How Does Technology Innovation Effect The Performance of SMEs in China - Case Study Example

Introduction It has been argued by researchers and academics that technology innovation is an essential strategic objective high-tech SMEs. However, although it is potentially attractive for any SME that seeks to gain a competitive advantage, especially in a highly competitive environment like China, there is inconclusive evidence regarding the impact of technology innovation on the performance of SMEs. Zhang and Pearce (2012: p54) finds that prior research on the issue has been mixed with some 65% of all studies finding evidence of a positive correlation, while the rest finds a negative or no correlation at all. Even though various explanations about the contradictions in results from empirical studies into the correlation between SME performance and technology innovation exists, this case study of Wenchang Electronics Co will seek to show that the different evolutionary phases of organizational learning ability accounts for the inconsistency. Because of the uncertain external environment and available resources, SMEs may show varying correlations between firm performance and technology innovation depending on the evolutionary phase the SME is in (Zhang & Pearce, 2012: p54). By using resource-based theory, contingency perspectives, and industrial organizational theory, this case study will seek to explain the effect of technology innovation on each phase of Wenchang’s life cycle. The case study reveals that technology innovation in Chinese SMEs like Wenchang is dependent on how fast the organization can fulfil technological learning, an aspect that has an association with how the SME can accumulate Research & Development capability. Background of Wenchang Electronics Wenchang Electronics Co. is located in DongGuan, Southern China and was first established in 1984 producing washing machine controllers and employing some ten workers (global-sources, 2014: p1). Prior to the 1990s, most of the Chinese-made washing machines were of a mechanical nature and had relatively simple controllers. However, when economic liberalization began to take root in China during the early 90s, foreign companies, especially from Japan, began to enter into joint-ventures. This saw the emergence of semi-automatic machines in the Chinese market, which made Wenchang aware of this technology, and they soon started to develop computer-based machine controllers. In the beginning, Wenchang simply imitated products from Japan and were able to complete a product in about six months for introduction into the Chinese market (global-sources, 2014: p1). However, the imitated washing machine controller was of a low quality, which failed to satisfy the machine’s market performance. Finally, the company settled on developing automatic computer-based washing machine controllers using their expertise after taking away lessons from their initial failure at technology innovation. This especially had to do with making the core product software for the machine controller. As a result, the washing machines made by Wenchang were successful and gave the company a competitive advantage that was highly profitable for the firm. The further entry of competitors after 2000 increased the level of competition in the market (global-sources, 2014: p1). To deal with this situation and remain profitable, Wenchang was forced to reduce costs while also extending its existing products and exploring related products actively. Phases of Technology Innovation and Effect on Wenchang’s Performance Imitation Technology Innovation A major benefit of small and medium enterprises is their increased sensitivity to changes in their markets. While many large companies account for a majority of market share, there are numerous niche markets that are referred by the population ecology theory that show an increasingly brighter future. SMEs, by scanning the environment, can identify potential changes within their business environment through early signals, while also identifying changes that are already occurring in the general environment (Chen, 2010: p72). By getting insights from the perspective of industrial organizations, SMEs can achieve an approach for the assessment of opportunities that are profitable. Theories of industrial organization are mainly focused on the choice of industry, as well as how firms are positioned within the selected industry to achieve competitive advantage that is sustainable. This specific approach came from the paradigm of structure-conduct-performance that places increased focus on the context or structure, rather than on strategy or conduct, as well as on the implication of government policies, instead of the strategy of the firm (Yu et al., 2013: p83). As per the traditional understanding, the strategy of a firm or its market conduct is only reflective of the environment. The emphasis in this formulation has to do with the search for monopoly rents via segment and sector selection, along with manipulating the structure of the market eventually to create market power (Franquesa & Brandyberry, 2009: p32). Theories of industrial organization focus on the attractiveness of the industry as the fundamental basis for increased profitability, while the implication of this is that the primary concern of strategic management is with looking for an industry environment that is favourable. In addition, strategic management is also concerned with defining the frontier for the firm’s generic strategy and the location of segments that are attractive to the SME. The washing machine in China in the 1990s was an emerging sector as Chinese demand for the product was high. Wenchang came to the realization that the trend was moving towards the automatic washing machine and that the market for the product was quite high. For SMEs, quick market reactions mainly benefit from their monitoring and scanning capabilities, as well as from an adaptable and flexible internal structure of the organization (Xu, 2013: p101). Once Wenchang Electronics Co. was in possession of this information, they came up with the idea of developing related goods and products. To start with, they made the decision to invest some one hundred thousand Yuan in setting up their research for washing machine computer controllers, at which time they only had five engineers working for them. Constraints to their development of new technology soon emerged, particularly with regards to poor quality human resources, as well as related knowledge (Feinstein & Howe, 2011: p37). This led them to take up imitation strategy after comparing the various available alternatives, choosing the imitated objective as Japanese-made washing machine controllers. Following six months of the strategy, they were able to introduce their initial washing machine controller into the Chinese market. However, the limitations that were portended on the company by their poorly-developed internal capabilities of R&D resulted in product problems and low quality of the product (Feinstein & Howe, 2011: p37), which caused a high rate of withdrawal and heavy losses for Wenchang Electronics Co. The limited internal capability at Wenchang was the biggest factor that contributed to the firm’s poor performance after initiating their imitation strategy. Thus, Wenchang’s technology imitation strategy failed to find support in the industrial theory that is mainly focused on how organizations can find highly profitable market niches. In industries that deal with high-technology products, it is evident that marketing success is highly dependent on technology (Wright et al., 2008: p142). While Wenchang succeeded in identifying an attractive market niche, the organization’s performance was still low, as they could not develop new technology innovation because of limitations to their capability of R&D. The lack of stability in their controlling software led to their failure. Because some of the hardware parts that Wenchang used were imported, the fundamental software innovation had to be developed by Wenchang in order to control costs, as well as to satisfy the specialized demand from their washing machine customers. As a result, Wenchang’s mismatch between their internal technology innovation capability and external demand caused the organization to pursue an imitation strategy. In addition, low R&D capabilities can lead to the initial low performance of their technology innovation (Fu & Soete, 2010: p58). Independent Technology Innovation Strategy After the failure of their technology imitation strategy, the organization was confronted by two alternatives, either to continue with their computer controller technology innovation or to give up on their research strategy (Wang, 2012: p28). While there was significant growth in the market for automatic washing machines and more SMEs were making their entry into the market, Wenchang was facing a critical juncture in their life cycle. However, despite not getting the expected success from their technology innovation objective, the organization had learnt from their initial technology research. They were able to accumulate a lot of valuable experiences, as well as knowledge about the key values of their new product technology innovation. Using their experience from their technology imitation phase, Wenchang took on board learning about how important it was to cultivate it capabilities in R&D. In their initial R&D stage, the organization was able to increase the firm’s absorptive capabilities. Thus, Wenchang took the decision to innovate computer-controlled washing machine controllers independently. In order for a new product technology innovation to be stable, it was also important to enhance the match between software and hardware (Harvie, 2010: p77). After making the decision to improve on the technology research program, organizations must go on to invest significantly in the reorganization process for the project (Su et al., 2011: p562), hiring a senior engineer as the manager of the project. This led to the completion of the washing machine computer controllers after five months using product technology that was entirely developed by Wenchang, including the machine controller design, integration of software and hardware, and selection of the parts. As a result of the significantly improved match between software and hardware in this phase, they managed to enhance the technology's quality significantly, increasing its market performance. An important aspect of this phase of technology innovation was Wenchang’s strong ability to learn. Successfully moving from using imitation technology to their strategy of independent technology innovation was mainly influenced by Wenchang’s learning capabilities. Resource-based theory, unlike the theory on industrial organization, focuses on the core nature of distinctive technology and product capabilities to competitive advantage and success. Huang and Chi (2013: p42) contends that the identification, leverage, and management of core competencies have more strategic importance, especially compared to an emphasis on markets and product technology in entrepreneurial planning. Resource-based perspective argues that it is only possible to sustain an organization’s competitive advantage if the organization’s advantage-creating capabilities have support from non-substitutable, costly-to-imitate, rare, and valuable (Siyanbola, 2012: p62). These resources then become the organization’s core competencies. When resources can enhance the performance of a firm in conceiving and implementing strategies that improve its effectiveness and efficiency, they are referred to as valuable. In spite of this, capabilities that are valuable but still common tend to become enablers of competitive parity. Capabilities that are not easy or cheap to imitate cannot be developed easily by competing organizations. In addition, resources that are not substitutable are those capabilities of a firm that have no equivalent strategically. If a capability does not satisfy these criteria of competitive advantages that are sustainable, then it is not the firm’s core competency. Therefore, while all core competencies of the firm are its capability, not all of its capabilities are core competencies. The resources of the firm, thus, it must can raise imitation barriers. Resources are, thus, basic analytical units and consist of financial and physical assets, along with the processes of the organization and the skills of its employees (Li, 2012: p88). The performance of the organization is the result of bringing its technology resources to bear on specific tasks that add value to the product. However, the ability of these core functionalities to improve the firm’s performance has to do with the afore-mentioned criteria (Sherif & Khalil, 2013: p44). Unless the organization’s abilities can continuously be achieved as the external environment changes, the organization cannot maintain competitive advantage sustainably. Non-substitutable and costly-to-imitate technology, are comparable in specific time periods. With regards to Wenchang, the confidence the organization had in their ability to learn enhanced their ability to innovate their technology independently. This ability to have first-mover advantage increased the market performance of the firm, although it cannot be ascertained just how long this competitive advantage can be sustained (Sherif & Khalil, 2013: p45). Of course, there would be entrants seeking to imitate or develop the firm that moved first, raising additional questions about the very nature of core competencies. After exemplary market performance with high profitability for about five years, Wenchang was again confronted by threats, this time from other competitors. Diversification and Cost Strategy The computer-controller market and the washing market sector had a very close relationship. The increased profits for companies dealing with automatic washing machines attracted the entry of more competitors and firms. This increase in competition led to increased price wars, significantly reducing market performance and profitability (Li 2002: p474). Computer controllers, as the major washing machine cost component and the key part, were facing cost reduction as their biggest challenge. Organizations with the ability to provide high quality, low-cost technology, are the only ones that can survive in this condition. The reduction of costs for the controllers became an essential issue for Wenchang. Because of capital limitations, organizations are required to allocate resources towards the development of technological processes that efficiently produce a select number of products or creation of multiple products that satisfy individual preferences of consumers (Shan & Jolly, 2013: p166). On one hand, there were gradual changes within the automatic washing machine environment that made it more hostile and threatened market performance with increased market competition and decreasing profits. However, Wenchang was able to use related technological abilities and knowledge after successfully and independently developing computer controller technology. Scope and economies of scale, as recognized, are two fundamental ways via which organizations can undertake cost reduction and, thus, Wenchang decided to extend cost control and the breadth of its technology in order to leverage the advantages of their approach. Essentially, undertaking diversification enables an organization to spread risks in relation to costs of production (Liu, 2013: p38). Taking into consideration the computer controller and its special features, Wenchang combined two strategies in order to minimize its costs and to explore new niche markets simultaneously. As a result, Wenchang undertook further technology innovation by standardizing control programs, CMOS clips, and parts of the washing machine hardware. In addition, because of the similarities between controls for washing machines and air conditioners, Wenchang also attempted to diversify its technology to develop computer controllers for the latter. These innovations and the subsequent product innovation variety will enable the firm to meet the needs and demands of a heterogeneous market, in effect reducing the risks that come with focusing too much on narrow segments of the market (Phan, 2010: p182). Wenchang’s success in the development of air-conditioner computer controller technology was a direct manifestation of the contingency perspective and its insights. Contingency theory focuses on the conditions of the external environment in direct relation to the variations in forms of organization. Thus, management tasks seek to achieve the perfect fit with the external environment. Contingency theory proponents have ignored or discounted opportunities for firms to influence their external environment directly, primarily giving focus and emphasis on reactive adaptation in sustaining market performance (Li et al., 2006: p681). It is assumed that the ability of an organization to successfully adapt to changes in the environment is directly dependent on top management’s ability to properly interpret conditions incident on the firm appropriately, as well as to adopt the best action course. Contingency theory’s major implication is that organizations must achieve best fit, in this case with regards to technology innovations, with altering external market environments via appropriate forms of organization (Li et al., 2006: p681). Wenchang, therefore, had to find another niche, while also maintaining the advantages they had in their old markets. Until now, their strategy of diversifying and reducing the costs of their technology have proved efficient in maintaining market performance in a hostile market environment. Conclusion This case study has taken Wenchang as an example in the discussion of technological innovation strategies of technology-based SMEs in China. By studying the product technology innovation at Wenchang under different phases of technology innovation, it is immediately evident that uncertain external environments are essential determinants of a firm’s strategy decisions. This is witnessed by SMEs that do not have infinite capital sources. Beginning with the initial technology imitation to their independent technology innovation phase, followed by technology diversification, Wenchang’s evolutionary process is a partial reflection of the locus of technology-based SMEs’ technology strategies. Poor capabilities in research initially resulted in a technology imitation strategy, copying products that are in existence. Despite this, the approach is not easy to pull off because of the expectations that most organizations have regarding market performance. With regards to the impact of imitation innovation strategy, Wenchang was a fail case, although this does not mean that imitation strategy is the wrong choice for SMEs. In fact, if there were no failures initially, it would not have been possible for Wenchang to accumulate the technological knowledge they required to succeed later. The most important thing for technology innovation to improve the performance of a firm has to do with organizational learning abilities. This was the case for Wenchang, which used technology innovation to improve their performance by using their learning abilities to improve processes. References Chen, D. (August 01, 2010). Does inter-firm technological cooperation enhance innovation performance? 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