GUANXI-BASED BUSINESS

STRATEGIES

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 Today guanxi hu is an everyday word used when speaking of
business firms that maintain extensive guanxi with one
another and give each other preferential treatment.
 It is important for firms that lack marketing experience,
distinctive competencies, or distribution channels, to cultivate
guanxi in order to compensate for their deficiencies.
 A firm can enhance its performance by benefiting from the
guanxi network it has established. This network constitutes a
firm’s core competency and distinctive competitive advantage
that can lead to high performance for the firm.
 The ultimate realization of guanxi potential depends upon the
application and operation of several business variables in
which guanxi embedded.
 In strategic management literature , a variety of business
strategy variables are observed to impact firm performance.

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 The most commonly analyzed business strategy variables
include firm size, pricing, advertising, and R&D intensity.
 Chinese management studies have observed that sales force
marketing and credit liberalization are important practical
business determinants.
 Sales force marketing, an activity heavily dependent on guanxi
and usually relying on partner firms, has become an
increasingly popular and effective marketing means.
 Three forms of sales force marketing can be distinguished:
direct dispatching of marketing personnel; setting up regional
sales offices in major target areas; and selecting sales
representatives from outside of the firm on a commission
basis.
 Another major guanxi-based business variable is credit-
extension in commercial activities.
 The above conceptual illustration suggests that sales force
marketing and credit liberalization are two major guanxi-
based business variables, whereas other business such as firm
size, R&D intensity, advertising and pricing are not guanxi-
based.

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 Guanxi-based personal selling can produce high performance
with regard to local market growth for ventures. In some cases,
where a firm’s product attributes are not competitive vis-à-vis
rivals, a good guanxi network can even offset the disadvantages
of poor product attributes.
 Driven by dynamics of maximization of sales commissions, a
form of compensation widely used in China today, sales force
marketing is expected to have a significant and positive effect
on domestic sales growth.
 Another major business strategy variable highly involved with
guanxi is credit-extension in business activities. A liberal credit
policy is reflected in preferential terms of payment and, in
particular, temporal extension of payment deadlines.
 When seeking market growth, selling firms in China tend to
avoid embarrassing those buyers with financial difficulties since
one principle of guanxi requires the maintenance of harmony
and providing assistance to those partners who need help.

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 The benefits from the economics of accounts payable are
possibly conducive to a higher accounting return. To make
guanxi work in the long run the buying firm must honor its
obligations, remain loyal to its guanxi hu, and maintain for
reliability.
 With the unprecedented economic development and the
modernization which is taking place in many Chinese societies
guanxi is under increasing pressure to change and adapt.
 Chinese will have to reconcile their guanxi networks with the
inescapable dictates of market rationality. Chinese
management often absorbs ideas from Western and Japanese
management wisdom and philosophies.
 In fact, learning Western organizational and managerial skills is
among the major strategic objectives for both the Chinese
government and domestic firms in utilizing foreign direct
investment.
 In order to examine the evolving role of guanxi in the
performance of Chinese firms, we used 1983-84 as the base
period time frame upon which the dynamic impact of guanxi
on performance can be explored by comparing it with the
currnet period 1990-91.

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This comparison contained 48 firms. The following results were:
 First, the intensity of sales force marketing has a significant
impact on overall performance. This intensity significantly and
favorably impacts firm profitability, market growth and asset
efficiency.
 Second, the intensity of accounts payable is important for the
overall performance of Chinese firms and has a significantly
positive influence on asset turnover. The intensity of accounts
receivable is also crucial to firm success in expanding the
local market.
 Third, we did not find that the pattern and magnitude of the
relationship between guanxi and firm performance changes
substantially over time.The data from two different time
frames both revealed the significant effect of sales force
marketing and the moderate effect of account payable on the
overall performance of firms.

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 In the course of this economic development, firms in China,
both local and foreign, are reengineering and restructuring the
organization in an effort to pursue realistic strategies and
accommodate firms’ strengths and weaknesses to an
environment where industry and market structures are being
drastically transformed and government policies frequently
change.
 An understanding of guanxi’s crucial role in affecting all the
major dimensions of firm performance, and knowing the ways
of creating and maintaining guanxi networks, are quite
necessary for corporate success.
 Foreign investors can gain an edge over their competitors by
understanding and incorporating the guanxi factor into their
business decisions.