Meeting the competition with a market-oriented organisation: A case of China s state-owned enterprises

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1 Market-oriented organisations China s SOEs Meeting the competition with a market-oriented organisation: A case of China s state-owned enterprises Sandra S. Liu Yi-Zheng Shi Department of Marketing, School of Business Hong Kong Baptist University Hong Kong Abstract: The past two decades have witnessed significant changes in China as it has moved from a centrally planned economy to a more market-oriented one. As a socialist nation, state owned enterprises (SOEs) continue to comprise a dominant part of economic activity in China. While many SOEs are inefficient and incur losses, economic reforms since the late 1970s have brought about irrevocable changes in the manner in which Chinese SOEs conduct their business. The important agenda for the Chinese government now is how to vitalize state sectors and ensure that SOEs are able to strive for their own survival. SOEs therefore are exploring ways to improve the productivity of their current operation and to enhance innovativeness in their business development, including seeking financial and technological resources overseas. The varying levels of market-orientation in SOEs present diverse outcomes for the SOEs. This study attempts to evaluate the extent to which the SOEs have adopted market-based organizational learning (Sinkula, Baker, and Noordewier 1997), market orientation (Deshpande and Farley 1998), entrepreneurial orientation (Smart and Conant 1994), and learning and innovativeness (Hurley and Hult 1998). THE DEVELOPMENT OF STATE-OWNED ENTERPRISES State owned enterprises (SOEs) have been the backbone of the Chinese economy since the communist take-over in iven that government policy now encourages the development of non-state sectors, the share of SOEs in the industrial output of China has declined from 77.6 percent in 1978 to 28.2 percent in 1998 (National Statistics Bureau of China, 1999). Exhibit One depicts the contribution of these SOEs to the ross Value of Industrial Output in China. Whilst SOEs have become less important to the Chinese economy, they do continue to play a sizeable role in the economy. In 1998, they employed more than half of the industrial workforce and 138

2 controlled more than sixty percent of fixed industrial assets. They are also the major recipient of credits provided by state banks and dominate some key sectors such as heavy industry and telecommunications (Laurenceson and Chai, 2000). It is predicted that the accession of China into the WTO will force many SOEs, especially those with low efficiency and in traditional industries, out of business. Nevertheless, some policy makers argue that greater competition from foreign invested firms will help to accelerate further reforms within SOEs (Wang, 2000). EXHIBIT ONE: CONTRIBUTION OF SOES TO ROSS VALUE OF INDUSTRIAL OUTPUT(VIO) IN CHINA (100 MILLION YUAN) SOEs Collectives Private Others Total amount % amount % amount % amount % amount % SOEs are owned by various central, provincial, and local government organizations (Dodds, 1996). Prior to the economic reforms in 1979, SOEs were not independent economic entities but were organized as departments of the State through central planning. Under this mechanism, SOEs were simply production units at the lowest level of the bureaucratic hierarchy, producing goods and services in accordance with the planned targets that were designated by the supervisory government authorities. Because SOEs were responsible merely for production, they delivered all their profits to the government and relied on subsidies from the government to cover any losses. The governance structure of state enterprises has been changed considerably as the magnitude of economic reforms is becoming increasingly broadened. As SOEs are evolving and attaining more autonomy in their operation, the government has not only gradually streamlined its internal economic agencies/sections but has also changed their function from that of an administrative role, consisting of monitoring activities in their subordinate enterprises, to one of framing regulations and broad policy setting. Now that production targets and operating budgets are no longer being allocated by the central authority, the managers of SOEs when planning and considering resource allocation are now more concerned about the market forces. (Chow and Fung, 1996). 139

3 Currently, the reform of SOEs follows the principle of zhua da fang xiao (grasp the large, let go of the small). That is, literally, the State retains ownership and control over large SOEs, while allowing small SOEs to survive on their own by converting them to various ownership structures (Cooper and Zheng, 1998). Because of their importance to the China s economy those SOEs in key sectors remain under total state ownership. enerally speaking, sectors that are either natural monopolies, or in upstream industries, are less liberalized, and enterprises in these sectors are more subject to government interventions. On the other hand, manufacturing sectors, especially consumer goods manufacturing sectors, are more competitive; and enterprises in these industries are more market oriented (Chai and Docwra, 1997). The changes in the operations of Chinese SOEs caused by the economic reforms have resulted from: (a) organizational change within firms (e.g. new departments integrating with new operations) (uthrie, 1997); (b) cultural change within the firm; and, (c) external environmental change (e.g. socio-economic, political environmental, increased competition). These changes manifest the role of entrepreneurship in institutional innovations (Holt, 1997). More importantly, they provide increased opportunities for SOEs to undertake entrepreneurial activities. In the United States a discussion on the feasibility and effectiveness of entrepreneurial management in the public sector, and state-owned enterprises that are in transition, has emerged (Bruce, 1995; Osborne and aebler, 1992). The transitional state entails organizational change-expansion and/or consolidation. To be successful, China s SOEs will be compelled to be innovative in their business development (Jefferson and Rawski, 1994). Rather than opting for the conventional (and hence the familiar or the comfortable ), SOE managers will have to be willing to assume risks, be proactive, and be market oriented. The organization itself requires transformation through a series of learning behaviors to become a market-oriented enterprise (Day, 1991; arvin, 1993; Slater and Narver, 1994). Therefore an interesting research question is to understand how senior Chinese SOE managers perceive their organisations as being market-oriented learning organization. 140

4 A FRAMEWORK FOR ANALYZIN MARKET-ORIENTED ORANIZATION Due to its significant managerial relevance market orientation has been studied extensively (Deshpande and Farley, 1998). There have been empirical measurements of market orientation developed by a number of scholars (Narver and Slater 1990; Kohli, Jaworski, and Kumar 1993; and Deshpande, Farley, and Webster 1993) both from the perspective of organizational culture and from the perspective of it being a set of processes and activities. Whilst some consider market information generation and dissemination along with institutional responsiveness to the information as important dimensions of market orientation (Kohli and Jaworski, 1990; Kohli, Jaworski and Kumar, 1993), others focus more on customer-oriented aspects of market orientation (Deshpande, Farley, and Webster, 1993; Deshpande and Farley, 1998). Narver and Slater (1990) argue, on the other hand, that market orientation, complemented by an entrepreneurial drive, provides the cultural foundation for organizational learning. Sinkula et al. (1997) proposed a framework for market-based organizational learning to link values, knowledge, and behaviors. The synergistic effect of organizational values and market information processing behaviors resulting in organizational actions. They identify commitment to learning, open-mindedness, and shared vision as the core facilitators of the phenomenon of organizational learning. The market information processing behaviors, on the other hand, they borrow Kohli and Jaworski s (1990) assertion of market orientation, namely market information generation and dissemination. As learning may be affecting the dynamism of new product development (improvement) without affecting market performance, according to Sinkula et al. (1997:307), organizational actions are accounted for through changes in organization s product/brand mix, sales strategies, and sales promotion/advertising strategies. Deshpande, Farley, and Webster (1993) indicate in their study that marketand entrepreneurial-oriented cultures outperform those that are more internally or hierarchically oriented. Morris and Paul (1987) also determine that more entrepreneurial firms have an enhanced marketing orientation and that the marketing function provides an effective vehicle to achieve innovative activities. Entrepreneurship has been characterized as a multidimensional concept (Miller, 1983) or a process of risk taking, innovativeness, and proactiveness - (Covin and Slevin, 1991; Morris and Paul, 1987). Some scholars have noted that the central idea underlying entrepreneurship is entering new or established markets with new or existing 141

5 products (Slater and Narver 1995; Hurley and Hult 1998). Others (e.g., Burgelman, 1985; artner, 1985; Sexton and Smilor, 1986) consider entrepreneurship to be an important characteristic of the strategic planning process that helps the larger and more established organisation, itself in transition, to adapt to change. Hurley and Hult (1998) argue that Slater and Narver s (1995) model of market orientation, learning orientation, innovativeness, and innovative capacity, in effect, concerns itself with those very organizational properties that affect the innovation process. Therefore, their study identifies innovation and organizational culture as important constructs for studies that attempt to understand the process of organizational adaptation, responsiveness, and performance. They concur with Deshpande, Farley, and Webster (1993) in that organizational innovativeness is important for understanding market orientation and organizational learning, and that the relationships should be explored in the context of culture. A further study by Baker and Sinkula (1999) based on the framework of Sinkula et al. (1997), discovered that levels of market orientation and learning orientation, and the combination of the two, may determine the extent to which the innovation is a success or failure. In addition, they stipulated that an entrepreneurial oriented organization promotes generative learning. There has not been, however, a study that interrelates organizational values, market orientation (from both the cultural and processes/activities perspectives), entrepreneurial orientation, and innovation and learning. The present study therefore not only proposes a framework for marketoriented organizational learning (as shown in Exhibit Two) but also attempts to investigate this interrelationship along with empirically testing the construct within the context of Chinese SOEs. METHOD Sample A structured questionnaire was administered to managers in major SOEs and/or their joint venture companies in the economic zones in China. A total of 304 questionnaires were returned and valid for analysis. The profile of subjects is shown in Exhibit Three. The most common industries that the 142

6 respondents worked in were manufacturing and services, consisting of 52.6 percent and 26 percent, respectively. But the majority of the companies have 500 or fewer employees, which constitutes 57 percent of the total sample. EXHIBIT TWO: A FRAMEWORK FOR MARKET-ORIENTED LEARNIN ORANIZATION Commitment to Learning Openmindedness Shared Vision and Experience Learning Orientation Customer Orientation Information eneration Information Dissemination Entrepreneurial Orientation Innovativeness Marketing Program Dynamism 143

7 EXHIBIT THREE: PROFILE OF RESPONDENTS Characteristics Employee Numbers Industry* Target Customers* Position of the Individual* Sources for Marketing Knowledge* 50 and less ,000 1,001-5,000 5,000 and greater than Manufacturing Distribution Retailing Services Construction More than one End Users Business/Organizations Middlemen End Users/Business End Users/Middlemen Business/Middlemen All Marketing Manager Senior Management Owner/CEO Others Business Experience Formal Business Education Training Seminars Experience/Education Experience/Seminars Education/Seminars All None % * The total does not add up to 100% due to missing values In general, Chinese SOEs have multiple layers of managers. At the apex is the core group of decision-makers (i.e. chief executive officer, president and chief financial officer). Immediately below these individuals is senior management (e.g. plant manager). Next are employees (or associates, as they are called). The core group, along with senior managers, rather than front-line managers, tends to play the key role in SOE entrepreneurship and the core group s entrepreneurial philosophy has an impact on initiating the 144

8 entrepreneurial process for the SOE (Liu et al., 2000). Therefore, it would be appropriate to sample subjects in the upper to high organizational level across different industries (Sinkula et al. 1997) percent of the subjects hold a senior position in the hierarchy. Among the respondents, 52.1 percent of them acquired marketing knowledge from their own business experience. Measures The market-based organizational learning framework of Sinkula et al. (1997) was adopted (see Exhibit Four). An organization s commitment to learn, shared vision, and open-mindedness are treated as first-order indicators of the second-order construct, namely learning orientation. Each of these first-order constructs was operationalized using a 7-point Likert scale ranging from strongly agree (7) to strongly disagree (1) instead of 5- point due to the finding of positive relationship existing between the number of scale points and reliability (Churchill and Peter 1984). Instrument EXHIBIT FOUR: THE SOURCES OF THE RESEARCH INSTRUMENT Number of items Alpha Market-Based Organizational Learning (Sinkula, Baker, 5-categories >0.8 and Noordewier 1997) 17-item scale Market Orientation Deshpande and Farley (1998) 10-item scale 0.88 Entrepreneurial Orientation Smart and Conant (1994) 6-item scale 0.84 Learning and Innovation (Hurley and Hult 1998) 7-item Not reported The constructs of Market Information eneration and Market Information Dissemination as Sinkula et al. (1997) were, in fact, Kohli and Jaworski s (1990) assertion of market orientation. They utilize 7-point Likert scales to assess the generation of market intelligence on current and future customer needs and the dissemination of intelligence across the organization. The construct of market orientation is expanded by including Deshparde and Farley s (1998) focus on customer orientation so as to conceptualize market orientation as an aspect of organizational culture, which was integrated in the research on market and learning orientations with innovation (Hurley and Hult 1998). 145

9 As innovation also has been a commonly recognised dimension of entrepreneurship (Covin and Slevin, 1991; Morris and Paul, 1987), the present study included Smart and Conant s (1994) scale for measuring entrepreneurial orientation to capture the dynamic process in dimensions of risk-taking and proactiveness, in addition to innovation (Covin and Slevin 1989). Exhibit Four details the instruments that are incorporated in the present study, namely organizational learning (Sinkula et al. 1997); market orientation from both behavioral (intelligence generation and dissemination) and cultural (customer-orientation) aspects (Deshpande and Farley 1998); entrepreneurial orientation (Smart and Conant 1994); and learning and innovation (Hurley and Hult 1998). The questionnaire for the study was compiled with all the items in the above-mentioned instruments (see Exhibit Five) and was translated into Chinese with back translation to ensure accurate reflection of the original meanings in the Chinese context. EXHIBIT FIVE: VARIABLES REPRESENTIN ORANIZATIONS BELIEFS A Commitment to learning (Sinkula et al.1997) Managers basically agree that our organization s ability to learn new knowledge and /or skills is the key to our competitive advantage The basic values of this organization include learning as key to improvement The sense around here is that employee learning is an investment, not an expense Learning in my organization is seen as a key commodity necessary to guarantee organizational survival Shared vision and purpose (Sinkula et al.1997) There is a commonality of purpose in my organization There is a total agreement on our organizational vision across all levels, functions, and divisions All employees are committed to the goals of this organization Employees view themselves as partners in charting the direction of the organization Open-mindedness (Sinkula et al.1997) We are not afraid to reflect critically on the shared assumptions we have made about our customers Personnel in this enterprise realize that the very way they perceive the marketplace must be continually questioned We rarely collectively question our own biases about the way we interpret customer information b Market information generation (Sinkula et al.1997) We do a lot of in-house market research We often talk with or survey those who can influence our end users purchases (e.g. retailers, distributors) We periodically review the likely effect of changes in our business environment (e.g. regulation) on customers 146

10 Market information dissemination (Sinkula et al.1997) Marketing personnel spend time discussing customers future needs with other functional departments There is minimal communication between marketing and other departments concerning market developments b When one department finds out something important about customers, it is slow to alert other departments b Marketing Orientation (Deshpande and Farley 1998) Our business objectives are driven primarily by customer satisfaction We constantly monitor our level of commitment and orientation to serving customer needs We freely communicate information about our successful and unsuccessful customer experiences across all business functions Our strategy for competitive advantage is based on our understanding of customers needs We measure customer satisfaction systematically and frequently We have routine or regular measures of customer needs We are more customer-focused than our competitors I believe this business exists primarily to serve customers We poll end users at least once a year to assess the quality of our products and services Data on customer satisfaction are disseminated at all levels in this business unit on a regular basis Entrepreneurial orientation (Smart and Conant 1994) Relative to our competitors, our company has higher propensity to take risks Relative to our competitors, our company has higher tendency to engage in strategic planning activities Relative to our competitors, our company has higher ability to identify customer needs and wants Relative to our competitors, our company has higher level of innovation Relative to our competitors, our company has higher ability to persevere in making our vision of the business a reality Relative to our competitors, our company has higher ability to identify new opportunities Learning and innovation (Hurley and Hult 1998) Notes: Our organization provides opportunities for individual development other than formal training (i.e. work assignments and job rotation) Our organization encourages managers to attend formal developmental activities such as training, professional seminars, symposia, etc. Technical innovation, based on research results, is readily accepted Management actively seeks innovative ideas Innovation is readily accepted in program/project management People are penalized for new ideas that don t work b Innovation is perceived as too risky and is resisted b A Operationalized as a 7-point scale as follows: 1- strongly disagree to 7 strongly agree; b Reversely coded 147

11 A separate factor analysis (using varimax rotation) was employed to determine the underlying dimensions of the total 40 items. The scree test criterion was utilized to ascertain the number of extracted factors for each sub-sample (Cattell, 1996). An item was assigned to a factor if its factor loading was at least 0.4, as suggested by Hair et al. (1998). If the item cross-loaded on at least two factors, it was eliminated from subsequent analyses. Coefficient alpha was computed to discern the reliability of each dimension. RESULTS AND DISCUSSION Factor analysis was employed and the 40 items was subsumed by eight factors (Exhibit Six). They are customer orientation (coefficient alpha = 0.88), entrepreneurial orientation (alpha = 0.86), shared vision and experience (alpha = 0.82), commitment to learning (alpha = 0.84); learning management (alpha = 0.65); Intelligence sharing (alpha = 0.62); market sensing (alpha = 0.69); and innovativeness (alpha = 0.64). The first four factors listed in Exhibit Six basically confirm the corresponding constructs adopted from the previous studies. The factor of entrepreneurial orientation completely matches Smart and Conant s (1994) construct for entrepreneurial orientation. The factors of commitment to learning and shared vision and experience basically confirm Sinkula s (1997) first-order indicators for the latent construct of learning orientation, but including an additional item from Hurley and Hult s (1998) learning and innovation and two items from Deshpande and Farley s (1998) marketing orientation, respectively. A factor is named customer orientation to reflect Deshpande and Farley s (1998) more customer oriented marketing orientation construct. In addition, it includes one indicator for market information dissemination (Sinkula et al. 1997) and one for learning and innovation (Hurley and Hult 1998). The additional indicators for the first four factors are highlighted in Exhibit Six. The factors learning management, intelligence sharing, and market sensing are less reliable and more of combinations of the first-order indicators for constructs of the previous studies, namely: learning and innovation and market information generation ; market information dissemination and open-mindedness ; open-mindedness and market information generation, respectively. On the other hand, innovativeness comprises only two out of the total seven items from Hurley and Hult s (1998) learning and innovation. 148

12 FACTOR Item EXHBIT SIX: FACTOR STRUCTURE Kaiser-Meyer-Olkin Measures of Sampling Adequacy = Bartlett s Test of Sphercity (Chi-square = ; df = 780; p = 0.000) Total variance explained = % Factor Loading Perecentage Variance Explained Reliability 1: CUSTOMER ORIENTATION We have routine or regular measures of customer needs.778 We measure customer satisfaction systematically and frequently.693 Our strategy for competitive advantage is based on our understanding of.667 customers needs Data on customer satisfaction are disseminated at all levels in this business.644 unit on a regular basis We poll end users at least once a year to assess the quality of our products.631 and services We are more customer-focused than our competitors.605 INNOVATION IS READILY ACCEPTED IN PRORAM/PROJECT.525 MANAEMENT Our business objectives are driven primarily by customer satisfaction.478 Marketing personnel spend time discussing customers future needs with.431 other functional departments a I believe this business exists primarily to serve customers.401 2: ENTREPRENEURIAL ORIENTATION Relative to our competitors our company. has higher level of innovation.767 has higher tendency to engage in strategic planning activities.698 has higher ability to identify customer needs and wants.691 has higher ability to identify new opportunities.683 has higher ability to persevere in making our vision of the business a reality.651 has higher propensity to take risks : SHARED VISION AND EXPERIENCE There is a total agreement on our organizational vision across all levels,.732 functions, & divisions All employees are committed to the goals of this organization.695 There is a commonality of purpose in my organization.596 WE FREELY COMMUNICATE INFORMATION ABOUT OUR.522 SUCCESSFUL AND UNSUCCESSFUL CUSTOMER EXPERIENCES ACROSS ALL BUSINESS FUNCTIONS WE CONSTANTLY MONITOR OUR LEVEL OF COMMITMENT AND.507 ORIENTATION TO SERVIN CUSTOMER NEEDS A Employees view themselves as partners in charting the direction of the.478 organization 149

13 4: COMMITMENT TO LEARNIN The basic values of this organization include learning as key to improvement.812 Managers basically agree that our organization s ability to learn new knowledge and /or skills is the key to our competitive advantage The sense around here is that employee learning is an investment, not an expense Learning in my organization is seen as a key commodity necessary to guarantee organizational survival OUR ORANIZATION PROVIDES OPPORTUNITIES FOR INDIVIDUAL DEVELOPMENT OTHER THAN FORMAL TRAININ (I.E. WORK ASSINMENTS AND JOB ROTATION) A 5: LEARNIN MANAEMENT OUR ORANIZATION ENCOURAES MANAERS TO ATTEND.567 FORMAL DEVELOPMENTAL ACTIVITIES SUCH AS TRAININ, PROFESSIONAL SEMINARS, SYMPOSIA, ETC. We do a lot of in-house market research 518 TECHNICAL INNOVATION, BASED ON RESEARCH RESULTS, IS READILY ACCEPTED A MANAEMENT ACTIVELY SEEKS INNOVATIVE IDEAS A.399 6: INTELLIENCE SHARIN When one department finds out something important about customers, it is.730 slow to alert other departments b We rarely collectively question our own biases about the way we interpret.657 customer information b There is minimal communication between marketing and other departments.633 concerning market developments b 7: MARKET SENSIN We are not afraid to reflect critically on the shared assumptions we have made about our customers Personnel in this enterprise realize that the very way they perceive the marketplace must be continually questioned We often talk with or survey those who can influence our end users purchases (e.g. retailers, distributors) We periodically review the likely effect of changes in our business environment (e.g. regulation) on customers 8: INNOVATIVENESS PEOPLE ARE PENALIZED FOR NEW IDEAS THAT DON T WORK B.761 INNOVATION IS PERCEIVED AS TOO RISKY AND IS RESISTED B NOTES: a The item was eliminated in the subsequent analysis because it is cross-loaded. b Reversely coded UPPER-CASE NORMAL TYPE INDICATES LEARNIN AND INNOVATION (HURLEY AND HULT 1998). Lower-case underlined Indicates market information dissemination (Sinkula et al. 1997). UPPER CASE ITALICS INDICATES MARKETIN ORIENTATION (DESHPANDE AND FARLEY 1998). Lower-case italics indicates market information generation (Sinkula et al. 1997). 150

14 With reference to the framework for market-oriented learning organization as shown in Exhibit One, these findings suggest that the constructs of customer orientation and entrepreneurial orientation may be reflected in the Chinese SOEs context with confidence. The construct of learning orientation has only commitment to learning and shared vision and experience factors confirmed in the Chinese context. Exhibit Seven depicts the proposed structural constructs for a market-oriented learning organization and their relations in the Chinese SOEs context. EXHIBIT SEVEN: PROPOSED STRUCTURAL CONSTRUCTS AND THEIR RELATIONSHIPS Commitment to Learning Learning Management Shared Vision and Experience Learning Orientation Entrepreneurial Orientation? Market Sensing Intelligence Sharing Innovativeness Customer Orientation Marketing Program Dynamism Different from the original constructs, the latent variable of learning orientation is represented by commitment to learning, shared vision and experience and learning management, which is varied from Open- 151

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