Rahul Chawla PG-A 11

Achieving Superior Financial Performance in China: Differentiation, Cost Leadership, or Both? Introduction: China has been the fastest growing economy in the world in terms of almost everything- exports, growth, diversification etc and hence it has attracted many foreign internationals to come and invest into and hence has also raised a question that remained unanswered is how do the firms in China achieve such positions that help the country to grow at such a hi pace. The reading talks about how its only about a few firms that influence the trade of an economy such as China rest low level firms are the just the market followers, and how foreign companies influence an economy like China. According to porter a company can achieve a level of hi competency only through differentiation or cost leadership, as the article continues, it explains what are the various factors that leads a firm to decide, whether a firm should go for a cost advantage or differentiation or a mix of both. Also the article talks about why a firm should or should not go for a mix of both the cost and differentiate what kind of firm should use which type of strategy in order to achieve a competitive advantage over others. Different authors have a different say in either kind of strategy. For example, Murray (1988) suggests that a cost-leadership strategy does not work in mature industries, whereas Miller (1988) and Ward, Bickford, and Leong (1996) report that it works best in conditions of environmental stability; in uncertain environments, they find that a differentiation strategy functions best. Hill (1988) proposes and Louri and Anagnostaki (1995) confirm that in mature industries, a dual strategy is more appropriate, and Hall (1980) documents that combining differentiation and low cost enables firms in hostile environments to succeed. From the standpoint of turbulent global environments, Kim, Nam, and Stimpert (2004) suggest that firms should adopt flexible combinations to adapt to dynamic global markets, therefore this article aims to carry out investigation in regard to the kind of strategy is optimum for a firm. A few empirical studies on strategic choice also produce conflicting results. For example, from a sample of firms in Greece, Spanos, Zaralis, and Lioukas (2004) find that a dual strategy with low cost as the primary component is better suited and preferable to pure strategies. Furthermore, they indicate that Greek firms pursuing pure differentiation strategies are less profitable, even compared with firms that fail to develop a clear strategy. Generic Strategies and Financial Performance Firms that follow a cost-leadership strategy strive to supply a standard, no-frills, high-volume product at the most competitive price to customers. An emphasis on a cost-leadership strategy is more likely to create superior financial performance for firms operating in emerging economies, such as China, because firms gain a relative

advantage from their low labour and production costs. However A differentiation strategy creates customer value through means such as innovative products, superior quality and technology, a differentiated brand image, good service, and so forth, which distinguish the firm from its rivals It represents an external focus that is designed to enhance customer satisfaction and to create customer loyalty by meeting a particular need. Controversies and conflicting empirical evidence mark the discussion of whether firms can effectively adopt and implement a dual strategy, in which they simultaneously differentiate and lead on cost, to attain superior performance. However, the combined strengths of a dual strategy (i.e., high quality and low cost) could match with or exceed the needs and expectations of average Chinese consumers, who have boosted their standards in terms of consumption patterns and lifestyles as China increasingly integrates into the global economy , though their disposable income remains limited. Thus, pursuing a dual strategy in China may be a more likely means to gain profitable volume and market share. Effect of Domesticity A cost-leadership strategy should have a greater impact on the financial performance of domestic firms because, compared with foreign enterprises, firms from emerging economies often possess natural cost advantages in terms of low labour and production costs, from which they can gain higher financial returns. Domestic Chinese firms that undertake cost leadership as their primary mode gain relatively higher margins through their solid supply networks and entrenched distribution channels, which ensure them consistent access to raw materials and efficient delivery. From the foreign firms perspective, cost leadership appears to be less effective for superior performance, mainly because of firms comparative cost disadvantage when operating in emerging economies. Foreign multinational corporations have gained increasing benefits from the liberation of trade and investment around the world but still suffer overall cost disadvantages relative to domestic firms in emerging economies because of the liability of foreignness. The impact of a cost-leadership strategy on financial performance is greater for domestic firms than for foreign firms. However, foreign firms may achieve greater financial performance than domestic firms when they use differentiation strategy foreign firms enjoy an inherent advantage over domestic firms with regard to adopting a differentiation strategy. The resources and capabilities they own (e.g., financial and technological resources, modern management systems, updated production methods, trained personnel) better fulfil the conditions required to implement a differentiation strategy successfully, thus we can say The impact of a differentiation strategy on financial performance is greater for foreign firms than for domestic firms. The effect of a dual strategy on performance is stronger for foreign forms than for domestic firms for several reasons. Because a cost-leadership strategy is focused internally on operational efficiencies whereas a differentiation strategy is externally targeted toward satisfying customers, the two strategies essentially stem from divergent organizational philosophies. Although foreign firms face the same conflicting

philosophies when they implement a dual strategy, their well entrenched corporate culture may help them resolve conflicts by building ambidextrous organizations comprising separate divisions that effectively follow different strategies. Dells success is a perfect example: Dell entered China in the late 1990s, much later than rivals such as Compaq and IBM. However, Dell pushed lower costs and prices in China through effective cost controls, obtained through its direct sales and supply chain integration Effect of Market Concentration Industrial organization theory suggests that market structure influences the strength of relationship between business units strategies and their performance (Scherer and Ross 1990). Most industries in China are experiencing deep structural transformations that are characterized by greater structural uncertainty and unbalanced growth (Zhou, Tse, and Li 2006); thus, both domestic and foreign firms must align their marketing strategy with market structure factors. Market concentration refers to the extent to which a large share of market sales is accounted for by a small number of competitors. It is an important characteristic of market structure that reflects the oligopolistic nature and competitive behaviour of the market. Therefore, following the industry structure model, we examine whether the effects of generic strategies on financial performance vary according to different levels of market concentration. When the level of market concentration is low, a cost-leadership strategy has a weaker influence on the financial performance of firms operating in China. When markets are less concentrated (and, therefore, more competitive), all firms experience intense pressure and face strong product and technological competition. Therefore, firms that adopt a cost-based marketing strategy must pursue internal efficiency by increasing the efficiency and productivity of their internal operations. A cost-leadership strategy has a weaker influence on financial performance when the level of market concentration is low rather than high. A differentiation strategy has a stronger influence on financial performance when the level of market concentration is low rather than high, because customers in markets with low concentration (and intensive competition) have many choices, firms must prevent them from switching to rivals to maintain their superior performance. In this case, a differentiation strategy, which introduces and modifies unique products to exceed customers expectations, can help firms retain customers and achieve superior performance. Furthermore, when markets are less concentrated with competitors, firms must have a sustainable advantage to stand out from competitors. Measures adopted to ensure fairness of the results The team adapted measures from established studies and employed professional back translation to ensure conceptual equivalence .We then conducted a pre-test with 20 senior managers to assess the face validity and clarity of the measurement items. On the basis of the pre-test responses, the team revised several questionnaire items to enhance their clarity. To reduce the potential for

common method bias, we collected information about market concentration and firm performance from secondary data. The market concentration measure uses the Herfindahl index, which captures the number and market share distribution of firms in an industry also the team controlled for the effects of firm age, firm size, and industry type in our analyses because existing studies suggest that these variables influence firm performance. They measured firm age as the number of years since the firm first was established. Firm size is the logarithm of the number of employees, they coded industry type as a dummy variable, where 0 = low-tech firms Limitations Although we make some important contributions to research on strategic choices as determinants of firms financial outcomes in the emerging economy of China, we also note some limitations that require additional research. This study focuses on the moderating effect of two contextual factors, domesticity and market concentration, but the moderated relationship between market concentration and strategic choices might be contingent on domesticity Additional investigations should attempt to uncover the interplay of strategic choices, domesticity, and market concentration or other structural elements. Furthermore, in our preceding discussion, we suggest that a dual strategy is less effective for domestic firms because of their poor resource base and lack of managerial competency. Therefore, a fruitful direction for further research involves determining which capabilities and resources underlie the successful implementation of a dual strategy by firms in emerging economies. Alternatively, researchers could use a longitudinal design to examine the pattern of strategies adopted and its influence on financial performance to capture the transitional characteristics of emerging economies. Finally, although China shares many characteristics with other emerging economies, additional research should attempt to validate our findings in other emerging economy settings. Conclusion Firms operating in emerging economies must choose appropriate marketing strategies to address the idiosyncratic challenges of rapid changes and institutional voids. On the one hand, domestic firms need a proper marketing strategy to take advantage of their local position; on the other hand, foreign firms must adjust the marketing strategies they traditionally have deployed to confront the environmental pressures for change. Despite its importance, the question of which marketing strategy is more appropriate for domestic and foreign firms in the emerging Chinese market remains largely unanswered. Moreover, debates about the effectiveness of pure versus dual strategies persist in existing literature. Therefore, to bridge the research gaps, Li and Li investigate when various types of marketing strategies might work by examining the effects of both pure and dual strategies on financial performance for domestic versus foreign firms and across different market concentration levels in Chinas emerging economy. The authors conducted a survey in the manufacturing industry in China and obtained

249 complete questionnaires, of which 97 were from domestic firms and 152 were from foreign firms. The results show that the effectiveness of a certain marketing strategy varies depending on domesticity and the level of market concentration. The impacts of both cost and dual strategies on financial performance are stronger for foreign firms than for domestic firms. Although cost leadership and dual strategies are less effective in less concentrated markets than in more concentrated ones, the effect of a differentiation strategy is stronger when the level of market concentration is low rather than high. The findings suggest that managers of domestic Chinese firms should use qualityand innovation-based differentiation strategies. Foreign firms can leverage their relative advantages to achieve a low-cost position or a balance between cost and quality. However, managers should use caution when considering the cost and dual strategies in less concentrated (more competitive) markets because the fierce competition among the many competitors dampens their effectiveness in terms of financial performance.