lowest score is in inventory at 45 percent. It is interesting that there are significant gaps from the targets. Finally a “Lean Profile” chart is generated based on the results from, the score worksheet. Figure 1 shows the lean profile for the electronics. This is a very useful chart that shows the current state of electronics in the nine key areas of

Section 1.0 Inventory 2.0 Teams 3.0 Process 4.0 Maintenance 5.0 Layout 6.0 Supplier 7.0 Setup 8.0 Quality 9.0 Scheduling

Section points

Number of quest

Section average

Section (percent)

Strategic impact factor (percent)

Section target (percent)

5.44

3

1.81

45

11.1

100

14.89 12.00 14.11

6 6 5

2.48 2.00 2.82

62 50 71

11.1 11.1 11.1

100 100 100

13.89 9.11 7.33 10.11 7.89

5 5 3 4 3

2.78 1.82 2.44 2.53 2.63

69 46 61 63 66

11.1 11.1 11.1 11.1 11.1

100 100 100 100 100

Sum (in percent) Max (in percent)

100 11.1

Applying lean assessment tools

633

Table I. Score worksheet for electronics industry (nine plants) – average score

MD 43,4

634

Figure 1. Lean profile of electronics

manufacturing, their target, and the gap between the actual and the target. There are major gaps from the current state of plants in electronics industry from the lean targets. This observation was also apparent in the score worksheet. Again, we have to remind the reader, that people who conducted the assessment had the results available to them immediately upon completion of the questionnaire in the assessment. Next, we could look at the three industries in comparison charts. Figure 2 shows the actual performance in terms of section percentages from the score worksheets for all nine key areas for the three selected industries. As you can see in Figure 2, no one sector is the leader in all sections. Electronics has the lead in maintenance and layout. Telecommunication and wireless companies have higher scores in inventory and team approach. The computer sector leads in process, suppliers, setup, quality, and scheduling. We can somehow conclude that the computer sector is performing better than others in hi-tech industries. This is not a surprise finding, because of the intense competition in the computer industry, companies are forced to be more agile (process), have good supply chain management (supplier), and to meet individual customer demand and specification (setup, quality, scheduling). But, we would like to caution about generalization of these results due to small number of plants in our study. We decided to further anaylze data to better understand the state of the lean manufacturing in hi-tech industries. There are two important aspects in lean manufacturing, human and nonhuman. The nonhuman is the design of the production process dealing with the layout, inventory, scheduling, supply chain, and others. The human aspect which is also of equal importance is the organizational design. This aspect is somehow evaluated in the “team approach” of the assessment that contains six questions about the organization type, job security, personnel turnover, team

Applying lean assessment tools

635

Figure 2. Performance in key manufacturing areas by 20 selected plants in hi-tech industries

acitivity and training. Figures 3-8 show the charts for these sub-categrories for the 20 plants in the hi-tech industry. Our analysis shed some light about the organization structure in 20 selected plants in hi-tech industries in China. More than 60 percent have participative or highly participative organization type. Compensation in terms of salary including annual bonus are the norm with 70 percent of factory workers, while only 20 percent receive hourly wages. Job security is very high since only 10 percent of plants reported frequent annual layoffs. The last two figures display the teambuilding and team

Figure 3. Organization type in 20 selected plants in hi-tech industries

MD 43,4

636 Figure 4. Compensation of factory workers for 20 selected plants in hi-tech industries

Figure 5. Job security in 20 selected plants in hi-tech industries

Figure 6. Annual personnel turnover in 20 selected plants in hi-tech industries

activities. The results are somehow similar, since about 50 percent of plants reported that 30-100 percent of their total personnel receive teambuilding training and who are also active members of teams in the plants in problem solving, quality teams, and work teams. Again, we caution about generalization of these results due to small number of plants in our study. Conclusion Lean manufacturing improves material handling, inventory, quality, scheduling, personnel and customer satisfaction. Competitive forces are challenging manufacturers to produce products of higher quality at a lower price. The primary explanation offered by analysts and industry leaders with regard to moving factories to China can be summarized by lower production cost. It was our intention to assess the state of lean manufacturing in some selected manufacturing plants in China in order to explain or challenge lean manufacturing as one reason for the lower production costs in China. Competitiveness is critical for Chinese companies as they are starting to produce and market their own brands globally and have even launched manufacturing facilities in western countries. In order to stay competitive, these companies should improve their manufacturing operations. Our assessment in a few selected companies in hi-tech industry has showed a somewhat significant gap from the lean target. But the assessment has also identified opportunities for improvement in those areas where the current plant standing is below the benchmark (maximum score for each question).

Applying lean assessment tools

637

Figure 7. Percentage of personnel receiving teambuilding training at 20 selected plants in hi-tech industries

Figure 8. Percentage of personnel who are active members of formal work teams, quality teams, or problem-solving teams in 20 selected plants in hi-tech industries

MD 43,4

638

References Arinez, J.F. (2000), “An equipment design approach for achieving manufacturing system design requirements”, PhD thesis, Massachusetts Institute of Technology. Chase, R.B., Jacobs, F.R. and Aquilano, N.J. (2004), Operations Management for Competitive Advantage, 10th ed., Irwin-McGraw Hill, New York, NY. Cochran, D.S. (1999), “The production system design and deployment framework”, Proceedings of the 1999 SAE International Automotive Manufacturing Conference, Detroit, MI, 11-13 May. Cochran, D., Duda, J., Linck, J. and Taj, S. (1998), “Design of manufacturing cells using a combination of new and existing equipment”, Proceedings of the 9th Annual Meeting of the Production and Operations Management Society, Santa Fe, NM, 28-31 March. Duda, J., Castaneda-Vega, J., Cochran, D., Baur, M., Anger, R. and Taj, S. (1999), “Application of a lean cellular design decomposition to automotive component manufacturing system design”, Proceedings of the 1999 SAE International Automotive Manufacturing Conference, Detroit, MI, 11-13 May. Ellegood, W., Taj, S. and Hendricks, S. (2000), “Design of volume flexible linked-cell production system for capital intensive automotive component”, Proceedings of the Third World Congress on Intelligent Manufacturing Processes and Systems, Cambridge, MA, 28-30 June. Goodson, E. (2002), “Read a plant fast”, Harvard Business Review, May, pp. 105-13. Lee, Q. (2004), “Lean manufacturing strategy”, Strategos, available at: www.strategosinc.com/ Liker, J.L. (1997), Becoming Lean – Inside Stories of U.S. Manufacturers, Productivity Press, Portland, OR. Liker, J.L. (2004), Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer, McGraw-Hill, New York, NY. Magretta, J. (1998), “The power of virtual integration: an interview with Dell computer’s Michael Dell”, Harvard Business Review, March-April, pp. 73-84. Suh, N.P. (1990), Principles of Design, Oxford University Press, New York, NY. Taj, S. and Ghorashyzadeh, Y. (2003), “Strategic issues for planning manufacturing plant/facilities”, Proceedings of the European Applied Business Research Conference, Venice, 10-15 June. Taj, S., Cochran, D., Duda, J. and Linck, J. (1998), “Simulation and production planning for manufacturing cells”, Proceedings of the Winter Simulation Conference, Washington, DC, 13-16 December. Taj, S., Pfeil, J., Sullivan, D., Hutka, J. and Cochran, D. (2000), “Designing a factory with a future in mind”, paper presented at the Seventh Annual Meeting of the Production and Operations Management Society, San Antonio, TX, 1-4 April. Womack, J. and Jones, D. (1996), Lean Thinking: Banish Waste and Create Wealth in Your Corporation, Simon & Schuster, New York, NY. Womack, J., Jones, D. and Ross, D. (1990), The Machine that Changed the World, Rawson Associates, New York, NY. Zeng, M. and Williamson, P.J. (2003), “The hidden dragons”, Harvard Business Review, October, pp. 92-9. Appendix. Lean assessment tool developed by Strategos, Inc. This assessment helps to investigate, evaluate, and measure nine key areas of manufacturing. The result is a deeper understanding of key issues, problem areas, and potential solutions.

Response 1.0 1.1

1.2

Inventory For the categories of finished goods, work-in-process (WIP) and purchased/raw materials, what portion of middle and upper managers can state from memory the current turnover and the purpose of each type? What is the overall inventory turnover, including finished goods, WIP and purchased/raw material?

1.3

What is the ratio of inventory turnover to the industry average?

2.0 2.1

The team approach What is the organization type?

2.2

How are workers on the factory floor compensated?

2.3

To what extent do people have job security?

2.4

What is the annual personnel turnover?

2.5

What percentage of personnel (ALL Personnel) have received at least eight hours of teambuilding training? What percentage of personnel are active members of formal work teams, quality teams, or problem-solving teams?

2.6

X

0-6 percent 7-55 percent 56-80 percent 81-93 percent 94-100 percent

Applying lean assessment tools

639

0-3 4-6 7-12 13-24 25 þ # 1.0 1.1-2.0 2.1-4.0 4.1-8.0 8.1 þ Exploitive Bureaucratic Consultive Participative Highly participative Individual incentive Hourly wage Group incentive Salary Salary þ Annual bonus Layoffs every year Transfers and retraining reduce layoffs Layoffs are rare 31 percent þ 14-30 percent 7-11 percent 3-6 percent 0-2 percent , 5 percent 6-10 percent 11-30 percent 31-90 percent 91-100 percent , 5 percent 6-10 percent 11-30 percent 31-90 percent 91-100 percent (continued)

Table AI.

MD 43,4

Response 3.0 3.1

640 3.2 3.3 3.4

How easy is it to alter the total production rate by ^15 percent?

3.5

What is management’s target operating capacity for individual departments or machines?

3.6

How would you rate the overall bias of the plant’s process selection with respect to technology level?

4.0 4.1

Maintenance Describe equipment records and data. Include records of uptime, repair history, and spare parts. Include repair and parts manuals Excluding new installations and construction projects, what percentage of maintenance hours is unplanned, unexpected, or emergency? Does maintenance have and follow a defined preventive schedule?

4.2

4.3

Table AI.

Processes How many large-scale machines or single-process areas are in the plant through which 50 percent or more of different products must pass? How would you rate the overall bias of the plant’s process selection with respect to scale? How easy is it to shift output when the product mix changes?

4.4

Do equipment breakdowns limit or interrupt production?

4.5

What is the overall average availability of plant equipment?

X

4þ 3 2 1 0 Large scale Medium/mixed Small scale Very difficult Moderately difficult Easy Very difficult Moderately difficult Easy 96-100 percent 91-95 percent 86-90 percent 76-85 percent 50-75 percent Complex technologies Moderate/mixed Simple technologies

Nonexistent Substantially complete Complete and accurate 71-90 percent 51-70 percent 26-50 percent 11-25 percent 0-10 percent No PM 1-10 percent coverage 11-30 percent coverage 31-90 percent coverage 91 percent þ coverage Often Occasionally Frequently Unknown 0-75 percent 76-90 percent 91-95 percent 96-100 percent (continued)

Response 5.0 5.1

Layout and handling What portion of total space is used for storage and material handling?

5.2

What portion of the plant space is organized by function or process type?

5.3

How would you characterize material movement?

5.4

How would you rate overall housekeeping and appearance of the plant?

5.5

How well could a stranger walking through your plant identify the processes and their sequence?

6.0 6.1

Suppliers What is the average number of suppliers for each raw material or purchased item?

6.2

On average, how often, in months, are items put up for re-sourcing?

6.3

What portion of raw material and purchased parts comes from qualified suppliers with no need for incoming inspection?

X

71-100 percent 46-70 percent 30-45 percent 16-30 percent 0-15 percent 71-100 percent 46-70 percent 30-45 percent 16-30 percent 0-15 percent Pallet-size (or larger) loads, long distances (.100 ft), complex flow patterns, confusion, and lost material Mostly tote-size loads, bus-route transport, and intermediate distances Tote-size or smaller loads, short distances (, 25 ft), simple and direct flow pattern Messy, filthy, confused Dirty Some dirt, occasional mess Clean Spotless, neat, and tidy Impossible to see any logic or flow sequence Most processes are apparent with some study. Most sequences are visible Processes and their sequences are immediately visible Response 2.5 þ 1.6-2.4 1.3-1.7 1.2-1.4 1.0-1.1 1-11 12-17 18-23 24-36 36 þ 0 percent 1-10 percent 11-30 percent 31-70 percent 70-100 percent

Applying lean assessment tools

641

X

(continued)

Table AI.

MD 43,4

Response 6.4

What portion of raw material and purchased items is delivered directly to the point of use without incoming inspection or storage?

6.5

What portion of raw materials and purchased parts is delivered more than once per week?

7.0 7.1

Setups What is the average overall setup time (in minutes) for major equipment?

7.2

What portion of machine operators have had formal training in rapid Setup techniques?

7.3

To what extent are managers and workers measured and judged on setup performance?

8.0 8.1

Quality What portion of total employees have had basic SPC training?

8.2

What portion of operations are controlled with Statistical process control (SPC)

8.3

What portion of the SPC that is done is accomplished by operators as opposed to quality or engineering specialists?

8.4

What is the overall defect rate?

9.0

Scheduling/control

642

Table AI.

X

0 percent 1-10 percent 11-30 percent 31-70 percent 70-100 percent 0 percent 1-10 percent 11-30 percent 31-70 percent 70-100 percent 61 þ 29-60 16-30 10-15 0-9 0 percent 1-6 percent 7-18 percent 19-42 percent 43-100 percent Not at all Informal tracking and review Setups tracked, Performance in job description 0-6 percent 7-55 percent 56-80 percent 81-93 percent 94-100 percent 0 percent 1-10 percent 11-30 percent 31-70 percent 71-100 percent 0 percent 1-10 percent 11-30 percent 31-70 percent 71-100 percent 0 percent 1-10 percent 11-30 percent 31-70 percent 71-100 percent (continued)

Response 9.1

What portion of work-in-process flows directly from one operation to the next without intermediate storage?

9.2

What portion of work-in-process is under Kanban or Broadcast control

9.3

What is the on-time delivery performance?

0 percent 1-10 percent 11-35 percent 36-85 percent 86-100 percent 0 percent 1-10 percent 11-35 percent 36-85 percent 86-100 percent 0-50 percent 51-70 percent 71-80 percent 81-95 percent 95-100 percent

X

Applying lean assessment tools

643

Table AI.