THE STRATEGY CONFIGURATION OF CHINESE SMEs

ZHI TANGE. Philip Saunders College of Business

Rochester Institute of TechnologyMax Lowenthal Building, Room 2327

107 Lomb Memorial DriveRochester, NY, 14623-5608

U.S.A.ztang@saunders.rit.edu

and

CLYDE EIRÍKUR HULLE. Philip Saunders College of Business

Rochester Institute of TechnologyMax Lowenthal Building, Room 3317

108 Lomb Memorial DriveRochester, NY, 14623-5608

U.S.A.chull@saunders.rit.edu

NOTE: This is the pre-proof final DRAFT that was accepted forpublication. The published version is as follows:

Zhi Tang & Clyde Eiríkur HullThe Strategy Configuration of Chinese SMEs

Journal of Enterprising CultureVol. 19, No. 3 (September 2011) 229– 259

DOI: 10.1142/S0218495811000799

APA citation style:

Tang, Z., & Hull, C. E. (2011). The strategy configuration of Chinese SMEs. Journal of Enterprising Culture, 19(03), 229-259.

This paper investigates how Chinese SMEs configure marketing, cost-control, and innovation strategies in order to attain betterorganizational effectiveness. Rather than the more standard approach of suggesting that SMEs focus exclusively on one strategy, we hypothesize that when a strategy configuration is composed of multiple prioritized and related strategies, organizational effectiveness will be improved. Data collected from 133 small and medium-sized Chinese SMEs verified our hypotheses. The implications of our study for Chinese SMEs, China’s policy makers, and overseas investors are discussed.

INTRODUCTION

Due to resource insufficiency, small and medium-sized

enterprises (SMEs) have long been advised to keep their strategy

pure instead of pursuing multiple strategies simultaneously

(Borch, Huse, and Kenneseth 1999; Ebben and Johnson 2005; Porter

1980). Though this approach has prevailed in stable, Western

economies, it may not be universally valid. Recent studies hint

that due to the ever-changing nature of emerging economies such

as China, a combination of different strategies outperforms any

single strategy (He 2007; Tang et al. 2010). To provide a

systemic and thorough perspective on this issue, we draw on

configuration theory (Chandler 1962) in this project to examine

how Chinese SMEs configure their strategies to improve

organizational effectiveness, i.e., how effectively a firm achieves its

goals. We argue that a well-configured mix of strategies will

improve organizational effectiveness.

Strategy configurations, “multidimensional constellation[s] of

conceptually distinct” strategies that occur together within a

company (Meyer et al. 1993), are the essence of a firm’s strategy

application. A strategy configuration consists of two aspects:

1

what strategies are used and how these strategies are structured.

While most strategists focus on what strategies SMEs use (Peredo

and Chrisman, 2006; Strotmann 2007; Venkataraman and Van de Ven

1998), little attention has been paid to how SMEs diversify and

prioritize different strategies. We believe that the way a SME

uses its strategies also influences the effectiveness of those

strategies, which in turn determines the extent to which a SME

can achieve its goals. In this study, we follow the SME

definition specified in the “Interim Provisions on the Standards

for Medium and Small Enterprises” (2003) which defines SMEs as

firms with fewer than 2000 employees and total sales of less than

300 million Yuan, or total assets of less than 400 million Yuan.

By investigating how Chinese SMEs structure different

strategies to improve organizational effectiveness, we intend to

make two contributions to strategy configuration research.

First, we provide evidence that to best pursue an organization’s

goals, adopting the right strategies isn’t enough: SMEs need to

structure these strategies properly. The prioritization and

relatedness of the strategies can impact how effectively each

strategy is implemented. Although this issue has attracted

2

attention from theorists (Dess et al. 1999), to our knowledge it

has not been developed and verified, especially in a SME context.

Given the resource constraints of SMEs, the consequences of

inappropriate strategy configuration can be more severe for them

than for large corporations. Noting this, He and Wong (2004)

call for a systematic investigation of how a firm should direct

attention and allocate resources among multiple strategies and

how configurations of strategies may improve or damage firm

performance. This study provides a response to their call.

Second, the impact of the Chinese institutional environment

on its firms, especially SMEs, cannot be over-emphasized (Li and

Atuahene-Gima 2001; Li and Zhang 2007; Tang et al. 2008).

Compared with stable, Western economies, China posesses two major

characteristics that have implications for SMEs (Tang et al.

2008). First, the ever-changing environment presents abundant

opportunities for SMEs to initiate innovative strategies.

Second, however, the cut-throat competition makes traditional

strategies such as cost-control still relevant. Thus, we believe

that strategy configuration studies are especially important to

understand the strategic behaviors of SMEs in China.

3

In the next section we review strategy configuration

research. We then hypothesize how different strategy

configurations (prioritized vs. non-prioritized; related vs.

unrelated) impact organizational effectiveness. In the research

design section we discuss the sample, data collection and

analysis procedures. Results and implications are discussed in

the final sections.

LITERATURE REVIEW

Configuration theory recognizes organizational systems as

composed of multiple, co-existent relationships instead of either-

or relationships (Fong 2006; Kosmala and Herrbach 2006; Kreiner

et al. 2006; Piderit 2000). Configuration scholars believe that

the congruence among a firm’s strategy, technology, structure and

process ultimately determines its overall effectiveness (Chandler

1962; Fry and Smith 1987). Different strategies may demand

different, if not opposite, requirements of the organization,

such that attempting to pursue them simultaneously may be seen as

paradoxical (Han and Celly, 2008). When multiple strategies are

employed, these requirements need to be coordinated or controlled

4

in such a way that the organization can facilitate these

strategies with bearable resource demands.

Strategy research in Western countries has consistently

suggested that SMEs, quicker and more nimble than their larger

counterparts but constrained by scales of economy, should pursue

differentiation strategies (Dean et al. 1998). Differentiation

strategies, especially in innovation, have drawn many advocates

among entrepreneurship scholars as an effective means for SMEs to

pursue success. Borch et al. (1980) said that small firms could

improve performance by being “technology firms” (focusing on

product innovations), “managerial firms” (focusing on marketing

strategies), or “traditional firms” (relying on financial or

locational benefits), but would damage growth potential by being

“impoverished firms” that do not have a consistent strategy.

Ebben and Johnson (2005) verified that firms that mixed

efficiency and flexibility (marketing) strategies significantly

underperformed those that adopted just one; however, no

significant performance difference was found between firms using

either strategy. Thus, in studies of Western SMEs, strategy

purity has been found to persistently outperform a hybrid

5

strategy configuration. However, as Moss (2005) indicates, the

Western institutional environment is not a universal one, and in

non-Western settings other models may apply. Han (2007) and Han

and Celly (2008) find that strategic ambidexterity helps

companies competing in an international setting. SMEs in China

are recommended to adapt their strategies to the local

institutional environment (Man, Lau and Chan, 2008).

China indeed provides grounds for Chinese firms to configure

strategies differently than do their Western peers. There are no

studies that directly investigate how Chinese SMEs compose

strategies uniquely, but relevant research seems to signal that

in China, strategy hybridity rather than strategy purity is

preferred. For example, by using the Chinese SME’s sample, Tang

and his colleagues (2010) found that in a complex environment but

with plentiful opportunities, a blend of different strategies can

better deal with environmental uncertainty. Davies and Walters

(2004) clustered firms based on their scores on four strategies –

marketing intensity, emphasis on efficiency, product line

breadth, and commodity to specialty products – and found that

“aggressive” firms, which had the highest scores on all four

6

strategies, enjoyed performance superior to others. This finding

also indicates that a hybrid strategy configuration is rewarded

in China. Note that marketing may be business-to-consumer or

business-to-business. Lastly, employing Miles and Snow’s (1978)

typology, Luo and Park (2007) found that, compared with

prospector and defender strategies, analyzer strategies fit the

institutional environment of China best. Luo and Park’s

definition of prospector strategies resembles generic

differentiation strategies in innovation, in that prospectors

emphasize “scanning, identifying, and capitalizing emerging

market opportunities.” Their defender definition fits cost-

control strategies: “increasing efficiency of existing operations

through continual improvements and developing cost-efficient core

technology while seldom adjusting internal configurations.”

Analyzers were described as “a unique combination of the

Prospector and the Defender orientation,” which was a “hybrid” of

differentiation and cost-control strategies. Luo and Park’s

findings provide evidence that in China, a hybrid strategy

configuration may outperform a pure strategy configuration.

7

Summarizing the above findings, we find that although

classic SME research conducted in Western countries clearly

states that SMEs need to keep strategy pure, studies in China

seem to indicate the opposite, that a hybrid strategy

configuration provides better protection. We believe that this

distinction derives from the differences in the institutional

environment between the West and China. Very few countries in

recent history have experienced the number and magnitude of

societal changes that have occurred in China in such a short

period; these changes have been “deliberately designed” to

radically reshape the beliefs and attitudes that distinguish

Chinese managers’ behaviors from those of managers in a typical

developing or mature economy (Ralston et al. 1999). When a SME

has the time to develop its proficiency in one strategy in the

relatively stable environment that has characterized most Western

economies, Chinese SMEs have to learn to cope with a complex,

rapidly changing environment that features multiple stages from

the history of the West compacted into a very short time. Thus,

Chinese SMEs may be forced to adopt a more complex strategy

configuration than those used by their Western peers. If Chinese

8

SMEs indeed configure strategy differently from their Western

counterparts, the implications for researchers and practitioners

should be significant.

In this paper, we adopt Miller’s (1986) strategy typology, a

variation of Porter’s typology. Porter distinguishes cost

leadership from differentiation. Miller’s typology further

distinguishes between differentiation in marketing and

differentiation in innovation. SME researchers prefer Miller’s

typology as it emphasizes the unique role of innovation

strategies (Moreno and Casillas 2008). We propose that all

organizations are potential adopters of multiple strategies.

However, whether this potential is realized depends on the

specific context and capability of the organization. In China,

due to the constraints of the institutional environment and the

paucity of slack resources, SMEs are encouraged to adopt multiple

strategies if and only if these strategies are prioritized and

related.

HYPOTHESIS DEVELOPMENT

Strategy Prioritization

9

If a firm is considered as a potential adopter of multiple

strategies, the difference between a pure strategy configuration

and a hybrid strategy configuration is that the former presents a

highly prioritized or unbalanced strategy system (e.g., 95% of

the time the firm relies on marketing activities and only 5% of

the time on innovative or cost-control activities) while the

latter presents a non-prioritized or balanced strategy system

(e.g., equal importance on all strategic activities). The

prioritization of strategies thus indicates the degree to which a firm

employs a non-balanced approach in diversifying its strategies.

Whether a firm can actually adopt multiple strategies

without prioritizing them depends on its resources and capability

as well as on the lenience of the environment. A non-prioritized

configuration will prolong decision-making, as managers must

determine how to allocate limited resources among different

strategies whenever a new strategic activity is proposed.

Without prioritization, the relative importance of each strategy

has to be reassessed continually, and resources need to be

allocated to meet multiple, or even opposing requirements from

different, unweighted strategies. Pursuing market expansion,

10

controlling operational costs and administration expenses, or

spending resources on innovations that may lead to future

competitiveness, are common, often exclusive, strategic options

(Miller 1987). Their conflicting logics make it difficult to

apply these strategies together, especially for SMEs with scarce

resources. The resource-saving nature of cost-control strategies

and the resource-consumption nature of marketing and innovation

strategies are naturally in perpetual conflict and cannot be

easily coordinated. Thus, prioritizing, rather than balancing,

strategies would appear to be the appropriate solution for SMEs.

However, a resource-rich, munificent environment can reduce

the need among SMEs for a prioritized strategy configuration.

Nevertheless, the current institutional environment of China does

not provide such a nurturing environment, especially to SMEs.

Applying the widely accepted country institutional profile

(Busenitz et al. 2000; Scott 1995), we analyze the regulatory,

cognitive, and normative impacts of the Chinese environment on

SMEs’ strategy configurations.

The regulatory environment of China, which consists of laws,

regulations, and codified government policies that may provide

11

support and reduce risks for businesses, challenges Chinese SMEs

seeking to employ hybrid strategy configurations (Busenitz et al.

2000). Though the Chinese national government is pushing hard to

establish laws and regulations to help a gradual transition from

the central-planning distribution system to a market-oriented

system, the legal system in China is still largely subject to the

arbitrary interpretations of regional governments (Hoskisson et

al. 2000; Li and Atuahene-Gima 2001). As a result, businesses in

China tend to align themselves with the direction promoted by the

regional government. When growing local GDP was the main goal of

local governments, Chinese SMEs emphasized cost-control

strategies that could produce instant economic gains. However,

when, for example, the Guangdong government began to promote

innovation, many local ventures responded by switching from cost-

control to innovation strategies or, eventually, by leaving the

province. In a government-directed economic system, SMEs

typically adopt the strategy the government wants instead of

trying multiple strategies.

The cognitive environment in China, which consists of the

knowledge and skills possessed by the people in a country

12

pertaining to establishing and operating a business (Busenitz et

al. 2000), also poses challenges to Chinese SMEs in adopting a

complicated strategy configuration. Though Li (2009) notes

influxes of Western-trained Chinese repatriate entrepreneurs, the

cognitive environment within China is still not very supportive

of entrepreneurship. Entrepreneurship education, especially at

the college level, just started a few years ago in China. Fewer

than 20% of colleges have integrated entrepreneurship programs in

their curriculum. Most entrepreneurs lack training in the areas

of business plan preparation, pricing, negotiation, management of

the workforce, and handling of cash flow. As a result, the self-

efficacy of Chinese SME owners is notably lower than that of

their peers in neighboring countries (Baugh, Cao, Le, Lim, and

Neupert, 2006). Due to this knowledge gap, owners of Chinese

SMEs are less confident in, and thus less likely to employ,

complicated strategy configurations.

The normative environment, the degree to which a country’s

culture, values, beliefs, and norms favor small business

activities (Busenitz et al., 2000), has changed dramatically in

the past three decades in China. Strong materialism has

13

accompanied the market-oriented economic system and is eroding

Chinese “traditionality” (Hui, Lee, and Rousseau, 2004, p 231),

which favors trust, commitment, and long-term orientation. Until

this materialism can find a balance with traditional values to

form a new set of ethical codes, trust continues to erode while

bribery and corruption increase. This hurts local ventures’

willingness to develop complicated strategies based on market

principles (Li and Zhang, 2007). Instead, Chinese SMEs get

entangled with non-market activities necessary to placate

governmental officials (Peng, 2002; Robertson and Watson, 2004).

These entanglements further constrain their incentives and

resources for designing complicated strategy configurations.

Therefore, in the current institutional environment of

China, the tension among different strategies can be even more

serious for SMEs than their western counterparts. Chinese SMEs

that employ multiple generic strategies equally have to face both

external and internal constraints. SMEs that adopt cost-control

strategies, through which the firm tightly controls costs,

including innovation and marketing costs, and cuts prices in

selling a basic product, often lack advanced technologies or

14

well-known brands (Wu and Pangarkar 2006). These Chinese SMEs

mainly rely on the Original Equipment Manufacturer (OEM)

approach, under which they focus on manufacturing and assembling

products for brand businesses, especially overseas brands,

leaving the marketing and R&D responsibilities to the outsourcing

companies. Because of their almost unlimited supply of cheap

labor, this strategy has worked for many Chinese SMEs. For

example, in Guangdong province, the world’s manufacturing base

for about 70% of shoes, 50% of watches, and 40% of computers and

computer components, SMEs focus on competing to produce their

product at the lowest possible cost and are seldom willing or

encouraged to invest in developing their own marketing or

innovation strategies.

On the other hand, SMEs who adopt marketing strategies try to

create market niches by uniquely meeting a particular need

(Miller, 1987). For them, building a marketable and recognizable

brand is the main objective. To do this, they need to spend

significant resources on market promotions and advertisement

campaigns, which often impose constraints on controlling costs.

Compared with their counterparts in Western countries, it is

15

often more resource demanding for Chinese SMEs to employ

marketing strategies. For example, in China, the business credit

system is under-developed and it is harder for SMEs to get credit

from suppliers, customers, banks, and government agencies than it

is for their peers in Western countries. Furthermore, it is

often more resource demanding for Chinese SMEs to build

relationships with suppliers and distribution channels because it

involves setting up physical offices or sparing resources to

entertain stakeholders. These institutional conditions require

that Chinese SMEs establish their brands by spending large

amounts of cash with minimal use of credit. As a result, Chinese

SMEs have a difficult time keeping their costs, especially

marketing expenses, low.

Innovation strategies, through which firms introduce new products

or services to the market rather than simple or cosmetic

departures from previous offerings (Miller, 1987), can also pose

constraints on Chinese SMEs with respect to other strategies. As

mentioned, cost-control and marketing strategies often focus on

improving current processes or locating more customers for

current products, while innovation strategies distract

16

organizations’ attention from current routines and concentrate on

new areas that have potential marketability. Instead of refining

current processes, innovation-oriented firms spend resources on

testing, assessing, and exploring these new areas. These

resources thus cannot be spent on marketing existing products or

saved to reduce costs. Furthermore, the weak protection of

private property and intellectual properties in China makes it

even harder for SMEs to pursue future competitiveness through

innovation strategies, which do not produce the same short-term

economic gains that marketing or cost-control strategies offer

(Li and Zhang, 2007). It is thus not surprising that the ratio

of R&D expenses to sales among Chinese SMEs is lower than 1%, far

less than the 7-8% ratio in mature, Western economies. Chinese

SMEs will be largely constrained when attempting to

simultaneously employ innovation strategies with cost-control or

marketing strategies.

In summary, we believe that in today’s China, while using

multiple strategies is possible, even advisable, conditions do

not permit SMEs to adopt a strategy configuration that is

composed of multiple, equally important strategies. Pursuing all

17

strategies equally is ineffective. In contrast, a configuration

with a clear strategic focus (i.e., prioritized or unbalanced)

enables Chinese SMEs to concentrate limited resources in the area

where they perform best, and allows them to facilitate and

coordinate the strategy-making and implementation processes

within the organization comparatively easily. As such, we

propose:

Hypothesis 1 In China, SMEs that prioritize their strategies havehigher organizational effectiveness.

Strategy relatedness in China

If adopting a strategy configuration that is a hybrid of

multiple, equally important strategies is not recommended in China,

how should we interpret previous findings that suggest the

opposite? We believe that prioritization does not mean that

different strategies are mutually exclusive, and this is where

relatedness plays an important role. When SMEs prioritize

different strategies, related strategies can move to the top of

the priority list while unrelated strategies stay at or near the

bottom; by doing so, organizational effectiveness will be

improved. For instance, when Firm A spends 80% of its resources

18

on marketing strategies, 15% on innovation strategies and 5% on

cost-control strategies, according to H1, it will outperform Firm

B that spends equal amounts of resources on all three strategies.

However, when Firm C spends, for instance, 80% of its resources

on cost-control strategies, 15% on marketing strategies and 5% on

innovation strategies, will it outperform or underperform Firm A?

We believe that Firm C will underperform Firm A even though both

firms have exactly the same strategy prioritization structure.

The reason lies in the relatedness of strategies. When a firm’s

top two strategies are highly related (e.g., such as marketing

and innovation strategies for Firm A), it will perform better

than a firm for which the top two strategies are not highly

related (e.g., such as cost-control and marketing strategies for

Firm C).

Related strategies are strategies that draw upon the same

resources, capabilities, or strategic principles; strategy relatedness

is the degree to which two strategies do so. For some

strategies, the underlying logics may be opposed, such as

marketing strategies and cost-control strategies, but for others,

the working logics can be related to some extent (Porter, 1980).

19

For example, when a marketing-strategy-dominated firm researches

customer preferences to prepare for market campaigns, such

research also provides data for developing or introducing new

products to meet this market need (Webster, 1994). Although the

link between cost-control strategies and innovation strategies

are not as clear, previous research has also found that the

effort of improving business efficiency can stimulate procedure

and process innovations, especially in an incremental manner

(Terziovski, 2010).

When adopting multiple related strategies, Chinese SMEs will

be able to control marginal cost increases since resources can be

shared by different strategies, while benefitting from the

options provided by multiple strategies. Efficiency-oriented

strategies polish a firm’s current capabilities for a

comparatively certain return and provide internal funding for

innovations and marketing strategies (Luo and Park 2007), while

innovation and marketing strategies broaden the firm’s vision and

develop new domains for (probably) better market standing in the

long run (Dess et al. 1999). From a dynamic perspective,

innovation is often the cause of marketing and cost-control

20

strategies because SMEs need to refine their new capabilities

after capturing them through explorative activities (Terziovski,

2010). Conversely, marketing and cost-control efforts provide

the motivation for innovations by exhausting the current

alternatives and generating a sense of dissatisfaction with the

prevailing rules (Holmqvist, 2004). Therefore, these strategies

do not just complement each other; they also nurture each other.

The more related these strategies, the more likely a SME can

benefit from employing multiple strategies at low additional

cost, and the more likely the SME will be able to avoid the

tension created by the opposing facets of strategies: Cost-

control concerns may trap firms in core rigidities or

organizational myopia and undermine innovative capability and

marketing efforts (Levinthal and March 1993), while innovation

activities may disrupt a company’s current successful routines

(Teece et al. 1999). When the relatedness or complementariness

of different strategies is the emphasis of employing multiple

strategies, a delicate balance among these strategies may be

achieved and firms can “build layers of advantages” (Dess et al.

1999). When strategies are related, the use of resources can be

21

amplified, as more than one strategy can benefit from the same

resources, and organizational effectiveness should thus be

improved. As such, we hypothesize that:

Hypothesis 2 In China, a related (versus unrelated) strategy configuration improves SMEs’ organizational effectiveness.

RESEARCH METHODOLOGY

Sample and data collection procedures

Data were collected from two sources in China. A field

survey provided the data about organizational strategies,

organizational effectiveness, employee number, and slack, while

industry effect variables were calculated from archival Chinese

stock market data.

To increase the generalizeability of this study, we adopted

a multi-industry sample. Controlling industry effects is thus

important in our model. To calculate industry effect variables,

we collected archival data such as industry sales and profit from

Shenzhen Securities Information Co., Ltd. (SSIC). SSIC is the oldest

professional provider of security information service in China.

Backed by Shenzhen Stock Exchange and Securities Times, it is

empowered by Shenzhen Stock Exchange (SZSE) to authorize real-

22

time quotations as well as to disclose and manage the corporate

information of companies listed in Chinese stock markets. SSIC

is also the sole agent of Securities Times, with the power to

authorize or license the publishing of its information. Following

Palmer and Wiseman’s (1999) suggestions, we used stock market

data to approximate industry munificence and instability.

Organizational data were provided through a field survey

conducted in the northeast of China. A Chinese national

consulting company based in Beijing was hired to distribute the

survey. The company keeps a current list of SMEs in northeastern

China, and has direct and indirect business relationships with

most of these firms. A stratified random selection method was

used to choose the survey subjects. According to the China

Statistical Yearbook, manufacturing industries account for about

2/3 of the national GDP. Therefore, we randomly selected 333

firms from manufacturing industries on the list while 167 were

randomly chosen from service industries. The survey was

developed in English and then subjected to a double back-

translation process for translating international surveys

(Brislin, 1980).

23

For the pretest, one top management team member was

recruited from each of eight firms not in our sample of 500,

randomly chosen from three industries (electronics, machines, and

service). These top management team members were chief executive

officers, chief finance officers, chief operations officers, or

other chief executives in charge of a main function and who have

substantial knowledge about their firms. We asked them about the

face validity of the measures and received general confirmation

of the appropriateness of applying the Western measures in China.

They flagged a few items as “ambiguous.” We reworded and

resubmitted the items for another round of double back-

translation. The process was continued until all eight

respondents were satisfied.

When the survey was ready, all 500 firms in the sample were

contacted by telephone and/or email and asked to participate in

the survey. A dozen firms declined with reasons such as “Our CEO

is too busy to participate” or “We are not interested.” For

these firms, a replacement firm was randomly selected from the

same industry. The questionnaire was then uploaded online and

all submissions were automatically downloaded into an Access

24

database.

From December of 2005 to February of 2006, 207 firms

participated, yielding a response rate of 41.4% (207/500). The

employee numbers of these companies ranged from 5 to 791, which

categorizes them, in China, as SMEs. Five firms that indicated

they were in an “other” industry were excluded from analyses for

non-identifiable industry effects. Chief officers are generally

very busy, so to test for the possibility of respondents

answering questions in a casual or indifferent manner, we asked a

question about one of the firm’s most important financial indices

– firm sales – twice, but in different formats and at different

places in the survey. The second question in the survey asked

respondents to check one of the following six categories

according to the companies’ sales: less than 200,000 Chinese Yuan

(RMB); 200,000 – 400,000 RMB; 400,000 – 600,000 RMB; 600,000 –

800,000 RMB; 800,000 – 1 million RMB; and more than 1 million

RMB. At the end of the survey, respondents were asked to fill in

the exact amount of their companies’ sales. Twelve respondents

answered these two questions inconsistently and were judged

unreliable; their responses were excluded from the analysis. The

25

remaining 190 cases well represented the industry distribution in

China, with 64.3% of them in manufacturing industries, which is

about the same percentage as applies nationally.

Further investigation found 57 missing-value cases; the

final sample included 133 cases. The usable-case response rate

was 26.6% (133/500). ANOVA was employed to test for possible

biases between the final sample and the missing-value cases. No

significant difference was found in our key variables such as the

number of employees, strategies, performance, and slack.

Measure

Strategy. Previous studies suggest that a firm’s strategic

activities can be categorized into generic groups (Rajagopalan,

1997). Based on previous studies (Ashmos et al., 1996; Davies and

Walters, 2004; Miller, 1987; Rajagopalan, 1996) and the opinions

of Chinese chief officers, we were able to identify 11 important

strategic activities that are frequently used by Chinese SMEs.

These strategic activities were: advertising, market

segmentation, competitive pricing, marketing promotion, hiring a

marketing consulting company, automating suppliers and inventory

26

management, automating customer service, conducting research and

development on new products, conducting research and development

on new business processes, reducing operating costs, and reducing

fixed costs. Respondents were asked how often they employed these

strategies on a 5-point Likert scale (“1” = never; “5” = Very

often).

We then conducted exploratory factor analysis (EFA) on these

11 strategic activities to extract strategy types. By employing

the principal component method with oblique rotation and by

analyzing the correlation matrix, three factors were extracted

with an eigenvalue equal to or greater than 1 (eigenvalue =

1.17). The KMO measure of sampling adequacy was 0.70. KMO

calculates both for the entire correlation matrix and each

individual variable in order to evaluate the appropriateness of

applying factor analysis. Values above 0.50 indicate that factor

analysis is appropriate. Bartlett's test of sphericity was

significant at the 0.001 level. Bartlett’s test is used to check

if the items in the correlation matrix are correlated. A

significant test result indicates that the strength of the

27

relationship among items is strong, so proceeding with a factor

analysis of the data is appropriate.

An examination of the specific items in each factor revealed

that the three factors clearly represent three distinct generic

strategies: marketing, cost-control, and innovation. Sixty-one

percent of the total variance was explained and no item loading

was lower than 0.50. Furthermore, the component correlations of

the three factors were from 0.06 to 0.22 – lower than 0.50,

indicating that there were no strong correlations among the three

factors and thus, they were distinctively different from each

other and no further EFA was needed. The Cronbach’s Alphas for

marketing, cost-control, and innovation strategies were 0.76,

0.69, and 0.67, respectively. Items and factor loadings are

included in Table 1. The arithmetic averages of items in each

factor were used to measure the three strategies.

____________________________________________________________

Insert Table 1 about here____________________________________________________________

Strategy prioritization. To boost the robustness of our analysis

and allow cross-validation of the test results, we adopted two

28

different measures from previous management literature to gauge

the prioritization of strategy configuration. Previous studies

suggest two major approaches to measure the prioritization

structure. The first measure is standard deviation (SD), which

has often been applied to measure the spread of variability in a

variable (Weiss, 2004). We applied the SD of these three

strategies’ use frequency as the first prioritization measure. A

low SD means that a firm employs all three strategies with almost

the same frequency, indicating a balanced or non-prioritized

policy. By contrast, when a firm clearly prioritizes its

strategies and makes one or two strategies more important than

others, the SD is higher. To be aligned with our

conceptualization, we subtracted the SD measure from a constant

to form the prioritization measure. Therefore, a high value indicates

a balanced strategy configuration while a low value indicates a

prioritized strategy configuration.

The second strategy prioritization measure is the entropy

measure widely used in strategic management literature (Bigley

and Wiersema, 2002; Jacquemin and Berry 1979; Palepu 1985). The

entropy measure is often used to gauge the diversity or

29

variability of an organizational system. We adapted this measure

to Likert scales, as expressed in Equation ①. In Equation ①, S

represents the strategy use frequency, and i indicates the three

generic strategies. A high entropy measure means that the system

is greatly diversified and different components in the system

share about the same weight. A low entropy measure in this

scenario means that the firm possesses a strictly prioritized

strategy configuration in which one or two dominant strategies

overshadow others. We thus calculated the entropy measure of the

three strategies’ use frequency as the other assessment of the

strategy prioritization.

Strategy relatedness. We also developed two sets of measures to

evaluate strategy relatedness in order to cross-validate our test

results. The first is the relatedness measure of all three

generic strategies, and the second set of measures assesses the

relatedness between any two strategies. Prior studies have seldom

measured the relatedness of strategies; however, exploratory

factor analysis (EFA) provides useful information for us to

30

identify the strategies’ relatedness. The first relatedness measure

is a composite measure that evaluates the relatedness of all

three strategies. This measure is based on the Component

Correlation Matrix generated by EFA. The Component Correlation

Matrix provides the correlations of the three strategies based on

analyzing the loading values of each strategy’s activities

assigned in oblique rotations, and it evaluates the association

of each item in each strategy with other items in the same

strategy (within group variance) as well as the association with

other items in different strategies (between group variance). The

formed correlations between the three strategies thus

comprehensively assess how often, when a SME frequently uses one

of the strategies, it will also adopt each of the others. For

instance, marketing and cost-control strategies were correlated

at 0.088 as given by EFA. This indicates that in our sample, when

a firm often uses marketing strategies, the likelihood for it to

frequently adopt cost-control strategies is 0.088. This number

shows how much marketing and cost-control strategies’ use

frequencies are related in our sample. Similarly, we found that

marketing and innovation strategies were correlated at 0.223, and

31

cost-control and innovation strategies were correlated at -0.053

in our sample. We were then able to use these correlations to

weigh each pair of strategies, as Equation ②. Equation ② is a

composite measure that weighs any two strategies by their

correlations, and it gives more weight to the combination of

marketing and innovation strategies than the other two pairs

because marketing and innovation strategies are correlated at

higher values than are the other two pairs. The pair of cost-

control and innovation strategies receives a negative weight in

Equation ② because in China, EFA found these two strategies are

negatively correlated with each other. By taking the

correlations of these three strategies into account, this

composite relatedness measure reflects how much interdependence

or relatedness a firm will obtain from adopting all three

strategies. For instance, when a firm mainly relies on marketing

strategies, the relatedness value of its strategy configuration

will be much higher than that of a firm that mainly relies on

cost-saving strategies, because marketing strategies correlate

with the other two strategies at a higher level than cost-control

strategies.

32

Simplifying, we can rewrite Equation ② as equation ③:

In equation ③, each generic strategy is weighted by its

“relatedness factor,” which is based on each generic strategy’s

correlations with the other two strategies. For example,

marketing strategies correlate with innovation strategies at

0.223 and correlate with cost-control strategies at 0.088 in

Equation ②. Thus, marketing strategies get the highest

“relatedness factor” at 0.311 (0.223 + 0.088) among all three

strategies. Cost-control strategies, on the other hand,

correlate with marketing strategies only at 0.088, and depress

(i.e., are incompatible with) innovation strategies at -0.053;

thus their “relatedness factor” is the least, 0.035 (0.088 –

0.053). Innovation strategies have a “relatedness factor” in

between, 0.170 (0.223 – 0.053). Thus, each relatedness factor

captures the associations of one strategy with the other two.

The relatedness factors thus give us the chance to form a

set of relatedness measures to cross-validate the above composite

33

measure. This set consists of three variables that weigh the

relatedness of any two of the three strategies. The first

variable measures the relatedness of the strategy configuration

that is composed of only marketing and innovation strategies

(RelatednessMI), as in equation ④:

Equation ④ reflects the level of relatedness of the

configuration when a strategy configuration is only composed of

marketing and innovation strategies. For example, a firm that

mainly relies on marketing strategies will have a higher

relatedness value than a firm that mainly relies on innovation

strategies.

Similarly, the relatedness of the strategy configuration

comprised of marketing and cost-control strategies (RelatednessMC)

and the relatedness of the configuration that combines innovation

and cost-control strategies (RelatednessIC) are expressed by

equation ⑤ and equation ⑥, respectively:

34

This set of three relatedness measures considers the

situation that a configuration is only composed by two – any two

– of the three, strategies. In this case, we expect that when a

Chinese SME adopts a strategy configuration that is composed of

two closely related strategies (e.g., RelatednessMI),

organizational effectiveness will be better than if a firm adopts

a strategy configuration composed of two less-related strategies

(e.g., RelatednessMC). The configuration that is comprised of

two least related strategies (i.e., RelatednessIC) should have

the least contribution to organizational effectiveness.

Firm performance. SMEs are often observed to have different

organizational goals (e.g., growth vs. profit; sales vs.

innovation). In order to evaluate SMEs’ organizational

effectiveness, i.e., how effectively they can achieve their

goals, we asked Chinese SMEs to identify the importance to their

company, based on a 5-point Likert scale (1 = “not at all”; 5 =

“very important”), of the following 10 goals: profitability,

sales, sales growth rate, market share, net profit, gross profit,

cash flow, return on investment, product innovation, and process

innovation. We asked respondents to evaluate their achievement

35

of these goals based on a 5-point Likert scale ranging from “not

satisfied at all (1)” to “highly satisfied (5)”. We then

weighted the satisfaction items by their importance ratings to

generate the organizational effectiveness measure. This weighted

measure should accurately capture a performance evaluation

aligned with SMEs’ organizational goals (Hatfield, Pearce,

Sleeth, and Pitts, 1998).

Control variables. Five variables that could affect our

hypothesized relationships were controlled for: industry

munificence, industry instability, industry, firm size, and

slack. Organizational strategy can be highly industry-specific,

so we controlled for three industry effect variables in analyses.

The first is industry munificence, which reflects the supports and

opportunities derived from industry growth. Industry munificence

was measured by regressing industry sales and profit against the

years 2001–2005 (Sutcliffe, 1994). As in Sutcliffe’s paper, the

ratios of the obtained regression slope coefficients (B) to the

mean values of dependent variables were obtained as industry

munificence items. The average of these two items was used in

regressions as the measure of industry munificence. The second

36

variable is industry instability, representing unexpected changes in

industry growth (Miller and Friesen, 1983). Industry instability

items are from the same regression as the ones generating

munificence measures. The ratios of the obtained standard

deviation (SD) of the regression slope coefficients to the mean

values of dependent variables were the industry instability

items. The average of these two items was used to measure

industry instability (Sutcliffe, 1994). We further controlled for

a dummy variable, industry. “0” represents manufacturing

industries while “1” indicates service industries.

Previous research has argued that smaller firms tend to be

at a resource disadvantage compared with larger firms, and it may

be harder for them to employ a complicated strategy

configuration. Therefore, we controlled for firm size, as measured

by the number of employees, to approximate each firm's resource

sufficiency and economies of scale (Calof, 1987).

For the same reason, firms with considerable slack resources,

defined as “a cushion of actual or potential resources which

allow an organization to adapt successfully to internal pressures

for adjustment or to external pressures for change in policy, as

37

well as to initiate changes in strategy with respect to the

external environment” (Bourgeois, 1980; Keats and Hitt, 1988),

may be better able to manipulate a complicated strategy

configuration than firms with few or no slack resources. We

therefore asked firms if their profits were sufficient to support

market expansion and firm development, using a Likert-type scale

ranging from 1 “strongly disagree” to 5 “strongly agree” (Tan and

Peng, 1980).

ANALYSIS AND RESULTS

The means, standard deviations, and correlations of relevant

variables are included in Table 2. As Table 2 shows, relatedness

measures are correlated with strategy measures up to 0.89 (p <

0.001) and later regression found that significant

multicollinearity was caused by such high correlations.

Therefore, we had to control the strategy type that was not

included in a relatedness measure when analyzing strategy

relatedness. For example, we controlled for cost-control

strategies when analyzing the relatedness between marketing and

innovation strategies (RelatednessMI).

38

____________________________________________________________

Insert Table 2 about here____________________________________________________________

We conducted two sets of hierarchical linear regressions to

test the hypothesized relationships. The first set was to test

the relationship between the prioritization of strategy

configuration and organizational effectiveness. The second set of

regressions was to test the relationship between the relatedness

of strategy configuration and organizational effectiveness.

The prioritization analysis involved four steps. The first

step, shown as Model 1 in Table 3, included all the control

variables to provide a comparison model for the later regression

equations. We then entered the three generic strategies into the

regression, shown as Model 2 in Table 3, to provide a reference

level for our prioritization analysis. The third step, Model 3 in

Table 3, introduced the SD measure of strategy prioritization.

Our results indicate that prioritization has a significantly

negative relationship with organizational effectiveness (β = -

0.16, p < 0.05), indicating that when Chinese SMEs adopt multiple

strategies with an equal importance, organizational effectiveness

39

deteriorates. Model 4 of Table 3 was a parallel analysis to

Model 3 but using the entropy measure. It shows that the entropy

measure has a significantly negative relationship with

organizational effectiveness (β = -0.28, p < 0.01), a result also

verifying that a configuration with multiple and equally

important strategies will hurt SMEs’ organizational

effectiveness. Thus, both analyses show that H1 is supported.

____________________________________________________________

Insert Table 3 about here____________________________________________________________

The second analysis was to test the relationship between

strategy relatedness variables and organizational effectiveness,

as shown in Table 4. Model 1 of Table 4 included control

variables. Model 2 of Table 4 further included the composite

strategy relatedness variable, and it shows that strategy

relatedness has a significant and positive relationship with

organizational effectiveness (β = 0.30, p < 0.001). This result

indicates that when the relatedness of strategy configuration is

high, organizational effectiveness improves. In order to cross-

validate this result, we tested the contributions of

40

RelatednessMI, RelatednessMC and RelatednessIC to organizational

effectiveness, respectively, in Model 4, Model 6, and Model 8 of

Table 4. As expected, RelatednessMI shows a greater contribution

to organizational effectiveness (β = 0.30, p < 0.001) than

RelatednessMC (β = 0.20, p < 0.01) or RelatednessIC (β = 0.16, p <

0.05). This result verifies that when a SME adopts two

strategies that are highly correlated, the contribution to

organizational effectiveness will be greater than adopting two

strategies that are only medium or least related. Thus, H2 is

supported.

____________________________________________________________

Insert Table 4 about here____________________________________________________________

CONCLUSIONS AND IMPLICATIONS

Recent studies (e.g., Moss, 2005) have indicated that there

may exist a big difference between how Western SMEs and Chinese

SMEs use strategies. Classic SME research conducted in Western

countries indicates that SMEs should employ a “pure” strategy

configuration owing to insufficient slack resources (Ebben and

Johnson 2005). Our study found that, though it was true that a

41

prioritized strategy configuration would improve organizational

effectiveness, SMEs could adopt multiple strategies to better

achieve their goals if these strategies are related.

Studying the strategy configuration of Chinese SMEs bears

increasing academic and practical significance. China has been

pushing a second reform, meant to move it from an economy relying

on labor-intensive industries to one supported by innovative

ventures (Chia et al., 2007; Li, 2009). SMEs are often among the

first to reshape their strategy configurations in order to follow

the trend. Some, like Lenovo, Alibaba, and Huawei, have become

important global players. Studying them will accurately record

what is happening today and also lay the foundation for

understanding and predicting their future strategic behaviors.

Limitations

Before we elaborate on the implications of this study,

several limitations need to be addressed. First, we used a survey

to collect data, and one top management team member from each

firm was responsible for answering all questions, which exposes

our study to common method variance bias. We judged a single

42

respondent in each firm to be appropriate for this study because

for SMEs, chief executives are believed to act as the brains of

the organization and the key determinants of their organizations’

strategies. Asking a top management member to respond to

organizational strategy questions is “consistent with classical

economics, in which an individual entrepreneur is regarded as a

firm” and “the small business firm is simply an extension of the

individual who is in charge” (Lumpkin and Dess, 2001).

Furthermore, common method variance only tends to be problematic

if the respondent is sensitive to survey questions. Our

questions – regarding employment, goals, strategy, and industry –

are relatively objective and not likely to evoke sentiment

(Steensma, Marino, Weaver, and Dickson, 2000). Third, to address

possible common method variance, we controlled for two industry

variables in regressions that were calculated from a secondary

archival data source. Lastly, we also conducted the Harman’s one

factor test on the survey items to assess the severity of common

methods bias. The survey items were entered into one exploratory

factor analysis. By analyzing the covariance matrix and

employing varimax rotation, we found that the first factor only

43

accounted for about 13% of the total variance, which suggested

that no single factor accounted for the majority of covariance.

Therefore, common method variance was not the main cause of our

findings.

Another limitation of our data is that our findings may be

limited to the specific area of Northeastern China. China has

its own unique cultural, political, and social climates (Boisot

and Child, 1999). Our model may apply with variations in other

settings.

Finally, in this paper, we only considered three generic

strategy types. It is worth noting that a more fine-grained

approach using more strategy types, such as marketing strategies

aimed at businesses versus marketing strategies aimed at

consumers, and differentiation strategy in service might add

value to the discussion. Future research with an expanded

strategy typology could add significantly to our understanding of

strategy configuration.

Implications for Strategy Configuration Theory

44

We believe that our study has moved the strategy

configuration theory forward. We have provided clear evidence

that not only does what strategies are adopted matter, the

structuring of these strategies also influences the effectiveness

of the implementation of these strategies. Furthermore, our

study signals the similarities and differences in strategy

configurations between Chinese SMEs and Western SMEs, which

highlights the impact that a different institutional environment

can have on firm strategies.

First, we found that a prioritized strategy configuration

improves Chinese SMEs’ organizational effectiveness, which

confirms the idea that Chinese SMEs, owing to the paucity of

resources and the disadvantageous position in the current

institutional environment of China, should have a clear strategic

focus in order to attain organizational goals. The negative

relationship between prioritization measures and organizational

effectiveness echoes the pattern found by Ebben and Johnson

(2005) that SMEs should purify the strategies they adopted.

However, in this study, we go one step further and, instead of

assuming that SMEs can only adopt one strategy, we propose that

45

every SME may adopt multiple strategies simultaneously, just with

a clear preference order. Our finding indicates that Chinese

SMEs may have to identify a major strategy type in their

operations, but they can also host other strategy types at the

same time, as long as all strategies are in a clear precedence

order. Every firm has to market its products, control costs, and

introduce changes to its system to some degree. Therefore,

prioritizing multiple strategies enables Chinese SMEs to achieve

the benefit of adopting multiple strategies (e.g., creating

multiple hedging options) while avoiding the enduring and

expensive process of coordinating several, equally important

strategies.

However, when a multiple, prioritized strategy configuration

is adopted, does the specific order of strategies matter? In

other words, if a SME mainly relies on marketing strategies,

which one, cost-control or innovation, should be the next? Our

second finding is that SMEs should use closely related

strategies, and that the more closely related two strategies are,

the more they contribute to organizational effectiveness. In the

current institutional environment of China, marketing and

46

innovation strategies are the most related strategies and thus,

this combination contributes the most to organizational

effectiveness. In terms of their contribution to organizational

effectiveness, this configuration is followed by the combination

of marketing and cost-control strategies and the composition of

innovation and cost-control strategies, in that order.

Integrating both findings, our study has identified an

optimal strategy configuration for current Chinese SMEs. The

best configuration is a prioritized strategy configuration

composed of marketing, innovation, and cost-control strategies,

in that order. The effectiveness of this strategy configuration

dramatically subverts the general impression that Chinese SMEs

must compete on cost-control strategies. However, it echoes

recent studies, which find that compared with conservative cost-

control strategies and aggressive differentiation strategies,

Chinese firms benefit more from applying a combination of both

(Luo and Park 2007). More importantly, our study advances theory

by clearly demonstrating that, as the strategy configuration

perspective suggests, a SME does not employ just one strategy,

and when multiple strategies are concerned, a marketing strategy

47

alone is not sufficient, and the SME needs to also adopt

innovation strategies and cost-control strategies, in this order.

Our study also shows the development of strategy configuration

among Chinese SMEs. They seem to be evolving away from

traditional cost-control strategies toward such market-added

values as brand, image, and convenience to customers. Innovation

strategies follow marketing strategies now, but eventually

Chinese SMEs may be like their counterparts in Western countries,

competing mainly on innovation, with other strategies following

behind.

Our findings, we believe, also fit the prescription of

configuration theory. Marketing strategies focus on meeting

current customers’ needs and locating more market niches for

current products (Miller, 1987). Therefore, marketing-oriented

firms are often more sensitive to potential customers’ needs, and

thus, more likely to generate creative ideas in order to better

meet market needs. Marketing strategies are recognized as a

potential hotbed for new ideas in products and services (Hult et

al., 2003). As a result, marketing-oriented SMEs may naturally

bind themselves with innovation strategies: marketing strategies

48

provide necessary market research for discovering, creating, and

developing new business opportunities hidden in their main and

related industries (Covin and Slevin, 1989).

On the other hand, cost-control strategies often adopt

logics opposed to those of marketing and innovation strategies.

Marketing and innovation strategies frequently involve

expenditures on marketing promotions and campaigns as well as

expensive R&D activities or risky projects. Therefore, by

nature, cost-control strategies conflict with the other two

strategies. Our study finds that cost-control strategies

discourage innovation strategies in China. Of the strategy

configurations we studied, the combination of cost-control and

innovation strategies contributes the least to organizational

effectiveness. The negative correlation between cost-control and

innovation strategies seems to indicate that in current China,

SMEs rely mainly on cheap labor, instead of innovations, to

control operational costs. The “advantage” of accessing

unlimited cheap labor may reduce the motivation to create new

ways to improve operational efficiency and save costs.

49

Implications for Chinese Policy Makers

Our findings may interest Chinese policy makers in that they

show that Chinese SMEs need policy that provides a good

environment in which to innovate. In the global economy, Chinese

SMEs are notoriously competitive because the supply of cheap

labor keeps production costs low. Knowledge of the local market

and local supply and distribution chains also offer competitive

advantages to local firms in China (Slater and Narver, 1995).

Chinese SMEs have no such advantage with respect to innovation.

They need a legitimatized environment that can enable them to

initiate, develop, and harvest innovation projects if they are to

complete the transition and become innovation-based ventures.

The regulatory, cognitive, and normative environments in

China, as discussed in previous sections, have not been able to

provide adequate support for ventures, especially SMEs, to grow

innovative businesses. This institutional environment may reduce

the possibility for SMEs to use a composite marketing-and-

innovation strategy configuration to realize their goals. The

Chinese government recognizes this situation and is pushing a

transition from growth fueled by labor-intensive industries to

50

growth fueled by innovative and high-tech industries (Li, 2009).

The adoption of the new labor law in 2009 – Labor Contract Law –

has raised the cost of labor in China more than 15%, indicating

that the Chinese government is dedicated to upgrading to a more

innovative business environment. This is wise, as a more

innovation-nurturing environment is required for Chinese SMEs to

succeed in the long term.

Implications for Oversea Businesses

Knowledge of local SMEs’ strategy configurations is

important for international ventures that intend to succeed in

China. Riding along with the fast-growing national economy,

Chinese SMEs can expand rapidly into big corporations. Some, by

applying appropriate strategy configurations to compete with

local monopolies and overseas giants, have grown into major

players, such as Lenovo, which has the largest share in China’s

personal computer market, and Alibaba, which controls half of the

online B2B market share for SMEs in China. Moreover, changes in

SMEs’ strategy configurations often signal changes in their

operating environment, as SMEs are generally more sensitive to

51

industrial and policy changes, and keener than large firms to

adopt appropriate new strategies in response. Thus, studying

SMEs’ strategy configurations offers important insight into the

future of both local ventures and the Chinese economy.

For overseas companies that plan to conduct business in

China, our study reveals an important trend that they cannot

afford to ignore. Chinese SMEs have begun to realize that instead

of controlling costs through cheap labor, marketing and

innovation are two critical strategies for them to achieve their

goals. This new strategy configuration is different from the

cheap-labor-strategy stereotype of Chinese SMEs and it may

indicate that overseas businesses are going to face challenges

from more innovation-based, and thus more competitive Chinese

SMEs than they are used to. The expectation of being able to take

advantage of cheap labor in China may position overseas

businesses in a comparatively disadvantageous position. Overseas

businesses are encouraged to adopt innovation strategies as well

when they are competing in Chinese markets. This implication

echoes Li et al.’s (2000) finding that multi-national

corporations pursuing a capital- or technology-intensive strategy

52

in China perform better than those pursuing a labor-intensive

strategy. Thus, our study should provide guidance to overseas

investors in terms of what strategy may grant them better

performance in China.

Conclusion

How to structure different strategies that serve different

organizational goals is a top concern in management practice as

well as in strategic management research. Due to different or

even opposing core logics, different strategies emphasize diverse

organizational competences and require resources to be allocated

differently. Generally lacking slack resources and experience in

dealing with complex strategy configurations, SMEs in China face

serious challenges in balancing different strategic requirements.

This study, by investigating the strategy configuration of

Chinese SMEs, tries to provide an explorative study of how

Chinese SMEs configure three different strategies. Future

research should include more strategy types in the study besides

these three generic strategies. Also, we would like to know if

SMEs from other emerging markets exhibit the same strategy

53

configuration pattern, and for what reasons. Similar studies

conducted in other major emerging markets should further enrich

our knowledge of how SMEs deal with competitive environments. We

are hopeful that our study will move strategic management

research and practice in emerging markets forward and draw more

scholars’ attention to this field. If the current marketing-and-

innovation Chinese SME strategy configuration does evolve with

help from the Chinese government into an innovation-and-marketing

strategy configuration, we will all stand to benefit from having

devoted study to these firms along the way.

54

REFERENCES

Ashmos, DP, Dennis, D, Frances, EH, and Reuben, RM Jr. (1996). Internal complexity and environmental sensitivity in hospitals. Hospital & Health Service Administration 41(4): 535-555

Bigley, G.A., and Wiersema, M.F. (2002). New CEOs and corporate strategic refocusing: how experience as heir apparent influences the use of power. Administrative Science Quarterly, 47(4): 707-727.

Boisot, M., and Child, J. (1999). Organizations as adaptive systems in complex environments: the case of China. Organization Science, 10(3): 237-252.

Borch, O.J., Huse, M., and Senneseth, K. (1999), Resource configuration, competitive strategies, and corporate entrepreneurship: an empirical examination of small firms. Entrepreneurship Theory and Practice, 24(1): 49-70.

Bourgeois, L.J. III, (1980). On the measurement of organizationalslack. Academy of Management Review, 6(1): 29-40.

Brislin, R.W. (1980). Translation and content analysis of oral and written materials in H. Triandis, H. and Berry, J. (eds). Handbook of Cross-Cultural Psychology, vol. 2, 389-444. Allyn and Bacon, Boston.

Busenitz, L.W., Gomes, C., and Spencer, J.W. (2000). Country institutional profiles: unlocking entrepreneurial phenomena.Academy of Management Journal, 43(5): 994-1003.

Calof, J.L. (1993). The impact of size on internationalization. Journal of Small Business Management, 31(4): 60-69.

Chia, H., Egri, C.P., Ralston, D.A., Fu, P.P., Kuo, M.C., Lee, C., Li, Y., and Moon, Y. (2007). Four tigers and the dragon:value differences, similarities, and consensus. Asia Pacific Journal of Management, 24(3): 305-320.

Chandler, A. (1962), Strategy and Structure: Chapters in the History of the American Industry Enterprises. MIT Press, Cambridge, MA.

Covin, J.G., and Slevin, D.P. (1989). Strategic management of small firms in hostile and benign environments. Strategic Management Journal, 10(1): 75-87.

55

Davies, H., and Walters, P. (2004). Emergent patterns of strategy, environment, and performance in a transitional economy. Strategic Management Journal, 25(4): 347-364.

Dean, T.J., Brown, R.L., and Bamford, C.E. (1998). Differences inlarge and small firm responses to environmental context: strategic implications from a comparative analysis of business formations. Strategic Management Journal, 19(8): 709-728.

Dess, G.G., Lumpkin, G.T., and McGee, J.E. (1999). Linking corporate entrepreneurship to strategy, structure, and process: suggested research directions. Entrepreneurship Theory and Practice, 23(3): 85-102.

Ebben, J.J., and Johnson, A.C. (2005). Efficiency, flexibility, or both? Evidence linking strategy to performance in small firms. Strategic Management Journal, 26(13): 1249-1259.

Fong, C.T. (2006). ‘The effects of emotional ambivalence on creativity. Academy of Management Journal, 49(5): 1016-1030.

Fry, L., and Smith, D. (1987). Congruence, contingency, and theory building. Academy of Management Review, 12(1): 117-132.

Fuller, D.B. (2010). How law, politics, and transnational networks affect technology entrepreneurship: explaining divergent venture capital investing strategies in China. Asia Pacific Journal of Management, 27(3): 445-459.

Hatfield, L., Pearce, J.A. II, Sleeth, R.G., and Pitts, M.W. (1998). Toward validation of partner goal achievement as a measure of joint venture performance. Journal of Managerial Issues, 10(3): 355-372.

Han, M. (2007). Achieving superior internationalization through strategic ambidexterity. Journal of Enterprising Culture, 15(1): 43-78.

Han, M., and Celly, N. (2008). Strategic ambidexterity and performance in international new ventures. Canadian Journal of Administrative Sciences, 25: 335-349.

He, X. (2009). The development of entrepreneurship and private enterprise in the People’s Republic of China and its relevance to transitional economies. Journal of Developmental Entrepreneurship. 14(1): 39-58.

56

He, Z., and Wong, P. (2004). Exploration vs. exploitation: an empirical test of the ambidexterity hypothesis. Organization Science, 15(4): 481-494.

Holmqvist, M. (2004). Experiential learning processes of exploitation and exploration within and between organizations: an empirical study of product development. Organization Science, 15(1): 70-81.

Hoskisson, R.E., Eden, L., Lau, C.M., and Wright, M. (2000). Strategy in emerging economies. Academy of Management Journal, 43(3): 249-267.

Hui, C., Lee, C., and Rousseau, D.M. (2004). Employment relationships in China: do workers relate to the organization or to people? Organization Science, 15(2): 232-240.

Interim Provisions on the Standards for Medium and Small Enterprises, 2003.Jacquemin, A.P., and Berry, C.H. (1979) Entropy measure of

diversification and corporate growth, Journal of IndustrialEconomics 27(4), pp. 359-369

Kosmala, K., and Herrbach, O. (2006). The ambivalence of professional identity: on cynicism and jouissance in audit firms. Human Relations, 59(10): 1393-1428.

Kreiner, G.E., Ashforth, B.E., and Sluss, D.M. (2006). Identity dynamics in occupational dirty work: integrating social identity and system justification perspectives. Organization Science, 17(5): 619-639.

Levinthal, D. A., and March, J. G. (1993). The myopia of learning. Strategic Management Journal, 14: 95-112.

Li, H., and Atuahene-Gima, K. (2001). Product innovation strategyand the performance of new technology ventures in China. Academy of Management Journal, 44(6): 1123-1134.

Li, J. (2009). Overseas technology incubators for international entrepreneurship: a Chinese experiment. International Journal of Entrepreneruship and Innovation, 10(3): 181-190.

Li, J., Qian, G., Lam, K., and Wang, D. (2000). Breaking into China: strategic considerations for multinational corporations, Long Range Planning, 33(5): 673-687.

Li, H., and Zhang, Y. (2007). The role of managers’ political networking and functional experience in new venture

57

performance: evidence from China’s transition economy. Strategic Management Journal, 28: 791-804.

Luo, Y., and Park, S.H. (2007). Strategic alignment and performance of Market-Seeking MNCs in China. Strategic Management Journal, 22(2): 141-155.

Lumpkin, G.T., and Dess, G.G. (2001). Linking two dimensions of entrepreneurial orientation to firm performance: the moderating role of environment and industry life cycle. Journal of Business Venturing, 16(5): 429-451.

Man, T. W. Y., Lau, T., and Chan, K. F. (2008). Home-grown and abroad-bred enterpreneurs in China: A study of the influences of external context on entrepreneurial compentencies. Journal of Enterprising Culture, 16(2): 113-132.

Meyer, A. D., Tsui, A. S., and Hinings, C. R. (1993). Configurational approaches to organizational analysis. Academy of Management Journal, 36(6): 1175-1195.

Miller, D. (1987). The structural and environmental correlates ofbusiness strategy. Strategic Management Journal 8(1): 55-76

Miller, D. (1986). Configuration of strategy and structure: toward a synthesis. Strategic Management Journal, 7(3): 233-249.

Miller, D. (1987). The structural and environmental correlates ofbusiness strategy. Strategic Management Journal 8(1): 55-76.

Moreno, A.M., and Casillas, J.C. (2008). Entrepreneurial orientation and growth of SMEs: a causal model. Entrepreneurship Theory and Practice, 32(3): 507-528.

Moss, L. (2005). Encouraging small cultural enterprises in Russia: gateways and barriers in Russian society. International Journal of Entrepreneurship and Innovation, 6(3): 193-200.

Palepu, K. (1985). Diversification strategy, profit performance and the entropy measure. Strategic Management Journal, 6(3): 239-255.

Palmer, T.B., and Wiseman, R.M. (1999). Decoupling risk taking from income stream uncertainty: a holistic model of risk. Strategic Management Journal, 20(11): 1037-1062.

Peng, M. (2002). Towards an institution-based view of business strategy. Asia Pacific Journal of Management, (19): 251-267.

Peredo, A.M., and Chrisman, J.J. (2006). Toward a theory of community-based enterprise. Academy of Management Review, 31(2): 309-328.

58

Piderit, S.K. (2000). Rethinking resistance and recognizing ambivalence: a multidimensional view of attitudes toward an organizational change. Academy of Management Review, 25(4): 783-794.

Porter, M. (1980), Competitive Strategy. Free Press, Boston.Rajagopalan, N. (1996). Strategic orientations, incentive plan

adoptions, and firm performance: evidence from electric utility firms. Strategy Management Journal, 18(10): 761-785.

Ralston, D.A., Egri, C.P., Stewart, S., Terpstra, R.H., and Kaicheng, Y. (1999). Doing business in the 21st century withthe new generation of Chinese managers: a study of generational shifts in work values in China. Journal of International Business Studies, 30(2): 415-427.

Robinson, K.C., and McDougall, P.P. (2001). Entry barriers and new venture performance: a comparison of universal and contingency approaches. Strategic Management Journal, (22): 659-685.

Robertson, C.J., and Watson, A. (2004). Corruption and change: the impact of foreign direct investment. Strategic Management Journal, (25): 385-396.

Scott, R. (1995), Institutions and Organizations. Sage, Thousand Oaks, CA.

Slater S.F., and Narver, J.C. (1995). Market orientation and the learning organization. Journal of Marketing, 59(3): 63-74.

Steensma, H.K., Marino, L., Weaver, K.M., and Dickson, P.H. (2000). The influence of national culture on the formation of technological alliances by entrepreneurial firms. Academy of Management Journal 43(5): 951-973.

Strotmann, H. (2006). Entrepreneurial survival. Small Business Economics, 28: 87-104.

Sutcliffe, K.M. (1994). What executives notice: accurate perceptions of top management teams. Academy of Management Journal, 37(5): 1360-1378.

Tan, J., and Peng, M.W. (2003). Organizational slack and firm performance during economic transitions: two studies from anemerging economy. Strategic Management Journal, 24(13): 1249-1263.

59

Tan, J., and Tan, D. (2005). Environment-strategy co-evolution and co-alignment: a staged model of Chinese SOEs under transition. Strategic Management Journal, 26(2): 141-157.

Tang, Z., Dickson, P., Marino, L., Tang, J., and Powell, B. (2010) The value of organizational ambivalence for small andmedium size enterprises in an uncertain world. British Journal of Management, 21(4): 809-828.

Tang, J., Tang, Z., Marino, L., Zhang, Y., and Li, Q. (2008). Exploring an inverted U-shape relationship between entrepreneurial orientation and performance in Chinese new ventures. Entrepreneurship Theory and Practice, 32(1): 219-239.

Teece, D. J., Pisano, G., and Shuen, A. (1999). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509.

Terziovski, M. (2010). Innovation practice and its performance implications in small and medium enterprises (SMEs) in the manufacturing sector: A resource based view. Strategic Management Journal, 31(8): 892-902.

Venkataraman, S., and Van de Ven, A.H. (1998). Hostile environmental jolts, transaction set, and new business. Journal of Business Venturing, 13: 231-255.

Webster, F.E. Jr. (1994). Executing the new marketing concepts. Marketing Management, 3(1): 9-16.

Weiss, N.A. (2004). Introductory Statistics. 7th ed. Pearson Addison Wesley, Upper Saddle River, NJ.

Wu, J., and Pangarkar, N. (2006). Rising to the global challenge:strategies for firms in emerging markets. Long Range Planning,39(3): 295-313.

60

Table 1 Factor loadings and reliability of strategy configurations

StrategyConfiguration

Item Loading

Marketing-oriented Strategy Configuration

1. Automation of suppliers and inventory management

0.79

2. Advertising 0.683. Market segmentation 0.654. Automation of customer service

0.63

5. Hiring marketing consulting company

0.59

6. Marketing promotion 0.54

Cost-controllingoriented Strategy Configuration

7. Reducing operating costs 0.888. Reducing fixed costs 0.799. Competitive pricing 0.61

Innovativeness-oriented Strategy Configuration

10. Research and development on new business process

0.86

11. Research and development on new products

0.80

Note:Factor loadings were extracted from Pattern Matrix table.

61

62

Table 2 Mean, standard deviation, and correlation1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

1.Effectiveness2.Prioritzation

.01

3.Entropy .07 .84**

*

4.Relatedness

.35*** .32**

*.61**

*

5.RelatednessMI

.35*** .33**

*.62**

*1.00

***

6.RelatednessMC

.32*** .33**

*.55**

*.88**

*.87**

*

7.RelatednessCI

.27*** .16† .44**

*.77**

*.77**

*.39**

*

8.Marketing

.32*** .34**

*.56**

*.89**

*.88**

*1.00

***.39**

*

9.Cost-control

.10 -.07 .03 .18* .11 .29**

*.11 .19*

10.Innovation

.25*** .17* .44**

*.75**

*.76**

*.35**

*.99**

*.36**

*-.04

11.Size .52*** .03 .05 .12 .11 .15† .05 .14 .12 .0412.Slack -.01 -.23

**-.10 .24** .23** .32**

*.02 .33**

*.05 .01 -.10

13.Munificence

.21* .06 -.05 .21* .21* .22* .11 .22** .04 .11 .31**

*.16†

14.Instability

.08 .19* .17* .02 .01 .06 -.04 .06 .09 -.05 .20* .11 .55**

*

15.Industry

-.12 .08 -.04 -.15†

-.15†

-.08 -.19*

-.07 -.04 -.19*

-.10 -.12 -.17*

.07

63

Mean 111.14

.44 1.09 1.73 1.60 1.16 .69 3.32 3.59 3.35 33.44

3.79 .03 .17 .33

S.D. 16.31

.25 .02 .27 .27 .19 .14 .59 .57 .79 39.27

.66 .16 .25 .47

Note:†p < 0.10; *p < 0.05; **p < 0.01; ***p < 0.001, two-tailed test.

64

Table 3 Results of strategy configuration prioritization regressionsDV = Organizational Effectiveness

M1 M2 M3 M4Control Variables

Size .50*** .47*** .47*** .47***

Slack .03 -.03 -.09 -.01Munificence .07 .01 .01 -.02Instability -.06 -.02 -.04 -.05Industry -.04 -.02 -.01 -.02

Strategy VariablesMarketing .20** .28** .37***

Cost-control .01 -.01 -.00Innovation .16* .16* .22**

Prioritization VariablesPrioritizati

on (SD) -.16*

Entropy -.28**

Fitness IndicesR2 .27 .35 .37 .39Adj. R2 .25 .31 .33 .35F 9.58*** 8.48*** 8.06*** 8.86***

d.f. (5, 127) (8, 124) (9, 123) (9, 123)∆R2 .08 .02 .04∆F 5.09** 3.39† 8.08**

∆d.f. 3 1 1Note:†p < 0.10; *p < .05; **p < .01; ***p < .001, one-tailed test.

65

Table 4 Results of strategy configuration relatedness regressionsDV = Organizational Effectiveness

M1 M2 M3 M4 M5 M6 M7 M8Control Variables

Size .50*** .47*** .50*** .47*** .50*** .47*** .47*** -.47***

Slack .03 -.04 .03 -.04 .03 -.03 -.06 -.03Munificen

ce.07 .01 .08 .01 .04 .01 .02 .01

Instability

-.06 -.02 -.06 -.02 -.03 -.02 -.03 -.02

Industry -.04 -.02 -.04 -.02 -.01 -.02 -.05 -.02Strategy VariablesMarketing .27*** .20**

Cost-control

.04 .01

Innovation

.23** .16*

Relatedness VariablesRelatedness

.30***

RelatednessMI

.30***

RelatednessMC

.20**

RelatednessCI

.16*

Fitness IndicesR2 .27 .35 .28 .35 .32 .35 .33 .35Adj. R2 .25 .32 .24 .32 .29 .32 .30 .32F 9.58*** 11.48 7.98*** 9.17*** 10.03*

**9.76*** 10.51*

**9.76***

d.f. (5,127)

(6,126)

(6,126)

(7,125)

(6,126)

(7,125)

(6,126)

(7,125)

∆R2 .08 .08 .03 .02

66

∆F 15.47*

**15.11*

**5.86* 3.83*

∆d.f. 1 1 1 1Note:†p < 0.10; *p < .05; **p < .01; ***p < .001, one-tailed test.

67