CELE Project 2011
Permission given to use this project
An analysis of managerial system of overseas Chinese family
business in a rapidly changing economic environment
29 April 2011
The overseas Chinese family businesses (CFBs) have achieved a lot of economic successes by operating the traditional managerial system which is deeply influenced by Confucian ideology. However, some weaknesses of this system have emerged from the fast changing economic environment. Thus, this project will analyze the advantages and disadvantage of traditional managerial system of CFBs in Southeast Asia and the future direction of development of overseas CFBs. The project found it is essential for the management to change from family management to professional management while still remain some good traditional features of CFBs.
Abstract 2 Introduction 3
Literature Review 4
1. Unique features of Overseas Chinese family businesses 8
2. Advantages and disadvantages of traditional management 8
2.1 The advantages of traditional management 8
2.2 The disadvantages of traditional management 9
3. Suggestion for the future direction 10
Overseas Chinese family businesses (CFBs) have achieved significant economic success in East and Southeast Asia (Ahlstrom, Young, Chen, Bruton, 2004). For example, Zutshi (1997) finds that the annual economic output of Overseas CFBs (apart from Taiwan) has achieved about $500 billion that equals to the 40% of GDP (gross domestic product) of the Chinese mainland. According to many relatively researches, Chinese traditional culture such as Confucian ideology has a big impact on Overseas Chinese family businesses and helps them to achieve economic success gradually. However, some scholars and economists claim that the same features of traditional management of Overseas CFBs which is based upon the relatively simple “personal management” or “Confucian management”
(Wang, 2008; Wah, 2001) sometimes will impede the development of CFBs in a rapidly changing economic environment. Furthermore, the researchers also indicate that lack of advertising and branding and little or no R&D (research and development) will hinder the growth of CFBs. This essay will be divided into three sections. First of all, it will list the distinctive characteristics of traditional managerial system of Overseas CFBs and their relationship with traditional Chinese Culture. Secondly, analyze the advantages and disadvantages of these features. Thirdly, through studying a case of a successful Overseas Chinese firm, it will give some suggestions of effective management in the future.
Literature review (717 words)
Overseas Chinese family businesses (CFBs) have achieved the extremely large number of Southeast Asian economic wealth (Wang, 2008; Tsang, 2002).The unique management of Overseas CFBs has become a passionate argument among scholars and economists. Almost all of the research indicates that the Confucian-based value play a significant role in Chinese traditional management, it offers the basic principles to conduct Overseas CFBs’ behavior and attitude in
economic field. Yet, some relevant studies argue that Chinese way of management is outdate, changing the style of management is the only way to survive in the changing economic environment. It is no doubt that the new future direction of managerial system will be serious considered by the scholars and entrepreneurs.
According to Wah (2001), the members of CFB having the similar cultural background which is the Confucian-based culture and this common value is the roots of the unique features of traditional management of CFBs. Several studies from Warner (2003) indicate that the distinctive characteristics of traditional managerial system include low level of organizational structure, tight family management and ownership, etc. Similarly, Tsang (2002) shows that the managerial ideology is deeply influenced by Confucian values such as clear hierarchy, highly centralized control and authority. Additionally, relaying on internal financing, lack of advertising and branding and little or no R&D (research & development) are also the significant features of Overseas CFBs (Weidenbaum, 1996; Backman, 1995).
Yu (2001) in his research claims that the traditional management of Overseas CFBs has strong internal capabilities such as highly flexible organizational structure, high degree of flexibility in production and the minimal transaction
costs. Firstly, quick decision making ensures to the organizations maintain a high level of flexibility, so the Chinese family firms are able to respond to
changing environment quickly. Moreover, the family members willing to work overtime during the labor shortage in the peak season and see their family businesses as their lifelong career, which can guarantee the normal operation of the organizations (Song, 1997). Secondly, the high degree of flexibility in production has the capacity of quick response and adaptation to the fast changing customer market (Yu, 2001). Thirdly, Overseas CFBs can reduce transaction costs through identifying strongly with the firm’s target among the
family members in the co-ordination of activities (Yu, 2001).
However, nowadays, the economic environment of East Asia has changed a lot, so Overseas CFBs have to face increasingly relentless competition. Some research show that the traditional style of management sometimes will impede the development of Overseas Chinese firms when they hard to adapt to the complex economic environment. For example, the paternalistic style of leadership may limit information flow and affect the decision-making internally, which will cause the employees to lack creativity and innovation. Similar idea comes from Chen (2001), as he argues that the typical organizational structure within clear hierarchy may impede the effective flow of information in the firms.
Another feature is that the Overseas Chinese firms are reluctant to accept outside funding, because they think outside financing will threaten their unshakeable ownership of firms (Ahlstrom, Young, Chen, Bruton, 2004). Weidenbaum (1996) points out that another potential problem of Overseas CFBs which is a lack of branding. Most traditional Overseas CFBs do not build the brand for their products and that can be obstacle to establish a higher value-added firm (Ahlstrom, Young, Chen, Bruton, 2004). Backman (1995) added that most Overseas Chinese firms lack R&D (research and development) which makes the work of enhancing additional funds and seeking IPOs (initial public offerings) more difficult.
In order to cope with the potential problem of managerial system of Overseas CFBs, many scholars give some significant suggestions. Wah (2001) claims that
the management needs to change from the family management to professional management. Similarity, Carney (1998) in his study emphasizes Overseas Chinese firms require the professionally trained managers to compete with outside economic world. Ahlstrom, Young, Chen and Bruton (2004) offer some detail advice for the management of Overseas CFBs. First, they suggest Chinese family firms slowly loosen the tight control over their firms and encourage their non-family employees to participate in the decision making process. Secondly, to reform some of the traditional practices such as appropriate use of outside funding, strength brand building and investment in R&D.
1. Unique features of management of Overseas CFBs (188 words)
Many researches indicate that the traditional Chinese culture which is known as Confucian ideology is the root of the Chinese way of management or “Confucian
management” (Wang, 2008; Wah, 2001; Ahlstrom, Young, Chen, Bruton, 2004). Under the teaching of Confucian values, the traditional management of Overseas Chinese family business has revealed some distinctive characteristics: simple organizational structure, tight family control and dominated ownership, paternalistic and nepotistic style of leadership, highly centralized governance and decision-making. Similarly, Tsang (2002) shows that the managerial ideology is deep influenced by Confucian values such as clear hierarchy, highly centralized control and authority. It is clear to see that the “Confucian
management” has a deep impact on the behaviors of Chinese family managers and organizations. In additional, There are two famous researches of Overseas Chinese family business which written by Weidenbaum (1996) has summarized
the significant characteristics of Overseas CFBs. Except the features of tight family control, information control, etc., they point out that the lack of advertising and branding and little or no R&D (research & development) also the common traits among the Overseas CFBs.
2. Advantages and disadvantages of traditional management (590 words) 2.1 Advantages of traditional management
thAs far back as the 18 century, especially after World War ?, Chinese family
businesses which are followed by particular style of Confucian management have already become an emerging economic force on the Asia’s economic stage
(Wah, 2001). Some scholars are very interested in Confucian management. Yu (2001) in his study claims that there are two significant characteristics of this management which are contributed to the competitive edges: the high degree of flexibility within organizational structure and production, the low transaction
costs. Firstly, most Overseas CFBs have no clear organizational structures (Wah, 2001) but a rigorous power hierarchy, so the main decisions are only made by the family patriarch or other family members. Thus, this style of structure can facilitate quick decision-making so that the family unit is able to adapt to the changing situation fast. This high flexibility is also revealed in production, for instance, the household electrical companies in Hong Kong have the ability of spending only 9 months to change their production line from producing black and white TVs to color TVs. That speed is faster than Japanese and American firms (Yu, 2001). Apart from the first advantage, the low transaction cost is another competitive advantage, being based on family members are trusted each other very much. Chinese family firms search the strategic resources such as human resources, financial supports effectively and they don’t need to
reinforce the supervision on their family members, so the transaction costs are low.
2.2 Disadvantages of traditional management
Although the traditional Chinese management has its own competitive advantages, some scholars and economists argue that Asian economic environment is changing fast, so the unique characteristics of Chinese management sometimes will impede the development of Overseas CFBs. Tsang (2001) in his research claims that top management positions are decided by family patriarch and close family members, therefore. There is no doubt that family members dominate the majority of the top position while non-family members must pay more efforts in the family firms for a long time to achieve higher management positions, so this unfair treatment may dampen the enthusiasm of non-family staff. Furthermore, Ahlstrom (2004) indicates that paternalistic style of leadership determines that the major decisions are made by the family patriarch or close family members without discussing or explaining to their employees. That decision-making style will limit the information flow internally and hinder employees’ creativity. Additionally, he also points out that
the attitudes and behaviors of financial management are not sensible, most of Overseas Chinese family firms are forbidden to receive the financial supports by outside funding, because the entrepreneurs are reluctant to accept the outside finance to intimidate their corporation ownership. In this way, without the sufficient capital, the size of the enterprise is hard to expand, so Overseas CFBs always maintain a small and medium-sized scale which is called SMEs (small and medium enterprises). The hidden problems are more than these, referring to the research from Chen et al (2004), the problems of lacking the brand building and R&D (research and development) become more and more obvious and dangerous in the rapid changing economic environment. In the real world, Overseas Chinese family firms are interested in short-term business, they good at grasping the opportunities and producing the high value-added but low-tech, no-brand goods. Some experts indicate that this famous “no-brand-one-niche
product strategy” (Yu, 1997) is no longer a competitive advantage in the current or future economic society. If the Overseas CFBs are not to pay more attention to brand building, they will lose huge profits from it and play the role as the replaceable suppliers forever.
3. Suggestions for the future direction (348 words)
In order to deal with above issues for Overseas CFBs, some entrepreneurs have taken up the managerial transition. For example, VTech, a family company which is produced electronic products in Hong Kong has got a successful business in the global market with being transformed into a modern style of management (Ahlstrom et al, 2004). VTech utilized four main measures to accomplish this change, first of all, the decision makers only employ the well-trained and competent managers in top management positions without considering whether they are family members or not. Then, they also give these high-skilled managers more chances to join in the final decision-making process.