“HUMAN ELEMENT IN AI INTERGRATION”

ABSTRACT:

This paper addresses the development requirements of an international firm in terms of the
application of firm-specific assets and human resource management needed for the
implementation of vertical integration decisions. The empirical investigation reported in this
paper is based upon a sample of international joint venture (IJV) hotel firms in China. The
evidence highlights how the vertical integration of corporate management acts as a catalyst
for the emergence of a structural approach to strategic orientation, contractual control and
formalization in hotel firms. The findings suggest that international HRM literature can be
extended to take better account of the inner connection of a firm's structural properties in the
vertical integration of its corporate management. Results from 136 IJV hotels offer valuable
insights into both how the process of the vertical integration of corporate management
positively influences the establishment of strategic orientation to achieve long-term
development and how contractual control guides the development priorities of IJV hotel
firms.

KEYNOTES:

 Contractual control and formalization

 performance
 strategic orientation
 vertical integration decision

INTRODUCTION

Scholars of corporate management have highlighted how business success is dependent upon
a combination of vertical integration decisions that define whether a firm's goods or services
should be transferred in-house or sold to outsiders. The study of vertical firm-specific asset
boundaries has received considerable attention due to the issues of asset heterogeneity, the
imperfect mobility of resources and the effective utilization of organizational capabilities. In
service industries, corporate management is increasingly driven by rapid changes in the
business environment, such as technology transformation, economic upheaval and heightened
market competition, and many service firms are actively searching for new ways in which to
improve their organizational structure to gain increased levels of organizational collaboration,
enhanced operational excellence and improved quality of information exchange. Previous
studies highlight the notion that the vertical integration of corporate management implies a
rationalization of long-term business development, as the level of a firm's structural
efficiency is mainly dependent upon the degree of management coherence in cross-functional
collaboration. Other studies have demonstrated that the co-ordination between the various
management levels of a firm is associated with the organizational alignment of one function
to other related functions in making joint decisions on business development. Furthermore,
the vertical integration of a firm's management is related to the synergistic benefits that result
from the introduction of human resource management (HRM) as an institutionally supported
package . It follows that studies on corporate management have become critically important
in the process of strategic management, especially when the vertical integration of human
assets specificities involves significant organizational changes.

VERTICAL HRM AND THE ASSET SPECIFICITIES OF FIRMS

Hypothesis 1:

The greater the level of vertical integration within corporate management, the better the
performance that will be generated through the establishment of a strategic orientation.

Contractual control can be employed to examine how the benefits from the vertical
integration of a firm's capital equipment, marketing, information systems, cost structures and
innovation can be maximized. The best-known contractual agreements in the service industry
are management contracts. Contractual control of a firm's products and services offers a
relatively high degree of organizational control, because the in-built explicit control standards
and methods can enforce unit conformance. Academics use contractual control to classify the
extent to which a binding business contract is used to specify a suitable price for a firm's asset
specificities and to define role and obligation of management in using the firm's assets. As
one of the primary economic considerations of a firm's business transactions, contractual
control over firm-specific assets is seen as a way to create imperfect replication through
provisional control, which can protect a firm's assets and mitigate its market transaction costs,
even in a high-risk environment. Although little is known about the actual influence of
contractual control over vertical firm-specific assets, scholars believe that the implementation
of contractual control may create various safeguards that regulate a firm's transactional roles
when circumstances are ambiguous, especially when the asset value of the ability of a firm to
replicate standards and services in multiple locations is high. It is quite clear that the adoption
of contractual control in an organization aids resource and knowledge transfers at low costs
and when a firm employs contractual control over its asset specificities, it should ensure that
asset complementarities, such as qualified managerial employees and firm-specific assets, are
readily available.

Hypothesis 2:

The greater the vertical integration that is employed in corporate management, the better the
performance that will be generated through the establishment of contractual control.

Formalization is the most commonly discussed dimension of organizational studies and is

often used to diagnose the fuzzy boundaries and structural indeterminacy that determine a
firm's integration decisions, particularly when the objective is to achieve organizational
efficiency . Studies of formalization are mainly devoted to tracking the degree to which
integration decisions are made and whether activities are carried out in accordance with
explicit operational routines, lines of authority and working relationships .The most important
explanations of formalization concentrate on the communication quality, management
participation, coordination and information exchange of a firm, but other studies have
provided theoretical support for the contribution to performance of organizational
formalization decisions through the manipulation of the resources and capabilities that are
available within a firm .The assessment of formalization is imperative, as its consequent
procedures, rules and regulations are employed to regulate a firm's behaviour in information
sharing, decision reporting and corporate culture, and such organizational routines may
determine what, where and how a firm should respond to corporate management decisions .
Recent research has emphasized that formalization is a primary rationale for the vertical
integration of corporate management activities, and scholars have tested this notion by
studying how officially established rules, regulations and procedures are employed to
regulate the behaviour of corporate management activities. The effect of the complementary
relationship between corporate management activities and formalized control over a firm's
performance can help in the systematic searches for information that are occur within an
organization.

Hypothesis3:
 The greater the vertical integration of corporate management activities, the better the
performance that will be generated through the establishment of formalization.

The asset specificities of vertical firms are widely regarded to be key to the attainment and
sustenance of competitive advantage. The more specific the assets employed by a firm, the
greater are their potential as a source of competitive advantage. Although the asset
specificities that relate to vertical integration may be viewed as heterogeneous in their
distribution, conventional studies highlight that the effective use of these asset specificities is
primarily determined by environmental forces. Studies on the identification of the
idiosyncratic resources, knowledge and capabilities of a firm have been extended to the
structure of management properties that involve strategic orientation, contractual control and
formalization. Normative decision theory suggests that vertical firm-specific assets should be
based upon trade-offs between risk and return , and given the various choices that are
available in most integration decisions, the effects of the vertical integration of a firm's asset
specificities may be felt in a firm's business transactions, which is where such decisions are
implemented through the integration of value chain activities. A firm is expected to choose
the vertical integration decision that offers the highest risk-adjusted return on its asset
specificities. From the viewpoint of the resource-based advantages that are appropriated
within and between organizations, a vertically integrated firm will display a set of
idiosyncratic resources and capabilities that are embedded in its economic needs, and will use
its available network of relationships to influence the distribution of its asset specificities .
However, behavioural evidence indicates that vertical integration decisions can be
determined by the availability of assets and the control needs of corporate management. A
firm that expects to possess additional superior resources, knowledge and skills may find that
making vertical integration decisions can help its organization to achieve economic gains that
are sufficient to counter the higher cost of servicing in the host market.

MEASUREMENT OF THE VARIABLE:

The depth of the checklist combined with the good quality of information provided a sound
basis for analysis and allowed useful conclusions to be drawn. The reason for choosing the
hotel sector for this study is that the firms in this sector have many common organizational
characteristics in terms of the vertical integration of corporate management activities. An IJV
hotel must involve its managers in the handling of 'service complexities' given the rapid
changes in international service standards and in the local business environment and the
theoretical development of firm-specific assets and HRM is significantly influenced by the
needs of corporate management to continuously upgrade its international service standards.
The vertical integration of corporate management activities in the hotel service sector is
relevant because the upstream value chain activities of such firms are primarily dominated by
service expertise and service knowledge, whereas the downstream activities are affected by
service offerings and sale promotions (Yu, [57]). The influence of hotel management
activities in this study is measured by the specific service packages of the IJV hotels,
including the rapidity of the acceptance of new products by customers, economies of scale in
marketing-support expenditure and the level of risk that is associated with the introduction of
a new manual .

Four items were used to measure the perceived importance of contractual control: brand
names, marketing procedures, supplier procedures and professional service procedures.
Contractual control is primarily exercised through the responsibilities that an IJV hotel firm
exerts over its tacit resources, including its intellectual properties, patents, trademarks,
copyrights, proprietary reservations and logistics systems. The brand name and marketing
reservations system of IJV hotels are believed to be important indicators of the level of
contractual control that is employed, as these factors are more likely to place limits on
business actions. Sub-scales of contractual control were constructed by aggregating the scores
of the four items into an internal consistency indicator with a listed alpha of.702. Thus, the
contractual control variable includes all of the structural aspects of asset management.

Four items were used to measure the perceived importance of organizational formalization,
including the perceived reliance on detailed financial reporting, the establishment of formal
systems, the setting of performance targets and the use of performance-related rewards and
appraisals, all of which were assessed using seven-point scales. We also asked questions
regarding the extent to which the hotel managers agreed with the use of regulations, rules and
operating procedures that spell out their detailed tasks and activities, and the standard
operating procedures, rules and policies that are employed to support corporate management
needs. Formalization was measured by the analysis of established formal documents that set
the standard operating procedures and measure the improved service efficiencies. Sub-scales
of the formalization constructs were then aggregated into a group score with a listed alpha
of.753 so as to include all of the soft aspects of HRM development in the measure of
formalization.

Firm size was assessed using the number of full-time employees as the primary measure. The
business duration of each IJV hotel was measured by the number of years that the hotel had
been in operation, and the age of the hotel was estimated by subtracting the year of formation
from the year of the survey. International experience was measured by asking the respondents
to indicate the number of years of experience that their hotels had had in operating in China.
A number of predictors of performance, such as profitability, growth of sales and market
share, was also used. The combination of all three performance indicators has an alpha
of.834, which is deemed to be statistically acceptable.

RESEARCH METHOD

SAMPLE:

The primary objective of this study is to examine the impact of vertical integration on
corporate management activities that involve strategic orientation, contractual control and
formalization. The data were collected from interviews with managers of IJV hotels in China
by an independent management research project team. The National Tourist Bureau of China
provided the requisite contact information for the hotels, and all of hotels in this study are
located in Beijing, Shanghai or Guangdong province. The sample consists of IJV hotels that
are jointly owned by local and foreign firms, with foreign equity shares ranging from 30 to 90
per cent. Where there are multiple local or foreign partners, the majority parent firm normally
takes the most active part in the management. The completed sample was limited to 136 IJV
hotels by the constraints of funding, timescale and the location of the research team. The final
sample represents a positive response rate of approximately 20 per cent of all of the hotels
that were contacted. The IJV hotels in this study are mostly large employers with more than
400 employees. On-site visits were made to all of the hotels and records were consulted to
obtain financial information where permission was granted. Background firm documentation
was also collected. The IJV hotels that were approached were able to provide high-quality
data that allow us to generate useful insights into the multiple aspects of the vertical
integration of corporate management activities.

RESULTS:

Table 1

Presents the descriptive statistics and zero-order correlations for all of the variables in the
study. The results show that the asset specificities of the IJV hotel firms influence the
selection of corporate management priorities. Positive correlations are found between the key
variables of strategic orientations, contractual control and performance. Our results suggest
that the enhancement of an IJV hotel's asset specificities gives the hotel the flexibility to
achieve the type of strategic orientation and contractual control that it needs to improve its
performance. However, the correlation between strategic orientation and formalization is
negative and not statistically significant.

Table 2

Presents the ANOVA results that examine the level of importance and the actual
performance as perceived by the hotel managers. The ratings show that most of the items of
corporate management across the areas of strategic orientation, contractual control and
formalization are significantly emphasized.

Variables Importanc Performance Value Value

e of t of p

Strategic orientation

Establishing business presence in new 5.7941 5.3346 4.442 .000

markets

The use of profit 4.0809 4.4265 − 2.412 .017

The setting of strategic priorities 5.6612 5.6691 .217 .828

The allocation of senior managerial 5.4853 4.9265 5.958 .000

positions
Contractual control

Brand names 4.7574 4.3676 3.641 .000

Marketing procedures 5.3088 3.9412 9.156 .000

Supplier procedures 4.7022 4.3601 3.641 .000

Professional service procedures 5.2206 4.8676 3.700 .000

Formalization

Detailed financial reporting 6.1985 5.9853 1.990 .049

Laying down formal systems, 5.9265 5.4265 6.084 .000

procedures, and rules

Setting performance targets, rewards, and 5.6838 4.9265 8.038 .000

appraisals