How does strategic orientation matter in Chinese firms

How does strategic orientation matter in Chinese firms?

Kevin Zheng Zhou & Caroline Bingxin Li

Published online: 11 May 2007# Springer Science + Business Media, LLC 2007

Abstract As China continues to transition toward a market economy, how strategicorientation affects firm performance has received significant attention. This articlereviews the extant literature with a framework that depicts contemporary work onstrategic orientation, the drivers of strategic orientation, and its boundary conditions.We identify important research gaps and propose to integrate institutional theory,dynamic capability perspective, and the knowledge-based view within the strategicorientation research stream for future investigations.

Keywords Strategic orientation . China . Emerging economy

In the past decade, China increasingly has been integrated into the world economy ata stunning pace. It has become one of the largest recipients of foreign directinvestment and the fourth largest economy in the world after only the United States,Japan, and Germany (World Bank, 2006). Concurrent with this integration process,China has been undertaking unprecedented economic, political, and social trans-formations in its transition toward a market economy (Peng, 2005). Its rapiddevelopment and drastic changes provide great opportunities but also raise seriousstrategic problems for firms operating in China (Hoskisson, Eden, Lau, & Wright,2000; Quer, Claver, & Rienda, 2007; Zhou, Tse, & Li, 2006).

Asia Pacific J Manage (2007) 24:447–466DOI 10.1007/s10490-007-9048-1

This paper was supported by a grant from the Faculty of Business and Economic (Research Funding withFudan University), The University of Hong Kong. The authors thank Editor-in-Chief Mike Peng for hisinvaluable comments on previous versions of the article.

K. Z. Zhou (*) : C. B. LiSchool of Business, The University of Hong Kong, Pokfulam, Hong Konge-mail: [email protected]

C. B. Lie-mail: [email protected]

To face the challenges, many scholars suggest that companies should turn tonetwork-based strategies based on managerial ties. With a history of more than5,000 years, managerial ties are central to commerce in China in that they helpcompanies gain scarce resources, foster firm growth, and achieve superiorperformance (Bartjargal & Liu, 2004; Peng & Luo, 2000; Xin & Pearce, 1996).More recently, however, some researchers posit that despite the prevalent use of ties,its role is likely to decline as the Chinese economy becomes increasingly market-oriented (Peng, 2003). Consistent with this logic, Li, Poppo, and Zhou (2007) findthat managerial ties are less effective in enhancing performance in conditions ofintensified competition. Therefore, to survive the competition in this fast-changingmarket, companies should develop market-based strategies centered on strategicorientation (SO) to guide their behaviors and activities (Peng, 2003; Zhou, Yim, &Tse, 2005b).

So how does SO matter in Chinese firms? In particular, how does SO affect firmperformance? What are its major drivers? And what are its contingency effects?Attracted by these intriguing issues, researchers have devoted great attention andefforts to understanding the role of SO in China. SO, defined as a firm’s strategicdirection to create proper behaviors to interact with the market (Gatignon & Xuereb,1997), provides a critical means for firms to survive and prosper in the competitiveChinese market (e.g., Gao, Zhou, & Yim, 2007; Li, 2005; Lin & Germain, 2003;Zhou et al., 2005b). Such efforts greatly improve our understanding of SO andrelated competitive dynamics for both domestic and foreign firms operating in thehuge Chinese market.

In this article, we review extant SO literature in China to develop a conceptualframework that depicts contemporary work and identifies potential researchquestions for further study. We first examine various dimensions of SO, itsperformance implications, its drivers, and the contingent conditions that surroundthe effects of SO. On the basis of extant research, we identify important researchgaps and propose some directions for future investigations. Through these efforts,we attempt to bring together emerging and important questions in this area andprompt more researchers to engage in this fascinating research.

Contemporary work

Consistent with Peng (2006), we view the drivers of strategy as consisting of threealternative perspectives: industry-based (i.e., competitive forces), resource-based(e.g., firm-specific resources and capabilities), and institution-based (e.g., policies,regulations). Accordingly, we develop a framework that depicts alternative drivers ofSO, the processes by which SO affect performance, and the moderators of theserelationships (see Figure 1).

Strategic orientation

Existing SO studies emerge from two distinct research streams: strategic manage-ment and strategic marketing, each of which has a set of typology. The strategic

448 K.Z. Zhou, C.B. Li

management stream follows Miles and Snow’s (1978) traditional typology toconceptualize SO in terms of reactors, defenders, analyzers, and prospectors (Luo &Park, 2001; Peng, Tan, & Tong, 2004; Tan & Tan, 2005). Whereas reactors lack aconsistent strategy, defenders endeavor to serve stable and narrow product or marketdomains that contain a particular customer group and established structure. Incontrast, prospectors focus on innovation and change and strive to compete primarilyby stimulating new market opportunities and grabbing emerging trends andtechnologies. Defenders and prospectors reside at opposite ends of a continuum ofstrategic proactiveness, and analyzers fall in the middle as unique combinations ofthe prospector and defender orientations. With this typology, Luo and Park (2001)report that an analyzer orientation leads to better performance than prospector ordefender orientations, possibly because it aligns better with the rapidly changingChinese market. Peng et al. (2004) examine the role of ownership as a significantpredictor of strategic orientation adoption and find that foreign-invested andcollective-owned enterprises tend to adopt an analyzer orientation, whereas state-and privately owned enterprises prefer defender and prospector strategies,respectively.

The strategic marketing stream emerges from the vibrant market orientationliterature, originally developed by Kohli and Jaworski (1990) and Narver and Slater(1990), and further refined by Gatignon and Xuereb (1997), Noble, Sinha, andKumar (2002), and Zhou et al. (2005b). From this stream, SO includes (1) market(customer and competitor) orientation, (2) technology orientation, (3) entrepreneurialorientation, (4) production orientation, and (5) selling orientation. Among variousdimensions, market, technology, and entrepreneurial orientations have receivedconsiderable attention, whereas little effort has paid to production and sellingorientations. We therefore leave the discussion of production and selling orientationsto the Section of “Future Research Directions.”

Market orientation is defined as an aspect of corporate culture that places thehighest priority on the superior customer value creation and delivery (Narver &Slater, 1990). It includes two pivotal subdimensions: customer and competitororientations. To create superior customer value continuously, customer orientation

Strategic Orientation

Market orientation (e.g., customer and/or competitor orientation)

Technology orientation

Entrepreneurship orientation

Competence DeploymentExploitation/exploration InnovationRadical innovation Incremental innovation Organizational Learning

Firm PerformanceSales growth, Profitability Market share Innovation PerformanceInnovativeness New product performance Employee outcomesJob satisfaction Organizational commitment

Environmental factorsMarket turbulence Technological turbulence Organizational factors Interfunctional coordination Leader charisma Globalization activities

Environmental factorsMarket turbulence Technological turbulence

Organizational factorsOrganizational structure Organizational culture Leadership

Institutional factorsGovernment interference Corporate governance

Figure 1 Conceptual framework of existing studies

How does strategic orientation matter in Chinese firms? 449

emphasizes the role of sufficiently understanding one’s target customers, whereascompetitor orientation focuses on the monitoring and matching of competitors’strategic initiatives promptly based on a thorough understanding of their strengthsand weaknesses (Narver & Slater, 1990). Most studies pertaining to China treatsmarket orientation as including both customer and competitor orientations(Deshpandé & Farley, 2004; Li, 2005; Li, Sun, & Liu, 2006), while some focuson customer orientation because they view the basic tenet of market orientation is toput the customers first (Lin & Germain, 2003; Liu, Luo, & Shi, 2002). More recentlyhowever, Gao et al. (2007) emphasize that customer and competition orientations aredistinct and behave differently in emerging economies. Zhou et al. (2005b) evencaution that an overemphasis on customers could lead to strategic shortsightednessand market myopia.

A technology (or innovation) orientation suggests that consumers prefertechnologically superior products and services. With the rapid diffusion of newtechnologies in China, firms face great pressure to strengthen and update theirtechnological base to improve their competitive advantage. As a result of suchmanagerial imperatives, prior studies, particularly in new product development andinnovation literature, document an enduring interest in examining technologyorientation as a crucial SO for firm success in China (e.g., Jeong, Pae, & Zhou,2006; Zhou, Gao, Yang, & Zhou, 2005a; Zhou et al., 2005b).

In the dynamic Chinese economy, many new firms are innately entrepreneurial(Peng, 2003). Because an entrepreneurial orientation promotes the renewal ofexisting practices and the pursuit of new opportunities, it is quite appealing toChinese firms that aim to reject ongoing practices, rejuvenate themselves, anddistinguish themselves in the highly turbulent market. As a result, entrepreneurialorientation also has gained substantial interest among SO researchers in China (e.g.,Li, 2005; Liu et al., 2002; Zhou et al., 2005b).

The connection between strategic management and marketing typologies Althoughdifferent, the two major typologies are closely related. For example, firms that use acompetitor orientation, and therefore attempt to pit their strengths against theirrivals’ weaknesses, share many commonalities with analyzers. Technology- andentrepreneurial-oriented firms, with their inherent needs for state-of-art technologyand market opportunities, possess a similar nature to that of prospectors. A customerorientation, which strives to serve customers, shares similar characteristics with theconcepts of prospectors and analyzers. Despite its significance, Miles and Snow’s(1978) typology has some limitations for both research and practice. The reactor,defender, analyzer, and prospector classification lacks clear boundaries, so theanalyzer domain often overlaps with the prospector and defender areas. Thisproblem makes it difficult to classify enterprises and draw implications for businesspractice. In contrast, the strategic marketing typology such as market orientation andtechnology orientation more clearly defines the domain of focal interest and therebyprovides more concrete guidance. Moreover, Miles and Snow’s typology is well-established, whereas the strategic marketing typology is still evolving and generateshot debate and controversy (see Hult, Ketchen, & Slater, 2005 for example).Therefore, we provide a review of studies pertaining to both typologies in Table 1and adopt the strategic marketing typology in the following discussion.

450 K.Z. Zhou, C.B. Li

Tab

le1

Sum

maryof

SO

stud

iesin

China.

Study

&sample

Dependent

variables

Independentvariables

Major

findings

a.Strategicman

agem

enttypo

logy:ba

sedon

Milesan

dSn

ow(197

8)

Luk

asetal.(20

01)36

0Chinese

electronic

firm

sPerform

ance;Strategic

orientation

(prospectiv

eandprotectiv

e)Environmentd

ynam

ism

andhostility;S

trategic

orientation(prospectiv

eandprotectiv

e)A

strategicorientationismoreprospectivein

conditionsof

lower

environm

entaldynamism

and

hostility;andismoreprotectiv

ewhenthe

environm

entishigh

lydy

namic

andho

stile.

Environment-strategy

coalignm

enthasmixed

performance

implications

forfirm

sop

eratingin

China’stransitio

naleconom

y.Luo

andPark(200

1)113MNC

subsidiaries

Perform

ance

Strategic

orientation:

defender,analyzer,and

prospector

Analyzerisview

edas

theappropriatestrategic

orientationformarket-seekingforeignsubsidiaries

inChina’shighly

complex

anddynamic

market.

The

prospector

anddefend

erorientations

lead

topoor

financialp

erform

ance

becausethey

mismatch

with

China’smarket.

Luo

(200

1)12

9IJVs.

MNE’smarketsharein

IJV

Proactiv

enessandFuturity

Amoreproactiveor

future

oriented

IJVrequires

ahigh

erequity

shareof

theMNEin

anIJV.

ParkandLuo

(200

1)12

8firm

sin

centralChina

Guanx

inetwork

Prospector,Ownershipstructure,

Organizationalfactors

Prospectors

aremorelik

elyto

utilize

aguanxi

network,

andminim

izeuncertaintiesandsecure

necessaryinpu

tsthroug

hagu

anxi

networkto

deal

with

competitiveforces

andgovernmentofficials

inthehigh

lyun

certainenvironm

ent.

Pengetal.(20

04)20

1firm

s(56

SOEs,53

POEs,41

COEs,and

51FIEs)

intheChinese

electronicsindustry.

Defender,analyzer,andprospector

Ownershiptype:state-ow

nedenterprises

(SOEs),Privately-ownedenterprise

(POEs),

Collectively-ow

nedenterprise

(COEs),

Foreign-investedenterprise

(FIEs).

SOEsareless

willingto

take

risk,less

proactive,

andless

aggressive,indicatin

gastrong

defender

orientation.

POEsaremorewillingto

take

risk,m

oreproactive,

andmoreaggressive,indicatin

gaprospector

profile.

COEsandFIEstend

tofallbetweenon

the

continuum,indicatin

gaanalyzer

strategy.

Benedetto

andSong(200

3)24

5Inside–out

capability,

outside–in

Prospector,analyzer,anddefend

erProspectors

have

sign

ificantly

high

errelativ

e

How does strategic orientation matter in Chinese firms? 451

Tab

le1

(con

tinued)

Study

&sample

Dependent

variables

Independentvariables

Major

findings

Chinese

firm

scapability,

marketin

gcapability,

inform

ationtechnology

capabilities

inside–out

andinform

ationtechno

logy

capabilities

than

analyzer

anddefender.

Defenders

have

thegreatestrelativ

estrengthsin

marketin

gandoutside–in

capabilities.

TanandTan(200

5)To

pmanagersfrom

104Chinese

firm

s

Perform

ance

Strategic

orientations:Futurity,Proactiv

eness,

riskiness,andanalyses;Environmentalfactors

Managersin

SOEsaremorewillingnessto

make

proactive,

innovativ

e,andrisk-orienteddecisions

in2002,com

paredwith

thefirststage

ofreform

in19

90.

Firm

historymoderatelytheim

pact

ofstrategic

orientations

onperformance.

Dav

iesan

dKo(200

6)36

6HongKong-basedelectronics

firm

s

Perform

ance

Prospector(environmentalscanning),

Techno

logy

strategy,Im

itatio

nProspector(environmentalscanning)hasapositiv

eim

pact

onperformance.

Process

inno

vatio

nhasapo

sitiv

eim

pact

onperformance.

Imitatio

nhasanegativ

eim

pact

onperformance.

b.Strategicmarketin

gtypology:ba

sedon

Narveran

dSlater

(199

0),Gatigno

nan

dXuereb(199

7),Noble

etal.(200

2),an

dZho

uet

al.(200

5b)

Deshpandé

andFarley(200

0)10

0Shang

hai-based

companies

Perform

ance

Marketorientation,

innovativ

eness,

Organizationalclim

ate,

Firmswith

higher

marketorientationand

inno

vativ

enessperform

better.

Firmswith

morecompetitiveandentrepreneurial

cultu

resoutperform

firm

swith

bureaucratic

and

consensual

cultu

res.

Liu

etal.(200

2)30

4SOEsand

theirjointventures

companies

inChina

Organizationalou

tcom

e(M

arketin

gprogram

dynamism)

Customer

orientation,

Corporate

entrepreneurship,Learningorientation,

Firm

ownership

Learningorientationpartially

mediatestheeffectof

custom

erorientationon

outcom

eandfully

mediatestheeffect

ofcorporateentrepreneurship

onorganizatio

nalou

tcom

e.A

stronger

custom

erorientation,

corporate

entrepreneurship,or

learning

orientationhas

stronger

impactson

organizatio

naloutcom

efor

state-ow

nedenterprises.

452 K.Z. Zhou, C.B. Li

Tab

le1

(con

tinued)

Study

&sample

Dependent

variables

Independentvariables

Major

findings

Lin

andGermain(200

3)20

5industrial

SOEs

Customer

orientation,

performance

Organizationalstructure:

form

alizationand

decentralization

Formal

controlispo

sitiv

elyrelatedto

custom

erorientation.

Decentralizationisnegativ

elyrelated

tocustom

erorientation.

The

higher

thedecentralizationlevel,thestronger

therelatio

nshipbetweenform

alcontroland

custom

erorientation.

Deshpandé

andFarley(200

4)30

9firm

sfrom

sixChinese

cities

Perform

ance:profitability,

size,market

share,

grow

thMarketorientation,

Innovativ

eness

Marketorientationandinnovativ

enessboth

have

positiv

eeffectson

performance.Inno

vativ

enessis

moreim

portantin

theindustrial

world;market

orientationismoreim

portantin

theindustrializing

world.

Deshpandé

etal.(200

4)54

6Asian

firm

sfrom

China,Hon

gKon

g,Japan,

Thailand

,India,

andVietnam

Perform

ance

Marketorientation,

Innovativ

eness,

Organizationalcultu

re,O

rganizationalclim

ate

There

isno

significantdifference

across

firm

sacross

sixAsian

countriesof

how

market

orientation,

innovativ

eness,organizatio

nalcultu

reandclim

ateaffect

business

performance.

Chinese

firm

sin

Shang

haireflecthigh

estlevelsof

marketorientationcomparedto

firm

from

other

five

coun

tries.

Atuahene-Gim

a(200

5)22

7high

-techfirm

slocatedin

Guang

dong

Province

Com

petenceexploitatio

nand

exploration,

Increm

entalinnovatio

nandradicalinno

vatio

n

Customer

orientation,

Com

petitor

orientation

Customer

andcompetitor

orientations

positiv

ely

affect

competenceexplorationandexploitatio

n.

The

effectsof

custom

erandcompetitor

orientations

oncompetenceexplorationarepo

sitiv

ely

moderated

byinterfunctionalcoordinatio

n.Li(200

5)18

1foreign-invested

enterprises(FIEs).

Networkbu

ilding:

tieswith

government,tieswith

business;Firm

performance

Marketorientation,

Technology

orientation,

Entrepreneurial

orientation

Marketorientationpositiv

elyaffectsboth

typesof

networkbu

ilding.

Technology-orientedfirm

saremorelik

elyto

cultivate

managerialtieswith

topmanagersat

otherfirm

s.Entrepreneurial

firm

saremorelik

ely

todevelopvertical

networks

with

government

officials.

Com

petitiveintensity

moderates

therelatio

nships

betweenstrategicorientations

andmanagerialties.

Luo

etal.(200

5a)23

3firm

sin

variou

secon

omic

zones.

Firm

performance

Marketorientation,

Entrepreneurship

orientation,

Innovativ

ecapacity

Globalpartnershipandglobal

market-seeking

activ

ities

strengthen

marketorientation-sales

How does strategic orientation matter in Chinese firms? 453

Tab

le1

(con

tinued)

Study

&sample

Dependent

variables

Independentvariables

Major

findings

grow

thlin

k.The

relatio

nshipbetween

entrepreneurship

andperformance

isstrengthened

byglob

alprod

uctsourcing

,bu

tweakenedby

global

partnership.

Luo

etal.(200

5b)mangers

from

218firm

s.Corpo

rate

Entrepreneurship,

Perform

ance

Internationalization,

Ownershiptype,F

irm

size

andage,

Customer

orientation

Internationalization,

firm

size

andage,

andmarket

orientationallhave

impactson

thepracticeof

corporateentrepreneurship,andthereby

contributesto

superior

performance.

Zhouet

al.(200

5a)18

0manufacturing

firm

sMarketorientation,

Innovatio

norientation;

Employee

outcom

es:job

satisfaction,

employee

commitm

ent,

andconfidence

infirm

future

Organizationalgroupcultu

re,Managerial

attitudetowards

change

Marketorientations

positiv

elyrelatedto

employ

ees’

jobsatisfaction,

organizatio

nal

commitm

ent,andconfidence

infirm

future

performance.

Managerialattitud

etowardchange

andgrou

pcultu

repositiv

elyim

pact

marketorientations.

Charism

aticleadersstrengthen

theeffectsof

market

orientationon

employee

outcom

es.

Zhouet

al.(200

5b)35

0brands

attheSBU

levelin

consum

erproductcategories.

Breakthroughinnovatio

n:technology-

basedinnovatio

n;market-based

inno

vatio

n

Marketorientation,

Technology

orientation,

Entrepreneurial

orientation;

Marketorientationhasapo

sitiv

eim

pact

ontech-

basedinnovatio

nbuta

negativ

eim

pacton

market-

basedinnovatio

n.A

technology

orientation

positiv

elyaffectstech-based

innovatio

nbutno

effectson

market-basedinnovatio

n.Entrepreneurial

orientationpositiv

elyaffectsboth

market-basedandtech-based

innovatio

ns.

Organizationallearning

partially

mediatedthe

relatio

nshipbetweenstrategicorientationand

breakthrough

innovatio

ns.

454 K.Z. Zhou, C.B. Li

Tab

le1

(con

tinued)

Study

&sample

Dependent

variables

Independentvariables

Major

findings

Jeonget

al.(200

6)23

2manufacturing

firm

s.Strategic

orientation:

custom

erorientationandtechnology

orientation;

NPD

performance

Organizationalsupport,Strategic

orientation:

custom

erorientationandtechnology

orientation

Organizationalsupportpositiv

elyaffectsstrategic

orientationandtherebycontributesto

theproduct

inno

vatio

n.Customer

orientationleadsto

higher

custom

eracceptance,bu

thasalesser

impact

ontechnical

performance.

Techno

logy

orientationhasastrong

positiv

einfluenceon

technicalperformance

and

profitabilityof

newproductswith

aless

significant

impact

oncustom

eracceptance.

Liet

al.(200

6)274SOEs.

Marketorientation;

Perform

ance

Marketcompetitivepressure,Governm

ent

interference,Fo

rmalized

corporategovernance

Marketcompetitivepressure

andform

alized

corporatego

vernance

positiv

elydrivemarket

orientation.

Governm

entinterference

isnegativ

elyrelatedto

marketorientation.

Marketorientationpo

sitiv

elyaffectsperformance.

Zhouet

al.(200

6)18

0manufacturing

firm

s.Techno

logicalchange,Adm

inistrative

change

Marketorientation

Marketorientationispo

sitiv

elyassociated

with

technicalchanges,butnotwith

administrative

changes.

Gao

etal.(200

7)40

8brands

attheSBU

levelin

consum

erproductcategories

Businessperformance

Strategic

orientation:

custom

erorientation,

competitor

orientationandtechnology

orientation

The

positiv

eeffect

ofcustom

erorientationon

performance

turnsto

benegativ

ewhenmarket

demandgetsmoreuncertain.

Asthelevelof

technologicalturbulence

grow

s,the

impact

oftechnology

orientationturnsfrom

negativ

eto

positiv

e.A

higher

competitor

orientationleadsto

better

business

performance,andthispo

sitiv

eeffect

isrobustregardless

ofcompetitiveintensity.

Aboldtypeface

indicatesthat

thearticle

was

publishedin

APJM

.

How does strategic orientation matter in Chinese firms? 455

How does SO matter?

The prevalent practice of network-based strategies (e.g., guanxi) in China has ledmany researchers to pose the question: “Does SO matter in China?” According toexisting empirical evidence, the answer is yes. For example, Deshpandé and Farley(2004) find that a market orientation positively contributes to performance, and theresearch of Li et al. (2006) further supports this positive link between marketorientation and firm performance. Gao et al. (2007) also report that competitororientation has a positive effect on sales growth and technology orientation leads togreater firm profitability. Zhou et al. (2005b) find entrepreneurial orientation to be asignificant driver of firm performance in China. Moreover, research has shown thatmarket and technology orientations foster employee outcomes such as job satisfactionand organizational commitment (Zhou et al., 2005a). The findings of Jeong et al.(2006) indicate that customer and technology orientations enhance innovationperformance, including firm innovativeness and new product performance.

In addition to direct SO–performance relationships, researchers have begun toshow a great interest in the underlying process by which SO affects performance andproposed three sets of mediating variables: competence deployment, organizationallearning, and innovation. Atuahene-Gima (2005) finds that competence explorationfully mediates the relationship between customer/competitor orientation and radicalinnovation performance, whereas competence exploitation and exploration partiallymediate the effects of customer/competitor orientations on incremental innovationperformance. Liu et al. (2002) show the significant mediating effect of organiza-tional learning for customer- or entrepreneurship-oriented firms hoping to achievebetter organizational outcomes. Finally, Zhou et al. (2005b) find a mediating role oforganizational learning between strategic orientation and breakthrough innovation aswell as mediating effects of breakthrough innovation on the strategic orientation-performance relationship.

Drivers of SO

As Peng (2006) suggests, there are three leading perspectives of strategic choices.First, the industry-based view posits strategy is driven primarily by competitiveforces in the industry in which the firm operates (Porter, 1985). Second, theresource-based view proposes that a firm’s unique resources and capacitiesultimately determine its strategy and performance (Barney, 1991). Third, theinstitution-based view has emerged as an influential perspective that explainsstrategic differences, especially in emerging economies, by focusing on the role offormal and informal social rules (Hoskisson et al., 2000; Peng, 2003). Consistentwith this “strategy tripod,” researchers have examined the drivers of SO from theperspectives of environmental factors, organizational variables, and institutionalinfluences.

Environmental drivers The formation of a firm’s strategic orientation is notindependent of the environment in which the firm operates (Gatignon & Xuereb,1997; Kohli & Jaworski, 1990). Prior research suggests that a firm’s strategy andperformance depends significantly on the relative influence of the environmental

456 K.Z. Zhou, C.B. Li

factors that the firm encounters, including market uncertainty and technologicalchange. Because of the turbulent environment in China, external forces exert evengreater pressure on firms’ business activities. For example, Lukas, Tan, and Hult(2001) show that when an environment is less dynamic, firms tend to embrace amore risk-taking, prospective orientation. Jeong et al. (2006) also find that marketturbulence positively reinforces customer orientation, and technological turbulencesignificantly facilitates a technology orientation.

Organizational drivers Extant research has examined organizational drivers in termsof organizational structure, culture, and leadership. Lin and Germain (2003) find thatformalization positively affects market orientation, whereas decentralization nega-tively influences it. Zhou et al. (2005a) show that organizational group culture isbeneficial to developing market and technology orientations. The transitional natureof the Chinese market may make top managers the most influential actors in terms ofstrategy choice. Zhou et al. (2005a) document that top managers’ attitude towardchange fosters market and technology orientations. Jeong et al. (2006) furtherindicate that the support of top management significantly facilitates customer andtechnology orientations.

Institutional drivers The constant changes in social, economic, and culturalinstitutions make institutional factors important drivers of firm strategic formulationand implementation (Hoskisson et al., 2000). Peng (2005) further emphasizes thatinstitutional factors such as laws, regulations, and norms should be treated asindependent variables rather than background conditions in research on emergingeconomies. Despite the importance of this conceptualization, extant research oninstitutional drivers remains limited, with the exception of Li et al. (2006), who findthat government interference obstructs firms’ incentives to be market-oriented,whereas formalized corporate governance (e.g., governance structure, top manage-ment team’s appointment) positively affects market orientation.

Contingency conditions

Following the tradition of the contingency view of strategy, significant efforts haveattempted to identify the boundary conditions of SO. Most research focuses on howenvironmental factors moderate the SO–performance relationships. For example,Gao et al. (2007) report that customer orientation positively affects performance atlow levels of demand uncertainty but negatively affects it at higher levels. Atechnology orientation has a negative effect on performance when technologicalturbulence is low but a positive effect when technological turbulence is high. Lukaset al. (2001) also show that a risk-taking, prospective-oriented strategy is moreinfluential for improved performance when the surrounding environment is lessdynamic or hostile.

Organizational moderating factors in existing research include leader charisma,interfunctional coordination, and globalization activities. Leader charisma strength-ens the positive effects of market and technology orientations on employee jobsatisfaction and organizational commitment (Zhou et al., 2005a). Atuahene-Gima

How does strategic orientation matter in Chinese firms? 457

(2005) shows that interfunctional coordination positively moderates the effects ofcustomer/competitor orientation on competence exploration; moreover, perceivedmarket opportunity exerts positive moderating effects on the strategic orientation–competence exploration relationship. Luo, Sivakumar, and Liu (2005a) find thatglobal partnership and global market-seeking activities by organizations strengthenthe effects of market orientation on sales growth; and global product sourcingbolsters but global partnership weakens the impact of entrepreneurial orientation onfirm performance.

Future research directions

The previous studies we have summarized undoubtedly provide many importantfindings and insightful conclusions. However, research gaps still remain for SOresearch in China. In this section, we identify the important gaps and propose somedirections for further research. We also develop a new framework (see Figure 2) thathighlights these new directions for SO research.

The scope of strategic orientation

Most extant studies, whether based on China or not, focus on three major types ofSO: market (including customer and competitor), technology, and entrepreneurial.However, these three are not the only viable orientations firms can employ. Otherimportant SO, such as production and selling orientations, may also enable firms toachieve competitive advantage (Noble et al., 2002). Market, technology, andentrepreneurial orientations share many characteristics with prospector and analyzerfirms, which emphasize market effectiveness. In contrast, production and sellingorientations, which are similar to defenders, have received little attention. However,given the heterogeneities and complexities of the Chinese market, a market-effectiveness-based SO may not fit all industries or conditions. Therefore, wepropose that production and selling orientations, which by nature focus more onoperational efficiency, offer two important dimensions of SO for further research.

With a production orientation, a firm attempts to improve its productionefficiency, minimize costs, and develop mass distribution to establish competitive

Strategic OrientationProduction orientation Selling orientation

Market orientation (e.g., customer and/or competitor orientation)

Technology orientation

Entrepreneurship orientation

Firm performance

Innovation performance

Employee outcome

Dynamic capabilities

Knowledge exploration/exploitation

Institutional factors

Environmental factors

Organizational factors

Institutional factorsGovernment advocacy

Leading firms’ strategy

Industry norms and values

Organizational factors

Environmental factors

Figure 2 Conceptual framework for future research

458 K.Z. Zhou, C.B. Li

advantages (Fritz, 1996; Noble et al., 2002). It essentially stresses the importance ofdelivering fixed output with lower production costs. Many Chinese firms (especiallysmall- and medium-sized firms) have adopted this practice to help enhanceproductivity, utilize capacity, cut costs, and expand market share. With a productionorientation, these firms often produce relatively cheap products and deliver them toconsumers worldwide. However, the trade-off inherent in a production orientation isalso obvious, because the internal operational efficiency and productivity focus mayreduce firms’ abilities to innovate, enhance product quality, or maximize customersatisfaction (Kotler, 2002). Despite these obvious limitations, a productionorientation has led to the success of many Chinese companies, including Galanz.Within 13 years of its start as a small, indigenous company, Galanz has become theworld’s top manufacturer of microwave ovens (Asia Times, 2005). Large-scaleproduction and low prices are key for Galanz’s success. Galanz focuses all itsresources to increase its production scale and lower prices: When its annual outputreached 1,000,000, Galanz began to set its microwave oven prices below the costs ofrivals with smaller outputs. When its output kept increasing, it cut its prices lowerthan most major competitors. Through these efforts, Galanz gained its cost-leaderposition and today controls more than 60% of the Chinese microwave oven market.

Therefore, although extant literature pays less attention to production orientation,delivering a reasonable quality at the lowest price may be highly effective inemerging economies such as China, where the gross domestic product per capitaremains very low. An investigation of the role of production orientation in Chinaand, more specifically, the appropriate context for production orientations (e.g.,industry types and features, organizational characteristics, target markets) would bevery insightful and beneficial.

Assuming customers’ hesitancy about purchases can be overcome by marketingtactics, a selling orientation emphasizes aggressive sales and marketing efforts toachieve fast returns and maximize market share (Noble et al., 2002). Whereas amarket orientation puts customers at the first place and aims to develop long-termcustomer relationships, a selling orientation focuses on maximizing fast returnthrough hard-sell tactics (e.g., buy one get one free). Because of its emphasis onshort-term sales, a selling orientation might hurt customer loyalty and repeatbusiness, and ultimately long-term success (Kotler, 2002). However, Noble et al.(2002) report that even in the United States, a selling orientation helps firmperformance, whereas customer orientation is not a significant driver ofperformance in the retailing industry. This finding suggests that the short-term,sales-maximizing orientation may be more effective than the long-term, customer-building orientation in some contexts (e.g., retailing). Industry observations alsoshow that in China, many large-scale retailers (e.g., Gome Electronics) andconsumer products companies (e.g., DIAO Brand by Nice Group) have achievedamazing success with a selling orientation. Gome Electronics, the largest electronicappliance retailer in China, achieved 42% growth in its revenue in 2005 (China.org.cn, 2006). The DIAO brand outperforms even multinational competitors suchas Amo by Unilever or Tide by Procter & Gamble, earning its ranking as the topcompetitive brand in the field (China Daily, 2004). The secret behind bothcompanies’ success is the selling orientation inherent in their business philosophy:They both firmly and eagerly pursue market share expansion and short-term sales

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maximization and invest heavily in marketing promotions and retail chainbuilding. Thus, further research should investigate the true role of sellingorientation in business operations in China.

How does SO matter?

Because most studies examine the direct effects of SO on performance, more effortshould be expended to uncover the process by which SO influences organizationaloutcomes (Zhou et al., 2005b). Consistent with Hoskisson et al. (2000), we encouragefuture researchers to investigate mediating mechanisms from two perspectives:dynamic capability and the knowledge-based view, which “will become prominent inthe study of emerging economies” (Hoskisson et al., 2000: 257).

The effect of SO on dynamic capability The dynamic capability perspective stressesfirms’ capacity to exploit and develop specific capabilities, combine thosecapabilities with existing resources, and further reconfigure resources to achievecongruence with the changing environment (Teece, Pisano, & Shuen, 1997). The keyissue addressed by this perspective is how firms should organize and buildcapabilities to achieve their dynamic fit with rapidly changing environments.

In emerging economies, the fast changing nature of the market makes itimperative for firms to adapt effectively to the turbulent environment and thereforerequires a higher level of dynamic capability. We suggest SO may influence dynamiccapabilities and, thus, performance. Because SO provides guidance for how a firmshould use its resources and interact with environmental forces, such as customers orcompetitors, it necessarily affects the firm’s capabilities to manage environmentaldynamics and transform resources into superior performance (Teece et al., 1997).For example, because customer orientation promotes understanding the needs andwants of target customers, customer-oriented firms can anticipate customers’changing needs and respond in a timely manner (Zhou et al., 2005b). Therefore,further research should uncover how SO affects the dynamic capabilities of a firm.

The effect of SO on knowledge exploration/exploitation Many scholars havehighlighted organizational knowledge and its management as a key source ofcompetitive advantage in fast changing environments (e.g., Dickson, 1992; Grant,1996; Hoskisson et al., 2000). Firms with superior knowledge can coordinate and usetheir existing resources and capabilities in new and distinctive ways and thereforeprovide unique value to customers (Teece et al., 1997). Kohli and Jaworski (1990)similarly suggest that knowledge from current/prospective customers, along withknowledge of competitors, provides firms with the ability to deliver superior customervalues. Thus, it is intriguing to examine how SO influences organizational knowledgeand its management, especially with regard to knowledge exploitation and exploration.

Knowledge exploitation represents the assimilation of external knowledge intofirm-specific internal knowledge, the refinement and extension of existing know-how, and the further creation and distribution of knowledge within the boundaries ofthe firm. In contrast, knowledge exploration focuses on the discovery of newknowledge and experimentation with new technologies or organizational processes(March, 1991). As a learning process, knowledge exploration often does not provide

460 K.Z. Zhou, C.B. Li

quick returns. The differences between these two types of knowledge managementmake it very challenging for managers to strike a balance between exploitation andexploration (Atuahene-Gima, 2005).

Because SO guides how firms gather market, competitor, and technologyinformation and then translate those knowledge resources into learning and strategicactions (Noble et al., 2002), it may shift firms’ relative emphasis on futureknowledge exploration or current knowledge exploitation. For instance, a technol-ogy orientation generates knowledge about current and future technologies in thefield, then disseminates and assimilates the knowledge within the firm. If atechnology-oriented firm possesses less technology-related knowledge than its majorcompetitors, it will explore and acquire new knowledge to keep pace and defend itsstrategic position. In contrast, when the technological knowledge of the firm exceedsthe requirements of its strategic implementation or the level of major competitors,exploring new technological knowledge becomes financially and operationallyinefficient (March, 1991). Therefore, the firm should focus on exploiting andrefining its existing knowledge for certain and immediate returns (Schulz, 2001;Zack, 1999). Likewise, customer or competitor orientations may reflect similar (ordifferent) patterns when they drive knowledge exploitation/exploration. The fastchanging nature of the Chinese market also prompts more intriguing questions ofwhen and how SO affects knowledge exploitation/exploration and what theperformance consequences of that influence may be.

Drivers of SO

Of the three major types of drivers (i.e., industry-, firm-, and institution-based),institutional factors have received the least attention. However, institutional theory isincreasingly proposed as an important approach for strategy research in emergingeconomies such as China (Peng, 2003, 2005, 2006). Therefore, we focus on this researchgap and propose some venues to help further research focus on institutional factors.

According to institutional theory, organizational behavior and strategic choicesare driven primarily by isomorphic pressures embedded in formal and informalinstitutions (DiMaggio & Powell, 1983). Organizations are motivated to enhancetheir legitimacy by conforming to other organizations in the environment throughisomorphism processes such as coercive, mimetic, and normative (DiMaggio &Powell, 1983; North, 1990; Scott, 1995). Coercive isomorphism refers toorganizational responses to political or legal authorities; mimetic isomorphismresults from uncertainties surrounding technologies, objectives, and environmentsthat cause organizations to model themselves on others; and normative isomorphismmeans that organizations follow the norms and values that define socially acceptableeconomic behaviors (DiMaggio & Powell, 1983). Although many Western countriestreat institutional factors as background, because “the rules of the game” have beenwell-established (North, 1990), in emerging economies without clear rules, theyshould be considered explicitly (Peng, 2006). In line with the concepts of coercive,mimetic, and normative isomorphism, we propose government advocacy, leadingfirms’ strategic choices, and industry norms and values as important institutionaldrivers of SO.

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Government advocacy In emerging economies such as China, the government stillplays a salient “macro-control” role in shaping economic activities. Governmentadvocacy, or the focus of political rules and policies, can exert great influence overfirm behavior and strategic choices through coercive isomorphism (Scott, 1995).Firms must adapt to these coercive pressures to gain legitimacy and the necessaryresources for their survival and success. The government tends to advocate differentpolicies for different industries. For industries related to national competitiveadvantages, the Chinese government expends great effort to lead and even controlthe direction and focus of industrial development. For example, in high-tech industriessuch as semiconductors, the Chinese government has invested heavily and issuedextensive regulatory incentives to promote the competencies of independent integratedcircuit designs (Shorenstein APARC News, 2005). In response, most firms in thisindustry promote a technology orientation rather than a production orientation. Thebanking industry also faces great pressure from the government to transform andbecome more market- or customer-oriented so that local banks can competeeffectively with the foreign banks that appeared in the market after China’s entryinto the World Trade Organization. Therefore, government advocacy is an importantdriver of SO that reflects a coercive isomorphism mechanism by which firms adapt tothe regulations and policies established by political or legal authorities.

Leading firms’strategic choice In response to the highly uncertain nature of emergingeconomies, firms tend to imitate leading firms in their field, whose behavior isperceived as more legitimate or successful (Child & Tsai, 2005). In most cases, theleading firms in an industry are successful, and their experience provides goodguidance for other firms; therefore, following the practices of leading firms allowsyoung or emerging firms to avoid uncertainties and gain cognitive legitimacy (Yiu &Makino, 2002). Leading firms’ choice of SO influences other firms’ choices throughmimetic isomorphism. For instance, leading firms with a customer orientation likelymake customer orientation the dominant orientation of the industry. Haier serves as acase in point: The first company to firmly advocate a customer-focused orientationin the household electrical appliances industry in China, Haier introduced theconcept of “Star Service” based on the tenet that the customer is always right andsets customer satisfaction as the primary yardstick by which to measure performance(Business Week, 2006). These actions have led to Haier’s huge success and broughtdrastic changes to the whole industry. Other major companies such as Hisense andTCL began to imitate the “customer is always right” philosophy to keep customersfrom switching to Haier.

Industry norms and values Values are the desirable standards and norms refer to howthings should be done to achieve values (Scott, 1995). Because industry norms andvalues represent shared understandings and the logic of appropriateness in a field,they can define socially acceptable economic behavior in the industry (Zukin &DiMaggio, 1990). Therefore, if a certain type of SO becomes a desirable standardand the right method, most firms in that industry will be motivated to adopt similarSO. For example, due to the relatively low purchasing power of Chinese consumers,making products affordable to consumers is a critical goal for many companies. As aresult, Chinese firms tend to undertake a production orientation to provide low-

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priced products. Some companies have achieved amazing success, as illustrated bythe Galanz case. Hence, we propose that industry norms and values represent asignificant driver of SO.

Contingency conditions

Rather than examining the moderating role of environmental and organizationalfactors, we encourage further research to investigate the interactions amonginstitutions, organizations, environments, and strategic orientations. Consistent withPeng (2006), we suggest studying the dynamic interactions among institutional,environmental, and organizational factors, as well as the consequent effects of theseinteractions on strategic orientations and performance. More research is neededespecially to consider the effects of institutional factors, such as formal constraints(e.g., political rules, economic limits) and informal constraints (e.g., sanctionednorms or values for behavior). For example, the interaction between governmentadvocacy and knowledge resource available to the firm may significantly shape theeffects of SO on firm performance. In addition, how SO interacts with network-based strategies (e.g., guanxi) would be a fascinating question for additionalresearchers to tackle.

Conclusion

SO in emerging economies is a highly significant and intriguing research area, andChina offers a rich context for further research in this area. Scholars from both strategicmanagement and strategic marketing have persevered to uncover the role of SO in theemerging Chinese market, and these studies have improved our understanding of whatdefines SO, how SO affects performance, what drives the formation of SO, and thecontingency conditions of SO, which are undoubtedly invaluable.

In addition, we also identify many exciting opportunities for further inves-tigations. First, we propose to expand the scope of SO by integrating production andselling orientations, which are more efficiency focused and may be particularlyrelevant in emerging economies due to the relatively low purchasing power ofconsumers. Second, more efforts are needed to uncover the more intriguing questionof how SO matters. We propose two important mechanisms, dynamic capabilitiesand knowledge management, to explain the processes through which SO affectsperformance. Third, in addition to environmental and organizational drivers, moreresearch should emphasize the institutional antecedents of SO. Employing theisomorphism mechanism of institutional theory, we propose three sets of institutionaldrivers: government advocacy, leading firm’s strategic choice, and industry normsand value. Fourth, we encourage further research to move beyond traditional tests ofthe moderating roles of environmental and organizational factors to examine theinteractions among institutions, environments, organizations, and strategic orienta-tions. By so doing, researchers and practitioners can gain a richer understanding ofthe boundary conditions of SO, as well as how and when SO matters in China.

The findings based on the Chinese context also provide important insights forfirms operating in other emerging economies, because China shares many

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characteristics with other emerging economies (Hoskisson et al., 2000; Peng, 2003).However, as China also possesses some idiosyncrasies such as corporate climate,social transformation, and political environment, the generalizability of thosefindings is limited. Extant SO studies in other emerging economies demonstratesome consistencies with the findings in China, but at the same time, reveal manydifferent or new findings. For example, Deshpandé, Farley, and Bowman (2004)document that Thai companies possess a similar level of market-oriented culture asChinese companies; however, Thai firms have much lower levels of innovative andentrepreneurial values than Chinese firms. Powpaka (2006) reports that marketorientation has no effect on employee job satisfaction in Thailand, which isinconsistent with the findings of Zhou et al. (2005a) in China. In addition,Subramanian and Gopalakrishna’s (2001) study based on India shows that themarket orientation–performance relationship is quite robust and is not moderated bycompetitive environment, which is in sharp contrast to the findings of Gao et al.(2007). Hooley et al. (2000) report that in central Europe (Poland and Slovenia)stronger market orientation leads to more aggressive and externally focused strategicpriorities, more focused and targeted marketing approaches, and higher differenti-ation. Taken together, we hope our efforts can stimulate more research on how SOmatters in China as well as how SO matters differently in China as compared to itsrole in other emerging or developed economies.

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Kevin Zheng Zhou (PhD, Virginia Tech) is Assistant Professor of Marketing at the School of Business,The University of Hong Kong. His research focuses on strategic orientation, product innovation, andstrategic issues in emerging economies. His previous work has appeared in a variety of academic journalsincluding Journal of Marketing, Journal of International Business Studies, Organization Science, andInternational Journal of Research in Marketing.

Caroline Bingxin Li is a doctoral student at the School of Business, The University of Hong Kong. Herresearch interests include strategic orientation, knowledge management, product innovation, dynamiccapability, and strategic marketing in emerging economies.

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