Environment-strategy relationship and its application to performance: a study of China's pharmaceutical companies in transition

The organizational environment in China has been on a rapidly changing track during the past three decades, which has created high environmental uncertainty in China. The relationship between environmental uncertainty and strategic orientations, as well as its implication for performance, has been a relatively neglected field of strategic management studies on Chinese companies. This thesis addresses this gap by employing the environment-strategy-performance paradigm and testing hypotheses with an empirical analysis of China's pharmaceutical companies during the period from 1996 to 2005. China was accepted into the World Trade Organization (WTO) in 2001, hence the time period is divided into two five-year periods, labeled as the pre-WTO period and the post-WTO period. This temporal setting generates a basis for comparative analyses in this research. The environment-strategy-performance paradigm was adopted as the main typology for this study to enable the objectives of this research to be fulfilled. A double-layer perspective (environmental dimensions and environmental segments) was used to analyse environmental uncertainty. Each environmental dimension (dynamism, hostility, and complexity) was first measured in eight segments (competition, customer, supplier, technological, regulatory, economic, social-cultural, and international), and then environmental uncertainty was measured by the three dimensions. Strategic orientations were conceptualized as six dimensions (futurity, proactiveness, analysis, defensiveness, riskiness and aggressiveness) (Venkatraman 1989a). Organizational performance measures were adopted from the work of Vajanapoom (2005), and the relevance of Venkatraman and Ramanujam's (1986) three dimensional approach was acknowledged. A survey instrument was the main method of data collection, and interviews were also conducted to supplement the data. In total 173 companies participated in the survey and 141 companies were retained in the final database. Several face-to-face and telephone interviews were held with three interviewees in order to verify findings generated from analyses and also to gain more insights into the Chinese pharmaceutical industry. Structural equation modelling techniques and MANOVA were used to test the hypotheses developed for this study. Empirical findings show that, in the pre-WTO period, all environmental segments impacted managers' perceived environmental uncertainty to various degrees, while in the post-WTO period, the managers' perception focused more on the macro and symbolic factors: economic, social-cultural and international. In addition, top management were found to perceive a more hostile, dynamic and complex organizational environment in the post-WTO period. Results derived from open-ended questions show that 47 per cent of respondents believed that the environment was more uncertain in the post-WTO period. Among them, 81 per cent perceived higher environmental complexity in the post-WTO period than in the pre-WTO period. This research demonstrates that top management's perceived environmental uncertainty has had a significant impact on the firms' strategic orientations in the pre-WTO period but not in the post-WTO period. Specifically, China's pharmaceutical companies adopted proactive/futurity-orientated, or analysis-orientated, or defensive-orientated strategies in response to the high environmental complexity in the pre-WTO period. However, results show that only companies who chose defensive strategies outperformed the industry during this period. The results also suggested that, in the post-WTO period, the companies with the more proactive- and futurity-orientated strategies were most likely to achieve superior performance. 'Ownership type' was the contingency variable employed in this research. MANOVA results suggested that for both time periods, there were no differences in the perception of environmental uncertainty between managers of state-owned enterprises, joint/soleventures, and private-owned enterprises. However, similar uncertainty perceptions led to different strategic orientations in the pre-WTO period. Hypothesis testing results indicate that, in the pre-WTO period, the joint/sole-ventures were the companies with the more proactive- and futurity-orientated strategies and the state-owned enterprises were the companies with the least proactive- and futurity-orientated strategies. Whereas, in the post-WTO period, there was no significant preference of strategic orientations in terms of ownership type. In addition, this research has also found that a company who underperformed the industry in the pre-WTO period was more likely to shift to alternative strategic orientations in the post-WTO period. This research has contributed to the knowledge of how Chinese companies have strategically responded to environmental uncertainty in the context of transition, and to what extent the co-alignment between environment and strategy has had implications for their organizational performance. Empirical studies have demonstrated the applicability of the environment-strategy-performance paradigm and the majority of these studies were in the context of a mature market economy (Bourgeois and Eisenhardt 1988; Morgan and Strong 1998; Thompson 1967; Zajac et al. 2000). This research provides a solid base for establishing the cross validity of the environmentstrategy- performance paradigm in terms of its application in different national contexts. In addition, the decision-makers of Chinese companies will benefit from knowing which strategic orientations 'fit' given a certain environmental state. This research also provides rich information for policy-makers in China about what the companies are thinking and how they react to outside change.