web-based chinese management (wcm)—toward a new management paradigm for the next millennium?

TRENDS

Web-Based Chinese Management (WCM)- Toward a New Management Paradigm for the Next Millennium? Kai-Alexander Schlevogt

EXECUTIVE SUMMARY

This article develops a distinctive Chinese management model called ‘Web-based Chinese Management” (WCM). It is practiced in private family enterprises located in Mainland China’s booming “noncommunist” business centers and in overseas Chinese firms. The model is thought to be highly effective due to its use of social capital, high degree of flexibility, and cost efficiency. However, given that it usually puts limits to the growth of the focal company, it is less effective in exploiting economies of scale in steady-state mass-production industries. With its emphasis on skill, experience, and action, it conforms to my definition of “art.” I propose WCM as a new management paradigm for the next millennium and think that it fits well into the prevailing zeitgeist of ever more interdependent networks. The framework can help international businessmen both to deal effectively with Chinese enterprises, as well as serve as “best practice” that can be emulated to master highly uncertain and complex environments. 0 1999 John Wiley & Sons, Inc.

Thunderbird International Business Review, Vol. 4U6) 655-691 (NovemberlDecember 1999) 0 1999 John Wiley & Sons, Inc. CCC 1096-4762/99/060655-37

655

656 SCHLEVOGT

Can the strength of a hundred people be greater than that of one thousand people? It can and is, when the one hundred are organized.

-I? I. Lenin.

Science is systematized knowledge. . . Art is knowledge made efficient by skill.

-J. F. Genung

INTRODUCTION

Historical Importance of Organization in China

Chinese management has a long tradition. Indeed, China is the place where the first concepts of organization and management were ever developed (Lui, 1996, p. 390). More specifically, the first Chinese emperor, &in Shi Huang, was one of the earliest-known organizer-managers and one of the greatest leaders of all time-the unification of the Chinese nation being one of his greatest achievements (Cotterell, 1981). The ancient city of Xi’An-the capital established by him in 221 BC-was the starting point of the world-famous Silk Road, along which, in ancient times, together with people and goods, the extremely advanced knowledge and ideas of China traveled to the West (Fukuda, 1989). Amongst those ideas, it was presumably possible to find sophisticated concepts of organization.

Subsequently, China became the first bureaucratic nation state in the world. The term “mandarin” is still the very epithet of a bu- reaucrat, though with slightly negative connotations in our times. Voltaire pointed out that the Chinese administrative system was the

most perfect structural arrangement the Voltairepointedout world had ever known -the fact that China that the Chinese is the only ancient civilization that still sur-

vives after more than 5,000 years is a power- administrative system was the most ful testimony to its historical effectiveness. arrangement the The system was based on meritocracy sus- world had ever tained through rigorous testing in the Imper- known . . . ial Exams. Its flexibility and capacity for sur-

viva1 was demonstrated by the fact that it allowed for transitions from incompetent leaders to new dynasties. A former beggar, Zhu Yuan Zhang, becoming emperor and founder of the splendid Ming Dynasty (1368-1644) is an impressive example of this flexibility.

structural

‘It should be mentioned, however, that the word “mandarin” was originally given to the na- tive officials in Macao by the Portuguese and is of Portuguese origin (rnandar means ‘to command”).

TRENDS: WEB-BASED CHINESE MANAGEMENT 65 7

Organizational Experiments in Modern China In modern times, China started a new “natural experiment” in organizational studies (Shenkar, 1984). The Great Cultural Revolution in a sense wanted to prove the invalidity of Max Weber’s (1947 [originally published in 19241) ideal type of bureaucracy and later devel- opments in “contingency theory,” which argued for its differential effectiveness under certain circumstances. It did so by claiming that formalization and specialization are not necessary in any circumstances and are only inherited faces of hidden power. Therefore, the red guards abolished, for example, all rules relating to sterilization in hospitals and also claimed that nurses could easily perform surgery. The ensuing disaster provided strong evidence for the failure of the experiment.

More recently, China kicked off another organizational experiment, the creation of an allegedly new economic system called “So- cialism with Chinese Characteristics.” It is to be achieved through a transition from a plan- More kicked recently, off another China

ning system to a socialist market economy. Af- organizational ter the quick removal of the nongovernmental experiment, the individual economy in the mid 1950s, an im- creation of an portant pillar of the reforms, started by the economic system late paramount leader Deng XiaO Ping after called uSocidism the Party’s historic Third Plenum in Decem- withChinese ber 1978, was the recreation of a private econ- Characteristics.” omy, particularly through the development of special economic zones along the coastal areas of South China.2

As a result of the economic reforms, the nonstate economic sector has boomed and broke the 50% mark of GDP for the first time in 1992. By now, private firms already represent the largest share of the enterprise population in terms of numbers. These changes were associated with new forms of organization and management. The key point of this article is to argue that these distinctive management practices of Chinese private enterprises, which have contrib- uted to the rapid development of the private sector, (a> constitute an “art” in the sense of doing something well, and (b) can potentially serve as a new management paradigm for the new millennium. Chi- na’s historical connection with the development of organizations and the transfer of managerial ideas to the West would thus, after a long interruption in the time gone by, find a continuation in the next cen-

2Apart from these ownership changes, at the enterprise level, a key element of Chinese economic reforms was the separation of government functions and officials from enterprise management through the introduction of the “Director Responsibility System” (cf. Scher- merhorn, 1987, p. 346; Hunt & Yang, 1990).

658 SCHLEVOGT

tury that might once again be a period of great Chinese influence in the region and the world.

A DISTINCTIVE MODEL OF CHINESE MANAGEMENT

The Overseas Chinese Perspective

In general, research on Chinese management is a relatively recent phenomenon and the literature is still sparse (Redding & Ng, 1982, p. 201; Leung, 1995, p. 6). Studies analyzing the nature of private overseas Chinese management are presented together with their relevant findings and methodology in Table 1.

As can be seen from this recent snapshot, with one exception, all studies refer to overseas Chinese private management. One recent study (Schlevogt, 1999, in press) has demonstrated that this management model has been readopted in mainland Chinese private enterprises and probably accounts for much of the dynamism of the private sector’s development in the PRC. We therefore can speak of a truly Chinese management model.

Distinctive Elements of Chinese Management

Most literature focuses on individual, fragmented aspects of Chinese management, and there is no overarching framework that synthesizes these various ideas. Based on the review of the relevant literature, I therefore developed such a unifying model of private Chinese management. This overarching framework is graphically illustrated in Figure 1.

As illustrated, the following distinctive characteristics of Chinese management in private enterprises can be synthesized. Distinctive- ness here implies that the management style is different from state- owned enterprises.

High Centralization. There is a high degree of centralization of power in the hands of one autocratic entrepreneur (Hickson & Pugh, 1995, p. 171; Turpin, 1998, p. 8; Schlevogt, 19981, who is usually the founder and owner. This phenomenon can be termed “dictatorship by the owner-manager” (Montagu-Pollock, 199 1, p. 23). A good example for this structural characteristic is the hub-and-spoke management system of US computer tycoon Wang, who at times had 136 out of 2,000 employees directly reporting to him (Cohen, 1990, p. 24). Oth- er Chinese organizations, instead of adopting a multidivisional form with relatively independent heads of business units, require all of the organization’s various branches to report directly to the found-

TRENDS: WEB-BASED CHINESE MANAGEMENT 659

ing entrepreneur (Kao, 1993). In contrast, Chinese state-owned enterprises tend to be more decentralized (Child, 1994, pp. 94-95).

Lou, Degree of Bureaucracy. Bureaucracy does not appear to be very strongly developed in Chinese private enterprises. More specifically, the degree of formalization, specialization, standardization of control systems, and integration is very low (Redding & Wong, 1986; Redding, 1990; Weidenbaum, 1996, pp. 149- 150). In addition, there is a distinctive lack of Put in a nutshell,

formal needs of a well-designed organizational hierarchy (Le- control are less ung, 1995). Put in a nutshell, formal needs of important, given control are less important, given that the that the CEO exerts CEO3 exerts personal control. In contrast, personal contro~ studies on state-owned enterprises in Main- land China emphasized the high degree of “structuredness” of these organizations. For example, Krone, Garrett, and Chen (1992) un- dertook a preliminary investigation of managerial communication practices in state-owned factories, concluding that Chinese factories resembled the bureaucratic model in their use of formal information centers. Weihrich (1990) also found that state enterprises tend to use a strong degree of bureaucracy.

Entrepreneurship. Chinese private enterprises tend to follow proactive and aggressive strategies, adopt a flexible leadership style, and entrepreneurial decision making (Mackie, 1992, p. 53; Hickson & Pugh, 1995, p. 170). In contrast, studies on state-owned enterprises highlighted the importance of planning for decision making (Weihrich, 1990). In addition, Boisot and Liang (1992, p. 180) found that state enterprises inhibited the emergence of entrepreneurial managers.

Networks. There is a predominance of small enterprises within ex- tensive (often subcontracting-based) firm networks (Montagu-Pol- lock, 1991, p. 21; Williamson, 1997). This “enterprise city” is held together by family lineage, trust, and ‘‘panxi” (Fukuyama, 1995). Whitley (1994, p. 173) calls these networks “centrifugal type of business system’’ and states that strong connections with customers and suppliers are likely to be their distinctive characteristics. Many such lineage-based “webs” extend internationally (Watson, 1975b) with Nunyang Chinese investing back into their hometowns. These emi- grants also represent the most important foreign-investor group in

3Following common usage (cf. Gupta, 1988; Lewin & Stephens, 1994, p. 208), I use the term CEO throughout the article but include general managers, who might have other official ti- tles.

Tab

le 1

. O

verv

iew

of

Lit

erat

ure

on Private C

hine

se M

anag

emen

t

Aut

hors

Y

ear

Rel

evan

t Fi

ndin

gs

Met

hod

Cai

, P. H

.

R. H

elle

r

J. L

ee

F. F.

L. h

un

g

J. A

. C. M

acki

e

M. M

onta

gu-P

ollo

ck

G. R

eddi

ng &

Y.

Y. W

ong

(199

7)

(199

1)

(199

6)

(199

5)

(199

2)

(199

1)

(198

6)

Ove

rsea

s C

hine

se b

usin

esse

s ch

arac

teri

zed

by l

ack

of f

orm

aliz

atio

n,

entr

epre

neur

ial f

lexi

bilit

y (linghuoyingbianxing), an

d en

terp

rise

net

wor

ks,

all s

harp

ly c

ontr

astin

g w

ith t

he p

rofe

ssio

nal,

cons

iste

nt, a

nd tr

ansp

aren

t m

anag

emen

t of U.S. c

ompa

nies

, and

wel

l est

ablis

hed

“man

agem

ent t

heor

y.”

Succ

essf

ul o

vers

eas

Chi

nese

man

agem

ent

mod

el c

hara

cter

ized

by

emph

asis

on

fam

ily ti

es a

nd “

rule

by

men

” in

stea

d of

rul

e of

law

or

form

aliz

atio

n, a

s w

ell a

s st

rong

ly f

ound

er-d

omin

ated

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ture

.

cent

ered

ness

, fam

ily-c

ente

redn

ess,

cen

tral

izat

ion

of p

ower

, and

sm

all s

ize,

co

nflic

ts w

ith W

este

rn m

anag

emen

t mod

el.

Dis

tinct

ive

over

seas

Chi

nese

man

agem

ent m

odel

cha

ract

eriz

ed b

y la

ck o

f hi

erar

chie

s, lo

w f

orm

aliz

atio

n, a

nd d

omin

ance

by

owne

r. E

ntre

pren

euri

al v

ersa

tility

, as

wel

l as

impo

rtan

ce o

f pe

rson

al r

elat

ions

, and

fa

mili

sm in

Chi

nese

ove

rsea

s fi

rms.

D

istin

ctiv

e C

hine

se o

vers

eas

man

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ent

styl

e, c

hara

cter

ized

by

cent

raliz

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port

ance

of r

elat

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, and

ent

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ise

netw

orks

, oft

en le

ads

to h

igh

orga

niza

tiona

l fle

xibi

lity

but

mig

ht s

et li

mits

to g

row

th.

spec

ializ

atio

n, s

tand

ardi

zatio

n, f

ew s

taff

dep

artm

ents

, and

str

ong

relia

nce

on p

erso

nal

rela

tions

.

Dis

tinct

ive

Chi

nese

man

agem

ent m

odel

in

Sing

apor

e, d

escr

ibed

by

hum

an-

Typ

ical

ove

rsea

s C

hine

se f

irm

cha

ract

eriz

ed b

y st

rong

cen

tral

izat

ion,

low

The

ory

only

The

ory

only

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ory

only

The

ory

only

Lit

erat

ure

revi

ew

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ory

only

Cas

e st

udie

s

S. G

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ding

(1

990)

K. A

. Sch

levo

gt

(199

8)

K. A

. Sch

levo

gt

( 199

9;

in

pres

s)

D. T

ur,p

in

(199

8)

Wei

denb

aum

, M.;

(199

6)

Wei

denb

aum

and

(1

996)

an

d H

ughe

s, S

.

Dom

inan

ce of

cen

tral

ized

lead

ersh

ip, i

nfor

mal

str

uctu

res,

and

impo

rtan

ce

of p

erso

nal

netw

ork

in ty

pica

l ove

rsea

s C

hine

se o

wne

r-m

anag

ed firm.

Stro

ng d

egre

e of

cen

tral

izat

ion

of d

ecis

ion-

mak

ing

pow

er a

nd im

port

ance

of

per

sona

l net

wor

ks in

pri

vate

ent

erpr

ise

in T

aiw

an, p

artl

y du

e to

em

phas

is o

n na

tiona

l cu

ltur

al v

alue

s.

Dis

tinct

ive

stru

ctur

al a

nd m

anag

eria

l ch

oice

s in

priv

ate

Chi

nese

ent

erpr

ises

, ce

teri

s pa

ribu

s, d

ue to

em

phas

is o

n tr

aditi

onal

Chi

nese

cul

ture

and

sm

all

com

pany

siz

e.

Ove

rsea

s C

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se b

usin

esse

s ch

arac

teri

zed

by c

entr

aliz

ed, p

ater

nalis

tic

deci

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-mak

ing

dom

inat

ed b

y th

e ow

ner,

sim

ple

busi

ness

str

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res,

fle

xibi

lity,

as

wel

l as

“lea

n an

d m

ean”

man

agem

ent.

Fam

ily b

usin

ess

repr

esen

ts t

he tr

aditi

onal

for

m o

f C

hine

se c

apita

lism

. Due

to r

elia

nce

on

inte

rnal

pri

vate

fam

ily c

apita

l, fi

rms

tend

to b

e ve

ry c

ost c

onsc

ious

and

hi

ghly

eff

icie

nt.

Cen

tral

ized

, aut

hori

tari

an le

ader

ship

, fle

xibi

lity,

lack

of b

urea

ucra

cy, a

nd

ente

rpri

se n

etw

orks

in o

vers

eas

priv

ate

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nese

bus

ines

ses.

Fam

ily

busi

ness

es a

re th

e do

min

ant f

orm

of c

orpo

rate

gov

erna

nce

amon

g th

e ov

erse

as C

hine

se.

Con

vers

atio

ns

with

man

ager

s St

anda

rdiz

ed

pers

onal

in

terv

iew

s,

case

stu

dy

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dard

ized

pe

rson

al

inte

rvie

ws,

ca

se s

tudi

es

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ory

only

Mai

nly

theo

ry

(and

ane

cdot

es)

662 SCHLEVOGT

Figure 1 Distinctive Private Chinese Management Framework

China (Fukuyama, 1995, p. 92). In this context, Vogel (1989) found that private Chinese enterprises are often part of the “Hong Kong Business System.” Similarly, Cai (1997) pointed to the predominance in Asia of internationally spawning networks, consisting of companies usually owned by one (often undisclosed) overseas Chinese entrepreneur and all managed by overseas Chinese.

As regards their purpose, networks provide useful business intelligence and opportunities (Montagu-Pollock, 1991, p. 22). They also represent one form of dealing with market imperfections (Child, 1994, p. 121). Finally, by cross-holding-based “proliferating” or “spawning” (Whyte, 1995, p. 1003; Hickson & Pugh, 1995, p. 170) instead of trying to grow in size, many Chinese enterprises facilitate close ties with family members. Those often head the spin offs and might otherwise join other large companies to find positions of responsibility. In contrast to these family-based webs, state-owned enterprises are usually vertically integrated and form part of govern- mental “Industry Bureaus” (Child, 1994, p. 151) or even Ministries (cf. Schermerhorn, 1987, p. 346; Xu, 1992, p. 537).

Emphasis on Chinese Cultural Elements. The Chinese represent the world’s largest racial, linguistic, and cul-

Researchers.. . tural group, and are spread all over the world. Researchers highlighted the importance of se- concluded that

Chinese overseas family businesses lected elements of Chinese national culture as and Chinese part of a distinctive Chinese management traditional culture style. Cai (1997), for example, concluded that

Chinese overseas family businesses and Chi- are one research topic.

nese traditional culture are one research topic. Other researchers stated that, more than in many other countries, “in China culture pervades” (Hall & Xu, 1990, p. 574). Apart from other factors and to a greater extent than other religions such


as Buddhism or Taoism, it was Confucianism (Yang, 1961; Hofstede & Bond, 1988; Chan, 1996) with its underlying personal ethical principles that has been the most significant shaping factor of social relations within the Sinitic culture over the last 2,500 years. Its ethics were internalized by members of the community through socialization and often served as a surrogate for systems of laws. Despite the influence of communism, neotraditional Confucianist values remain pervasive in the PRC (Laaksonen, 1984, 1988, p. 7; Walder, 1986; Hall & Xu, 1990, p. 574).

I will now review in greater detail the importance and distinctiveness of certain elements of Chinese culture highlighted in the literature, as well as their implications for organizational design. A common underlying thread in most of these elements is the emphasis on family-related values in private enterprises. Cai (19971, for example, states, “overseas Chinese enterprises put family capital, traditional customs and Confucianist culture together.” This emphasis on Chinese culture is an important influencing factor of organizational structure and management practices. Writers such as Lockett (1988), Xing (1995), and Child and Lu (1996, p. 4) emphasized the following basic characteristics of Chinese culture as impacting on organizational choices: Respect for age and hierarchy; group orientation; face; and the importance of relationships.

Respect for age and hierarchy. Scholars stressed the impprtance of a hierarchical orientation in China (Smith, Peterson, & Wang, 1996; Davis, 1997, p. 121-22). This high “power distance” seems to be a result of the influence of Confucianism (Kahn, 1979, p. 121; Hicks, 1989, p. 40). Hamilton and Biggart Woolsey (1988, p. 87) proposed that authority patterns and legitimization strategies tend to explain organizational structure. More specifically, a strong hierarchical orientation might have significant structural implications in terms of a relatively high degree of centralization (Hofstede, 1980, p. 135). Sim- ilarly, Child (1994, p. 31) argued that this cultural characteristic will reinforce the hierarchical and conformist attributes of a top-down command structure, since it leads to a high value being placed on social control, virtually as a end in itself.

Group Orientation. Confucian doctrines emphasize ties of kinship and group loyalty (Wilson, 1970, p. 20). In pri- Conflict is generally vate enterprises the most important group is handed through the family. The individual exists for the bene- intra-group fit of the group, and members frequently find mediation rather their identities through reference to other i:z zrzmal group members. They often adopt group ob- jectives and opinions in exchange for reciprocal protection and care.

664 SCHLEVOGT

Conflict is generally handled through intragroup mediation rather than the external legal system. In terms of managerial consequences, the social needs of employees in the workplace might be perceived to be more important than autonomy and self-actualiza- tion needs (Xing, 1995, p. 17). In addition, Cai (1997) emphasized that close ties among family members create strong cohesiveness (ningiuli) in private overseas Chinese enterprises. It should be emphasized that whereas at the family level, group orientation is very important, in contrast to countries such as Japan, there is less of a collective orientation or “public spiritedness” at the societal level (Pye, 1985). The saying of Lin Yu-tang expresses this by stating, “Japanese society is like a piece of granite, while traditional Chinese society was like a loose tray of sand, each grain being an individual family.”

Face. Various authors have emphasized the importance in traditional Chinese culture of “keeping face” (Hu, 1944; Ho, 1976; Bond &

Lee, 1981; Redding & Ng, 1982, p. 203). Group Losing face is pressure is used to ensure conformity through thought to be more eliciting shame (“loss of face”). Losing face is consequential for a Chinese manager thought to be more consequential for a Chi- than a Western one. nese manager than a Western one. Achieving

a certain position may also be relatively more significant than in the West (Lockett, 1988, p. 489). This could potentially have some structural implications with respect to the use of hierarchy and centralization, but I believe that the overall impact on structure is not very strong.

The Importance of Relationships. Personal long-term relations, a form of “social ~ap i t a l , ”~ are of paramount importance in China when dealing with internal or external stakeholders (Ambler, 1994; Bian, 1994; Yeung & Tung, 1996). Davies (1995) states that personal connections are “all-pervasive in the description and analysis of Chinese business.” They are also most often cited in the literature on Chinese management (Strange, Kamall, & Tan, 1998, p. 3). As “social in- vestments” (Butterfield, 1982), these guanxi often consist of extend- ing mutual favors on the basis of reciprocity (Pye, 1992). Chinese tradition favors such implicit structuring rather than precise formalization of social relations (ECAM, 1986). More specifically, trust- based personal relations among family members and friends might

qThe central argument of social capital theory is that networks of relationships constitute a valuable resource for the conduct of social affairs (Nahapiet & Ghoshal, 1998, p. 243). I de- fine social capital as a “set of resources rooted in relationships” (ibid).


be a substitute for written contracts (Barton, 1983; Montagu-Pollock, 1991, p. 21; Roehrig, 1994, p. 83) and impersonal bureaucratic con- trols in general.

It is important to discuss briefly two caveats. First, it might be argued that relationships are important all over the world. Neverthe- less, writers tend to agree on the special status of guanxi in the Chi- nese context (Strange, Kamall, & Tan 1998). This is due to the fact that they are so ubiquitous and play a crucial role in everyday life (“sang, 1998, p. 65): Personal relationships based on trust often are more important than the legal system, company policies, or regular “Western” business practice.

Second, writers mentioned the importance of guanxi in state- owned enterprises, too (Child, 1994; Boisot & Child, 1996). Howev- er, given the fact that most private Chinese firms are family owned, one distinctive feature in these firms is the fact that the closest relationships are often based on family ties (Heller, 1991; Chu & Ju, 1993). Those are less dominant in state enterprises. Whyte (1995, p. 1014), for example, states that in private firms “the dynamics of Chinese families are absolutely central.”

As can be seen from the foregoing discussion, one overarching theme permeating the various elements of emphasis on Chinese culture in private enterprises is the importance of familism. The concept of family, in Chinesejia, due to the Con- . . . one overarching fucianist principle of filial piety, xiao (Chao, theme permeating 19791, is considered to be the most important the various elements focus of loyalty for the individual in China. of emphasis on

Chinese culture in Family loyalty is almost a divine act (Fukuya- private enterprises ma, 1995, p. 86) and even more important istheimportanceof than loyalty to the state (Levy, 1949b, p. 1). familism. The concept ofjia is generally wider than the notion of family in the West (Freedman, 1979). Ideally, it encom- passes a five generation household, but statistics show that the joint family, i.e. a three-generation household, or even the nuclear family are much more common (Hareven, 1987). This is often due to wealth constraints or breaking up of families as a consequence of intrafam- ily tensions (Lee, 1953). Some authors argue that the concept of family also includes lineage or clans. These jia-zu are defined as “a family of families” and are based on demonstrated descent from a common ancestor (Freedman, 1971, pp. 43-67; Baker, 1979, p. 67; Watson, 1982, p. 394). They often share the same surname and property, such as an ancestral hall. These clans sometimes consist of en- tire villages and are most common in Guangdong, Fujian, and Hong Kong‘s New Territories. In an even wider interpretation, the notion of “family” might comprise very good friends, old boys from school

666 SCHLEVOGT

days, and other close individuals (Montagu-Pollock, 1991, p. 211, i.e., people sharing an aspect of personal identification (Jacobs, 1979).

Given that there is a lack of unitarian and egalitarian ethical principles, obligations are graded and not universal. They decline in in- tensity the further one moves from the inner- family circle (cf. Tung, 1994, p. 60). There is thus a strong separation between members of the family, who can be trusted and are accountable for their deeds in front of other kin-members (Wolf, 1968, p. 23), and nonmembers, who cannot be trusted.

In regards to its purpose, in the absence of property rights and social protection, the family provided a protecting wall against the ar- bitrariness of rulers and political instability, including, in this century alone, wardlordism, foreign occupation, collectivization, and the

Cultural Revolution. Having many sons also Having many 'On' lessened the economic hardship in old age also lessened the economic hardship (Jenner, 1992, p. 4). Therefore, despite the in old age eroding forces of the modern world and the in-

fluence of communism, it is argued that the patrilineal Chinese family has emerged strongest amongst all other institutions (Tien & Lee, 1988; Buxbaum, 1978; Hareven, 1987). Al- though it changed over time (Freedman, 1961-19621, it has represented one of the only certainties in the latest Chinese history.

Small size. Writers on Chinese management in overseas countries have frequently highlighted that many Chinese private enterprises are relatively small (Montagu-Pollock, 1991, p. 21; Hickson & Pugh, 1995, p. 170; Lee, 1996). There is some confusion in the literature as to whether size is an influencing factor, as most contingency theorists would argue, or whether it is a dependent variable forming part of the Chinese management system. In this article, it will be treated as a contextual variable influencing structure and management, but the choice of the level of this contextual variable; i.e., the decision to stay small might be a distinctive element of Chinese management. For example, in countries which allow the Chinese free economic activity, maybe due to the importance of family-based ties, with the exception of a few powerful conglomerates Chinese companies are most often small scale (Hicks & Redding, 1982, p. 212; Myers, 1984, 1986, p. 29; Tam, 1990, p. 161h5 Support for this link between family and size is provided by the fact that in these countries, most firms from the private sector are family owned and family managed (Redding, 1990, p. 3; Wong, 1985; Heller, 1991). In this context, Weidenbaum (1996, p.

5Apart from Hong Kong, Taiwan, and Singapore, these countries include ethnic enclaves such as Malaysia, Thailand, Indonesia, and the Philippines, as well as other overseas Chinese communities such as in the US.


141) states that in contrast to the prevailing situation in the West, “the family enterprise is the basic economic unit of the typical overseas Chinese community.” Berger (1994, p. 72) notes that Chinese businesses are almost always family firms because, within traditional Chinese culture, you can only trust close relatives.

Concluding the overall discussion, there seems to be a strong influence of Chinese culture on organizational structure and management. An emphasis on family-based traditional values does not only have a direct impact on organizational properties, but also influence the choice of other contextual factors, i.e., the decision to stay small in private companies in order to maintain personal relations with important stakeholders or avoid inclusion of outsiders who are not trusted.

CHINESE MANAGEMENT AND ORGANIZATIONAL EFFECTrVENESS

An important theme related to the distinctive Chinese management style is the performance implications of this family-based model of organization. There is a moderate amount of descriptive, but rather fragmented discussions in the literature on overseas Chinese businesses, which focus on selected aspects of Chinese management and related effectiveness aspects. I can synthesize the following merits and dements of family-based Chinese management. The results of the following discussion are illustrated in Figure 2.

Advantage. Socialization and trust reduce need for expensive monitoring devices Company loyalty of family members Potentially few conflicts, due to culturally grounded authority structu@ Family-based firm networks pmvido access to opportunities, resources and diversify risk Enbepreneurial spirit and incentive to work hard due to capital partidpation in family

Flexibility due to central control, lack of formality, entrepreneurial decisions and small size

based spin-offs

Disadvantage8 Firm longevity and capital accumulahon limited due to heritage split up Dtflicult to integrate non-family professionals Lack of ‘ratronal’ structure makes it difficult to attract outside capital - Danger of nepotism

Figure 2 Advantages and Disadvantages of the Chinese Family-Based Manage- ment Model

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Merits of Family-Based Chinese Management

On the one hand, it can be argued that the Chinese management style practiced in small family-based enterprises has certain benefits and leads to comparatively high performance. The central theme is that the unusually strong loyalties and close ties of Chinese families are a potent source of motivation and performance (Whyte, 1995, p. 1003). Mackie (1992, p. 531, in his review, concluded, “virtually all accounts of the economic behavior of Overseas Chinese emphasize the versatility and entrepreneurial qualities of their family firms, as well as the particular characteristics of Chinese family structure, as the primary source of socialization and of the trans- mission of values conducive to business success.’’ Further, a recent empirical study of enterprises in Mainland China (Schlevogt, 1999, in press) showed that family-based ownership was positively related to organizational effectiveness when other factors such as company size were held constant. There are following detailed advantages of Chinese family-based management.

Valuable Social Capital. For the sake of the family, the Chinese study hard, work long hours, labor for less, and make more sacrifices than nonfamily members would do. Since family members usually

participate in the capital and are responsible For the sake of the family,theCKnese for their own spin offs, they have additional study hard, work strong incentives to be entrepreneurial and long h o u s ~ labor for work hard (Whyte, 1995, p. 1003). At the same less and make more time, their belonging to a family-based net- sacrifices than nonfamily members work provides some diversification of risk at would do. the aggregate level and a “group insurance

against failure” for the individual member (Greenhalgh, 1990, p. 90; Silin, 1976). There is also a strong company loyalty among family members, who are likely to stay with the firm even when better-paying opportunities arise elsewhere or a t least support the family firms from overseas (Watson, 1975b; Salaff, 1981). Moreover, trust among family members will allow for a high degree of secrecy or yinbixing (Cai, 1997) in information-sen- sitive areas. In addition, conflicts with the “boss” are reduced, given that there are culturally grounded authority structures in the company, which often reflect positions in the family (Smart & Smart, 1993).

Flexibility. The small size of family businesses and accordingly appropriate centralized leadership makes them flexible and fast in terms of decision making (Montagu-Pollock. 1991, p. 21). This


sharply contrasts with the slow consensual decision-making style in more bureaucratic organizations, such as Chinese state-owned enterprises or large Japanese companies. In addition, due to family- based interorganizational networks, Chinese private companies are very responsive to the environment (Whyte, 1995, p. 1004). This is because these enterprise networks provide additional access to scarce resources, business opportunities, and intelligence (Leung, 1995, p. 7), making it possible for Chinese firms to adapt rapidly to changing market conditions.

Cost-Emciency. Interorganizational subcontracting-based networks have the advantage of low overhead costs and a small number of permanent staff. In addition, due to the reliance on internal private capital instead of outside sources of finance, firms tend to be very cost conscious and highly efficient (Turpin, 1998, p. 8). In addition, socialization and trust reduces the need for elaborate monitoring devices that are expensive in terms of transaction costs.

In conclusion, the almost neoclassical, perfect, competitive, and atomistic characteristic of these enterprises makes them ideally suited for industries The model therefore with rapid change in consumer tastes and high will be most uncertainty, where sensitivity to changing *Uccessful in

industries in which circumstances is vital and mass specialization small size and the instead of mass production is required. The ~ s ~ t i n g ~ e ~ b i l i t y model therefore will be most successful in are a distinctive industries in which small size and the result- advantage- ing flexibility are a distinctive advantage. Due to the small size and consequently low start-up costs, the economy as a whole is characterized by many new entrants and exits injecting a highly competitive spirit into it. Such an economic structure sharply contrasts with the small number of oligopolistical- ly organized (and most often capital intensive) giant firms sharing certain markets in the West, as well as the large industrial state- owned conglomerates in the PRC. That is why overseas Chinese companies tend to excel especially in labor-intensive industries and in sectors with fast-changing, highly segmented, small markets such as textiles and apparel, trading, timber and other commodi- ties, small-scale metalworking, plastics, furniture, paper products, toys, and PC components and “commodity” PCs Fukuyama, 1995, p. 80).

Maybe as a consequence of the above-mentioned advantages of Chinese management, the 40 million noncommunist Chinese have managed to produce an unusually large population of billionaires

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relative to their collective GNP (Montagu-Pollock. 1991, p. 20).6 Their aggregate GNP even approaches the total GNP for China that is produced by 1.2 billion people. They also dominate medium- and large-scale corporate capital in all Asian markets except for Japan and Korea (Turpin, 1998, p. 8). In addition, the number of new mil- lionaires in private Mainland Chinese enterprises, especially in Guangdong province, is ever increasing, too. Viewed from a macro- economic perspective, Wong (1988, p. 146) thus concludes, “Chinese familism will fuel the motor of development.”

Demerits of Family-Based Chinese Management

In contrast to these positive aspects, there are certain disadvantages associated with the family-based management model practiced in Chinese private enterprises. The main theme is its limiting influence on company growth.

Limits to Capital Accumulation. Due to the patrilineal system of equal inheritance of sons, as opposed to primogeniture that was for- merly practiced in Great Britain and France, there is a limit to capital accumulation and growth for Chinese private family companies. This is due to the fact that the family fortune will be split up equal- ly after the death of the founder (Wong, 1988, p. 139; Jenner, 1992). In rural China, the equivalent of this phenomenon was found in the continuous partition of plots that finally were not sufficient anymore for the whole family (Feuerwerker, 1969, p. 15).

Lack of Integration of Professional “Outsiders”. Due to the emphasis on familism, there is a lack of trust towards nonkin members and no mechanism for adopting outsiders (Watson, 1975a; Berger, 1994, p. 72). As a consequence, in very few cases can professional managers be brought in (Chan, 1977, 1982; Redding, 1990, p. 66; Whitley, 1991). In addition, failure to adopt professional and rational ‘Western- style” structures as well as transparent forms of governance makes it difficult to attract outside nonfamily funding. Both factors might further limit g r ~ w t h . ~ In addition, nonfamily members normally do not aspire to life employment, but try to spin off their own company after

6Nine out of every ten billionaires in Southeast Asia are ethnic Chinese (Chen, 1995, p. 69). ‘The failure to move from family to professional management contrasts sharply with the de-

velopment ofAmerican companies, which also often started as family firms but then moved to professional management and structures (Chandler, 1984).


a while (Wong, 1988, p. 143; Whyte, 1995, p. 1001). They often, therefore, are not good team players, which might adversely affect performance. Moreover, the social distance between them and their Chinese superiors is believed greater than in other countries (Hamilton & Big- gart Woolsey, 1988), which might also negatively affect effectiveness.

Nepotism. There is a danger of nepotism with all the negative consequences already described by Weber (1951 [originally published in 19161) as the “sib fetters of the economy.” They are illustrated by the decline of the family business “Wang Laboratories,” Massachusetts (Brown, 1989; Cohen, 1990; Kenney, 1992). These Chinese companies cannot institutionalize themselves and thus are dependent on the respective following generation leading them. The result is the so-called “Buddenbrooks” phenomenon of rising and falling family enterprises due to differential skills and motivation to manage across generations (Hsu, 1967, pp. 5-7; Baker, 1979, p. 131). An example of complete disintegration only one generation after the founder’s death is the dissipation of Sheng Xuan-huai’s wealth, who was one of imperial China’s early successful entrepreneurs (Feuer- werker, 1958, pp. 84-85).

As a consequence of all these factors, family-based companies tend to do less well in industries which require the exploitation of indivisible economies of scale and scope, as well as large capital investment such as in steady-state mass production, where small size is not a competitive advantage. Examples include aerospace, semiconductors, automobiles, and petrochemicals companies. This also appears to be true for mass-marketed consumer brands (Redding, 1990, p. 5). For Chinese companies to be successful in these industries, in many cases they need strong state sponsorship or ownership. For example, it is interesting to note that despite the highly competitive and atomistic industry in the rest of the private economy, the most successful manufacturing companies in China at the start of the modern age such as the porcelain metropolis of Jingdezhen, were actually state owned and state operated (Jenner, 1992, p. 81). Other possibil- ities for Chinese companies to enter these large-scale industries are attracting foreign investment or developing interorganizational networks in these sectors. Those “webs,” as is the case of networked computer systems, can leverage the power of individual companies and achieve economies of scale through collective synergy. Using a slight-

For Chinese companies to be successful in these industries, in many cases they need strong state sponsorship Or ownership.

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Furniture

Garments

YO share of private sector in gross output by industrial subsector

1 98% 96%

0% 100%

Electric power

Water supply

Refining

Tobacco

136%

] 22%

116%

I 9%

Leather

LUmk

Paper

Electronics

Textiles

Food processing

Chemicals

Pharmaceuticals

Ferrous metallurgy

Coal

I 193% I

187%

173%

171%

I 67%

156% I

151% I

149%

138%

136%

ly changed version of Sun Microsystems’ slogan we can say: “The network is the company.”

The findings of an analysis of the PRC industrial structure illustrated in Figure 3 provide evidence for the idea that Chinese private enterprises are strongest in industries that are dominated by small- scale businesses. This is due to the fact that these sectors do not require much capital investment and demand rapid adaptation to changing tastes, such as garments, electronics, and textiles. They are very weakly represented in scale-intensive industries such as oil, refining, energy, and utilities.

In more general terms, due to the disadvantages pointed out above, in earlier studies family enterprises were regarded as actually retarding the economic development of China (Weber, 1930 [originally published in 1904-19053, 1951 [originally published in 19161; Levy, 1949a; Feuerwerker, 1958).


THE ART OF CHINESE MANAGEMENT?

It is now time to come back to the first part of my key message, con- tending that Chinese management is an “art.” To test this hypothe- sis, let us first look for an appropriate definition of the word “art.” The following definition can be found in the Oxford English Dictio- nary (Simpson & Weiner, 1989, p. 657):

Skill in doing anything as the result of knowledge and practice. (1)

At the beginning of the century, Webster’s International Dictio- nary of the English Language produced two somewhat richer defin- itions (Harris, 1902, p. 85):

A system of rules serving to facilitate the performance of certain actions; a system of principles and rules for attaining a desired end; method of doing well some special work; oRen contradistinguished from science or speculative principles; as the art of building, the art of war. (2)

Skill, dexterity, or the power of performing certain actions, acquired by experience, study, or observation; knack; as, a man has the art of managing his business to advantage. (3)

Adopting the last definition (31, I believe that private Chinese management is indeed an “art,” given that it meets the underlined re- quirements postulated in the definition.

Dexterity

It is fair to say that the private Chinese management style consti- tutes a particular skill of “doing something well” given, as was shown in the previous two sections, that (a> it is characterized by distinctive structural and managerial choices and (b) proved to be ef- - fective. As regards the first point, I believe that maybe the most important and distinctive skill is the ability of many private Chi-

. . . maybe the most important and distinctive skill is

nese businessmen to “craft” or spin their own the ability of many family-based enterprise webs. & interesting feature of these webs is the fact that it allows the Chinese entrepreneurs to “shape” their

private Chinese businessmen to

own family-based OF spin their

environment or, at least, partly insulate themselves from uncertainty. Second, based on the effectiveness evidence from a recent study (Schlevogt, 1999, in press) and the track record in terms of, for example, the numbers of mil-

enterprise webs.

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lionaires it produced not only overseas, but in mainland China as well, I can conclude that by applying this skill the private Chinese entrepreneurs “do very well.”

In more general terms, the fact that Chinese private businesses in certain business segments adopt differentiation strategies based on innovative, high quality products and services contradicts the thesis developed for other South-East Asian countries which implied that Chinese businessmen are often mere ersatz capitalists (Yoshihara, 1988; Clad, 1989). These researchers thought that many Chinese businessmen are just “rent-seekers” rather than truly productive entrepreneurs, or, when they do produce, are to a large extent dependent on external sources of capital and technology.

Action-Orientation

Private Chinese management is also geared towards powerful action. A recent study (Schlevogt, 1999, in press) found that instead of analysis and planning, there is a distinctive urge to make bold entrepreneurial decisions and get things done in a short period of time.

The study included the case of a Shanghai- nese entrepreneur’s single-handed decision . . . instead of

analysis and planning, there is first to buy a stake in a luxury hotel without a distinctive urge having the necessary “financial clout” and to make bold then, within a couple of months, to move into

the mass-market hotel business by using his entrepreneurial decisions and get things done in a existing property. In both instances, solutions short period of time. were found through action, such as tapping

the international overseas Chinese network for funds to overcome the capital constraints and converting his of- fice into a hotel to avoid huge time lags that might have neutralized the benefits of quickly seizing the attractive opportunity and occupying the market niche. This importance of action orientation can also be traced back to ancient origins. The Chinese warfare strate- gist Sun Zi (Sungzi, 1963 [written about 500 BCI) said, “complacen- cy is perhaps the greatest danger that could hasten the ruin of a successful operation.”

Experience-Based

Chinese management is not a science or a system-just the opposite. The lack of bureaucracy, systematic procedures, and elaborate analysis support this conclusion. Its practice is based on uncodified experience, which resembles Polanyi’s (1962, p. 49, 1967) notion of tacit knowledge or “knowing.” It is also grounded on observation and the willingness to learn from other web participants. Sun Zi emphasized


this importance of rapidly learning from situational experience: “The one who is able to alter and revise his tactics and strategy according to the enemy’s situation will be considered as divine as God.”

A NEW PARADIGMATIC BUSINESS MODEL FOR THE NEXT MILLENNIUM?-LENIN VS. SUN ZI

Let us now analyze the second part of my key message. In general, though highly exploratory and tentative in nature, I propose my version of private Chinese management as a candidate for becoming a future new “management model,” or even a new paradigm in business studies. It might, in its distinctiveness, perhaps later join the pedigree of previous management models that due to historical and maybe cultural reasons originated in certain countries but later became worldwide in implication. Those include “German” Bureaucra- cy (Weber, 1947 [originally published in 192411, “American” Scientif- ic Management” (Taylor, 19111, and “Japanese” Management (cf. Clark, 1979; Pascale & Athos, 1981; Lambert, 1982). We can call the model “Web-based Chinese Management” (WCM) to stress maybe its most distinguishing feature.

Web-based Chinese Management is assumed to be practiced in private firms mainly located in Mainland China’s booming “noncommunist” business centers-especially along the sea coast and in the South, as well as among the overseas Chinese in general. Its success under certain circumstances has been described above. While recog- nizing the criticism of “ideal types” in the sense that selected elements invariably reflect subjective choices of the researcher, as well as acknowledging the still underdeveloped empirical basis for such categorizations to date, the six dominant features of Chinese private enterprises are conceptualized as broadly characterizing this business model.8

In certain cases, some of these features of Chinese private enterprises can be discovered in Western companies as well. One example is the tendency towards In certain

some of these fea- smaller and more entrepreneurial units. 0th- tures of Chinese er attributes seem to be more distinctive, such vate enterpries can as the importance of family-based networks be discovered in and the Confucian autocratic leadership style.

as well. Those features contrast with our Western culture that, instead of guanxi (personal connections), tends to rely more on the legal system to enforce contracts and

companies

81t is recognized that the management of private rural enterprises might be different from this model and was not examined in my research.

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moves toward a more participative leadership style. The distinctiveness of the emerging Chinese management model is based not only on the individual structural and managerial attributes, but also on the fact that most of the above- mentioned elements are thought to exist as a bundle in the focal Chinese organization.

In a sense, this model represents an antidote to Weberian bureaucracy and Taylorian management science. This jwtaposi- tion has been highlighted in the opening quotes to this article, comparing the theoretical superiority of scientific systems of organization to the practical functionality and efficiency of “art” which operationalizes knowledge by skill. In figurative terms, it is not only the contrast between science and art, but also between Lenin’s theoretical principles of collective organization and Sun Zi’s practical “Art of War,” or between state and private enterprises in China.

The new web-based Chinese management Thenewweb-based model might be very appropriate as a blue- Chinese management model might be very print for the organization of the future. Curi- appropriate as a ously, it fits very well with the prevailing zeit- blueprint for the geist characterized by the importance of organization of the Internet, communitarianism, multipolar (PO- future. litical) alliances, and globalization in general. In all these cases the unifying theme is an emphasis on networks.

In more general terms, by proposing an alternative to (state) bureaucracies, the Chinese management model might be the only way to stop the seemingly unstoppable bureaucratization of the planet and its negative implications, such as Weber’s iron-cage notion. In this context, the emphasis on small size as well as the resulting high degree of entrepreneurship and personal accountability might be a welcome alternative to the increasing scale and anonymity of big business in the wake of incessant waves of mergers and acquisitions. This consolidation finally might lead to less flexibility, a lack of dy- namic adaptation to customer needs, and enhance oligopolistic market structures. In addition, by substituting social capital for market forces, WCM also is an alternative model to the increasing marketi- zation of business. More specifically, there has been a growing interest in the notion of social capital (cf. Coleman, 1988, 1990; Kramer, Brewer, & Hanna, 1996; Nahapiet & Ghoshal, 1998, p. 243). Private Chinese enterprises are one of the best illustrations of its importance, representing an antithesis to the superiority of the market in many spheres of our society.

In broader terms, the family structure might alleviate the problem related to the separation of ownership and control, resulting in moral hazards such as “empire-building” (Williamson, 1970) and


residual loss (Jensen & Meckling, 1976, p. 308; Fama & Jensen, 1983). Indeed, instead of building empires, Chinese private enterprises spin intelligent and intricate webs. In addition, “class strug- gles” between scientifically managing executives and workers will be alleviated when many employees are actually dedicated and trusted family members.

If applied widely, I might argue for a slightly changed version of the Weberian prediction, i.e., I would propose to see “not an ever bureau- cratizing but ever proliferating” model of organization which has to “win” because of its differential effectiveness. If this prediction came true, the distinctive private Chinese management style would become a new paradigm in the sense of radically breaking with well-accepted patterns of thinking - - . in contrast to

Japan and Korea, (Kuhn, 1970). If it does not achieve this grand private enterprises success, at least WCM might become one new in the PRC do not instrument in the manager’s toolbox for receive strong achieving success in highly uncertain indus- government support

and have to raise tries and services. In such a case, it will just their funds from be a new business model instead of a new par- private sources of adigm. capital . . .

PRIVATE CHINESE ENTERPRISES-A NEW GLOBAL FORCE?

Having praised the model in such high terms, does it mean that we have to prepare for an invasion of a new force of Chinese private firms into Western countries comparable to the Japanese “take-over” of corporate America? I believe that the answer is negative for two reasons: First of all, despite more than 20 years of reforms, so far there have been very few PRC-based companies that have made successful inroads into Western markets by means of foreign direct investment. Secondly, if my prediction is correct, most family-based private companies will not grow substantially enough to be able to fund such foreign “campaigns.” Chinese private businesses thus have not only not expanded internationally because they had enough growth opportunities at home, but also for these intrinsic limits to growth of family-based firms. In this context it is important to note that in contrast to Japan and Korea, private enterprises in the PRC do not receive strong government support and have to raise their funds from private sources of capital instead of national banks and well-functioning saving systems. China’s substantial domestic sav- ings are mostly channeled to large and often inefficient state enterprises.

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There will be certain exceptions of private companies (but normally not family-owned ones), which will become successful international players. Potential candidates are the Shenzhen-based financial service company Pingan that in less than 20 years has become the second largest insurance company in China after the state-owned People’s Insurance Company. Potential additional candidates are the fast-growing Haier, CITIC, and China Everbright. In all these cases, to grow internationally, private companies need to form hybrid, professionally and family-managed organizations and adopt universal management techniques, such as strong brand management and international marketing. Another potential group of internationally expanding companies are presently state-owned enterprises that, due to their political connections, enjoy strong political clout and financial muscle. In the wake of “securitization” (gufen- hua)-a disguised form of privatization-they will seek international listings in New York or London to expand internationally.

Having argued for intrinsic limits to international expansion, I still think that in Mainland China itself, the new generation of private enterprises will become very strong competitors for multina- tional companies (MNCs) by occupying niche positions and gaining advantage through quick adaptation in uncertain, competitive markets with low entry barriers. For example, in less than two years, China’s Legend Group has become number three in the Chinese computer market (from number six), just behind IBM and Compaq (Turpin, 1998, p. 8). But once again, WCM is likely to be successful only in sectors that favor small scale and great flexibility rather than predictability of organization. Put bluntly, WCM will not be suitable or successful for the management of nuclear power stations, hospitals, or other high-reliability organizations.

An interesting failure and “misuse” of the private Chinese management model, which has not yet been discussed in the literature, is the predominance of a large number of small cement companies in China in a fragmented market. Most companies are below minimum

efficient scale and compete aggressively for market share. However, experience shows . . . private firms . . .

will be the major that in the cement businesses, only coopera- economic growth tive strategies and very careful capacity man- which wi l l make agement by a very few number of players can China an economic* ensure profitability levels that allow for rein- political and military powerhouse and vestment to take place at all. In the cement new strategic force business, this is a particular skill of large, pro- in the world. fessionally managed Western conglomerates.

In conclusion, although private firms themselves are not likely to become a major force internationally, they will

of domestic


be the major engine of domestic economic growth, which will make China an economic, political, and military powerhouse and new strategic force in the world. The present short-term economic crisis in Asia does not change this fundamental economic reality. If anything should stop China’s growth, in my view, it will be the lack of sufficient skilled human resources, not short-term economic dis- ruptions.

PRACTICAL IMPLICATIONS FOR INTERNATIONAL MANAGERS AND INVESTORS

International businessmen can potentially derive important lessons from the preceding discussion and leverage the insights for two pur- poses. The Web-based Chinese Management might both help them to deal effectively with Chinese enterprises as well as serve as “best practice” for mastering highly uncertain and complex environments, which require flexible management techniques. I will discuss both issues in turn. It should be remembered that I will only highlight some key issues that have to be further elaborated in subsequent studies.

Dealing with Chinese Private Enterprises

When investing and managing in the Middle Kingdom, foreign companies might deal with private Chinese enterprises in several forms, such as joint-venture partner, subcontractor, supplier, customer, take- over candidate, and competitor. To be successful in these interactions, it is important for foreign businessmen to understand their distinctive management style. It is different from the older state-owned enterprises, which might be more familiar to Western “China veterans.” What might have worked well in the case of SOEs might prove less effective when dealing with private enterprises. Amongst others, the following practical insights can be derived from the WCM model.

Owner-Manager is Key Leverage Point. Given that decision-making power is heavily centralized in the hands of the CEO, it is of crucial importance to conduct all-important transactions through him. This is different from dealing with state enterprises, where significant authority is dele- gated to specific “roles.” When getting in contact with the touch with a private family enterprise, make sure you establish the first contact with the “boss” (Zaoban) directly. Later, negotiate with

When getting in touch with a Private family enterprise, makes^^ you establish the first

‘‘boss” (hoban)

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him, not with his subordinates. When problems arise with imple- mentations of agreements, look for him for resolution-other inter- ventions will be very low leverage. To summarize, effectively influencing the owner-manager will open all gates leading to success in the new private business environment.

Unbureaucratic action will be rewarded. In contrast to the state-owned bureaucracies that you might know from past interactions with Chinese companies, the new private enterprises are highly adverse to rigid rules, formal roles, and elaborate paperwork. Thus, you will not make many friends with elaborate discussion agendas, protocols, statements of intent, and contracts. These things might be considered a barrier towards getting closer to the top managers and, in a very traditional enterprise, even be regarded as showing lack of trust. In such a situation, you are better advised to follow the wisdom of “repeated games” where reputation effects will ensure that players do not behave opportunistically. Instead of constant mistrust wrapped into the whole modern weaponry of corporate paperwork, it is better to think hard about unbureaucratic and entrepreneurial means to achieve incentive alignments with the Chi- nese partner, which will prevent unwelcome surprises.

Investment in Social Capital Will Bear High Returns. Given your rich experience from business dealings in the West, you might be afraid of firing all your corporate lawyers, management consul-

tants, and paper tigers. You are probably , , . it is important to afraid of loopholes not covered in contractual bear in mind, that dl agreements. But anyway, contracts Will not in- the friendship in sulate you from dangers. First, in a highly un- China not certain business environment, you are unlike- if either partner does not see enough profit ly to predict all future outcomes, which is the in the transaction. basis for writing good contracts. Second,

amidst all the uncertainty in China, there is one thing you can be sure about: Contract law and Chinese courts are very unlikely to help you out once your partner has fooled you. Given the importance of personal contacts in China, the best way to deal with this problem is to use implicit contracts and invest into reputation building. But remember, whereas contracts and financial capital can be transferred from the West, implicit contracts and social capital have to be built on-site, through persistent and determined efforts. In the end, developing long-term relations with your Chinese part- ners, who might eventually become your friends, will partly protect you from “external shocks” and opportunistic behavior. The Chinese private entrepreneur will consider it as loss of face to betray his friend. Finally, it is important to bear in mind, that all the friendship


in China will not help if either partner does not see enough profit in the transaction. Put distinctly, social capital can help smooth out but not smooth over inconsistencies and fractures in the basic business model.

Learning from Chinese Private Enterprises

In the main discussion related to the high effectiveness of the Web- based Chinese Management model, I explained the merits (and demerits) of the new paradigm. In this section, the key idea is that international businessmen can possibly profit from using the framework to emulate the successful Chinese management practices-both in the Middle Kingdom and abroad. It should be remembered that these learnings are only applicable for organizations dealing with uncertain environments, which require strong flexibility. They are less suitable for organizations that can program perfectly their operations in ad- vance and rely on significant, indivisible scale economies. The following best practice elements might potentially be adopted.

Emulate Family Ownership. One crucial element leading to the success of WCM is the strong feeling of ownership embedded in the family structure of many private Chinese enterprises. It creates powerful incentives for the individual to maximize his efforts in pursuit of the organization’s objective, pushing him to take very entrepreneurial action. International businessmen should revive this feeling of family ownership in their corporate giants. There are various approaches to achieve this objective, varying in the degree to which the organizational structure is changed. On the one end of the spec- trum, contractual arrangements can offer stock options and other ownership-based incentives. To build shared ownership in a situation where the “agents” (managers or employees) do not have enough capital to buy large chunks of ownership, apart from using stock options, it is possible to make regular deductions from managers’ and employees’ payrolls that are then used to purchase shares for the individual-maybe at privileged prices. To recreate the extended family of the Chinese business firm, this approach can be expanded to suppliers (and even customers) as well. The other extreme is carv- ing out division, floating them on the stock market, assigning shares to managers and employees, and have the market monitor the performance of the new corporate “family” enterprise.

Build Enterprise Networks. The term Web-based Chinese Manage- ment highlights the importance of enterprise networks as part of the distinctive style of private Chinese enterprises. Western businessmen possibly can learn important lessons from the success of these enter-

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prises in making strong interorganizational connections. The crucial characteristic of these networks is the fact that in contrast to subcontractor relationships in the West, they are mainly based on social capital, most importantly trust, reciprocity, and shared values. These aspects, which give Chinese networks their special fluidity and cohesiveness, are often neglected or underestimated by Westerners.

The “networking society” often is only understood in technical, not in social, terms. There The “networking

society“ often is only understood in are many Merent approaches to building technical, not in these special enterprise webs. Much can be social, terms. learned from the Chinese in this respect. For

example, managers can encourage former employees to build interorganizational linkages with their “alma mater” company. This is Merent from treating them as “traitors” who have jumped the ship. Besides, certain very entrepreneurial current employees might be encouraged to spin-off their own companies with the promise of continued relationships. “his will cut overhead costs and provide strong incentives for the new entrepreneurs.

Adopt Confucian Leadership Style. The leader of Chinese private enterprises is a tough “dictator”-not the coach and team player everybody talks about in the West when describing the ideal person at the top of 2lst-century organizations. But he is successful and his employees are happy! The explanation is a subtle Confucian leadership approach that international businessmen could potentially learn from. Although the final decision-making power is centralized

in the hands of the owner-manager, the lead- Put in a nutshe’19 the ership style can be termed “consultative.” Put boss is democratic in discussions and in a nutshell, the boss is democratic in dis- authoritarian in cussions and authoritarian in decision mak- decision-making. ing. Before making a decision, the Chinese

CEO uses rather subtle ways of testing the waters, collecting ideas, and gauging potential reactions to the decisions. Thus, he can reap the benefits of centralization in terms of speed and flexibility, while still using the input of local knowledge. In addition, Western managers and investors also might learn from the caring attitude the Chinese CEO adopts when dealing with his employees. As the big “company father,” he is personally responsible for each individual and receives strong loyalty in return, This is quite different from the opportunistic leadership approach of many Western CEOs who treat their employees as “human resources,” not family members. In sum, internalizing and promoting the classical Confucian moral values of respect (gong), generosity (hang) , trust (xin), sensitivity (rnin), and kindness (hui) will help the Western manager to develop better “soft” leadership skills, complementing


the already existing “hard” scientific management techniques. When operating in China, they do not have to be perfect in recreating Chi- nese traditional leadership elements, but the sincerity of their in- tention and respect for China’s heritage will be highly rewarded by Chinese employees.

RESEARCH OUTLOOK

Research on private enterprises in Mainland China is in its infancy. The Chinese management model so far has been operationalized and tested in one study only (Schlevogt, 1999, in press). It is therefore of paramount importance to increase our knowledge by undertaking more studies in the P.R.C.’s private sector. I suggest future research along the following broad themes.

Sources for Readoption Throughout the article I have suggested that overseas Chinese management practices have been readopted in mainland private firms. It would be interesting to analyze in more detail the mechanism by which this distinctive style has been transferred. The WCM framework is useful in con- ; ; ; ~ ~ ~ ~ ~ ~ r ~ 7 ceptualizing the linkage between emphasis on many private traditional culture and organizational out- entrepreneurs to comes. This linkage can be tested through fur- revive traditional ther surveys and firm-level data, assessing Chinese manager’s attitudes, and correlating them with organizational outcomes in a longitudinal research set up. More qualitative studies will also provide additional “real world richness” illuminating this linkage. So far, case study evidence from China leads me to make two predictions related to the sources of readoption: First, there is a conscious desire by many private entrepreneurs to revive traditional Chinese culture. In this case the knowledge is mainly recycled from older family members who had experienced prerevolutionary China, as well as through the study of ancient Chi- nese books. Second, another hypothesized mechanism is the transfer of management practices through the influence of overseas Chi- nese investors, who, for example, might sit on mainland Chinese Boards of Directors.

International Comparisons I have argued for the distinctiveness of the Chinese private model when compared to state-owned enterprises. The next step is to show

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that the model is also distinctive when compared to family businesses in other countries. Given the importance of Confucianist values in family enterprises, which are unique to Chinese culture, I would expect this distinctiveness to be demonstrated in terms of sta- tistically significant differences in mean levels for structural and managerial choices, as well as their relationship to the two contextual factors. But the final evidence will only be provided by empirical studies. Such studies might measure the mean values for organizational choices, using, for example, the Aston scales (Pugh & Hickson, 19761, and compare them to results from other countries and regions, such as the textile subcontractors and their impanna- tores in Italy’s Emilia Romagna (Brusco, 1982; Lazerson, 1995). They might also assess statistical differences between country subgroups in the association between context and organizational design using structural equation models.

Wansferability of Chinese Management Model I have argued khat though originating in China, the Chinese web- based organizational model might be a potential new-management

paradigm for Western companies, too. It would be interesting to analyze an instance of . . . though

originating in China, the Chine- web- a Western company actually adopting this based organizational new model and analyze its impact on various model might be a stakeholders, such as employees and cus-

tomers, and its influence on overall value cre- potential new management

for ation. Suggested research designs for this pur- companies, too. pose include field experiments, natural

experiments, or action research. The prediction from the model would be an increase in organizational effectiveness after adoption of WCM, as measured by increased flexibility, trust, and reduced costs.

Political Implications/Emergence of New Class From a political-science view, it could be argued that Chinese private entrepreneurs are potentially the torchbearers of a great Chinese cultural revival. We also witness the growing importance of private firms in general. It will be interesting to analyze in the future whether this new, rising entrepreneurial class will be able to shape the political agenda as well. To test such a proposition, we would need longitudinal data exploring the influence of private entrepreneurs on society through political network analysis.


If we proceed along this research agenda, we will be able to enhance further our understanding of the giant that, using Napoleon's dictum, has been awakened and is soon to become a political and economic superpower. With this growing importance, it becomes increasingly more urgent to understand better organization in China, identify similarities with the West, and observe differences due to di- verging cultural backgrounds and ideas. We will thus be able to im- prove the quality of advice we can give to managers and politicians, and in general move towards even higher levels of international co- operation with this important ancient nation.

In general, understanding and learning from others, especially oriental cultures, might well be an important advantage in our glob- alizing world. Increasingly, success will depend on a synthesis of East and West, and the East, so far, has been in a much better position to achieve this than the West. I hope that my work is one of the first steps to reverse this trend and prepare us for the coming oriental challenge in the new millennium. Sun Zi said, "only he who, fully prepared, waits for the unprepared, will be victorious."

ACKNOWLEDGMENTS

I would like to thank the two anonymous reviewers and the editor for their insightful comments on an earlier draft of this paper.

About the Author Dx Kai-Alexander Schleuogt holds faculty appointments as Associate at the Haruard Fair- bank Center for East Asian Research, Asia Center, and Visiting Scholar at the Harvard Busi- ness School. He received his Ph.D. in Management Studies from Oxford Uniuersity. He has worked as a consultant for McKinsey & Co. in Greater China and as Country Manager for a kading European insurance company in the former Soviet Union. He educates, researches, and consults in the area8 of leadership, strategic management, international management, human resource management, and organizational design.

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