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The International Journal of Accounting 44 (2009) 256 – 278
Strategy, performance-measurement systems, and
performance: A study of Chinese firms☆
Damon M. Fleming a,⁎, Chee W. Chow a , Gongmeng Chen b
a
b
Charles W. Lamden School of Accountancy, San Diego State University, 5500 Campanile Drive,
San Diego, CA 92182-8221, United States
School of Economics, Shanghai Jiaotong University, 535 Fahua Zhen Rd., Shanghai 200052, PR China
Abstract
Numerous studies in developed Western countries have shown that firms' strategic choices are
responsive to attributes of their external environment. In turn, performance-measurement systems are
used to support strategy implementation, which then affect firm performance. However, institutional
factors may limit the extent to which these linkages exist in the transitional Chinese economy. We
analyze survey and publicly available data for 104 listed Chinese manufacturing firms and find that,
despite a number of identifiable impediments, these firms' strategic emphasis on growth is
responsive to the competition and uncertainty that they face. In the case of uncertainty, the
relationship goes in the opposite direction to that found in Western firms. Like their Western
counterparts, Chinese firms with greater emphasis on growth also tend to make greater use of
balanced/integrated performance measurement systems, and, in turn, they perform at a higher level.
© 2009 University of Illinois. All rights reserved.
Keywords: Chinese firms; Performance-measurement systems; Strategy; Performance
1. Introduction
Numerous studies have shown that firms make strategic choices often in response to their
external environment. Firms also use performance-measurement systems (PMSs) to support
strategy implementation that increases their performance. This literature, however, is largely
☆
The authors are indebted to Co-editor Sue Haka and two anonymous reviewers for many helpful suggestions,
and to Rong-Ruey Duh and Jason Xiao for their contribution to this study.
⁎ Corresponding author. Tel.: +1 619 594 6347.
E-mail addresses: dfleming@mail.sdsu.edu (D.M. Fleming), chow@mail.sdsu.edu (C.W. Chow),
trgmchen@inet.polyu.edu.hk (G. Chen).
0020-7063/$ - see front matter © 2009 University of Illinois. All rights reserved.
doi:10.1016/j.intacc.2009.06.004
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257
focused on firms from the more developed Western economies (see Chenhall, 2003, 2007 for
reviews). Whether or not these relationships hold true for Chinese firms has not yet been
empirically tested. We believe that such an investigation is warranted, in part, because China
has become one of the world's largest export and import countries (OECD, 2005; Roberts &
Engardis, 2006), and in part because its transitional economy has certain attributes which
might suppress a manager's motivation and/or ability to respond to his/her firm's challenges
and opportunities. With the expanding global presence of Chinese firms, an increased
understanding of the strategic nature and performance effects of their current management
practices might help investors, creditors, joint-venture partners, suppliers, and competitors in
assessing their relationships with Chinese firms. These findings can also be of use to Chinese
firms as they plan improvements.
We obtained data for this study from multiple sources (surveys and actual financial
reports) for 104 exchange-listed Chinese manufacturing firms. We then used path analysis
to examine simultaneously the extent to which these firms' strategic emphasis on growth is
a function of the competition and uncertainty in their environment, the relation between
their emphasis on growth and the use of balanced/integrated PMSs, and how their PMSs
affect performance. For the sample firms, we find that the emphasis on growth increases
(decreases) with the perceived competition (uncertainty) in the business environment.
Notably, the relationship with uncertainty goes in the opposite direction to that found in
Western settings. The findings also indicate that a greater strategic emphasis on growth is
accompanied by a higher use of balanced/integrated PMSs, and that the PMSs have a
significant, positive link with firm performance. These findings suggest that despite the
many institutional impediments that we identify, Chinese firms are responding to the
opportunities and challenges in their business environment, though not always in the same
way as their Western counterparts.
The remainder of this paper is organized as follows. Section 2 provides an overview of
China's institutional characteristics and then develops three hypotheses based primarily on
the extant (Western) literature. Section 3 explains how we collected data, and Section 4
reports the results. Section 5 concludes the paper with a discussion of the findings and their
implications.
2. Background and hypothesis development
2.1. Institutional characteristics of China's emerging economy
China had a command economy up to the end of the 1970s, wherein business enterprises
were merely units for implementing government plans and had very little autonomy (Expert
Group, 1995). Although privatization was adopted as official policy in 1978, the Chinese
government chose to “grow out” of central planning gradually, rather than following the
Russian approach of dramatic policy shifts (Peng, 2003). As a result, the Chinese
government has maintained a central role in guiding the economic transition (Luo, 2005),
and many of the policies and institutions supporting this change (e.g., establishment of the
Shanghai and Shenzhen stock exchanges, termination of financial support for most stateowned enterprises) did not come into being until the 1990s (Chow, Duh, & Xiao, 2007).
Since then, the continued opening of markets and the ascendancy of private ownership have
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brought about an expansion in both management autonomy and the demand for “scientific
management” systems to improve efficiency and effectiveness (Chow et al., 2007).
Despite these developments, Chinese firms still face several identifiable obstacles in
responding to the environment and/or emulating the management practices of the more
developed Western countries. Peng (2003) suggests that Scott's (1995) fundamental and
related institutional “pillars” can be used to describe the institutional challenges facing
China's business enterprises. One such pillar is regulative, and focuses on the formal rules,
systems, and enforcement mechanisms sanctioned by the government (e.g., the legal
infrastructure and takeover markets). Studies of the developed economies indicate that
internal and external disciplining mechanisms like these help outsiders monitor and
discipline management (e.g., Karpoff, Malatesta, & Walkling, 1996; La Porta, Lopez-deSilanes, & Shleifer, 2002; Sundaramurthy, Mahoney, & Mahoney, 1997). In the case of
China, Allen, Qian, and Qian (2005) and Pistor and Xu (2005) have found that its laws and
institutions, including investor protection systems, corporate governance, and accounting
standards, are far less developed than in the more advanced economies. These weaknesses
could reduce managers' incentives to respond to their firms' challenges and opportunities.
Further dampening effects may come from the government's continued activism via direct
interventions, the promulgation of regulations, and the espousal of political ideology (Ji,
2001; Luo, 2005; O'Connor, Chow, & Wu, 2004), especially because government entities
in China often have objectives that deviate from profitability, such as maintaining social
order and effecting wealth redistribution (Liu, 2006; Tang, Xi, Chen, & Wang, 2006).
Another of Scott's (1995) suggested pillars relates to the beliefs and values that are
imposed on, or internalized by, the people in the institutional environment. During the
centralization era, people often were appointed to managerial positions for reasons other
than ability (e.g., political ties and seniority; see Hassard, Sheehan, & Morris, 1999), and
enterprises operated under so-called “soft budget constraints” (Kornai, 1980) whereby the
government would automatically write off debts and provide operating funds, and firms
were essentially evaluated based on their outputs, not profitability. A legacy of this recent
era is a shortage of managers with experience in decision making (Wang & Zhang, 2000),
and recent evidence suggests that this problem continues to plague Chinese companies
(Lane & Pollner, 2008). As a result, many Chinese firms still may have high-level
appointees who either do not appreciate the potential benefits from modern management
practices, or resist their implementation to protect their own turf or influence (Xu & Wang,
1999; Yang, Chen, Su, Liu, & Liu, 2001). There also may be remnants of the “iron rice
bowl” mentality among the rank-and-file employees, who may resist management
initiatives that threaten the “Chinese way of doing things” (O'Connor et al., 2004).
Finally, China's national culture has distinct differences from that of many Western
countries (Chow, Deng, & Ho, 2000; Hofstede, 1984), and these differences may cause
Chinese managers and workers to prefer management practices that differ from those of
their foreign counterparts (Chow, Shields, & Wu, 1999; Merchant, Chow, & Wu, 1995). For
example, being authoritative is not a typical or well-received behavior of executives in the
West, but in China it is viewed as a legitimate way to behave given the Chinese tradition of
respect for hierarchy (Fu & Tsui, 2003). Yet another example is Chinese managers'
preference for security in the face of uncertainty (Tan & Litschert, 1994), while their
contemporaries in the West tend to adopt more aggressive strategies in such circumstances.
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In summary, there are reasons to expect that the managers of Chinese firms may be less
able and/or motivated than their Western counterparts to address the opportunities and
threats facing their organizations. To better understand the nature and extent of Chinese
firms' strategic responses to the environment, we develop three hypotheses below to
investigate whether: (1) characteristics of the environment (specifically, competition and
uncertainty) drive Chinese firms' strategic emphasis on growth; (2) Chinese firms that
emphasizing growth as a strategic priority use more balanced/integrated PMSs to support
strategy implementation; and (3) greater use of balanced/integrated PMSs leads to greater
strategic performance.
2.2. Effects of environmental characteristics on competitive strategy
The strategy literature has long proposed that firms' competitive business strategies must
suit their environmental circumstances (e.g., Child, 1997). Such strategies focus on how firms
compete with, and position themselves in relation to competitors (Fuchs, Mifflin, Miller, &
Whitney, 2000; Langfield-Smith, 1997).1 The Western literature has proposed a number of
typologies for classifying firm-level competitive strategies (e.g., Miles & Snow, 1978; Porter,
1980).2 Building upon the earlier frameworks, Gupta and Govindarajan (1984) suggest that
firms' strategies can be placed on a growth continuum. At one end are firms following a “pure
build” strategy that focuses on attaining growth by improving market share and competitive
position at the expense of short- term performance. At the other end are firms following a “pure
harvest” strategy, with a focus on maximizing short-term profit and cash flow rather than
growth and market share. In the middle are firms that seek to hold their current positions or
divest away peripheral operations. We adopt this build — harvest view of strategy for two
major reasons. First, it is representative of, and extensively tested in, the strategy literature
(Anthony, Dearden, & Govindarajan, 1992; Fisher & Govindarajan, 1993; Govindarajan,
1986; Govindarajan & Shank, 1992). Second, China's transition to a market-based economy
has allowed firms to play a more active role in developing strategic responses to environmental
stimuli (Hoskisson, Eden, Lau, & Wright, 2000; Peng, 2003), and the opportunities for growth
in Chinese firms have vastly increased since the start of economic reform in 1978, especially
since the 1990s (Chow et al., 2007).
Concomitant with expanded market opportunities for Chinese firms, both domestically
and abroad, has been a dramatic increase in the number of domestic and international
competitors (Peng & Heath, 1996). In addition, Li, Poppo, and Zhou (2008) argue that the
wide-reaching and complex institutional changes accompanying China's transition from a
centrally-planned to a market-based economy have intensified competition for Chinese
firms. This has been observed especially in manufacturing processes, product technologies,
1
Langfield-Smith (1997, 2007) provide reviews of the strategy literature as it relates to management accounting
practices.
2
Miles and Snow (1978) identify four pure types of strategic orientation. Three of these – prospectors,
analyzers, and defenders – are classified as successful types and the fourth – reactors – is viewed as an
unsuccessful type (Miles & Snow, 1978; Segev, 1987). All four types have to do with the rate of change in
products or markets. An alternative typology is that of Porter (1980), which views firms as seeking competitive
advantage via cost leadership, differentiation, or focus.
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market demand, supplier relations, and distribution channels (Dent, 1996; Govindarajan,
1986). The strategy literature suggests that these competitive conditions pressure firms to
adopt a growth orientation in order to exploit critical resources and achieve a competitive
advantage (Oliver, 1991).3 The rationale is that, in less competitive markets, firms have
more open access to key resources and more flexibility in pricing their products and
services, resulting in softer budget constraints and greater ease of attaining profitability. But
as competition intensifies for resources and in pricing, growth becomes more important to
generating increased revenues and profits. Consistent with this view, empirical research in
the West suggests that firms change their strategic foci in response to increased competitive
intensity. For example, Baines and Langfield-Smith (2003) find that Western firms facing a
more competitive environment increase their strategic emphasis on product differentiation
to maintain or expand market position and increase organizational performance. Thus, if
Chinese firms are similarly responsive to their environment, then their strategic emphasis
on growth would increase in proportion to the intensity of competition that they face. This
expectation forms our first hypothesis:
H1a. Chinese firms' strategic emphasis on growth increases with the competitiveness of
their environment.
Beyond intensifying competition for many firms, China's economic reform has led to
the structural transformations of many industries (i.e., an increased presence of
multinational firms and the emergence of entrepreneurial firms in local markets), thereby
increasing environmental uncertainty (Li et al., 2008). Uncertainty is generally described as
an information deficit and defines situations in which probabilities cannot be assigned to
particular outcomes and where elements of the environment may be unpredictable (e.g., the
actions of other economic players like competitors, customers, suppliers, and regulators;
see Galbraith, 1973; Chapman, 1997; Hartmann, 2000; Chenhall, 2003; Head, 2005). Some
attributes of Chinese labor law also increase uncertainty. For example, there are relatively
few national laws, and business regulations are purposefully vague and ambiguous to
permit the courts to rule on each case without being constrained by common-law practices
(Head, 2005). This vagueness increases uncertainty because the outcome of the legal
process is subject to greater government influence (Head, 2005).
Uncertainty makes it difficult for managers to predict the future, and studies of Western
firms have found a positive relationship between uncertainty and the firms' emphasis on
growth. For example, Miller and Friesen (1983) study firms in the United States and
Canada and find that they adopted innovative, growth-oriented strategies as environmental
uncertainty increased. Miller (1988) finds that firms facing greater uncertainty employed
more innovative strategies. Chong and Chong (1997) also find a positive association
between environmental uncertainty and a firm's tendency to pursue a growth-oriented
strategy. Several studies focusing on Chinese managers also find a relationship between
uncertainty and emphasis on growth, though the relationship tended to be in the opposite
3
The strategy literature distinguishes between deliberate and emergent strategies. Deliberate strategies are
formally planned and executed, whereas emergent strategies may develop from other intended strategies, random
shocks, or emerge incrementally (Langfield-Smith, 1997; Mintzberg, 1978; Snow & Hambrick, 1980). Since we
are interested in firms’ intended actions, our discussion and analysis focuses on deliberate strategy.
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direction. Alder, Brahm, and Graham (1992), for example, indicate that Chinese managers
are particularly concerned with security, and are likely to avoid proactive and risk-taking
decisions when facing uncertain environments. Similarly, Tan and Litschert (1994) find that
Chinese managers' perceptions of increased environmental uncertainty are negatively
related to proactive (i.e., growth-oriented) strategies. To the extent that Chinese managers'
attitudes and preferences about uncertainly have not changed due to China's progression
toward a market-based economy, we would expect the following relationship:
H1b. Chinese firms' strategic emphasis on growth decreases with the level of uncertainty
in their environment.
2.3. Effect of growth strategy on performance-measurement systems
Even well-conceived competitive strategies cannot increase organizational success
unless they are effectively implemented. Performance-measurement systems (PMSs)
can play a key role in strategy implementation by helping to translate organizational
strategy into desired behaviors and results, communicate expectations, monitor
progress, provide feedback, and motivate employees through performance-based
rewards (Banker, Potter, & Srinivasan, 2000; Chenhall, 2003; Chenhall & LangfieldSmith, 1998; Ittner, Larcker, & Randall, 2003; Kaplan & Norton, 2001). This implies
that the optimal design of a firm's PMS depends on its strategy (Chenhall, 2003; Ittner
& Larcker, 1998; Van der Stede, Chow, & Lin, 2006), and studies in the West provide
support for this notion. For example, Ittner, Larcker, and Rajan (1997) examine factors
that influence the relative weights placed on financial and nonfinancial measures in
CEO compensation contracts, and find that firms' use of nonfinancial measures
increases with their strategic emphasis on change and growth. Said, HassabEnaby, and
Wier (2003) find that firms with an innovation-oriented strategy and greater emphasis
on quality make greater use of nonfinancial performance measures. Van der Stede,
Chow, and Lin (2006) also find that firms which emphasize quality in manufacturing
tend to use more of both objective and subjective nonfinancial measures. Along the
same vein, Bouwens and Abernethy (2000) report that firms employing customization
strategies place greater importance on integrated, aggregated, and timely management
accounting information.
For firms seeking growth and increased market share, many critical success factors, such
as new product development, tend to involve tradeoffs across time and lead-lag
relationships (e.g., R&D, prevention vs. warranty costs), as well as aspects that are
difficult to quantify objectively (e.g., cooperativeness, innovativeness) (Langfield-Smith,
2007). As such, the pursuit of growth particularly requires the support of a balanced/
integrated PMS, i.e., one that goes beyond the traditional short-term and backward-looking
financial measures to include non-financial measures (e.g., timeliness) and other leading
indicators of performance (e.g., customer satisfaction) across various business dimensions
(e.g., financial, customer, internal-business processes, and learning and growth)
(Govindarajan & Gupta, 1985; Kaplan & Norton, 1996a,b).
Several studies have examined factors affecting Chinese firms' management accounting
practices (e.g., Chow et al., 2007; O'Connor, Chow, & Wu, 2004). Specifically related to
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performance measurement, Chow, Duh, and Xiao (2007) survey 225 listed Chinese firms
and find that only 39% of the sample adopted some form of a balanced/integrated PMS.
This finding suggests that performance-measurement practices are not uniform among
listed Chinese firms, thus leaving open the possibility that institutional factors may be
impeding Chinese firms' use of strategic performance-measurement practices. For instance,
lingering effects of the soft budget constraints (Kornai, 1980) from China's pretransition
period may dampen managers' emphasis on measuring the success of their strategic
objectives, resulting in the continuance of outmoded performance-measurement practices.
In addition, China's shortage of managers with experience in decision making and modern
management practices (Lane & Pollner, 2008) may limit firms' ability to develop and
implement balanced/integrated PMSs. In view of these institutional impediments, our
second hypothesis provides focus to an inquiry of whether, like their Western counterparts,
Chinese firms use balanced/integrated PMSs to support the implementation of their
strategic emphasis on growth:
H2. Chinese firms' use of balanced/integrated PMSs increases with their strategic emphasis
on growth.
2.4. Effect of a balanced/integrated PMS on firm performance
Among the attributes of a balanced/integrated PMS, an often emphasized aspect is the
inclusion of nonfinancial performance measures, and prior research has found that the use
of such measures leads to superior firm performance. For example, Said, HassabEnaby, and
Wier (2003) compare firms using nonfinancial performance measures in managerial bonus
plans, matched against the same number of firms using exclusively financial measures.
They find that the use of non-financial measures had a significant positive effect on current
market-based returns and future accounting- and market-based returns. Van der Stede,
Chow, and Lin (2006) differentiate between objective and subjective nonfinancial measures
and find that manufacturing firms that use more numerous performance measures have
higher performance — particularly when their PMSs include greater numbers of objective
and subjective nonfinancial measures.
Other studies have considered the effects of using groups of financial and nonfinancial
performance measures in a balanced/integrated manner. For example, Banker, Potter, and
Srinivasan (2000) analyzed archival data for a six-year period from 18 hotels managed by a
large U.S. hotel chain, during which management implemented a balanced/integrated PMS.
They find increases in both customer satisfaction and profitability, and that the increase in
profitability was due to greater revenues driven by increased occupancy (a strategic
objective), not increased room rates. Similarly, Davis and Albright (2004) examine the
performance effects of introducing a balanced/integrated PMS to a single banking
organization in the United States. They find that during the two-year period following
introduction, the financial performance of the branches that implemented the balanced/
integrated PMS significantly improved over the (non-implementing) control branches. In
their study of 66 Australian manufacturing companies, Hoque and James (2000) also find a
positive relationship between the increased use of a balanced/integrated PMS and firm
performance.
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Several studies have gone further to investigate the strategy-PMS-performance linkage.
For example, Chong and Chong (1997) find that greater use of management accounting
information (including nonfinancial information) increases performance for business units
following a prospector or growth-oriented strategy. However, Perera, Harrison, and Poole
(1997) find no association between the use of nonfinancial performance measures and
perceived firm performance in organizations following a “customer-focused” manufacturing
strategy. Baines and Langfield-Smith (2003) find that while changes in strategy do not directly
affect changes in the use of nonfinancial management accounting information, greater use of
nonfinancial information, per se, increases organizational performance. Thus, the thrust of
extant findings in the Western literature is that there are performance gains from using more
balanced/integrated performance-measurement systems. While it seems reasonable to expect a
similar link amongst Chinese firms, this has not been addressed by prior empirical research.
Thus, we posit the following hypothesis:
H3. Chinese firms' performance increases with the use of balanced/integrated performance
measurement systems.
3. Research method
3.1. Sample selection
We focused on Chinese firms listed on the country's two major stock exchanges (i.e.,
Shanghai and Shenzhen) in part because they represent a substantial portion of the
Chinese economy, and in part because their required public disclosure provides data for
computing a key variable — strategic performance. A further attribute of these firms is
that they are more likely than other Chinese firms to be competing for market share and
resources across a broad spectrum, thus facing higher levels of competition and
uncertainty at the same time that they have more potential room for growth. Data for the
study were collected in late 2004, when there were 890 firms listed on the Shanghai
Stock Exchange and 601 firms listed on the Shenzhen Exchange. Out of these 1,491
firms, we selected the 458 that were in manufacturing industries. This focus was partly
motivated by the desire to control for industry effects (e.g., manufacturing vs. service),
and in part because the Chinese manufacturing sector is faced with a turbulent
environment due to increasing domestic and foreign competition. A solicitation letter was
sent to each company's secretary of the board of directors (a high-level manager who was
a member of the board), together with a copy of the survey. The names and addresses
were obtained from the Shenzhen GTA Information Technology Company's China Stock
Market and Accounting Research Database. The contact person was asked to direct the
survey to a middle or high level manager knowledgeable about the company's systems
and processes.4 As inducement, we promised to send each participating company the
China Venture Capital Yearbook and China Venture Capital Journal. Follow-up phone
4
While having multiple responses from each firm is desirable, we refrain from seeking such cooperation
because our prior experiences with survey research in China suggests that such a request would have greatly
reduced our success in enlisting participation.
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calls were made to each contact person two weeks after the initial mailing. Three hundred
firms declined to participate. Of the 158 that promised cooperation, 128 actually returned
completed questionnaires. After excluding 19 surveys with extensive missing data and
five firms with missing financial-statement data, the remaining 104 responses represent a
23% usable response rate.5
The firms in the final sample represent manufacturing industry segments including
electronics/communication, transportation, general manufacturing, aerospace/defense,
consumer products, discount/mass merchandise, healthcare products, and food products.
On average, they had 2004 sales of Renminbi (RMB) 2.67 billion (US$322 million; US
$1 ≈ RMB8.3 in 2004) and 58.7% of them had more than 1000 employees. All of the
respondents identified themselves as managers, with 40.4% being members of top
management, 47.7% being middle managers, and 2.8% indicating that they were members
of lower management. The remainder checked an “other” category, but did not provide
further details. On average, the respondents were 37.8 years old, had been working for their
companies for 7.4 years, and had been at their current positions for 4.7 years. Sixty-eight
percent were male, 68.8% had a university degree, and 30.3% had a graduate degree
(master's or Ph.D.). These characteristics suggest that the respondents would be sufficiently
knowledgeable to answer the questions in the survey.6 Table 1 presents descriptive statistics
for the respondents.
3.2. Survey design
The survey contained questions related to perceptions of competition and uncertainty in
the firms' business environment, the firms' emphasis on increasing growth and market
share, characteristics of the PMS, and selected respondent and firm characteristics. Because
the survey was administered in Chinese, we followed Brislin's (1986) recommendation of
translation and back-translation to ensure conceptual equivalence between the original
instrument (in English) and the Chinese version. A number of recent studies in accounting
and management-related fields have followed this approach (e.g., O'Connor, Chow, & Wu,
2004; Shin & Zhou, 2003). The survey was first translated into Chinese by a bilingual
individual who was not told the objective of the study; then, another bilingual person backtranslated the Chinese version into English without having access to the original instrument.
Only a few minor changes to the Chinese survey were triggered by comparing the backtranslated and original English versions. The final Chinese version of the survey was
reviewed by several Chinese academics. All agreed that the terminology used was
5
Several recent studies report similar response rates for mailed instruments to experienced, difficult-to-reach
participants: managers/directors of manufacturing (16%, Van der Stede, Chow, & Lin, 2006), retail store
managers (31%, Ghosh, 2005), audit committee members (28%, DeZoort, Hermanson, & Houston, 2003). We did
not record the receipt dates of responses and, as a result, we could not compare early vs. late responses as a test for
nonresponse bias. Despite this limitation, our sample still should be of interest since it includes a large number of
relatively large firms that represent an important part of the Chinese economy.
6
The high education level of our respondents may be more representative of the largest listed Chinese firms
than all Chinese firms. The implication of this sample characteristic on the generalizability of our findings is
addressed later in the discussion section.
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Table 1
Profile of respondents (n = 104).
Position
%
Mean (S.D.) years
of experience with firm
Mean (S.D.) years
at current position
Top management
Middle management
Lower management
Other management
Total sample
40.4
47.7
2.8
9.1
9.16 (6.65)
6.71 (5.15)
3.67 (2.52)
4.70 (2.63)
7.43 (5.77)
4.75 (2.37)
5.02 (2.93)
3.33 (2.52)
2.90 (1.66)
4.67 (2.66)
Number of firm employees
%
Fewer than 100
101–500
501–1000
1001–5000
5001–10,000
Over 10,000
11.0
6.4
23.9
45.9
6.4
6.4
Primary industry classification
%
Electronics/communication
Transportation
Manufacturing-general
Aerospace/defense
Consumer products
Discount/mass merchandise
Healthcare products
Food products
Other
24.8
3.7
27.5
4.6
5.5
1.8
7.3
6.4
18.4
appropriate and that the questions were clear and understandable for the intended
participants.
3.3. Independent and dependent variables
3.3.1. Competition and uncertainty
We focus on managers' perceptions of competition and uncertainty rather than objective
measures of these variables because perceptions about the external environment drive
decision making in organizations (e.g., Baines & Langfield-Smith, 2003; Dill, 1958). Both
measurement scales were adapted from Khandwalla (1977). Perceived competition was
assessed by asking respondents to rate the intensity of competition for seven aspects of their
industry (e.g., in obtaining inputs, pricing, market share) on seven-point scales (1 = “Of
negligible intensity” and 7 = “Extremely intense”). Environmental uncertainty was assessed
by asking respondents: “How stable/dynamic is the external environment facing your
company in terms of six aspects: (a) economic; (b) technological; (c) political/regulatory;
(d) social; (e) customer expectations; and (f) competition?” The seven-point response scale
was anchored by 1 = “Very stable (changing slowly)” and 7 = “Very dynamic (changing
rapidly).” Both perceived competition and perceived uncertainty had acceptable
Cronbach's alphas (0.86 and 0.74, respectively), and common factor analysis (with
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oblique rotation) yielded a one-factor solution for each scale.7 Accordingly, the items for
each scale were averaged to form the variables Competition and Uncertainty.
3.3.2. Growth strategy
Each firm's strategic emphasis on growth was assessed by asking respondents how much
they agreed or disagreed that each of the following statements applied to their companies:
“Growth is a high strategic priority for the company” and “There is a strong emphasis on
increasing market share.” The seven-point response scale was anchored by 1 = “Strongly
disagree” and 7 = “Strongly agree.” This relatively coarse measure was aimed at increasing
comparability across responses. The scale had a Cronbach's alpha of 0.71 and common factor
analysis (with oblique rotation) indicated that the two items loaded on one factor. Based on
these results, Growth Strategy was measured as the average of the two items.
3.3.3. Use of a balanced/integrated PMS
The extent to which a firm used a balanced/integrated PMS was measured with six items
developed from an extensive review of the management accounting literature (e.g., Abernethy
& Lillis, 1995; Epstein & Manzoni, 1997; Hoffecker & Goldenberg, 1994; Kaplan & Norton,
1992, 1996a,b, 2001; Maisel, 1992; Provost & Leddick, 1993; Scott & Tiessen, 1999).
Respondents were asked to indicate the extent to which they agreed or disagreed, on a sevenpoint scale (1 = “Strongly disagree” and 7 = “Strongly agree”), that each of the following
statements applied to their companies: “Performance evaluation uses a mix of financial and
non-financial (including subjective) measures,” “Performance measures are systematically
tied across levels of the company's hierarchy,” “A mix of leading (e.g., customer satisfaction)
and lagging indicators (e.g., sales) is used to evaluate performance,” “Performance evaluation
uses a mix of measures that are explicitly identified with different aspects of performance (e.g.,
customer satisfaction, internal operations, learning and growth),” “Only financial measures are
used to evaluate performance” (reverse coded), and “Performance evaluation is explicitly tied
to the company's competitive strategy.” Common factor analysis (with oblique rotation) of
these items revealed a one factor solution, and their Cronbach's alpha was 0.77. Based on these
results, the six items were averaged to form the PMS variable.
3.3.4. Strategic performance
We used archival data to avoid the potential problems associated with self-reported
measures commonly used in prior studies (e.g., Baines & Langfield-Smith, 2003; Bisbe &
Otley, 2004). Duh, Chow, and Chen (2006) and Langfield-Smith (2007), among others,
emphasize the importance of using performance measures that are consistent with the
priorities in a firm's competitive strategy. For firms intent on growth, profit-based
performance measures frequently used in other studies (e.g., ROA, ROI) do not accurately
reflect the intended tradeoffs implied by their strategy. Further, it is important to note that
7
Common-factor analysis was used over principal-components analysis because it provides a better
understanding of the number of latent factors underlying a set of items (Netemeyer, Bearden, & Sharma,
2003). Additionally, oblique (PROMAX) rotation was used because it will reveal (in most cases) more
theoretically meaningful factors (Netemeyer et al., 2003). Results are the same for all reported measures when
using principal components analysis.
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growth in transitional economies such as China often centers on increasing sales and
profitability (Peng & Heath, 1996). Thus, we measured each firm's geometric annual
growth rate in sales for the year before and the year of survey data collection (i.e., 2002–
2003, 2003–2004), plus the following year (i.e., 2004–2005).8 Our choice of this “event
window" was aimed at balancing two considerations. First, some of the sample firms may
have implemented their competitive strategies and/or PMSs prior to the year of data
collection, and a longer time period increases the chances of capturing these initiatives'
effects.9 Along the same vein, firms implementing their strategies or PMSs in 2004 may not
immediately realize the benefits of these initiatives. On the other hand, too long an event
period opens the performance data to too much “noise” from other sources (e.g., global or
regional economic shocks), and potentially could obscure the effects under consideration.10
Data for each firm's Strategic Performance measure were obtained from its publicly
available financial reports.
4. Analysis and results
4.1. Descriptive statistics and preliminary analysis
Table 2 provides descriptive statistics for the variables. Reliability statistics are also
provided for the multi-item measures and, as was mentioned earlier, their high values provide
confidence that the items in each variable are measuring a single construct. The survey
responses indicate that, on average, the Chinese managers perceive their firms' external
environment to be rather competitive (mean = 4.67; sd = 1.06), especially in the areas seen as
competitive are competition for market share (mean = 4.99), competition on time-to-market for
new products (mean = 4.97), and price competition (mean = 4.80). In contrast, the managers
consider their environment to be only moderately uncertain (mean = 4.04; sd = 0.89),
characterized by relatively stable economic (mean = 3.51) and political (mean = 3.63) facets,
and relatively more dynamic competition (mean = 4.95) and customer demands (mean = 4.37).
The data also reveal that the sample firms tended to place a strategic emphasis on growth
(mean = 4.97; sd = 1.34) and used somewhat balanced/integrated PMSs (mean = 4.58;
sd = 1.03). One sample t-test revealed that the mean values for these measures (except for
the overall uncertainty measure) are significantly different from the midpoint (4) of the scales
(p-values b 0.01). The archival sales data indicate that the average annual geometric growth
rate in sales for the sample firms was 0.12 (sd = 0.32).
8
The geometric annual growth rate is a better measure of the growth rate over multiple periods than the average
annual growth rate because it measures the compounded rate of sales growth over the time period under
consideration. Another relevant consideration is that return measures like ROA and ROI are affected by both
accounting conventions (e.g., depreciation, noncapitalization of R&D) and manipulations. The latter is especially
rampant in China (Tang, 2000; Chen, Chen, & Su, 2001).
9
We did not ask for an implementation date for the current strategy and PMS because such initiatives take time,
and asking for a date could create “noise” in the data. Including the year preceding the survey date increases the
chances of capturing the implementation date in the study period. By the same token, it takes time to realize the
performance effects of strategic and PMS choices. Including the year following the survey increases the chances
of capturing such effects, especially for firms with implementation dates close to 2004.
10
To evaluate the findings' sensitivity to our event period choice, we also conducted tests using different event
windows (e.g., 2003–2004, 2003–2005). The conclusions were not qualitatively affected.
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Table 2
Descriptive statistics for model variables (n = 104).
Model variable
Perceived competition (competition) a
Perceived uncertainty (uncertainty) a
Strategic emphasis on growth (growth strategy) a
Degree of balance/integration in Performance measurement
system (PMS) a
Strategic performance b
a
b
Range
Mean
Standard
deviation
Cronbach's
alpha
1.43–7.00
1.33–5.83
1.50–7.00
1.67–6.83
4.67
4.04
4.97
4.58
1.06
0.89
1.34
1.03
0.86
0.74
0.71
0.77
− 0.31–2.93
0.12
0.32
N/A
Variable items were measured on seven-point scales, ranging from one (lowest) to seven (highest).
Strategic performance is measured as the geometric annual growth rate in sales from 2002–2005.
Table 3 reveals a number of significant (at p b 0.05) and positive bivariate correlations
amongst the variables. Competition is significantly correlated with Uncertainty, Growth
Strategy, and PMS. Growth Strategy is significantly correlated with PMS, and the latter has
a marginally significant (at p = 0.10) and positive correlation with Strategic Performance.
Given these correlations among variables that span different hypotheses, we use path
analysis for hypothesis testing because this method allows the simultaneous analysis of
multiple relationships, provides measures of overall model fit, and decomposes the
correlations among the variables to test the significance of specific links within the model
(Kline, 2005).11 In contrast, prior research into relationships among the environment,
strategy, PMS, and performance has primarily examined only binary or subsets of
relationships among these variables (Luft & Shields, 2007).
First we ran a full model which contained all possible links among the variables, including
both those paths that were hypothesized and ones not hypothesized. This was done to allow for
relationships that have either not been well established in prior studies, or had been studied
previously in isolation from the remaining factors in the overall causal chain. For example,
Hartmann (2000) reports that prior studies (e.g., Ezzamel, 1990; Gupta & Govindarajan, 1984;
Ross, 1995) have found mixed results for the effect of uncertainty on the use and
appropriateness of accounting-based performance measures, while including a link between
Competition and PMS acknowledges the suggestion of prior research that a more balanced/
integrated PMS may help firms to cope with more competitive environments (e.g., Kaplan &
Norton, 2001). And to account for the well-known effect of growth opportunities on firm
performance, we included as a control the ratio of book value of assets to the market value of
equity (denoted as BTOM; see Ittner, Larcker, & Randall, 2003).
Results for the full model (Fig. 1, panel A) indicated acceptable model fit, with an
insignificant Chi-square of 4.11 (df = 4, p = 0.39) and other absolute and incremental fit
11
Two criteria primarily govern the recommended sample size for path analyses. First, it is suggested that the
ratio of subjects to free parameters should be between 5:1 (Hair et al., 1998) and 10:1 (Kline, 2005) to provide
valid fit indices. In our final model, there were 12 parameters, which would require a sample size of between 60
and 120. Second, the ratio of subjects to degrees of freedom required to ensure stable path analysis is suggested to
be between 5:1 (Hair et al., 1998) and 10:1 (Kline, 2005). Our final model had nine degrees of freedom, which
would require a minimum sample size of 90. Thus, our sample of 104 should be sufficient for the reported
analyses.
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Table 3
Correlation coefficients among variables (n = 104).
Competition
Uncertainty
Growth strategy
PMS
Strategic performance
Competition
Uncertainty
Growth strategy
PMS
Strategic performance
1.000
0.41⁎⁎⁎
0.45⁎⁎⁎
0.35⁎⁎⁎
0.09
1.000
− 0.14
− 0.03
0.12
1.000
0.66⁎⁎⁎
0.10
1.000
0.17⁎
1.000
See Table 2 for variable definitions.
*p b 0.10, and ***p b 0.01. All tests are two-tailed.
indices that were either within or close to acceptable levels (RMSEA = 0.02; CFI = 0.99;
TLI = 0.99).12 Except for a significant and positive link between Competition and Uncertainty, all of the paths outside our hypothesized set were nonsignificant: between the
environmental variables (i.e., Competition and Uncertainty) and PMS as well as Strategic
Performance, and between Growth Strategy and Strategic Performance. Retaining only
the significant paths yielded an improved model fit (χ 2 = 7.11, df = 9, p = 0.63;
RMSEA = 0.00; CFI = 1.00; TLI = 1.03).13 This final path model is presented in panel B
of Fig. 1. Table 4 summarizes how the significant paths related to the hypotheses.
4.2. Hypotheses tests
4.2.1. Environmental factors and competitive strategy (H1)
H1a states that Chinese firms that face greater competition place higher strategic emphasis
on growth. This hypothesis is supported. Results from the final path model indicate a
significant positive relationship between Competition and Growth Strategy (β = 0.61,
p b 0.001). H1b states that Chinese firms' strategic emphasis on growth varies with the
degree of uncertainty in the environment. Results from the final path model indicate a
significant negative relationship between Uncertainty and Growth Strategy (β = −0.39,
p b 0.001). This finding is consistent with prior China-based findings from the early 1990s
(Alder, Brahm, & Graham, 1992; Tan & Litschert, 1994), and opposite in direction to findings
from developed Western nations. Overall, these results imply that Chinese firms' choice of
strategic mission is responsive to the competition and uncertainty in their environment.
12
Absolute and incremental fit indices viewed as robust to sampling and model characteristics were used to
further assess model fit. This is because recent measurement research has suggested that some of the traditional
“goodness of fit” measures (e.g., goodness-of-fit index (GFI) and adjusted goodness-of-fit index (AGFI)) are
sensitive to sample size, number of indicators in the model, size of the factor loadings, and model misspecification
(Hu & Bentler, 1999). Absolute fit indices such as the root mean square error of approximation (RMSEA) assess
how well an a priori model reproduces the sample data, while incremental fit indices such as the Tucker-Lewis
Index (TLI) and Comparative Fit Index (CFI) measure the proportionate improvement in fit by comparing a target
model with a more restricted, nested baseline model. Hu and Bentler (1999) suggest that RMSEA values of less
than 0.06 and TLI and CFI values of greater than 0.95 are indicative of acceptable model fit. Although this
research cautions against solely relying on the traditional goodness of fit indices for assessing model fit, it is
worth noting that our final model had a GFI of 0.98 and an AGFI of 0.95.
13
We also tested for the effect of firm size (measured as the log of assets) and industry in the model. Both
variables were not significant and are therefore excluded from the final analyses.
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Fig. 1. Path analyses results. Panel A: full model. Panel B: final model. PMS = degree of balance/integration in
performance measurement system; BTOM = book value of assets over market value of equity. ⁎p b 0.10, ⁎⁎p b 0.05,
⁎⁎⁎p b 0.01. All reported p-values associated with directional hypotheses are one-tailed, all others are two-tailed.
4.2.2. Competitive strategy and PMS (H2)
Our second hypothesis states that Chinese firms' use of balanced/integrated PMSs
would increase with their strategic emphasis on growth. This prediction is supported, as the
results from the final path model indicate a significant positive relationship between
Growth Strategy and PMS (β = 0.66, p b 0.001). Inspection of the survey data (not
tabulated) revealed that the sample firms use a mix of financial and nonfinancial (including
subjective) measures (mean = 4.76) and that performance measures are explicitly tied to
competitive strategy (mean = 4.57). One sample t-tests show that the means of these
variables are significantly greater than the midpoint (4) of the scale (p-values b 0.01).
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Table 4
Hypotheses test results from the final model (n = 104).
Hypothesized path
Competition–growth strategy
Uncertainty–growth strategy
Growth strategy–PMS
PMS–strategic performance
H1a
H1b
H2
H3
Standardized estimate (β)
p-value a
0.61
− 0.39
0.66
0.18
b0.001
b0.001
b0.001
0.03
See Table 2 for variable definitions.
a
All hypotheses are directional and p-values are one-tailed.
4.2.3. PMS and performance (H3)
Our third hypothesis states that greater use of balanced/integrated PMSs by Chinese
firms increases their strategic performance. This prediction is supported, as results from the
final path model indicate a significant relationship between PMS and Strategic
Performance (β = 0.18, p = 0.03).14
An important point to note about this finding is that it is due to PMS per se, rather than its
mediating the effect of strategy on performance. For mediation to be the case, Growth Strategy
needs to have a significant link to Strategic Performance, which then is rendered insignificant
by the inclusion of PMS in the model, with the latter showing a significant link to Strategic
Performance (Gerdin & Greve, 2004). This condition is not satisfied, as the path between
Growth Strategy and Strategic Performance is not statistically significant in the full model
(β = −0.02, p N 0.10); the bivariate correlation between them also is not statistically significant
(Table 3).
We also determined that PMS does not moderate the effect of strategy on performance.
To test for a moderating effect, we regressed Strategic Performance on Growth Strategy,
PMS, and the interaction between Growth Strategy and PMS; BTOM was included as a
control variable.15 A statistically significant interaction term would indicate the presence of
a moderating effect. Results (not tabulated) indicate that PMS has a marginally significant
positive effect on Strategic Performance (t = 1.51, p = 0.07, one-tailed), but there is no
significant effect of either Growth Strategy (t = − 0.27, p = 0.39, one-tailed) or the
interaction term between Growth Strategy and PMS (t = − 0.19, p = 0.43, one-tailed) on
Strategic Performance.
Taken as a whole, our results indicate that Chinese firms' emphasis on growth is responsive
to the intensity of competition and uncertainty in their environment. Further, Chinese firms
that place a greater emphasis on growth use more balanced/integrated PMSs. In turn, firms that
make greater use of balanced/integrated PMSs have higher strategic performance.
14
We acknowledge that annual sales growth is only one aspect of firm performance. However, it is appropriate
in this study because we are testing the extent to which firms with a growth-based strategy attain their objective.
We do not dismiss the possibility that firms which emphasized strategic priorities other than growth (e.g., cost
efficiency) may have lower sales growth at the same time that they out-perform growth-oriented firms in their
chosen areas of strategic emphasis.
15
A common problem arising from the use of multiplicative interaction terms is high collinearity with one or
both of the multiplicands. Cronbach (1987) suggests centering the multiplicands about their means prior to
creating the interaction term to alleviate this collinearity. This procedure eliminates the multicollinearity created
by the interaction term and has no effect on the reported R2 or the nature of the underlying variables. We followed
this approach.
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5. Summary and discussion
Studies of firms in developed countries in the West indicate that a firm's choice of strategic
emphasis is responsive to the degrees of competition and uncertainty in the environment.
Further, performance-measurement systems (PMSs) are used to support strategy implementation, which then increases performance. Using archival and survey data for 104 exchangelisted Chinese manufacturing firms, this study finds that the competitive strategy for these
firms – specifically, emphasis on growth – is also responsive to competition and uncertainty.
But notably, the relationship to uncertainty goes in the opposite direction to that found in the
West. We also find that Chinese firms with a higher emphasis on growth make greater use of
balanced/integrated PMSs, which have a positive link to strategic performance. Our findings
help reduce the relative lack of knowledge about Chinese firms' strategic responsiveness to
environmental stimuli. As for performance-measurement practices and how they affect
performance, prior research has largely focused on firms from the more developed Western
economies. Our results add to the literature by showing that Chinese firms, like their Western
counterparts, also adopt integrated/balanced PMSs and reap performance benefits from doing
so.
Our use of path analysis to analyze the relationships among the variables of interest in
this study provide several advantages compared to with commonly used techniques in
extant management accounting research, such as regression analysis. First, path analysis
allows multiple relationships to be considered within a single analysis, which provides
evidence on insignificant associations that would not be available in more selective
correlation or regression analysis. Second, it allows measures of fit to be determined which
provides evidence on the overall quality of the model. Lastly, the use of path analysis
provides evidence that environmental competition and uncertainty do not independently
influence either the use of a balanced/integrated PMS or strategic performance and that
strategy does not independently influence strategic performance. These findings, gleaned
from our use of path analysis, shed light on some relatively unstudied aspects of how
Chinese firms operate.
The responsiveness of Chinese firms to the environment, as reported in our research,
suggests that they will remain competitive in the global economy even as some of their
advantages (e.g. cheap labor) are eroded by the emergence of other transitional economies
(e.g. Vietnam). These findings help potential investor's, joint ventures partners, suppliers,
customers and competitors in assessing the value of these firms. Our findings also indicate
that evaluations of Chinese firms would benefit from considering aspects of their internal
processes and systems that are not typically revealed in external financial reports (e.g., their
performance-measurement systems). A further implication is that the firms in our sample
could be useful role models for others to emulate, in much the same way that Hangang's
“cost negation” method has been touted as an example of effective management.16
Hangang is the abbreviated English name of a Chinese iron and steel company. Its “cost negation” method
was held up as a major reason for the firm’s economic success and a model for others to emulate. The company
set internal transfer prices among branch factories by taking the average market prices of half-finished goods,
adjusting these for market changes semi-annually or annually. The transfer prices were included in calculating
each factory’s manufacturing costs. If a factory’s manufacturing cost was lower than the target set by the
company, then there would be a reward. Otherwise, no reward would be forthcoming (Chow, Duh, & Xiao, 2007).
16
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But it must also be recognized that like any study of this type, our results are subject to
several limitations. In particular, analyzing cross-sectional data cannot reliably identify
causal relationships. A longitudinal study, or at least one that compares early vs. late
adopters, could help to resolve this uncertainty. There also are potential concerns with non
response bias, sample size, model specification, the difficulty of using a survey instrument
to gather factual, representative data on management perceptions and organizational
practices, and attributes of the sample. In particular, to be listed on China's two major
exchanges, firms are required to meet certain size thresholds and to have a sustained history
of profitability (SSE, 2008; SZSE, 2007). As such, our sample is likely to be representative
of the larger and more successful Chinese firms, rather than all Chinese firms. Perhaps the
relatively high education levels of the managers in our sample are another manifestation of
this sample characteristic. Since prior research has suggested that China still faces a
shortage of accounting and managerial personnel with the expertise to introduce or
implement improved systems and practices, it remains an open question whether smaller
Chinese firms, and/or ones with less educated managerial personnel also are effectively
responding to the environment. If future research finds otherwise, this should add impetus
for initiatives to increase managerial expertise, such as formal training programs and venues
for the sharing of knowledge and experiences. In this regard, it is worth noting that the
management accounting literature in China has made a useful start towards disseminating
knowledge about cutting-edge techniques and their application by Chinese firms (Duh,
Xiao, & Chow, 2008).
Further insights also may result from deepening and broadening the scope of analysis. In
the case of strategy, for example, we have only considered this construct at a highly aggregated
level. Even among firms that seek growth, there are many different avenues for attaining this
outcome. Some firms may focus on innovation and bringing new products to market, while
others may emphasize customer service. Yet others may concentrate on cost control and
offering low prices (Langfield-Smith, 2007). Each focus is likely to require a different mix of
performance measures. For instance, firms that seek growth via innovation may find it useful
to monitor the number of new patents obtained (Jung, Wu, & Chow, 2008). In similar fashion,
the most effective mixes of strategy and PMS may differ among firms from the manufacturing
and non-manufacturing sectors. And even though the firms in our sample are reaping
performance gains from their choice of strategy and PMS, this does not necessarily imply that
they are realizing the full benefits. Insight into this issue might be gained from exploring the
processes Chinese firms go through when adopting their competitive strategies and PMSs. It is
possible, for example, that firms which use more balanced/integrated PMSs also use their
performance measures in a different way from those with less balanced/integrated systems.
They also may engage different performance measures.
Going even further, not all the systems and processes a firm uses are necessarily explicit
and formal (Birnberg & Snodgrass, 1988; Snell, 1992), nor is managing an enterprise
limited to measuring performance (Chenhall, 2007). For example, a firm's approach to
human resource management, including personnel selection, empowerment, training, and
development also can affect performance (Bae & Lawler, 2000; Becker & Gerhart, 1996;
Huselid 1995). Useful insights can result from examining how Chinese firms' PMSs
complement, substitute for, and/or interact with these other components of their
management systems. Since detailed information about competitive strategies, performance
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metrics, systems, and processes may only be available via interviews and firms' internal
records, field studies using qualitative and quantitative methods will likely be needed to
pursue these investigations (Merchant & Van der Stede, 2006). But even if this reason for
using other methods were absent, method triangulation still is desirable because each
method has unique strengths and weaknesses (Birnberg & Snodgrass, 1988).
Finally, our finding that Chinese firms place less emphasis on growth in the face of greater
uncertainty, whereas their Western counterparts do the opposite, suggests that there is room
to explicitly consider the unique characteristics of Chinese culture (see Chow et al., 1999,
2000; Hofstede, 1984). For instance, research suggests that Chinese people are more
inclined than their Anglo-American counterparts to subjugate their self-interests to those of
the group (i.e., high “collectivism”), to accept and respect that authority and power differs
across levels of a hierarchy (i.e., high “power distance”), and to adopt a longer time horizon
for decision making (i.e., high “Confucian Dynamism”) (Bond, 1991; Chinese Cultural
Connection, 1987; Hofstede, 1991). There is room for further research into how these
cultural differences affect managers' strategic and operational response to environmental
forces as well as how their subordinates react to these choices.
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