Competitive Advantages of Guanxi - Case Study Example

COMPETITIVE ADVANTAGES OF GUANXI Student’s Name Course Professor’s Name University City (State) Date Competitive Advantages of Guanxi Since it opened up to the global market in 1978, China has been operating on an economic system that is often referred to as Guanxi or network capitalism. Guanxi when translated to English stands for any relationships or connections (Wong & Leung, 2013, p.12). It plays a crucial role in how business is conducted in China since it comprises of a system of connections among various parties that work collectively and support one another. Most of the Chinese businesspersons believe in long-term relationships with those that they think may contribute to the success of their enterprises. Moreover, it is believed that a right Guanxi is the one that determines whether a business would turn out successful or not. By belonging to the right Guanxi, businesses can minimize disappointments, risks, and frustrations when transacting with others. Having the right Guanxi, at the same time, enables a company to circumvent barriers, risks, as a Guanxi is always present to give a helping hand. For this reason, a Guanxi is considered as a vital business strategy in China that every company must cultivate. The history of Guanxi dates back to pre-communist years where private entrepreneurs collaborated with government officials to form bureaucracy-business alliances. So and Walker (2013) explain that the networks were reinforced during the economic reforms that gave power to local officials to influence local development (p.142). Significantly, the officials did not comply with central state regulations in their efforts to promote local economic growth (Wang, Ketchen, & Bergh, 2012, p.227). As a result, private enterprises collaborated with government officials, which led to the creation of bureaucracy-business alliances. As the government officials became embedded in the local networks, they were automatically compelled to protect the private sector while locals protected them. Therefore, the private business flourished and expanded as the networks grew to support them. De Mente and Wallace (2016) explain that developing and nurturing a Guanxi is necessary for companies to succeed in China (p. 126). Although the process takes time and requires resources, the efforts used in establishing a secure network is worth the investment as businesses often reap significant results. Mostly, these networks are extensive and often cover suppliers, retailers, government officials, banks, and any person deemed necessary or relevant to the success of a venture. As a result, it is typical of Chinese businesspersons to pay visits to the residences of their acquaintances from other organizations carrying with them gifts with the aim of strengthening their relationship. Guanxi leads to the creation and sustaining of a good relationship between all the stakeholders of an enterprise. Arguably, treating someone without respect could worsen the relationship between trading partners and affect their business relationship. On the other hand, executives that treat others with decency, especially in an industry where there is little regard for the same could endear clients and useful people to his or her firm. More so, relationships help build trustworthiness that is crucial for any business deal. Equally, establishing relationships means that a company has an extensive network that relays to it credible information aimed at making a company better (Johnson & Turner, 2010, p.325). Through information from a Guanxi system, businesspersons may learn of new opportunities, trends, and laws as well as get advice on challenges. Ramady (2016) explains that Guanxi may enable businesses to survive during hard economic times (p.178). Notably, Guanxi usually happens in private places like homes and nightclubs, which highly contrast to the delicate negotiations in western markets. In the West, the financial system relies on defined legal arrangements to enforce contracts, whereas the Chinese system is grounded on reputation and trust. The Chinese way of doing business reduces transaction costs as well as establishes lasting networks. In addition, extensive contact networks help small enterprises to get access to resources, even in unstable political and economic environments, therefore supporting their versatility. Moreover, the system enables businesses to secure bank loans or supplies from private sources to make sure that they keep up with a market, increase its profit while at the same time build up connections with others. Guanxi has enabled firms in China small enterprises to be flexible. The enterprises having no formalized bureaucratic order are connected over networks that are flexible as well as low-cost manufacturers. The system gave rise to small-sized family businesses that can initiate fast reactions to changes in demand (Ruehle, 2002, p.22). Besides, the growth of niche markets, as well as the urge of flexible specialization, worked for the small Chinese businesses as multinational companies became increasingly reliant on them. As a result, Chinese firms were able to get market shares for low-end, labor-intensive products, doing businesses across boundaries with the help of networks. Besides, Chinese entrepreneurs have invested in different products; thus, they can move resources to activities and locations that offer the most profit. They also can increase gains and lower losses as well as discover new markets and investments. Furthermore, the ability to shift quickly from one specialization or location to another due to small units of production is a worthy asset during economic crises. Indeed, having connections with individuals with control over monetary assets and distribution possibilities saves business costs as well as secures a business survival in economically difficult times. Ruehle (2002) acknowledges that Guanxi ensures that transactions are flexible compared to legal contracts (p. 27). When transacting business with individuals in one’s group, it is easier to find bargainings or new chances in cases where one of the associates is forced to default due to unavoidable reasons. Besides, an external party like a legal institution does not bind Guanxi contract; thus the risks are borne by individuals Nonetheless, while it gives people second chances, it has systems to prevent failure in the first instance. On the other hand, in the western system, rules have to be followed to the later and one must abide a contract and even further offer collateral as security. The author says that informal systems provide loans to small enterprises, especially during difficult economic times, which enables them to continue their operations. Fu (2015) adds that alliance with business partners can reduce the risk of asset specificity, which means that small firms do not have to invest in specific assets (p. 77). As a result, they can switch quickly in the process of innovation. Guanxi culture makes it possible for Chinese businesses to develop the right kinds of networks when setting up businesses in foreign countries. Failure to involve all stakeholders and especially the central government could spell doom for firms that seek to tap into foreign countries. For example, Carrefour, a French-based retailer, concentrated on fostering Guanxi with local authorities with little regard to the Chinese central government when it set up businesses operations in the early 1990s (Tian, 2007, p. 68). On February 2001, Carrefour was ordered by the Central government to overhaul the market operations of its stores to meet government regulations. The Company struggled to carry out the restricting order, and this affected its operations, as they failed to open any new outlets until February 2004. On the other hand, Walmart, a U.S. based retailer was able to get permission to establish fourteen new outlets in China in March 2001, only a month after Carrefour got the restructuring order. Indeed, Carrefour was paying the cost for overlooking Guanxi with the central government. In other words, Chinese companies can avoid what befell Carrefour when investing in foreign markets as they establish the necessary networks that support their trade. Ruehle (2002) attributes the success of Wenzhou which is considered the capital of China’s network Capitalism” on Guanxi (p. 21). The reasons behind the success of Wenzhou private sector is attributed to its focus on manufacturing goods that can be easily assembled using simple labor technology. For long, the entrepreneurs in Wenzhou relied on commercial contacts and were able to establish marketing agents and laborers across China during the economic reform. These countrywide relationships and information networks were capable of transferring remittances back home that supported many private enterprises. Therefore, the migrants served as crucial sources of funding and creators of strong social networks over an expanded region. In addition, the local networks enabled facilitated collaboration between independent family enterprises, thus leading to specialization. As conventional credits were difficult to secure, entrepreneurs depended on an informal financial market in which several informal networks served as financial intermediaries. As seen in Wenzhou case study, its success can be traced to the flexibility of private businesspeople as well as the distribution networks between producers and customers. Likewise, Fu (2012) notes that during the global economic crises, Wenzhou entrepreneurs’ seemed to have endured the crises without incurring many losses (72). He adds that many companies in that area made decisions before the most difficult time as they got messages from their networks of family, friends, and business acquaintances. Furthermore, apart from incurring minimal losses, Wenzhou was able to walk away from the financial crisis ahead of other countries in China. The author acknowledges that small firms can survive economically challenging times as families and friends are often ready to work without pay and perks. Clearly, had it not been for extensive networks, small enterprises in that town would have been significantly affected by the global economic crises. Similarly, Feldman (2013) says Guanxi helps sustain 40 million small enterprises that employ 92 percent of Chinese workers (p. 223). The firms have been able to survive as they depend on Guanxi to maximize on strategy flexibility, keep their business focus narrow, and minimize costs in the pursuit of profit. Besides, the author acknowledges that the model works best in labor-intensive, dynamic, highly segmented small businesses such as textiles, garments, and assembly among others. Fu (2015) explains that Guanxi plays a significant role in facilitating commercial exchanges and overcoming bureaucratic costs in the face of a deficient institutional structure (p. 78). Furthermore, Fu (2015) argues that Guanxi with government officials can help overcome the danger of environmental uncertainty, as policies in China are often misunderstood (p. 78). The author claims that managers in China cannot rely solely on government bulletins as their source of information. Therefore, they often get critical information through their networks. It is important to note that information transferred with a Guanxi is more reliable and credible, thus aiding decision-making on investing in various projects. However, Guanxi also has its fair share of critics. Feldman (2013) acknowledges that it can lead to the hiring and promotion of less qualified individuals as jobs opportunities may be given as some promise of unspecified payback. Furthermore, the author claims Guanxi hinders the growth of enterprises, as they tend to remain small, which prevents corporate development (p. 56). The firms tend to be undeveloped in product design, distribution, brand management, marketing, and organization of decentralized structures and so on. In other words, the reliance on family often means lack of professional management, which limits organizational development. For this reason, there are very few Chinese multinational corporations as the lack of professional management prevents their expansion to foreign markets. The author also notes that the dependence on Guanxi leads to the disinclination to invest in expensive machinery and capital goods to invest in expanding production, improving labor productivity, and make products that are more sophisticated. Fu says that Guanxi takes time and resources to make it functional, which may damage the development of a firm. As earlier demonstrated, Guanxi is an intricate interpersonal net that needs a constant monitor, investment, and subtle utilization. Sometimes, some of the small enterprises might lack resources or use it at sustaining these networks at the expense of managerial training or acquiring of appropriate technology. Furthermore, businesses that rely on Guanxi may be negatively affected once the exchange between partners' stops. Equally, some firms may be forced to stick with their current partners for fear of destroying their Guanxi networks that take time and resources to establish. To sum the above discussion, Guanxi is regarded as a crucial strategy in China that every business must cultivate. The practice traces its history back to the economic reforms era where local authorities collaborated with private enterprises to promote their business environment. Guanxi offers numerous advantages to Chinese businesspersons. Firstly, it leads to the creation and sustaining of a good relationship between all the stakeholders of an enterprise. Secondly, allows businesses in China to be flexible, thus can survive during difficult economic times. Lastly, it makes it possible for Chinese companies to develop the right kinds of networks when setting up businesses in foreign countries. However, it has been criticized for promoting favoritism in workplaces where unqualified individuals may be rewarded with jobs at the expense of the qualified. Also, the networks take time and resources to make it functional, which may damage the development of a firm. Nonetheless, the benefits of Guanxi seem to outweigh its disadvantages. Reference De Mente, B. & Wallace, P. (2016). Etiquette guide to China: know the rules that make the difference. Toky, Tuttle Pub. Feldman, S. P. (2013). Trouble in the middle: American-Chinese business relations, culture, conflict, and ethics. New York, Routledge. Fu, W. (2015). Towards a dynamic regional innovation system: investigation into the electronics industry in the Pearl River Delta, China. Fu, X. (2012). China's role in global economic recovery. Abingdon, Oxon, Routledge. Johnson, D., & Turner, C. (2010). International business: themes and issues in the modern global economy. London, Routledge. http://www.crcnetbase.com/isbn/9780203634141. Ramady, M. A. (2016). The political economy of wasta: use and abuse of social capital networking. Ruehle, S. (2002). Guanxi as competitive advantage during economic crises: Evidence from China during the recent global financial crisis. 1st ed. [ebook] University of Oxford, UK, pp.1-41. Available at: http://www.ceauk.org.uk/2010-conference-papers/full-papers/Susanne-Ruehle.pdf [Accessed 10 Sep. 2016]. So, Y. L., & Walker, A. (2013). Explaining Guanxi: the Chinese business network. New York, Routledge. Tian, X. (2007). Managing international business in China. Cambridge, Cambridge University Press. Wang, C. L., Ketchen, D. J., & Bergh, D. D. (2012). West meets East: building theoretical bridges. Bingley, U.K., Emerald. Wong, Y. H., & Leung, T. K. (2013). Guanxi: relationship marketing in a Chinese context. New York, International Business Press. Read More