performance evaluation of chinese private enterprises…
TRANSCRIPT
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PERFORMANCE EVALUATION OF CHINESE PRIVATE
ENTERPRISES: A COMPARATIVE STUDY OF SUNING AND GOME
Ruilin Chen, BSc, Researcher
Yuhan Hu, BSc, Researcher
Yuting Wu, BSc, Researcher
Xiaosong Zheng, PhD, Professor
SHU-UTS SILC Business School
Shanghai University, China Abstract
In China the current development of private enterprises has encountered the
problems of gradually decreased survival rate and the development bottleneck, thus
can hardly maintain the truly sustainable development. However, the development of
private enterprises plays a pivotal role in the Chinese economy and exerts great
influence in stimulating the development of socialist market economy and it seems
especially important for private enterprises to develop the core competitiveness and to
establish the suitable managing strategy development system. Based on a detailed and
critical case study, this paper studies how Gome and Suning deal with the development
bottleneck and explore innovative methods through two performance evaluation
models Balanced Scorecard and Economic Value Added (EVA), and give three
appropriate suggestions for China’s private enterprises on how to develop effective
strategic management objectives in order to improve the corporate performance.
Keywords: private enterprises, performance evaluation, strategy development,
China
JEL Codes: L25, G32, P31
Received: April 05, 2019
Revision: May 09, 2019
Accepted: May 15, 2019
Chen, R., Hu, Y., Wu, Y. and Zheng, X. (2019), “Performance
Evaluation of Chinese Private Enterprises: A Comparative
Study of Suning and Gome”, Journal of Applied Management
and Investments, Vol. 8 No. 2, pp. 57-70.
Introduction
Since 1978 China has implemented the reform and opening up policy, the
economy has achieved unprecedentedly development and obtained a fast growth
with worldwide attention. Among these, the private enterprises have developed
and expanded rapidly, becoming the main force and important power in the
economic growth of China and exerting great influence in stimulating the
development of socialist market economy. Until 2005, private enterprises have
reached around 65% of China’s GDP (Yang, 2012). In addition, after China
became a member of WTO in 2001, the proportion of exports of state-owned
enterprises declined from 42.5% to 18% during 2001 to 2008, while the proportion
of private corporations increased from 7.4% to 26.7% (Tian, 2010). Generally
speaking, private enterprises are now playing an irreplaceable role in national
economic growth and social development, creating a large number of employment
opportunities for the country, releasing the burden of public economy and
providing more diversified services and products than before.
However, the private enterprises in China has currently encountered the
problems of gradually decreased survival rate and the development bottleneck,
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thus it is tough to maintain the sustainable development. Judged from the
perspective of historical development, most of the private enterprises develop in
the traditionally simple and extensive form, lacking core technology, science and
innovative ability and strategic development system (Tian, 2010). Seen from the
economic status in the current period, factors like the constant rising of raw
material and labor cost, the entry of foreign enterprises and the changes in
economy status of international foreign trade are all restraining the stable long-
term development of private enterprises. In order to ensure the development of
private enterprises in a more reasonable and scientific direction, it seems
especially important to upgrade and transform the industrial structure, to develop
the enterprise core competitiveness and to establish the suitable managing strategy
development system.
Focusing on the problems of the current period, this paper will discuss the
problems that Chinese private enterprises have recently encountered, analyze
examples based on two performance evaluation models and give appropriate
suggestions on how to develop effective strategic management objectives and
programs to improve the corporate performance. This kind of issues is seldom
investigated in the previous researches and the feasible suggestions are almost
unavailable. The possible findings might imply the future trend and bottlenecks
for Chinese private firms and provide some strategies to help them obtain higher
performance.
Literature Review
The Performance evaluation models
Business strategy is management strategies about how to complete the
company’s mission and objectives through a series of policy and action plans (Ma,
2005). To achieve successful strategic management (Svieshnikova and Zelenaya,
2012), performance management (Alsharf, 2015) of enterprises plays a vital role,
which is used to assess and monitor the feasibility and applicability of strategies. The
strategic performance evaluation mode could be explained as the set of methods and
procedures of all official, informative technology that enterprise managers use to
maintain business activities (Dodd, 1932). Performance evaluation system is the core
system in corporate strategic management system under the modern economy, playing
an essential role in corporate strategic management, which is also the organic whole to
achieve the goal of performance evaluation of enterprises (Xu, 2002). However,
enterprise performance evaluation (Goncharuk, 2014), especially the domestic
performance appraisal, is still insufficient for enterprises to adapt to new changes and
challenges (Bi, 2005). There are many errors in establishing the performance appraisal
compliant with the business strategy. First, not all performance indicators are critical in
corporate strategic management (Krýslová, 2018), and only those affecting long-term
development of corporations need to be considered. Second, companies should not
only focus on financial factors when setting Key Performance Indicators (KPI) (Hou,
2013). Financial data is more of a summary of historical data with a certain time lag.
Also, financial figures easily cause managers to pursue short-term interests, failing to
focus on long-term development. Third, the company’s KPI should not only aim at a
single functional department because the enterprise strategy is based on the
development of enterprise as a whole. Fourth, the company’s KPI could not only focus
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on internal business-related interest groups, but also take external stakeholders such as
customers, markets and society into account (Luo, 2004).
Among various kinds of performance evaluation models, Balanced Scorecard
and Economic Value-Added Model (EVA) are most commonly applied (Chinese
Institute of Certified Public Accountant, 2018). They are relatively scientific and
comprehensive strategic performance evaluation models recommended by business
executives.
Balanced Scorecard is a strategy performance management tool proposed by the
famous American management accountant Robert S. Kaplan and the President of
Renaissance Solutions, Inc. David P. Norton in 1990, which can be used by managers
to keep track of the execution of activities by the staff within their control and to
monitor the consequences arising from these actions. It consists of four aspects:
financial performance indicators (Florin, 2013), customer performance indicators
(Sulphey and George, 2017), internal business performance indicators (Zheng and
Alver, 2015), and learning and growth performance indicators (Sulphey, 2015;
Kurnosova and Zdor, 2012). Balanced Scorecard not only can correctly assess the
performance of enterprises, economic strength and competitive advantage, more
importantly, it can intuitively show the enterprise’s goals (Goncharuk, 2014), which is
conducive for managers to set strategic goals and plans, and could help employees to
understand the enterprise’s strategic goals and create personal value for the company in
accordance with the goal (Ma, 2009).
EVA is an indicator of enterprise operating performance evaluation proposed by
Stern Stewart Consulting Firm, a residual income method based on economic profit.
EVA can simultaneously consider the company’s own capital costs, debt costs, input
costs and the future development potential. Meanwhile, EVA can cover various
management levels to achieve more scientific management and decision-making (Nie,
2007). As the added value allocated to stakeholders other than shareholders increases
significantly, the profitability and stability of the enterprises increase as well. Value-
added distribution and the stability of profitability should be used as sustainable KPIs
for comprehensive reporting (Oshika and Saka, 2017).
Combining two models together, more comprehensive analysis in this study can
be made to understand the operation situation of different stages of business.
Researches on Chinese private enterprises’ bottlenecks
Merely a few scholars investigated the underlying reasons for the risky situation
of private companies in China. Tan (2013) stated that there are three main problems in
the development of private enterprises. First, the overall size of private enterprises is
growing together with the total tax expense and the number of employees, while the
rate of economic efficiency is slowing down. In addition, the corporate profitability
showed a downward trend. Furthermore, manufacturing industry still accounts for the
major share, and economic transformation and upgrading showed initial results. Liu
(2011) pointed out that a critical reason for the slowing economic efficiency is that the
strategic development of enterprise and talent pool failed to follow the pace of
economic development, especially due to the paternalistic management model common
seen in private enterprises. In the process of rapid and long-term development of
enterprises, such management model will arbitrarily lead to business decision-making
mistakes due to the individual limitations of entrepreneurs, and thus affect the
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development of enterprises.
In order to overcome the bottlenecks, it is important for enterprises to be
forward-looking, scientific, measurable and sustainable in decision making. Thus,
strategic management and scientific enterprise management system become effective
ways to improve the level of enterprise management.
All the studies above provide helpful materials for this paper and the analysis of
the research questions will be given in the following sections.
Research Model and Hypotheses
This paper uses a standard research method, based on the introduction of basic
theories, using data analysis and case study methods to analyze and answer the
research questions. As is indicated in the former part, the combination of Balanced
Scorecard and EVA can be comparatively scientific and comprehensive, so they are
employed as evaluation tools to analyze the operational situation and strategic
development of two Chinese electronics retailers: Suning and Gome.
Case study is an empirical inquiry and exploration of cases mainly through
analysis on why the problems happened and how to solve them. This study will apply a
scientific method invented by Yin Robert, a famous scholar, who developed a
relatively complete knowledge structure and system regarding case study. Yin (2003)
believes that there are six sources, which are the documents, archives, interviews,
direct observation, participatory observation, and physical evidence. They need to be
carefully read and interrelated to ensure that the results and quality of the case analysis
are greatly improved. Specific analysis study is based on the following steps: clear
research questions, pre-constructs according to research issues and related theories,
explanation of theories, predictions based on theories, multi-case analysis, specifying
the analysis objectives and the replicable logic of multiple cases. In the theoretical
analysis, the detailed description of case is based on the theoretical point of view and
hypothesis. Then, the quantitative and qualitative information should be collected,
sorted, processed and evaluated in order to detect the rationality and applicability of the
perspectives and models (Yin, 1981).
Case Background
With the continuous growth of Chinese electrical industry and improvement of
consumer spending, electrical retail industry has also been vigorously developed. From
the initial manufacturer of the supply and marketing department to the growing number
of dealers and then to the rise of private chain retail enterprises represented by Gome
and Suning, among which electrical retail industry chain of private enterprises has the
most impact on Chinese market economy.
Figure 1 shows the sales growth in the rapid development and competition stage
of Chinese electrical retail industry. The year 2005 becomes the milestone in the
development process with the electrical retail sales of 556.8 billion yuan. Until 2009,
the sales have reached 869.8 billion yuan, showing the fast development of electrical
industry.
In the current stage of competitive integration, leading enterprises suppress other
small and medium-sized competitors through the advantages of their enormous capital
size and extensive regional coverage to conduct resources integration within the
industry. As shown in Figure 2, in the initial stage of competitive integration, Gome,
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China’s largest electronics retailer reached the sales of 86.9 billion yuan, with 13.4% of
the market. Suning, as the second largest electronics retailer, had 60.9 billion yuan
sales revenue, accounting for 9.3% of the market (Yuan, 2007). With the continuous
transformation of China’s economic situation and the pressure from foreign
enterprises, China’s electronics retail industry is unable to rely on the advantage of
scale to win. They have to develop corporate strategic objectives and core
competitiveness based on the economic environment, in order to maintain the leading
position in the industry and achieve the enterprise’s sustainable and long-term
development.
Figure 1. The market sales scale of China's electronics retail industry
in the initial development and integration stage
Figure 2 Comparison of market share between Gome and Suning
in the initial development and integration stage
Case Analysis and Discussion
The main research question of this paper is how to effectively link the
enterprise’s strategy and performance management. Then two performance evaluation
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models will be used to analyze how Gome and Suning achieved effective integration of
strategic and performance management and accomplished development goals, thereby
improving the business performance.
Figure 3. Suning Balanced Scorecard Strategy Map
Suning Appliance Group Co. Ltd is a domestic electronics retailer, which was
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founded in 1990 and listed in 2004. By the end of 2012, the number of Suning physical
stores in Nanjing has reached nearly 90, with the sales revenue of 80 billion yuan
(Suning, 2010-2015). In 2013, Suning has repositioned, transformed from the original
pure electronics retailer to a high-tech company, and the products were also changed
from tangible electronics to intangible service. Gome, also a domestic electronics
retailer, was founded in 1987 and successfully listed in 2004. It has developed into the
largest electronics retailer in China until now. In the end of 2006 when Gome listed, its
sales have reached 86.9 billion yuan, over 2 million yuan high than that of Suning, the
second largest electronics retailer, and the number of its shops reached 820 across
around the mainland and Hong Kong (Yuan, 2007).
According to the idea of Balanced Scorecard, the organization of Suning will be
divided into four dimensions: financial strategy, customer strategy, internal operating
strategy and learning and growth strategy. Figure 3 shows the balanced scorecard
strategy chart of Suning.
From Suning’s Balanced Scorecard chart, it is easy to see how Suning should
develop its strategy in each dimension to improve business performance. This chart is a
quantitative indicator and only the combination of both quantitative and qualitative
indicators can help to achieve the ultimate corporation goal. Suning’s Balanced
Scorecard table is shown in Table 1.
Table 1. Suning Company BSC Scale Scale Name Scale Description Evaluation Index Evaluator
Customer
Satisfaction
Evaluation of Suning’s
service, product quality and
other aspects from
customers
Company image, and
department images of store
service, after-sale service,
customer service, distribution
Customers
Employee
Satisfaction
Employee's evaluation of
corporate management
policies, personal work, and
collaboration with other
employees
Job satisfaction, personal
income and development,
satisfaction with parent
supervisors, firm execution, and
management information
systems
Employees
Personal
Performance
A survey of employees’
working skills, working
efficiency and working
attitude
Motivation of work, and
mastery degree of personal
skills
Heads of
department
Enterprise
Atmosphere
Corporate culture, corporate
leaders’ image, the
collaboration between
departments and employees,
and working enthusiasm
Corporate culture and
atmosphere; staff morale
Functional
departments
Communication
between staff and
leaders
Summary Table
The number of
recommendations and the
situation of adoption
Vice
president
Mutual evaluation
form of departments
Evaluation of collaboration
and working effectiveness
of other departments
Interdepartmental satisfaction Employees
Staff training
assessment
Evaluation of the effect of
staff training
The improvement of staff
working skills and participation
rate of training
Department
heads
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Gome is committed to becoming a leader in the world’s electronics retailers in
China’s private enterprises. However, Gome used to take measures after the problems
arising, rather than formulating the overall development strategy from all angles to
analyze the operating situation of the enterprise. Therefore, it underwent a low period
when the arising of e-commerce. After introducing the Balanced Scorecard into the
development of strategic objectives, the company’s management system can be more
mature and its performance will gradually increase. Figure 4 is Gome’s strategic
objectives at all levels and Table 2 shows the Gome’s Balanced Scorecard of various
dimensions.
Figure 4. Figure Strategic Objectives at All Levels of Gome
Table 2. Gome’s Each Dimension Balanced Scorecard Design Financial indicators Customer dimension indicators
Asset turnover
Return on sales
Comprehensive contribution
Customer retention rate
Customer acquisition rate
Customer profitability
Internal operating indicators Learning and growth indicators
Inventory turnover ratio
Purchase price
Delivery efficiency
Employee satisfaction
Staff retention rate
Talent introduction rate
Similarly, the qualitative indicators need the cooperation of quantitative
indicators thus making Balanced Scorecard play its effectiveness. Table 3 shows
Gome’s key performance evaluation indicators.
According to the evaluation index of Balanced Scorecard, it is possible to
analyze that the current strategic goal of Gome and Suning is reasonable to meet the
current economic market environment and is able to help enterprises to achieve
international development and maintain the leading position in the industry. According
to the needs of performance evaluation and the actual survey results, combined with
the strategic development situation of Suning and Gome and the strategic objectives of
each stage, the paper analyzes and classifies the four dimensions of Balanced
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Scorecard Weight distribution analysis table, seen as Table 4 (Hou, 2009).
Table 3. Key Performance Index of Gome
Table 4. Weighting Analysis of Four Dimensions of Suning Yun and Gome
Balanced Scorecard
Index system Weights Gome Suning
Proportion Proportion
Finance 28% 31.44% 17.38%
Customer 16% 12.4% 13.22%
Internal operating 40% 44.72% 54.9%
Learning and growth 16% 11.44% 14.5%
Using the calculated data in Table 4, through the radar map presenting the way
out, the proportion of the four dimensions that Suning and Gome has developed
strategic objectives is shown in Figure 5.
It can be found from the figure above, Suning and Gome all focus on the internal
processes of strategic objectives with more than 40%, and Suning even reached 54.9%.
From the overall situation, Suning has more competitive advantage, with higher
indicators than Gome in the three dimensions: learning and Growth, internal processes
and customers. This is the good result of Suning focusing on building the core
competitiveness of enterprises, taking into account the brand building, service system,
the further construction of information technology and internal staff management and
energy distribution. However, Gome still has its own advantages in customer loyalty
Aspect Strategy theme Factors to success Key Performance Evaluation Indicators
Finance
Enhance the
sales of stores
and e-
commerce
platform
Adjust the structure of
electronic products The proportion of popular products
Sales promotion Promotion times per month
Introduction of new
products The rate of new products
Sufficiency of inventory
The rate of out-of-stock electronics
Vacancy proportion of both real and
virtual goods shelf
Increasing revenue Increase rate of revenue
Employees
Enhance the
popularity of
stores and
electricity
business
platform
Improve the sales
category
Number of types of goods compared
with last year
Increasing amount of
customer purchase
Weekly sales price compared with the
same period last year
More customers visiting The number of customers per week
compared with the same period last year
Customer satisfaction Customer satisfaction
Internal
operating
Reduce
operating costs
Reduce inventory Inventory turnover ratio
Reduce loss and return of
electrical appliances Return rate
Security Product loss rate in stores
Learning
and
growth
Enhance
working ability
and service
capabilities of
staff
Employees training Employee training time
Training fee per capita
Promotion opportunities
for excellent staff Staff promotion ratio
Material incentives Average employee income
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and management methods. Gome has higher proportion in the dimension of the
financial aspects than Suning, proving that in addition to the internal process, Gome
values the financial indicators most, with the proportion reached 31.44%. The
company's Profit and income are the most important indicators in assessing corporate
performance and will set the future strategic objectives based on these financial
indicators. From the analysis, Gome should balance the development by enhancing
several other dimensions in order to improve their competitiveness.
Figure 5. Four Dimensions Radar Chart of Suning and Gome
Furthermore, the evaluation of performance of the enterprise needs to refer to the
results of EVA, which can measure the true performance of enterprise and its real
value. Table 5, Table 6 and Figure 6 and Figure 7 below compare the EVA of Suning
and Gome from 2010 to 2014 and the corresponding net profit.
Table 5. Comparisons of EVA Value and Accounting Net Profit in Suning Yun
2010-2014 (Unit: RMB) Year 2010 2011 2012 2013 2014
EVA 835853470 603338320 -2445282330 -5520808170 -3008441139
Net profit 4105508000 4886006000 2505462000 104303000 824038000
Table 6. Comparison of EVA Value and Accounting Net Profit for Gome
2010 - 2014 (Unit: RMB) Year 2010 2011 2012 2013 2014
EVA 51227062829 42108176986 628805285 15285212472 45220377560
Net profit 1961654000 1801346000 -809991000 677445000 1018168000
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8,36 6,03
(24,45)
(55,21)
(30,08)
41,06 48,86
25,05
1,04 8,24
(80,00)
(60,00)
(40,00)
(20,00)
0,00
20,00
40,00
60,00
2010 2011 2012 2013 2014
(Unit: 100 million yuan)
EVA
Net profit
Figure 6. Comparison of EVA value and accounting net profit
for Suning Yun's 2010-2014 (Unit: 100 million yuan)
512,27
421,08
6,29
152,85
452,20
19,62 18,01 (8,10) 6,77 10,18
(100,00)
0,00
100,00
200,00
300,00
400,00
500,00
600,00
2010 2011 2012 2013 2014
(Unit: 100 million yuan)
EVA
Net profit
Figure 7. Comparison of EVA Value and Accounting Net Profit
for Gome’s 2010-2014 (Unit: 100 million yuan)
It can be seen from the above comparison that from 2010 to 2014, Suning's EVA
economic growth value is lower than the corresponding annual accounting net profit,
and from 2012 to 2014, EVA is even negative. It indicates that Suning's investment
Earnings is significantly lower than its investment costs, the corporate value is
damaged, and the corporate performance is reduced. On the other hand, from 2010 to
2014, EVA of Gome are all positive, and most of the year's EVA values are far beyond
the accounting net profit in the same period, which means that the value of Gome's
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business in this paragraph Period has been growing, and the corporate performance is
much higher than that of the Suning Cloud business (Gome, 2010-2015). This proves
the establishment of e-commerce platform and the positive integration with offline
stores show positive effect and set of the strategic development goals promotes the
company's good development.
From the above analysis of these data, the following conclusions and inspiration
can be drawn: First, no matter how the economic environment changes and how the
country's economic system changes, retail enterprises should always operate as the
essence of retail business enterprises. The internationalization of China's economy, the
networking of retail industry, the promotion of e-commerce platform, as well as the
rising living standards and the increasing demand for quality of products all remind
companies to make innovation on products, services and other aspects, and establish
the corresponding strategic objectives. During the transition period in order to meet the
environment, enterprises should take the advantages of previously accumulated
experience and the new technology to overcome the weaknesses of the original
operating model, thus achieving the maximization of advantages and enhancement of
business performance. Furthermore, the electronics retail enterprises should establish a
network information system to collect data, and use the data to analyze consumer
demand and business operations deficiencies, optimizing the entire supply chain
structure, improving the differentiation of product and service, reducing production
costs, optimizing the market structure and improving customer loyalty and satisfaction
(Hou, 2009).
Conclusions and Suggestions
This paper analyzes the state quo of the development of China’s private
enterprises and the problems they encountered, also predicts the future development
trends based on rational estimation, and then presents the bottlenecks in the current
development- business performance and strategic development. Meanwhile, two
performance evaluation methods Balanced Scorecard and EVA Economic Value
Added are used to analyze the performance of two largest Chinese electronics retailers:
Gome and Suning.
In the two performance evaluation methods, the Balance Scorecard is oriented to
the strategic management objectives of the enterprise, which are segmented from top to
bottom, then communicated and balanced, thus realizing the strategic management
objectives of enterprise. EVA is based on the return on investment, highlighting the
basic objectives of enterprises in modern economic society, and achieving the
distribution of limited resources and maximization of corporate value. Meanwhile,
EVA can cover various management levels to achieve more scientific management and
decision-making (Nie, 2007). Combining two methods together, more comprehensive
analysis can be made to understand the operation situation of different stages of
business thus providing reference for the strategic planning of the enterprise.
Based on the analysis of Gome and Suning cases about business performance
management and cooperation strategy, there are three main suggestions for all private
enterprises.
First, it is important for private enterprises to accurately and reasonably
determine their status and their own economic development environment. Different
development history, development stage, development direction and the current social
69
economic development trends of private enterprises, and current technical trends all
will affect the formulation of strategic development of enterprises.
Secondly, private enterprises should focus on performance management, and
conduct the divergence analysis and research based on it. Performance management is
an indispensable part of strategic management, which can effectively measure and
monitor the feasibility and applicability of the strategy. The commercial nature of
private enterprises means that the profit is the guidance, so the importance of
performance is self-evident.
Thirdly, private enterprises should conduct more research, using more
appropriate and scientific theoretical analysis methods. A variety of theoretical analysis
methods have different research focus, suitable for different types of private enterprises
or different development stages of private enterprises. When private enterprises
develop their strategic planning, it is important for them to learn, to conduct more
research and select the most appropriate ones, which are compliant with the current
development situation of enterprises and can reflect the theories.
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