The International Journal of Human Resource Management, Vol. 20, No.

12, December 2009, 24542470

Coping with an emerging market competition through strategy-human resource alignment: case study evidence from ve leading Japanese manufacturers in the Peoples Republic of China
Norihiko Takeuchia*, Ziguang Chenb and Wing Lamc
School of Management, Tokyo University of Science, Saitama, Japan; bDepartment of Management, City University of Hong Kong, Kowloon, Hong Kong, PRC; cDepartment of Management and Marketing, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong, PRC This paper documents how PRC-based Japanese afliates can align their human resource management (HRM) policies and practices with their business strategies based on in-depth interview surveys of the ve leading Japanese manufacturers in China. In particular, using a multiple-informant research design to interview both top and human resource managers in each site, the study has attempted to clarify the strategic t between the business strategies pursued and HRM practices adopted in China. Our interviews with top management for each afliate revealed three types of business strategies that the PRC-based afliates adopt to gain competitiveness in the Chinese market. Separate interviews with HR managers further claried that afliates HRM efforts are aligned with the strategy each afliate is pursuing. The ndings are used to suggest several hypothesized relationships between the particular strategies pursued and the HRM practices adopted in China. Furthermore, this study has provided some important insights as to how the choice of afliate-level business strategies in China affects the hybridization processes of the HRM policies and practices used in the cross-national business environment. Keywords: case study; hybridization of HRM practices; Japanese afliates in China; multiple-informants research design; strategy-HR alignment
a

Introduction An increasing number of people believe that the Peoples Republic of China (PRC) is becoming an economic superpower (Goodall and Warner 1997; Gamble 2006; Warner 2008). Chinas success is not only due to her enormous human resources, but also to other parts of the world. Findings consistently show that China is one of the most preferred places for foreign investment (e.g., National Bureau of Statistics of China 2007). Over the last decade (from 1997 to 2006), the PRC has attracted 310,607 foreign direct investment projects, with a committed investment of more than US$1 trillion (National Bureau of Statistics of China 2007). Chinas entry into the World Trade Organization (WTO) in 2001 further increased opportunities for foreign manufacturers, including Japanese rms, to expand their business activities into the mainland. Some observations, however, cast doubt on whether the economic achievements are sustainable. According to the extant research on strategic management that advocates the importance of t in organizations, the performance of an organization is contingent on

*Corresponding author. Email: takeuchi@ms.kuki.tus.ac.jp

ISSN 0958-5192 print/ISSN 1466-4399 online q 2009 Taylor & Francis DOI: 10.1080/09585190903363763 http://www.informaworld.com

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the degree of the organizational alignment between the organizational systems and the business environment (Dotty, Glick and Huber 1993; Boxall and Purcell 2003). Previous ndings in Western research contexts have conrmed a positive relationship between organizational systems and rm performance (Ketchen, Combs, Russell and Shook 1997). Extending this view to the context of the PRC, the sustainability of the economic success in the PRC will hinge on how effectively these rms can continue to restructure and reorganize themselves to align with the socialist market economy. Despite theoretical assertions of contingency t made by many researchers on strategic human resource management (SHRM) that the adoption of HRM practices should be aligned with a rms upper-level strategic goals and objectives, little empirical evidence has been reported to date to support such a contingency t proposition, particularly in Asian research contexts (Bratton 2001; Li 2003; Takeuchi, Wakabayashi and Chen 2003; Lam, Chen and Takeuchi 2009; Takeuchi 2009). Given such an absence of empirical evidence for this theory-based proposition, it is deemed appropriate, at this stage, to take a qualitative approach to exploring the rms strategic archetypes in the PRC, based on detailed case analyses of some representative rms. It is also considered important to identify the specic HRM activities that follow from a rms particular strategic orientations. Given that a large number of Japanese manufacturers have invested in the PRC and established competitive positions, the pattern of strategic t initiated in the PRC by Japanese rms would provide a strategic benchmark for constituting a potent source of competitive strengths among other manufacturing rms of this country in the future. The present study, therefore, attempts to document how PRC-based Japanese manufacturing units align their HR activities with their business strategies to gain competitive success in the emerging markets in the PRC, using case study data of the ve leading Japanese afliates in China. We expect that this work will help clarify the strategic prototype and its corresponding HR activities in the PRC from a practical point of view. Theoretically, the ndings of the paper will serve as a foundation for formulating more testable hypotheses on strategy-HR alignment by using the quantitative survey data for future studies in this eld. Methodology A case study using the interview method with a multiple-informant research design was carried out to explore strategic human resource activities in mainland China. This interview survey of a sample of ve leading Japanese manufacturing rms in and around Guangzhou, the capital of Guangdong province in China, was conducted in 2003. Guangzhou is wellknown as a nancial center of the southern part of mainland China as well as a manufacturing heartland alongside the three other active cities in Guangdong province: Shenzhen; Zhuhai; and Shantou. It is also widely known that the city has been developed through intensive foreign direct investments by Japanese, Hong Kong, US, and UK multinationals, and has been particularly inuenced by Hong Kongs economy and trading systems. One-day open-ended interviews with two to three managers for each sample afliate were undertaken. For the interview survey, we followed the method of multiple-informant research, asking to interview, for each sample afliate, one top manager (a general or a vice general manager in some cases) and two functional managers (the heads of the human resource and production departments). Given that the research seeks not only to explore an afliates entire business and market strategy, but also to obtain detailed information on the human resource and production management practices, it was necessary to interview a top manager as well as a functional manager. Clearly, information associated with an

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afliates strategic activities needs to be collected from the top management executives who are expected to have much information on the afliates strategic plans and objectives, whereas information relating to functional and divisional activities, involving HRM and production management, can be best obtained from the respective department heads; that is, the human resource and production directors. Thus, we utilized this method to examine the links between strategy and HRM. After our interviews, we asked each top manager to answer structured questionnaires that contain items of afliates strategic orientations and background information. Completed top managers questionnaires were returned to the second authors afliation using the stamped envelopes that were provided with the questionnaires. The reason why we distributed structured questionnaires to top managers was to ensure the compatibility of our open-ended interview ndings using different survey methodologies. Also, the complementary use of structured questionnaires with open-ended interviews helps us to effectively collect the basic information of afliates without spending much time on hearing their demographic information during the limited interview time. Table 1 summarizes the background information on the ve PRC-based Japanese afliates investigated. The target samples consisted of three electrics and two automobile companies. The major reason why these industries were chosen was that we wished to control the technology-level across afliates. Prior research has argued that the level of technology possessed by an afliate signicantly and directly inuences the strategic process of the afliates HRM practices (e.g., Delaney and Huselid 1996; Datta, Guthrie and Wright 2005). It has been reported that, in the PRC, the major industries of Japanese investors are textiles, electrics, food processing, etc. However, one study advocates that the technology level of the electronics industry is not necessarily comparable with those of the textile and food processing industries (Yuen and Kee 1991). Moreover, some SHRM studies recommend that afliates strategic activities and their response to internal management including HRM policies and practices should be observed from the careful sampling of some leading and progressive industries (Becker and Huselid 1999). The speed and the nature of environmental change and its reaction to HRM are different across industries with different levels of technology (Datta et al. 2005). For these reasons, we focused on choosing sample afliates belonging to high-technology based industries (Yuen and Kee 1991), and thus did not include textile or food processing industries. The size of an afliate is another important variable that should be carefully controlled in qualitative research of this type (Colins and Cordon 1997). The three electric afliates had a similar number of employees, ranging from 606 to 860. Also, two afliates that were classied as belonging to the automobile industry (Companies D and E) had 2100 and 2436 employees respectively, indicating that the afliates in the two samples had a similar number of employees. Thus, the possible extraneous effect caused by the different number of employees within the same industry was controlled. Except for Company E, the year of establishment of each company in mainland China was 1992 or 1993, indicating that most of the companies had been operating in mainland China for 10 years or more. All the Japanese afliates took the form of a joint venture with ownership capital being shared with their Chinese counterpart. For Companies A, B, and C, 60 80% of total assets were owned by their respective Japanese parent rms, while the rests were owned by Chinese domestic electric corporations. Companies D and E, which belonged to the automobile industry, had an equity ownership structure that divided capital investment equally between the Japanese and Chinese corporations. Sales in Chinas domestic market as a percentage of worldwide sales were much lower in the three electric companies (10%, 30%, and 2% for Companies A, B, and C, respectively) than in the two

Table 1. Background information of the ve PRC-based Japanese afliates interviewed. Company B Electrics Electrics Auto industry Company C Company D Company E Auto industry

Company

Company A

Industry type

Electrics

Background Interviewees 1 vice general manager, 1 prod. manager, and 1 HR manager

1 vice general manager, 1 prod. manager, and 2 HR managers

1 general manager, 1 prod. manager, and 1 HR manager Motorcycle 1992 2100 5 50 million 50%

1 vice general manager and 1 HR manager Car 1998 2436 26 139.9 million 50%

Main products

Electric iron

1992 606 2 40 million 80% 30% 30% 65% 2% 6 million 70%

Electric shaver, hair drier, etc. 1993 860 6

1 general manager (double as the prod. director) and 1 HR manager Micro-motors for electric devices (CD-ROM/ VTR) 1993 855 7

10.6 million 60%

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75%

95% 97%

60% 100%

Establishment year Number of employees Number of Japanese expatriates Total assets (US$) % of investment by Japanese parent % of local procurement % of sales in domestic market

10%

2457

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automobile companies (97% and 100% for Companies D and E, respectively). This was partly due to the differences between the international strategies generally pursued by the electric and automobile industries. Automobile industries tend to adopt multi-domestic strategies, whereas electric industries tend to adopt global strategies, which reect the extent of local market orientations and penetrations of overseas afliates (Prahalad and Doz 1987; Bartlett and Ghoshal 1989; Harzing 2000). Nonetheless, our interviews with top managers at Companies A, B, and C revealed that these electric afliates in the PRC were shifting from an export orientation to a domestic market orientation because of the rapid growth and importance of the PRC market in their businesses. Moreover, the managers interviewed at Company C, who reported that only 2% of total sales occurred in Chinas domestic market, added that a number of products were sold in mainland China via Hong Kong, and that these products were treated as export products. The sales of these products in China were thus counted as export sales, which deated the domestic share in their accounting data. Thus, the actual percentage of total sales that was made up of sales in China in Company C must be considerably higher than reported. Results Strategy types of the PRC-based Japanese afliates For the purpose of collecting information necessary for understanding how each company attempts to establish a competitive position in the PRC market, we performed interviews with top management employees in each company. Specically, the following information was collected from the afliates top managers to classify the afliates competitive strategies in the PRC: (1) the top management perceptions of the afliates competitive strength; (2) timeseries changes to the main product prices; (3) the amount of annual product rollout; (4) target clientele for each afliate; (5) and the degree of technology transfer from their Japanese parents. The ndings from the interviews enabled us to classify the competitive strategies of the ve Japanese afliates into three generic strategy types: (1) cost reduction strategy (Companies A and D), (2) differentiation strategy (Company B), and (3) quality enhancement strategy (Companies C and E). Strategy of companies A and D (cost reduction strategy) Company A specializes in producing electric irons that are distributed both at home and abroad. Of the total assets of US$10.6 million, 60% were invested by a Japanese parent rm of Company A and 40% was invested by a local partner. The Japanese parent of Company A manages more than 200 overseas afliates in almost every continent (including 46 units in the PRC), and is well-known as one of the most comprehensive worldwide electric and electronic manufacturers in the world. According to the vice-general manager of Company A, extensive cost reductions are the major source of competitive advantage for this company, especially during the erce competition in the PRC iron market of recent years. As with other Japanese electric and electronic multinational corporations (MNCs) in the PRC, high-quality production based on rm-specic, high technologies served as a foundation for meeting the market requirements of customers, which led to an increase in economic performance for Company A in the past. Furthermore, with a highly reputable global brand name that had been established by its Japanese parent, Company A could establish, from the outset, a strong competitive position in the PRC. In particular, at the beginning of its operations in the PRC in the early 1990s, the products that had its brand name attracted considerable attention among upper-income consumer groups, and thus

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Company A chose a focused strategy through which the company offered its high-quality products to such a selective consumer segment. However, the price competition has become increasingly heated among multinationals from Europe and Asia, which has prevented the expansion of Company As market share in mainland China. According to marketing research conducted by Company A, the potential demand of the PRCs electric iron market is for about four million iron sets per year. Company A can currently sell about 230,000 sets annually (6% of the total demand), which makes it the third biggest of all the iron makers in the PRC, following a European MNC (25%) and a Taiwanese MNC (22%). Given such a harshly competitive environment, Company A now places an overwhelming emphasis on cost reduction, restructuring the entire business process. The strategic changes Company A has made to cope with the emerging market competition can be observed in how it has succeeded in reducing the cost of its products. In 1998, it sold an anchor iron product for RMB 295, whereas a similar model currently sells for RMB 138. The price of the iron produced by Company A has dropped by more than 50% over the last 4 years, despite the fact that the commodity price estimated by the retail price index (RPI) in the PRC shows just a slight decline from 1999 to 2002 (National Bureau of Statistics of China 2003). According to a vice-president of Company A, such a strategic shift from a focused strategy to a cost-reduction strategy has enabled this Japanese company to cut into the mass market of the PRC, and to compete with other competitors on costs and prices. A very similar scenario was also found in Company D, which started its motorcycle manufacturing and sales operations in 1992 in Guangzhou. The Japanese parent company of this equity joint venture is well-known as a worldwide automaker that offers a range of automobiles, motorcycles, and other power equipment to the global market. In particular, over almost 50 years since its establishment, this MNC has manufactured a cumulative total of over a hundred million units in 25 countries. Company D attempted to compete in the market by maximally exploiting the reputational and technological advantages inherited from its Japanese parent. At the beginning of its PRC operation, its basic strategy was to produce quality motorcycles and appeal to selective customers in the high-income bracket. However, as Company D has penetrated into the PRC market, some of its competitors (mostly Chinese state-owned corporations (SOCs)) grew into strong competitors with a higher product quality than before. They eventually started to offer middle-to-high-quality products at very low prices, thus threatening Company D. Then, the market share of Company Ds motorcycles hit a ceiling 7 years after its establishment in the PRC. In 1999, the companys production volume and net sales peaked with 330,000 sets being produced in that year. After this, Company Ds market share gradually shrunk due to the growing competition among motorcycle manufacturers. In an attempt to increase its share of Chinas motorcycle market, Company D made a strategic decision to enter into the lower end of the market by slashing the prices of its mainstream product models. A 125cc motorcycle was offered for RMB 15,000 in 1992. However, a similar model with the same air volume displacement sold for around RMB 5000 to 6000 in 2002. In other words, Company D cut the price down to a third of the original price established at the beginning of its PRC operation. According to the general manager, Company Ds share of the motorcycle market has increased during the last 2 years, due largely to the success of this strategic change and its corresponding efforts at reorganization. As such, the major strategic shift this company is aiming to accomplish at present is expanding its market share by switching its target from the high-end to the mass market segment.

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Thus, Company D currently adopts a cost reduction strategy to cope with the emerging competition in the PRCs motorcycle market. Strategy of company B (differentiation) Company B produces various home electric appliances for both overseas and domestic (Chinese) markets, including electric shavers, hair dryers, electric toothbrushes, and air puriers. Electric shavers are its biggest-selling product: a total of 10 million sets were sold during 2002, which accounted for 60% of its total production volume. Following the multi-domestic strategy recently pursued by its Japanese parent company and the increased demand for home electric appliances among Chinese consumers, Company B has increased the percentage of domestic sales in China to the net ones from 5% to 30% during the past few years. Now, the situation is that in order to establish a long-term competitive advantage in the PRC market, Company B is focusing to a great extent on attracting Chinese customers through the on-site development of a wide range of product lines that no competitor has ever been able to challenge. In reality, the core R&D function resides at the head ofce of Company B in Japan, but currently, some of the new products, especially most of the electric shaver models, are designed and engineered independently by Company Bs R&D department in Guangzhou. The vice-general manager mentioned that this on-site R&D function inside Company B allows the company to offer a number of new products that suit Chinese customers. Company B introduces around 40 new shaver products into the PRC market every year, much more than any of its competitors, especially those from Europe, including Philips and Braun. According to the vice-general manager, with such a wide variety of product models, Company B is the top seller along with Philips in Chinas domestic market. Surprisingly, the sales volume of Company B has doubled during the past 5 years, putting the afliate ahead of its competitors. The vice-general manager stated that the company was, at that time, making a concerted effort to overtake Philipss share of the PRC market during the next 3 years. Such a product differentiation and innovation strategy has contributed signicantly to the establishment of Company Bs competitive position in the PRC market. Strategy of companies C and E (quality enhancement) Company C was established in 1993 with a capital of US$6 million invested jointly by a leading Japanese electronics producer and a local partner for the purpose of producing and supplying high-technology-based electric parts in mainland China, including various electric motors that can be used in computers, camcorders, VCRs, and audio products. When Company C was established, 70% of its total assets were invested by its Japanese parent and 30% by the Chinese local investor. With a total of 855 employees, Company C earned net sales of US$36 million in 2002. These indicators do not signicantly differ from those of two other electronics afliates (Companies A and B) investigated in the present study. Company Cs Japanese parent, also globally recognized, focuses on the development of miniaturization technologies based on high-density mounting and other new technologies stemming from its own unique perspective and knowledge. Company Cs strategic mission is to supply high-technology-based, high-quality IT components and devices not only to the overseas business units under this MNC, but also to other high-tech ventures operating in the PRC, especially those from Taiwan and Korea. According to the general manager, the micro-electric motors that Company C produces by exploiting miniaturization technologies are in considerable demand from Korean and Taiwanese

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manufacturers who do not possess appropriate technologies or know-how to manufacture such motors themselves. By taking advantage of rm-specic technologies that the parent rm has developed and accumulated over time, Company C the parts plant of the parent rm has extended its business to other manufacturers beyond the parents production units. Thus, it can be said that Company C has started to move beyond the boundary of this MNCs global value chain network, and to exploit the local markets in China with its manufacturing and technological strengths. Like other rms with a strong technological orientation, maintaining and continuously improving product quality is the major strategic goal of Company C in its pursuit of high nancial performance in the PRC. The general manager said that neither cost reduction nor differentiation is the issue for this components plant, as the product (micro-electric motors) offered by the company itself is based on its rm-specic technology. He also said that in order to keep its technological advantage, the company must always focus on continuous quality enhancement. Moreover, Company C specializes in the production of value-added products that can allow the afliate to increase its protability in the PRC. Hence, how to establish itself as the dominant producer in the micro-motor market and how to expand the market in the PRC through a quality enhancement strategy are the major concerns of Company C. Company E is another PRC-based Japanese afliate that can be classied as a quality enhancement company. This automobile manufacturer, which is an equity joint venture between leading Japanese and Chinese carmakers, started its PRC operation in 1998. It focuses on manufacturing and marketing only two car models in the PRC: a ve-seat middle-sized sedan with three variations that comes in different engine sizes (i.e. 2000cc and 2300cc), and a seven-seat multi-function car with a 2300cc engine. The choice of product lines offered in the PRC reects the marketing research conducted by this company prior to starting its PRC operation. According to the vice-general manager, our marketing surveys showed that the Chinese customers prefer to own more luxury models than we thought. They seemed to drive the models that are sold and driven in North America. Taking these marketing research results seriously into account, Company E made the decision to focus only on the above two executive car models that had already been well received in the US market. Surprisingly, Company E sold its cars at much higher prices than most other car manufacturers in the PRC: its main car model was around RMB 298,000 (US$38,000) as of the survey, despite the fact that European and other Japanese automobile makers generally sold the same car for less than RMB 150,000 (US$19,000) at that time. Even with its higher prices, this company outperforms others in the PRC car market because of its product quality. Thus, establishing and maintaining a high-quality production of luxury cars in the PRC forms the basis of Company Es success in the PRC market. The vicegeneral manager stated that in terms of quality, Company E had already met the expectations of its Japanese parent. According to him, the car quality inspection conducted by its Japanese parent revealed that the company made cars of higher quality than the 16 other manufacturing sites managed by the parent throughout the world. Overall, our interviews with top management of the ve PRC-based Japanese manufacturers revealed the way they adapted themselves to Chinas emerging market competition, which can be classied into the following three strategic types: cost reduction; differentiation; and quality enhancement strategies. This classication of the ve Japanese afliates into the three business strategies were crosschecked based on an analysis of our follow-up survey data that were collected using structured questionnaires over the same respondents. In this questionnaire, we included an 11-item measure of business strategies

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developed by Zahra and George (2000) that subsumes cost reduction, product differentiation, and quality-enhancement strategies. Consistent with our interview ndings, we found that mean scores of a cost reduction construct showed higher in Companies A and D than in the three other companies. Also, the score of differentiation construct in Company B was highest among the ve samples. Finally, Companies C and E showed higher scores in quality-enhancement than the three other companies did. These additional and consistent ndings from the different methodological approach may serve as supporting evidence that our classication using an interview method could be convincing. Human resource management practices under the three strategy types Our interviews with top management of the ve PRC-based Japanese manufacturers revealed the way they adapted themselves to Chinas emerging market competition, which can be classied into the following three strategic types: cost reduction, differentiation, and quality enhancement strategies. In the following section, we will document the ndings of our interview surveys with HRM and production managers, which will the increase understanding of the links between HRM practices and the three strategic types in the PRC. Table 2 summarizes the interview surveys on HRM practices and business strategy links.

HRM practices under the cost reduction strategy (companies A and D) As shown in Table 2, we found that both Companies A and D, which adopted a cost reduction strategy, had the following distinctive characteristics in terms of recruitment and employment policies: (1) recruitment of employees mainly from provincial areas; (2) high reliance on contingent workers; (3) short-term employment policy; and (4) reduction of the number of Japanese expatriates within the afliate. All these practices are considered to directly reduce the personnel expenses within the afliate. For example, Company A was found to have three employment contract options that were differentiated by the period of employment: 1 month; 9 months; or 1 year. The period of an employment contract for each employee is determined primarily by the results of screening tests of recruits as well as the work attitudes and skills they show during their probation period. High performers can choose a 1-year contract with the option of renewal, while those who do not perform well are forced to choose either the 9-month or 1-month contract. Since electric irons are, by nature, a seasonal commodity, as they sell well during spring and autumn but not during winter, a 9-month contract was prepared to reduce unnecessary employment costs during the winter season. As such, Company A pursues a exible management of human resources with an emphasis on an effective use of contingent workers that enables the company to balance the human resource and production inputs and outcomes. Company D also pursues a exible employment policy by offering 1-month, 3-month, and 1-year contracts for employees. Out of the 2100 employees 1400 were involved in operational jobs on the shop oor of Company D. Of these 1,400 direct workers, 300 were classied as temporary workers whose labor contracts were relatively short; that is, they were on a monthly basis for part-time workers and on a seasonal (3-month) basis for other temporary workers. These contingent workers are called assistants in the organization and are normally assigned to operational jobs that do not involve skillful tasks: they are treated differently from full-time employees in terms of the wage level, the welfare scheme, and certain other incentive systems. Thus, the use of a contingent workforce helps the afliate to reduce personnel expenses and ts well with the corporate-level cost reduction strategy that Company D is currently pursuing.

Table 2.
Company B Differentiation Buy & Make Results orientation Emphasis on the recruitment of R&D personnel Low reliance of contingent workers Long-term focus (Contract term: 1 year, but almost all employees renew contracts) Medium number of Japanese expats Person-Position t principle Seniority (length of service, experiences, etc.) considered Person-Organization t principle Large number of Japanese expats Small number of Japanese expats Person-Position t principle Seniority (length of service, experiences, etc.) considered Low reliance of contingent workers Long-term focus (Contract term: 1 year, but almost all employees renew contracts) High reliance on contingent workers Multiple focus (Contract term: 1 month, 3 months & 1 year) Make Long-term orientation Emphasis on the recruitment of administrative personnel Buy Flexibility focus Recruitment of employees partly from provincial areas Quality enhancement Cost reduction Quality enhancement Make Long-term orientation Recruitment of employees within Guangzhou city No reliance of contingent workers Long-term focus (Contract term: 1, 3, 5, & 9 year(s)) Company C Company D Company E

Summary results of the strategic-HRM alignment of the ve PRC-based Japanese afliates interviewed.

Company

Company A

Strategic focus

Cost reduction

HRM characteristics -Core philosophy -Basic policy -Recruitment and stafng

Buy Flexibility focus Recruitment of employees mainly from provincial areas

High reliance on contingent workers Short-term focus (Contract term: 1 month, 9 months, & 1 year)

Small number of Japanese expats

Very large number of Japanese expats Person-Organization t principle

-Performance appraisal and compensation

Person-Job t principle

Short-term, performance-based (Monthly bonus system)

Seniority (length of service, experiences, etc.) considered

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-Training and development

Technical most

Team performancebased (for shop-oor); Performance & Market-based (for R&D) Both managerial and technical

Technical most; language (Japanese) & disciplinary education emphasized; Incorporating strong corporate philosophy Long-term focus Very high

Technical most

Both managerial and technical; Incorporating strong corporate philosophy

Short-term focus Moderate

Long-term focus

Multiple focus Moderate

Long-term focus

2463

-Belief that the parent companys HRM is competent

Low

Very high

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Another important step in employment policy that Companies A and D took to align their overall cost reduction strategy was that both companies reduced the number of Japanese expatriates, employing only a small number of them. In Company A, only two Japanese expatriates were employed out of a total of 606 employees in the PRC operations, a 50% decrease in the number of Japanese expatriates over the past 3 years. In a similar vein, only ve expatriates out of the 2100 employees in the PRC were assigned from the Japanese parent to Company D. As with other Japanese overseas afliates, the personnel costs of Japanese expatriate assignments were prohibitively high, and so it became an inordinate burden to cost management. Thus, reducing the number of Japanese expatriates by replacing them with competent local managers seems to be consistent with the cost reduction strategy these companies are pursuing. Furthermore, the appraisal and compensation practices of Company A were found to be well designed to match the cost reduction strategy they were striving to follow. In particular, the HR department of Company A had increased the portion of the special cash payment (bonus) to an extent that reected the short-term performance results of an employee in the compensation package. As in other Japanese companies, individual differences in terms of work achievements and performance are reected in the amount of bonus each employee receives. At the time of the interview survey, around 21% of the total amount of pay for each employee was made up of the bonus. In order to further compensate for an employees work performance, the HR department of Company A set the objective of increasing this portion up to 40%. It should be noted that Company A modied the bonus practices of its Japanese parent company, which normally pays a bonus twice a year. In Company A, however, it started to be paid on a monthly basis. With this modication, the short-term work performance of employees is immediately compensated in the form of a monthly monetary reward. This modied short-term bonus system enabled the company to succeed in motivating part-time and seasonal workers, who have little interest in the upward career mobility in this organization. HRM practices under the differentiation strategy (company B) Company B has adopted a unique shop structure for producing a wide variety of electric shaver models that are continually developed by the companys on-site R&D ofce. To replace the traditional assembly line production typically seen in this type of electric factory, Company B introduced a module production system that ts well with the differentiation strategy the company is pursuing. In Company B, the belt conveyor production lines were replaced by a number of module work units on the shop oor. Each work unit is composed of ve to six production workers who assemble all the shaver parts and make the nished products. The main advantage of this system is that every work unit can independently assemble the different types of nished products at the same time, and thus the system is suitable for the production of a variety of models and products. According to the production manager of Company B, the system can also cope with the adjustments to the production methods that are necessary in the continuous development of new product lines. Indeed, more than 40 models are developed annually at Company Bs local R&D ofce. This unique work system was found to signicantly affect the management of human resources on the shop oor. Perhaps the aspects that best characterize human resource management under the differentiation strategy are Company Bs compensation policy and practices. Our interviews with human resource and production managers of this company revealed that there are essentially two compensation characteristics that distinguish Company Bs HRM practices from those of others. The rst is the policy that emphasizes

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rewards for team-based performance mostly among employees on the shop oor. Replicating the compensation practice that exists in the Japanese parent company, the basic policy of Company Bs compensation is to closely link an employees regular cash payment to his/her rank. However, to compensate the employees work performance in his/her monetary reward to a large extent, Company B increased the portion of the total compensation scheme that is made up of a special cash payment (bonus). In this sense, Company B has developed a performance-based compensation policy that ts well with its differentiation strategy. More interestingly, this special cash payment is given to employees based on their work as part of a team; that is, Company B has adopted a teambonus system. This unique compensation system was developed in the company without any transfers or inuence from our Japanese parent company, said the production manager. The introduction of the team bonus program in Company B was followed by the introduction of Company Bs module production system in which strong cooperation among employees within each work unit is highly encouraged. The amount of the bonus paid to each employee is determined by the team-based performance evaluation results. The evaluation results depend on the degree to which each module unit can attain the production goals and objectives set by the team leaders of each unit. In addition, some of the high-performing and/or promising employees are individually rewarded and become strong candidates for promotion. It is important to note that the team-based bonus program and the corresponding appraisal methods were developed independently by Company B, along with its corporate-level differentiation strategy. Another key HRM policy that characterizes a differentiation-focused company can be observed in the management of R&D personnel in Company B. With the increased strategic importance of the R&D section under the differentiation and innovation strategy, Company B places a strong emphasis on motivating R&D employees so that they can continuously dream up new product models that may stimulate customers willingness to buy. In reality, the incentive system for R&D employees is fairly independent in this company. First, Company B provides a relatively high level of incentives (basic wages) to designers and engineers in the R&D section. Second, the portion of total compensation that is made up of special cash payments including bonuses is higher for R&D employees than for other staff in Company B. This indicates that performance-based compensation is practiced to a greater extent in the R&D section than in other sections. Third, a part of the special cash payment is closely tied to the market success of Company Bs products. In other words, R&D staff who are involved in developing a new shaver model that succeeds in the market will receive high evaluation results that will be reected in the amount of special cash earnings that they enjoy. All these aspects of Company Bs HRM policies are aligned vertically with the differentiation strategy that the company is pursuing. Basically, Company B focuses on rewarding employees based on their performance. This tendency is much more obvious in the R&D section where new products are created and brought to the market. A results-oriented policy is consistent with the very nature of differentiation-focused rms whose success comes from offering a new line of products that can stimulate consumers buying behavior. HRM practices under the quality enhancement strategy (companies C and E) We observed from the qualitative analyses of the ve companies that there was a certain degree of similarity in the HRM practices of the two quality-enhancing afliates; namely, Companies C and E. It is notable that these two PRC-based afliates that adopted a quality enhancement strategy were found to have a strong tendency to train and develop their

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human resources from a long-term perspective, which is typically seen in many Japanese rms in Japan. For example, both companies adopted a similar recruitment policy of hiring potentially high-quality human resources rather than developing a low-cost workforce. At the time of our interview, Company C placed an emphasis on hiring administrative staff and conducted a very careful screening process in order to hire employees who could be easily trained and educated in the companys organizational culture that focused on high quality. Honesty, faithfulness, and a sense of loyalty were highly valued during the screening process. As the HRM manager said: The major reason why we seek to hire this kind of employee is that we desire to nurture employees with a strong quality consciousness. Thus, the HR department of Company C carefully screens for potential workers whose personality is compatible with the quality-focused nature of the company. The company pursues quality enhancement by uncompromisingly practicing its parent companys management methods introduced by the general manager from Japan. He was also responsible for the head of production division of this company, and has exercised strong leadership in this PRC-based afliate. Unlike the cost reduction rms that extensively hire recruits from provincial areas, Company E annually recruits fresh graduates only from within Guangzhou where the wage standards of employees are relatively high. The reason for this is that the company prefers to employ workers who have the technical and academic background needed to carry out highquality work within the organization. Another employment-related policy in Company E is the adoption of relatively long-term employment contracts. The company offers four different kinds of labor contracts: 1-year, 3-year, 5-year, and 9-year contracts. Such lengthy contracts are quite rare in the PRC. According to Company Es HR manager, the contracts are automatically renewed for most employees, so employment tends to be long term. Both Companies C and E have invested a large volume of capital in employee training and development. Company E conducts formal training programs 10,000 times a year. Company C provides not only technical training, but also language (Japanese) and disciplinary training to help employees t in well with the climate of this quality-centered Japanese organization. Evaluation and reward systems are closely linked to employees participation in the quality control (QC) activities and training, and other development programs. As such, the evaluation and reward systems of these companies are more processoriented than those of other companies. Interestingly, the HR managers of these two qualityfocused companies reacted in a similar way to our question asking if the parent companys HRM is successfully applied in the PRC-based afliate. They answered very much in the afrmative, adding that localization is of little importance in the PRC operation as it might involve a loss of quality in production and management. It appears from the ndings that a long-term development policy, which can be traced back to their Japanese parent companies, is an important aspect of the quality enhancement strategy that these companies adopt. Discussion With the emerging but increasing market competition in the PRC, how rms can outperform competitors through the management of Chinas abundant and high-quality human resources constitutes a major challenge for rms seeking to establish competitive advantages in the PRC (Zhao 2008; Zhu, Cooper, De Cieri, Thomson and Zhao 2008). Following the resource-based view of strategic management research (Barney 1991) and congruence theory of organizational research (Boxall and Purcell 2003; Lengnick-Hall and LengnickHall 1988; Milliman, Von Glinow and Nathan 1991), prior SHRM studies have suggested that a vertical t between business strategy and its supporting organizational policies and

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practices would constitute a potent source of competitive advantages in the market. This study has extended such conceptual views to the business units of Japanese MNCs operating in mainland China, documenting the ways in which the ve leading PRC-based Japanese manufacturers align their HRM policies and practices with their business strategies in the PRC market. The ndings and implications of the study are summarized below. Our interviews with general managers (or vice-general managers) revealed that their strategic orientations in the PRC market can be classied into three types: cost reduction; differentiation; and quality enhancement strategies. This nding is partly consistent with Porters (1986) framework of competitive strategies that categorizes MNCs strategies into cost leadership and differentiation strategies. The ndings indicated, however, that, in addition to these two strategies identied by Porter, there is an independent strategic dimension of quality enhancement in which some PRC-based Japanese afliates compete in the emerging PRC market. Some recent studies have tended to treat quality enhancement or high-quality strategies as a distinctive competitive strategy that can be used as a lens through which to analyze the strategy-HRM alignment (Schular and Jackson 1987; Sanz-Valle, Sabater-Sanchez and Aragon-Sanchez 1999; Zahra and George 2000; Ulrich and Beatty 2001). In this respect, this study has provided additional evidence that the three strategic typologies of quality enhancement, cost reduction, and differentiation are valid among Japanese manufacturers who have to cope with the erce competition in the emerging PRC market. As the PRC market becomes increasingly complex, global, and competitive, it is recommended that future studies explore some other strategic dimensions specic to PRC-based rms. Moreover, our interviews with HR and production managers of each sample afliate claried that the companies HRM policies and practices can be aligned with their competitive strategies in the PRC. Consistent with the contingency notion of SHRM (e.g., Takeuchi 2009), it was found that HRM policies and practices are greatly contingent on an afliates upper-level business strategies. Specically, the companies that employ a cost reduction strategy (Companies A and D) exclusively adopt short-term, exible HR policies in order to greatly reduce personnel expenses. Other HRM practices including compensation and training are also aligned with this exible policy as well as a corporatelevel cost reduction strategy. The core HRM philosophy of such cost reduction companies is to buy or acquire human resources and thus these companies rely on external labor markets surrounding them. On the other hand, the company that adopts a differentiation strategy (Company B) emphasizes HRM in the R&D section. Performance-based compensation is extensively practiced in this innovative company. The basic HRM policy of this afliate is not process-oriented, but results-oriented, whereby an employees role in the market success of each product is highly valued. This companys HRM philosophy is to mix the two approaches of buying and making human resources. In addition, those afliates that adopt a quality enhancement strategy (Companies C and E) place a huge emphasis on replicating the HRM policies and practices employed in their Japanese parent rms. Their corporate HRM procedures are thus very similar to those of the Japanese head ofce. Long-term employment and HR development are salient among these manufacturers. It appears that a strong commitment to quality may require a Japanese HRM model that focuses on quality enhancement. The core HRM philosophy of these companies is clearly to make human resources within the rm that can contribute to the upgrading and maintenance of unparalleled product quality. The above ndings regarding the links between HRM policies and business strategy are similar to those of some empirical studies carried out in Western research contexts. For example, Schular and Jackson (1987) point out that those rms pursuing a cost reduction

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strategy have the following organizational and operational characteristics: tight controls (centralization); overhead minimization; and the tendency to pursue economies of scale. Therefore, it is argued that a reduction in the number of employees and/or a reduction in wage levels might constitute the basic HR policies of this type of organization (e.g., Schular and Jackson 1987; Sanz-Valle et al. 1999). In their study of a US manufacturing plant, Youndt, Snell, Deana and Lepak (1996) report that the low-cost strategy tted well with what they describe as an administrative HRM policy including hourly pay, individual incentives, results-based performance appraisals, and so forth. Moreover, Miles and Snow (1984) and Khatri (2000) point out that HRM policies among differentiation rms tend to have a strong results orientation with the intention of developing a large number of innovative and creative employees. For instance, in his study of 194 Singaporean rms, Khatri (2000) found that innovative rms tended to introduce a more performance-based compensation system than those with a strong cost orientation. Sanz-Valle et al. (1999) and Ulrich and Beatty (2001) reported that rms using a differentiation strategy will compensate employees in relation to their competencies. Finally, Schular and Jackson (1987) looked at a US-based Japanese automobile manufacturer as an example of a company that pursued a quality enhancement strategy, and showed that a long-standing policy in the development of its human resources could be a major source of competitive success in the US. The similarity between the ndings of the current study and those of the above previous studies suggests that the ndings and evidence related to the strategy-HRM links in Western or other market economies can be practically used, to some extent, to see the ways rms in the PRC align their HRM policies and practices with Chinas emerging market environment. Therefore, the study suggests that certain types of HRM policies and practices t well with particular strategic orientations regardless of the cultural or geographic context. This point may generally support the recent assertion made by Becker and Huselid (2006) in that the idea of strategy-HRM t is convincing for conferring the competitive strength on rms. Furthermore, the ndings of the study offer a partial but signicant insight into the modication processes of HRM policies and practices in a cross-cultural setting, which has hitherto mainly been a concern of international HRM (IHRM). Some prior research in this eld (Bird, Taylor and Beechler 1999; Bird and Beechler 1995; Takeuchi 2005; Taylor, Beechler and Napier 1996) explained the modication processes of HRM practices in Japanese MNCs subsidiaries, and identied several determining factors that may affect the local adjustment of the parent companys HRM practices. One key consistent nding in this stream of literature is that the beliefs shared by the top management team of overseas afliates strongly affect the choice of HRM practices in the local setting (Taylor et al. 1996; Bird et al. 1999). To be more specic, if the afliates top management believe that the parent companys HRM practices are both competent and applicable to different contexts, then the original management template transferred from its Japanese parent rm can be sustained and reinforced. On the other hand, if the afliates executives believe that the parent companys HRM practices are both incompetent and context specic, then the HRM template will be signicantly modied in the local environment. The present study of some leading Japanese manufacturers in Guangdong province adds to such ideas by clarifying the processes by which the HRM template adopted by Japanese manufacturers in the PRC can be maintained or modied. In particular, the study found that an afliates choice of competitive strategy to help it survive in the PRC market determines the extent to which the afliate adjusts the HRM template used by the Japanese parent. Finally, the present study has attempted to document how PRC-based Japanese afliates using different strategic approaches adopt and emphasize different sets of HRM

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policies and practices in the manner by which HRM is vertically aligned with their competitive strategies in the Chinese market. However, as this is only a preliminary attempt to do this, further investigation is needed to empirically test the links between strategy and HRM by taking not only a qualitative but also a quantitative approach. A substantial body of empirical research that tests the contingency t between strategy and HRM in relation to the performance consequences of rms in the PRC would help to generalize the ndings of the study and provide a better understanding of this relationship.

Acknowledgement
The work described in this paper was supported by (a) the Grant-in-Aid for Scientic Research (B) funded by the Ministry of Education, Culture, Sports, Science, and Technology (MEXT), Japan (Project No. 19730264), (b) Competitive Earmarked Research Grants funded by the Research Grant Council of Hong Kong Special Administrative Region, China (Project No. CityU 1120/02H and CityU 141007), and (c) Departmental General Research Funds of the Hong Kong Polytechnic University (Project No. 4-ZZ71). The authors are grateful to all the companies and managers who participated in our survey for making this study possible.

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