Asian Management Improvements - Essay Example

Asian Management Describe the reasons why managers in Chinese SOEs have failed to run them competitively and the measures employed to improve the situation I. Introduction When referring to countries whose economy is organized around the governmental body, the role and the position of the private initiatives can be effectively evaluated only in accordance with the practices held at the state level. In this context, the strength of SOEs in China can be examined only in relation with the governmental views and behaviour although influenced significantly by the private sector. The number or state owned enterprises in China is really impressive reaching the 11,000 in 1992 (representing the 50% of country’s industrial total value). In this context, the management has to be reformed in order to meet the requirements set by the constantly changing environment. Currently, management presents two forms covering the needs of privatised sector and SOEs. Under these terms, SOEs are subjects either to the line system (depended on the central industrial ministry) or the block system (representing the local government institutions). As of the main industrial areas in which SEOs operate, the following ones can be used as an indicative sample: oil, telecommunications, aviation, power and steel. The role of the management team to the performance of the above organizations has been considered as significant, however the presence of particular elements (like the close dependency from the central government or the use of a highly bureaucratic system when applying the managerial plans in practice) often create a net of negative influences to the management’s daily operations. II. General characteristics of Chinese SOEs In the modern industrial and economic environment, governments not only ‘shape their countrys economy but also their culture and penetrate deeply into the dynamics of organizations’. Moreover (Tjosvold, 2002, 741) organizations must be understood ‘within their larger context, in particular in terms of their dependence on government’. In this context, facilitative governments are ‘supportive of independent organizations, operate through predictable laws and regulations, and are strong, whereas nonfacilitative governments are hostile, erratic, and weak; organization and management in the embrace of government shows that nonfacilitative governments require managers to accommodate to complex dependencies’. Particularly regarding China, managers in private companies, ‘unsure how to cope with many vague and contradictory laws, indicated that they were dependent upon the good graces of government officials more than established state-owned enterprises (SOEs)’. On the other hand it has been proved (Zhu, 1994, 1, 12) that Chinas market reform has been followed by a series of significant changes in management practices. More specifically, the responsibility for labour allocation ‘is being shifted from a centralized planning authority to forecasting and planning departments within enterprises; production and reward systems are changing, with less emphasis on egalitarianism and a stronger emphasis on efficiency and performance’. On the other hand, it should be noticed that managers in China are already showing ‘an increasing interest in using human resource techniques and motivational systems which emphasize productivity at the individual, group, and enterprise level; current best practices in HRM can make significant contributions to the process of change undertaken by Chinese enterprises’. However, constrained by ‘traditional practices such as "iron rice bowl", together with social responsibility and legal requirements, state-owned enterprises became mini-societies and had to be responsible for their employees once they were employed’. Current structure of industrial firms in China is as follows (Dodds, 1996, 695, 700): 1. State-Owned Enterprises (SOEs), 2. Collective Enterprises: a. Rural Collectives, b. Urban Collectives and 3. Private Enterprises and others. Regarding specifically the SOEs, the Chinese government began state enterprise reforms after 1978 in order to address SOE inefficiencies and the growing pressure for industrial reform’. In the above context, the first reforms ‘introduced incentives and encouraged SOE profit orientation; in 1979, the government began allowing some firms to retain a portion of their profits after meeting their obligations under the state plan; by 1980, the government had implemented profit retention plans nationwide, and it began introducing employee incentives such as work-related pay and bonuses whereas at about the same time, the government began to reduce the size of the state plan and relax or remove price controls, forcing more enterprises to buy and sell on markets’. In 1981, authorities began ‘requiring SOEs to finance their investments with interest-bearing bank loans instead of interest-free capital from the government’ (Dodds, 1996, 696). Under the above terms, the SOE productivity improved significantly after 1978 mostly because of the introduction of some basic intensives schemes which gave firms more autonomy and allowed them to retain more of their profits. According to a different view (Aivazian et al., 2004) the reform of SOEs has taken place in two periods: The first stage of reform has been completed between 1984 and 1993 whereas the period after 1993 and ongoing has been characterized as the second reform period. Chinese state-owned enterprises are officially (Dodds, 1996, 701) ‘under the ownership of the whole people;’ however, in reality, central, provincial, and local government agencies are the putative owners of SOEs, asserting pseudo-ownership rights based on the funds they have invested in the enterprise. Since the reforms of the 1980s, which decentralized control over SOEs, municipal governments supervise most enterprises. Only those two to three thousand SOEs classified as "very large" are still under direct central control. The remaining 104,700 industrial SOEs ‘are controlled by sub-central governments. Most SOEs are located in urban areas and concentrate on heavy industry. However, SOEs are more than mere productive units. They typically provide housing, schools, hospitals, dining halls, stores, pensions, and other benefits for their employees. SOE employees are rarely if ever fired, and their "iron rice bowl" benefits are guaranteed for life’. The next major reform initiative came in 1986 with ‘the implementation of contract responsibility systems for SOEs; enterprise directors signed contracts with their supervisory authorities, setting targets for enterprise performance; directors also agreed to sacrifice personal assets if they failed to meet targets, and the government offered substantial bonuses if they achieved success’ Recognizing the pressures that will inevitably come as foreign competitors enter their home markets, many SOEs in global industries are striving to attain world-class levels of capability. They are within reach. According to a recent benchmarking survey, for example, Capital Iron and Steel Corporation, Maanshan Iron and Steel Corporation, and Shanghai Baoshan Iron and Steel Complex all have sound operating skills and performance levels equivalent to top-tier international standards. (Macmurray, 1994, 67) There are also signs of the emergence of marketing- and brand-focused SOEs. Although traditionally weak in marketing (Lau, 2002, 541), Chinese companies do possess a handful of well-known brand names: Tsingtao beer, for example, and Phoenix, one of the worlds largest bicycle manufacturers, which sells five million bikes a year. Tsingtao and Phoenix are aggressively expanding their product franchises to tap the booming domestic market as well as setting up overseas distribution channels. Several SOEs producing machine tools have begun to venture beyond their traditional provincial markets to establish national franchises. When examining a series of different firm types, Lau (2002) found that ‘employees in joint ventures and reformed enterprises are more salient to change than those in state-owned enterprises; by considering the regional contexts, employees in more developed regions have higher salience to change and valence about change’. Furthermore, due to normative forces, senior managers ‘are more salient and less skeptical about change; organization cultures with a flexible orientation are also related to high salience, higher valence and less skeptical about change’. The results suggest that ‘there are variations in change schemas within a firm. Sharp contrasts are found between senior managers, middle managers, and workers in all three schema dimensions whereas people with more change experiences and more freedom to change will have a more positive change schema. In the above context, organizational changes are often characterized by interactions of groups with diverse cognition’. III. Weaknesses of managerial practices in Chinese SOEs Goodall et al. (1999, 29) tried to investigate the degree to which ‘the ownership variable has been a factor in determining the degree to which Chinese firms have adopted Western practices, particularly in the field of HRM, and how far there has been adaptation to labor-market realities’. Their research showed that many of the characteristics of the old-style HRM (danwei) were still found together’. On the other hand there are clearly many enterprises ‘that suggest a "hybrid" model’. Furthermore, ‘employee size, rather than sales turnover as such, seems to be an important determining variable regarding the pattern of HRM practices, yet it correlates with only some of the variables examined; the later the date of founding of the enterprise, the more likely it was to be a Joint Venture; both these variables correlated significantly and very strongly with reformed social insurance and a "new-style," HRM-oriented role for the personnel director; the state-owned sector has responded to new laws and regulations, while the Sino-foreign joint ventures may still be prone to institutional and organizational inertia’. The above assumptions could be possibly explained by the fact that ‘many Joint Venture firms "took over" the personnel practices of the Chinese partner company, and, in some cases, the handling of human resources was the responsibility of the personnel specialists who were PRC nationals and who persisted in the older "mind set" because of their training in the old ways’. Other important factors may have been ‘the residual effect of the previous danwei-based infrastructure, the structure of labor-management relations, the absence of HRM experience, and so on’. At the same time evidence has been presented (Buck et al., 2003, 542) that ‘high levels of employee ownership are consistent with successful HRI strategies as well as with less successful traditional paternalism, and with blocking relatively unsuccessful retrenchment strategies; the onerous task remains for potential investors, however, to identify those firms where HRM investment may prove successful’. The enterprise reform in China would be considered as not having the desired result to the performance of the SOEs. Possible reasons towards this assumption could be the ‘increased competition, accounting manipulation or a soft budget constraint’. In this context, the study of Choe (2000, 283) showed that the ‘contract management responsibility system provides incentives to managers for profit maximization in the world of certainty, thereby providing an argument in favour of the enterprise reform’. However, ‘in the world of uncertainty where the profit target is fixed ex ante, however, the managers incentives deviate from expected profit maximization depending on the profit target and the relative likelihood of future states; this is particularly so since most managers selected by the government are former managers of the same enterprises; they tend to have better internal information which will translate into more accurate assessment of profitability as well as realized profit’. Under the above terms, it should be noticed that managers tend ‘to hide the production capacity in order to lower the profit target in negotiation with the government’. Another important issue regarding the HR practices followed by Chinese managers in state owned firms (Zhu, 1994, 11) is connected with the mobility of labour. Of course it has to be noticed that until recently it was very difficult ‘to get into a state-owned enterprise as to get out; this mobility was first restricted by the nature, namely different ownerships, of an enterprise; an employee from a collectively (such as township) or privately owned enterprise could not be transferred to a state-owned one; although the reverse was possible, the employee had to give up the "iron rice bowl", including a secure job, a salary usually higher than the same position in enterprises with other ownerships, and significant benefits such as accommodation and a pension’. Secondly, an applicant ‘asking for a transfer had to get permission from both the enterprise and senior government administrative authorities; The whole transferring procedure could be very frustrating and time-consuming, yet could also be greatly simplified if an employee had connections in the right place’. In current terms, the absence of strategies that can handle this issue effectively and in a short period of time, has created significant obstacles to the growth of the industry sector as a whole. From a general point of view, the main weaknesses that management has to face in modern Chinese SOEs refers mainly to the lack of co-ordination over enterprise goals and the increasing risk aversion. On the other hand, the increasing bureaucracy could be also blamed for the delays in the decision making process as expressing through the reactions of SOEs to the instructions gave by government. Moreover, the low levels of efficiency and the lack of accountability are also characteristic weaknesses of the management activity in SOEs. It should also be noticed that the lack of an appropriate price mechanism leads to the lack of supply and demand signals which can be very negative signs for the financial performance of the country as a whole. IV. Measures towards the improvement of managerial style in Chinese SOEs It has been considered that (Chen, 1997, 290) Chinese management styles are ‘in a state of transition due to system, economic, and personal forces’. In this context, the major force to prompt change in Chinese management styles is ‘a shift from the "planning economy" to a "market economy"; under the planning economy, production quotas were set up by the Central and Local Government whereas under the market economy, production quotas are set by managers for the purpose of making a profit; this increased autonomy ‘presents factory directors with the promise of increased profitability’. According to Zhang et al. (2004) it is ‘no longer sufficient for SOEs to have traditional organizational structure but enterprises should continuously re-examine employees’ skills, knowledge and cognitive abilities to guarantee they keep up with competitive environment’. However, it should also been stated that Chinese workforce does not appear ready to function in market environment. The application of innovative practices in the workplace could help to avoid the limitation into ‘standard practices’ and to achieve high levels of performance. Specific techniques that could help to avoid the extended bureaucratic system should be a necessary element of every managerial decision in modern Chinese SOEs. The issue of labour mobility should be also addressed in order to limit the phenomena of overstaffing and of low productivity. In order for the above methods to be successfully implemented inside a given SOE in China, the inter-organizational communication has to be developed and the training offered to employees should be enforced. In this context, the management should be rather performance oriented involving individual job objectives, performance targets and measures and regular feedback on process. V. Conclusion The examination and the evaluation of the factors that influence the managerial decisions in a SOEs operational environment, has led to the assumption that the description of a specific strategy for the increase of SOEs performance is rather an unachievable task. The reason for this result could be possible that SOEs operate in a very challenging environment which is mainly governed by the traditional structures of management and administration. However, even in the above ‘hostile’ environment, the role of management can be significant proposing solutions and plans for the increase of organization’s performance and for the extension of its operations. A series of variables can create obstacles towards this target, however the application of a specific strategy in a long term basis can produce the desired results if carefully organized. References Buck, T., Demina, N., Filatotchev, I., Wright, M. (2003). Insider Ownership, Human Resource Strategies and Performance in a Transition Economy. Journal of International Business Studies, 34(6): 530-557 Chen, L., Krone, K. J., Xia, H. (1997). Approaches to Managerial Influence in the Peoples Republic of China. The Journal of Business Communication, 34(3): 289-305 Choe, C., Yin, X. (2000). 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