Chinese Medium Manufacturing Firms’ Strategic Shifts (OEM to OBM) Along with Performance from the Perspective of Organizational Capability

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Chinese Medium Manufacturing Firms’ Strategic Shifts

(OEM to OBM) Along with Performance from the

Perspective of Organizational Capability

-‐-‐-‐-‐Study on Jinjiang Medium Footwear Manufacturing Firms

Advanced International Business and Management (Dual Award)

Word count: 15460

Master Thesis

Supervisors: Emmalinde Roelofse & Rudi de Vries

Researcher: Cherish Xiumei Wang

Student No. S2657732 (Groningen)

Student No. 130494494 (Newcastle)

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Abstract

The aim of this thesis is to explore the factors that contribute to the medium sized Chinese manufacturing firms’ strategic decision-‐making. Most Chinese manufacturing firms started up with OEM. Some of these firms turn to OBM or Hybrid mode. Both internal and external factors cause firms to change. This thesis combines relational theory (especially partnership, namely “guanxi” in Chinese), resource-‐based view, organizational theory and dynamic capability to discover to what extent the concepts from these theories can contribute to the understanding of a firms’ strategic decisions. This thesis uses 9 cases, 3 for each type of organization (OEM, OBM and Hybrid). All the 9 organizations are from medium footwear manufacturing firms in Jinjiang, southeast of the Fujian province in China. With the information from the cases, the research question could be answered. A within type comparison and a between type comparison revealed significant differences among the organizations. The findings of this thesis provide a detailed view on firms that are making strategic shifts and contribute to academic research into firms’ behaviors.

Key words: OEM, OBM, Hybrid, Organizational Theory, Dynamic Capability

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Lists of Tables and Figures

List of Tables

Table 1.1: Comparisons between the Attribution Rights of OEM and OBM

Table 1.2: Comparison between OEM and OBM

Table 4.1: Interviewees Information List

List of Figures

Figure 1.1: Smiling Curve: adapted from Schih (1996)

Figure 2.1: Theoretical Model

Figure 2.2: Conceptual Model

Figure 3.1: Research design

Figure 3.2: Map of South-‐east China showing Fujian, Guangdong and Taiwan

Figure 5.1: Updated Model-‐Factors Contributing Firms Turning into Hybrid

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List of Acronyms and Abbreviations

OEM: Original Equipment Manufacturer

OBM: Original Brand Manufacturer IC: Industrial Cluster

RT: Relational Theory RBV: Resource-‐Based View

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Acknowledgements

It is a pleasure to thank those who help me a lot during this thesis time.

Firstly, I would like to thank both of my supervisors, Dr. Rudi de Vries and Emmalinde Roelofse. With their supports, I made the thesis step by step. It is their academic knowledge, valuable advice and insightful comments that made my thesis possible.

I really appreciate the journalist, Mr. Zhen, who is in charge of the footwear media coverage in Quanzhou City. He shared with me lots of information he collected and introduced me to the chamber of commerce in the local area.

I really appreciate the people who offered me the chance to do the interviews. Especially, I would like to thank my father as he helped me contact some interviewees with his efforts. And I am really grateful for all the interviewees as they have been open to my questions and some of them even tried to make Wechat voice interviews with me, the way they have never done before.

I really appreciate all my friends and family who have helped me during this thesis.

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China has been labeled as “Made in China” for a long time. This situation could be attributed to two reasons. On the one hand, due to the low price of input and high profits extraction, many famous multinationals entered Chinese market. Thus the substantial transnational investments and the flow of capital undoubtedly have made China the manufacturing base for many MNEs (Hu, 2008). On the other hand, most Chinese firms have difficulty in getting access to capital for R&D and only a limited pool of talents was available to develop innovative and high-‐value added firms. Therefore, they have to turn to well-‐known firms to establish strategic alliances, operating as the ‘manufacturing

department’ of multinationals as a business strategy. Chinese firms’ strength lies in their

productivity in manufacturing, which also contributes China to lie in the most powerful OEM position in the global value chain system (Hu, 2008).

OEM stands for Original Equipment Manufacturer, and the term “originated in the 1950s among computer makers who used subcontractors (called OEMs) to assemble equipment for them” (Hobday, 1995, p.49). To be more specific, OEM refers to a firm that produces products to be marked under another firm’s brand name. This process is also called ‘brand-‐sticking production’ (tiepai shengchan), which is the term describing the combination of local manufacturing and foreign knowledge and patents (He, 2001). OEM, as a business strategy, helps most of the Chinese manufacturing firms integrate with the global value chain. But even though this cooperation mode seems win-‐win, Chinese firms are being squeezed as the benefits beggars.

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Since “Made in China” has been one of the Chinese Characteristics and China has been recognized as the OEM production center, many Chinese firms who had worked as OEM struggle to get rid of the label especially when the financial crisis in 2008 made them suffer a lot. Taking toy industry for an example, the manufacturing profits fell from 10% to 6% as an effect of the financial crisis. (Ji & Xie, 2010) Without the competitive advantages to develop a sustainable strategy for the firms and too much dependence on foreign multinationals, most of the OEM firms who stayed in the lowest position of the product value chain try to upgrade their business strategies in China.

Based on the literature review, it is assumed that organizational capability theory (OCT) is of significance in enhancing business development and upgrading, especially in the typically Chinese manufacturing town. Organizational capability derives from the resource-‐based view (RBV); on the one hand, it emphasizes firms’ internal resources and capabilities to achieve competitive advantages, on the other hand, it assumes that firms focus on network connections and relationships as crucial value-‐adding resources leading to better firm performance (Batjargal, 2003; Peng, 2001; Peng & Luo, 2000). Additionally, for the firms’ capability, it is very important that they can manage their abilities and survive in the turbulent environment. Therefore, dynamic capability (DC), regarded as one part of the organizational capability, is also added into the theory part.

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competitive advantages in the footwear industry, some start with their business by the mode of OBM while some are still doing the collaborative model with the foreign firms by OEM even though OBM has been the tendency for all these firms.

The structure of the thesis is as follows: First, the thesis explains the problem in details (problem indication). Secondly, the thesis presents a brief and comprehensive theoretical background of organizational capability theory (OCT) that mainly includes resource-‐based view (RBV), dynamic capability (DC) and relational theory (RT) in the specific context of this study, based on which, by defining and deriving the theories, a related framework will be constructed to make the study clearer (literature review). Thirdly, the thesis follows methodology, analysis, discussion and conclusion.

Problem indication

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OEM as the lowest position in the product value chain is the most prevalent operation mode for most Chinese medium manufacturing firms (Hu, 2008). It is interesting to investigate the nature of OEM mode in shoe-‐oriented firms particularly in terms of specific product value chain they hold. OEM was the first step for many SMEs to start up since they did not have to cover the substantial cost of research and design. As for both parties in the OEM cooperation mode, this particular business strategy seemed win-‐win. For Chinese firms, by doing OEM, they can lower the operational risks and put fewer investments and gain the returns sooner；and it is easier to enter the market since they entry is lower. Besides, they can learn the advanced management methods and production technology from the foreign firms who have the strong brand, then put the knowledge into the practice of their own enterprise building. For the foreign firms, they do not have to burden the factory building and the depreciation of equipment. And they can place the orders flexibly based on the changes of the market demands.

However, after suffering from the financial crisis and the severe competition in the markets, most firms changed their strategies and upgraded from OEM to OBM, even though some still stick to OEM mode. Firms realized that staying in the low position of the product value chain cannot really help them to increase firm performance in the long run and relying on the orders from the multinationals and this kind of dependence can be a serious issue for them, especially when they were facing the financial crisis. To become a better market player, they needed to manage the strategic change process and upgrade their positions in the specific product value chain. This shift is also the main current focus of many Chinese manufacturing firms.

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increase performance. And brand is important when the firms want to enter international markets (Luo, 2006). Chinese firm Haier made a successful example as it entered the American market by strengthening its product quality management to attract foreign customers, as well as to consolidate itself in the American market. Even though brand architecture takes a long time, it is one of the most important strategies that most firms pursue.

Jinjiang, Wenzhou, Guangzhou and West are four footwear manufacturing industrial clusters in China. The strategic change process (from OEM to OBM) is vital for the development of these four clusters that are also the main forces of Chinese footwear industry. Looking into the strategic shift and the firm-‐level performance would be beneficial for these manufacturing firms to evaluate themselves especially when they are changing their strategies. Additionally, networks play an important role in regional business especially in China. The industrial cluster and the networking connect the upstream1_{and
downstream}2_{industry,
which
enables
better
business
cooperation
in
the} footwear manufacturing industry, among the networking business, some firms could adapt the economic environment and survive while some would face some problems ended with rejection of the business circles.

OEM vs. OBM vs. Hybrid

In the past, there were only two types of firms existing in Chinese markets. As two different modes of business operation, OEM and OBM had their own advantages and disadvantages, mainly distinct from the perspectives of technology, production and brand, which could be summarized as follows:

Technology Production Brand

OEM Foreign country Home country Foreign country

OBM Home country Home country Home country

1_{Upstream
industry
refers
to
firms
that
do
the
initial
productions
and
they
provide
essential
raw
material}

and primary commodity for the downstream industry firms. In this thesis, upstream industry in the footwear manufacturing industry could be firms that make semi-‐finished products such as shoe sole.

2_{Downstream
industry
refers
to
the
processing
industry
that
provides
products
for
the
customers.
They}

mainly turn the raw material or primary commodity from upstream industry into the real products that

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Table 1.1: Comparisons between the Attribution Rights of OEM and OBM

Factors OEM OBM

Self-‐owned Brand No Yes

Capacity for Independent Innovation Low High

Profit Margins Low Huge

Dependence on Foreign Firms High Low

Positions in the Global Value Chain Low High

Table 1.2: Comparison between OEM and OBM

Above all, it could be found that Chinese firms suffer a lot in OEM mode. It also presents the economic reality of China, which always lies in the lowest position of the global value chain and it forms the bigger body and two small heads as rugby. Firstly, from the perspective of ‘smiling curve’, they are in the lowest position of value added chain while the product designs and marketing which make the most values are controlled by the foreign firms. And nowadays, there are lots of factors contributing the OEM firms to change their strategies to survive in the turbulent economic environment since the competitive advantages of these firms are disappearing due to the increasing price of raw material, labor force and appreciation of RMB. Thus, the benefits of all these firms have been squeezed and they need to fight and innovate in the competitive markets.

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According to Mudambi et al. (2007), there are three categories in a firm’s value chain activities, namely upstream (input), downstream (output) and the middle. Upstream activities include R&D while the downstream activities normally combine marketing, distribution, brand management and after-‐sales services. However, the middle usually comprises assembly and manufacturing process. As shown in the figure 1.1, Schih emphasized that both upstream and downstream firms capture the higher values while the firms in the middle add the lowest firms in other words; these middle firms stay at the lowest position of the value chains. It is exactly the difference between OEM and OBM firms. As OBM firms apply R&D and obtain the brand development while the OEM firms only deal with the assembly and manufacturing process. They add different values in the smiling curve.

Hybrids refer to the firms that started with OEM mode then transform into OBM mode. Among the hybrids, there are two categories: some firms operate two production lines, which means they keep OEM business as well as OBM business; some are only dealing with OBM business. Due to several factors, increasing number of hybrids occur in the markets. Normally, hybrids have the long-‐term experience of OEM mode and learn more about the international markets. By transforming into OBM modes, these firms have more business development space and they expand their firms into a larger scale. Combining with the advantages of OEM and OBM firms, undoubtedly, hybrids that focus on both markets will be more adventurous as they need to compete in the different markets.

Main research question

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achieve competitive advantages as internal factors while taking the network (or partner relationship) as external factors in the model. In order to investigate the different performance of different modes (OEM and OBM), the thesis will focus on the firm level and look into how organizational capability contribute to the firms’ upgrading and increased performance. Additionally, in order to make the research more applicable to practical issues in reality, more external factors such as local government’s support will be taken into consideration. Based on the analysis of the problem indication and the literature review, the research question is

From the perspectives of organizational capability, what factors contribute to Chinese medium sized manufacturing firms’ shift from OEM to OBM?

It is worthy studying on this question. Firstly, this question is related to the current situation of many manufacturing firms in China. Especially, this question is around those firms whose strategies are changing and looking for sustainable business development. Therefore, the results could be useful for the firms who are inroad by providing some suggestions and practice from some successful managers. Secondly, relationship and networking play an important role in the informal markets; taking these factors into consideration could be beneficial to understand firm performance in the particular informal market conditions. This thesis will use some main components of organizational capability theory (OCT), namely resource-‐based view (RBV), dynamic capability (DC) and relational theory (RT) to set up a model that is in line with the situation of these OEM firms change their strategy from OEM to OBM.

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Chapter 2 Literature Review

Industrial cluster (IC)

Before the notion of relational theory, it is very significant to mention the industrial clusters (ICs), which offer one of the best opportunities for SMEs to survive and keep competitive in the regional, international and global scale (Morosini, 2004). IC has a long history traced back to Adam Smith and Marshall, as both of them did give the explanations about this notion. Besides, Marshall analyzed that why firms choose to form the geographic closeness. He explained that, IC could help the firms or specific industry to develop a pool of specialized and skilled labors, generate the information flow within the industry and develop the input specific for the industry development, such as the investment for the particular industry infrastructure in the regional area (Marshall, 1925).

IC “is a socioeconomic entity characterized by a social community of people and a population of economic agents localized in close proximity in a specific geographic region. Within an industrial cluster, a significant part of the social community called linked activities, sharing and nurturing a common stock of product, technology and organizational knowledge in order to generate superior products and services in the marketplace.” (Morosini, 2004, p.307) As this definition is closer to the formation of the typical Chinese IC.

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economy; many cities or towns are gradually establishing ICs as they are developing. And Jinjiang, as a typically manufacturing town in China, is a hybrid of pure agglomeration and social networks (Johanson & Mattsson, 1987; Möller & Törrönen, 2003).

Relational theory (RT)

The relational theory (RT) focuses on networking, social relations in societies and their implications for business strategies. To be more specific, the theory includes relational exchange (Macneil, 1980), social contract (Heide et al., 2007), and network theories (Burt, 2009; Lin, 2001).

As an important component of RT, network embeddedness (Granovetter, 1985), demonstrates the idea that social network plays an important role in the economic behaviors and in turn, the business activities are embedded in the social fabric, which highlights the relation between the social network and economic behaviors. As many network theorists have emphasized that the significance of the network embeddedness (Granovetter, 1985). Within the relational network, members can develop mutual understandings, share the tacit information, and build long-‐term partnership, also reduce the transactional uncertainty and avoid the opportunistic behaviors (Bonner et al., 2005; Morgan & Hunt, 1994). Besides, the parties in the network would like to build the group culture, set up an informal governance system to make the harmonious environment and protect the members (Dayasindhu, 2002; Bonner et al., 2005).

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al., 2009; Wasti & Wasti, 2008); how relational ties and network work as venues for resources and information (Park & Luo, 2001). Some researchers even went further to identify which specific types of networks enhance performance (Li & Zhang, 2007).

Relationships, grounded primarily on social, not legal, contract, as well as government and civil society, are vital in the informal economy (de Soto, 2000; London & Hart, 2004). The relational theory can be recognized as mainly looking at the external factors of the organizational capability, concerning the firm’s capability of utilizing its external

resource (Mitrega et al., 2012).

Resource-‐based view (RBV)

RBV, a prevalent theory in the strategic management (Barney, 1986; Dierickx & Cool, 1989; Rumelt, 1984), focuses on the firms’ performance differences among the same industry (Zott, 2003), which emphasizes the firms’ resources and capabilities (Penrose, 1959). To study firms’ internal resources, RBV is the fundamental theory for the cases. As RBV highlights firms’ characteristics and it requires the firms achieve the competitive advantages by developing the sustainable resources. VRIN, namely valuable, rare, inimitable, non-‐substitutable, are the core standards for the resources and the capabilities that firms should obtain.

However, RBV has some limitations in the practical application. Only a limited number of scholars studied these subjects in the context of a dynamic environment (Ray et al., 2004). Updating the resources and capabilities is essential for a firm to keep competitive in the highly volatile environments. Extending the RBV to dynamic markets is significant (Helfat & Peteraf, 2003), since the mere existing capabilities are insufficient for the firms to sustain competitive advantages in a turbulent environment all the time (Eisenhardt & Martin, 2000; Teece et al., 1997)

Organizational capability theory (OCT)

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sustainable and competitive strategy for organizational development (Hoopes et al., 2003). OCT implies that the organizations’ ability to fit together with all the various tangible and intangible fundamental resources coherently and synergistically, in order to perform the designed tasks for the purpose of achieving the targets. (Barney, 1991; Helfat et al., 2007)

Jeffrey Sachs (2005, p.41) notes, “I believe that the single most important reason why prosperity spreads, and why it continues to spread, is the transmissions of technologies and ideas underlying them. Even more important than having resources in the ground, such as coal, was the ability to use modern, science-‐based ideas to organize production.” As it can be observed that she strongly emphasized the importance of the technology and organizations. It is the organizations that develop, use and transfer the technology. Without the organization, technology could be nothing. OCT emphasizes the importance of the firms’ resource and the competency (Hoopes et al., 2003), playing a significant role in increasing firm performance.

Organizational learning (OL), which is assumed as the key strategic capability for firms to outperform among the competitors (Bapuji & Crossan, 2004), “enable the firm to modify itself so as to continue to produce, efficiently and/or effectively, market offerings for some market segment(s)” (Madhavaram & Hunt, 2008, p.69).

Dynamic capability (DC)

DC, as another extending theory of RBV, applies RBV to the dynamic markets (Helfat, 2007). By keeping the bundle of resources and capabilities without considering the changeable economic environment, firms still cannot survive under the environmental volatility (Teece et al., 1997; Eisenhardt & Martin, 2000). Teece et al. (1997, P.516) defines DC as “the firm’s ability to integrate, build, and reconfigure internal and external competencies to address rapidly changing environments.”

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sense the opportunities, seize the opportunities and maintain the competitive positions in the dynamic markets and it implies that the organizations’ ability to fit together with all the various tangible and intangible fundamental resources coherently and synergistically, in order to perform the designed tasks for the purpose of achieving the targets. DC requires the firms to improve constantly their strategic management to keep pace with the market evolutions as well as respond to market conditions.

As DC is a suitable theoretical foundation when applying into the analysis of firms’ performance in the changeable environment, it not only emphasizes the firms’ abilities to sense, seize and manage the internal and external firm-‐specific competencies but also responds to the volatile environment (Teece et al., 1997; Eisenhardt & Martin, 2000; Newbert, 2005; Teece, 2007). If a firm has the competitive resources or capabilities but lacks DC, it can seize the opportunity to make it in the short time but cannot keep the competitive advantages in the long run as it will be weeded out by the competition in the dynamic markets. (Newbert, 2005; Teece, 2007) That is to say, by possessing the DC, the firms can generate the profitability in the longer run and be the strong competitor in the market. As the economic globalization proposes, the economic environment is not static. DC is essential for a firm to manage in the market.

Figure 2.1: Theoretical Model

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context within turbulent environments. Thus pure RBV cannot provide the comprehensive theory to study the dynamics of firms and cannot explain the evolutionary nature of firm (Eisenhardt & Martin 2000; Priem & Butler 2001). OCT emphasizes the capability of organization rather than merely possessing the resources, while DC highlights the firms’ capabilities in dynamic and turbulent market conditions. Therefore, RBV, OCT and DC can complement each other and establish a more comprehensive theoretical background for this thesis. Besides, RT plays an important role in the behavioral economy. Due to the economic characteristics itself, especially for the operation of industrial clusters, it is necessary to include RT in the theory. Wang & Ahmed (2007) proposes a hierarchical order of the factors. In the hierarchy, resources are the “zero-‐order” element, capabilities are the “first-‐order”, core capabilities are the “second-‐order” and dynamic capabilities are the final element. However, it is the organization that absorbs, integrates and reconfigures the capabilities and resources (Verona & Ravasi, 2003). Without the organizations, all these elements are pointless. Therefore, in the thesis, one model is built on the combinations of theoretical perspectives, namely RT, RBV, OCT, DC, to study the firms’ strategic shift from OEM to OBM.

Conceptual model

As it is mentioned above, the combinations of RT, RBV, OCT and DC are the theoretical foundation for this thesis and the selected main factors from these theories will be built up as a preliminary conceptual model. Since RT and DC put emphasis on the external factors of firms while RBV and OCT pay more attentions to the internal factors, this thesis establishes a model consisting of internal and external factors. Additionally, it is more logical to only analyze the most important factors that contribute firms to update and improve their strategies instead of all the factors that might have the functions.

Internal factors

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capital (investment), firm performance, staff and loyal customers; intangible resources include leadership, R&D, partnership with supply chain partners, market knowledge and innovations (Stuart, 2000; Capaldo, 2009; Dittrich & Duysters, 2007; Hagedoorn, 2006).

Firstly, capital is the fundamental resource of a firm. When firms consider setting up their own brand and apply OBM mode in their business, they need to have substantial capital to invest their own production line and be able to develop the specific departments such as R&D to broaden their markets. Secondly, firm performance, mostly measured by market share and market growth rate, plays an important role in firms’ decision-‐making process. Only when the firms have obtained good firm performance they would like to consider upgrading their strategies to have brighter future. Otherwise, they need to think more about survival problems rather than development problems. Thirdly, as the saying goes in China, “Labor force is the first productivity”. Staff is significant for firms to keep energetic and powerful. Besides, staff is also the source of creative and innovative ideas and they work hard to put those ideas into practices. Fourthly, customers are the ultimate ends of the product supply chain. Only when the products end at the hand of the customers, the supply chain ends. Only when the products meet the satisfactions from customers, the firms can keep alive and make profits. Additionally, some customers can help the firms generate ideas to develop and improve the business by offering the feedback towards the products and services. Keeping a good relationship with loyal customers can help the firms get intermediate and critical feedback information related to their products or services. (Jüttner et al., 2007) Thus, the first sub-‐question could be set up as follows:

Q1 Among the internal factors, to what extent are capital, firm performance,

staff and customer significant factors for the firms (OEM, OBM and Hybrid) when they are making strategic decisions?

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to accumulate R&D before they can turn into an OBM mode. In other words, if OEM firms have the capability to manage R&D, they would be more ready to update their strategy, as their transaction cost would be lower. Thirdly, it is important to keep harmonious partnership with supply chain partners. In the relationship with the upstream and downstream industries partners, the firms can benefit from knowledge sharing, infrastructure building as well as mutual contracts among the partners (Zaefarian at al., 2011). Fourthly, market knowledge and innovations could be another important factor when firms choose to make a strategic shift. DC requires the firms to have adaptive, absorptive and innovative capability. By keeping awareness of the market conditions and owning market knowledge and innovations, the firms can respond as well as survive in a volatile environment. Thus, the second sub-‐question could be set up as follows:

Q2 Among the internal factors, to what extent are brand awareness of the manager, R&D, partnership with supply chain partners and capability of market knowledge and innovations significant factors for the firms (OEM, OBM and Hybrid) when they are making strategic decisions?

External factors

While for the external factors, concerning DC, the market conditions, as a significant factor, has to be included; with regards to the networking capabilities, the firms need to deal with a triangle relationship.

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such as the adaption to the markets. Thus, the third sub-‐question can be set up as follows:

Q3 Among the external factors, to what extent is market condition a significant factor for the firms (OEM, OBM and Hybrid) when they are making strategic decisions?

For the triangle relationship, firstly, government, as invisible hand in controlling the market, it has its own role in the market development as well as economical direction especially in China. In the relationship with the government, the firms can interact with the institutional infrastructures that support markets: regulations, business rules and policies (Granovetter, 1985). Secondly, partnership with other members of the industrial clusters is important, since it is essential to keep the good relationship with the various members in the industrial cluster especially in the same region such as Jinjiang, keeping the partnership could reduce the transaction costs and avoid the opportunistic behaviors. Besides, the partnership can enhance the information flow in the cluster and firms can learn form each other. Thirdly, due to industrial cluster characteristics, firms can feel pressure (by price-‐cap or diversified products to get more market shares) when they are working in a high competition atmosphere, which encourages them to increase inputs and become the market leader by exploiting resources and competencies. (Vilgon & Hertz, 2003) Thus, the fourth sub-‐question could be set up as follows:

Q4 Among the external factors, to what extent are the government, partnership with members of industrial clusters and competitors significant factors for the firms (OEM, OBM and Hybrid) when they are making strategic decisions?

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with which the next round is implemented.

Figure 2.2: Conceptual Model

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Chapter 3 Methodology

Research design

In order to develop and test a measurement model for the role of organizational capability in the firms’ strategic shifts (OEM to OBM), the thesis uses the existing literature to set up a conceptual model which includes Relational Theory, Resource-‐based View, Dynamic Capability and Organizational Capability Theory. Additionally, the researcher interviewed the famous and experienced local journalist to identify the problems and collect more information related to the local footwear industry. The model will be explored by means of qualitative research, for which the data are collected from interviews with selected case organizations. Basically, the research is conducted in Jinjiang, a typical industrial cluster in the footwear manufacturing industry.

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Jinjiang, a small and underdeveloped town of 2.03 million people located in the southeast of China, is full of industrial clusters. Since most people there do family businesses related to the footwear manufacturing industry, the local industrial groups have developed into a well-‐organized business network and maintain a good relationship between upstream and downstream industry. There are more than 3,000 shoe firms in Jinjiang, most of which utilize domestic capital, low labor cost and small production lines to make small marginal shoes (Liu & Lin, 2009). Most of the firms produce professional sports shoes, fashionable shoes, outdoor shoes and slippers etc. Jinjiang, with around 349 thousand employees and 97.5 billion yuan output value, has been the economic driver of the local development as well as the pioneer of the footwear industry in the Chinese domestic markets (data updated in 2013). Therefore, Jinjiang is representative of the footwear manufacturing industry in China. Additionally, it would be worthwhile doing the study here because it is related to the strategic change process of the whole industry and the upstream and downstream industries. On the other hand, typical industrial clustering in a town is one of the business characteristics of Chinese firms.

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Figure 3.2: Map of South-‐east China showing Fujian, Guangdong and Taiwan.

In order to get a quite comprehensive model, this thesis will start with looking through the business information about Jinjiang footwear industry to get a better understanding of the particular situation of this specific industry. Jinjiang Footwear industry, not only in China, but also in the world, plays its own role. Specific government departments and media have published information related to this aspect. Thus, I will contact the local journalist who has been responsible for the media coverage for footwear manufacturing industry for the last several years and then turn to Jinjiang Shoemaker's Federation to get more general knowledge. By doing this, I can get more information about Jinjiang Footwear industry and set up the basis for the whole study.

Based on the literature review and the long talk with one OEM firm, the interview question is designed (cf. appendix 3). And the researcher has reached a saturation point with the questions. The interview questions contain several parts, including the basic information of the firms and the validation of the factors and elements of the preliminary models. Questions vary when interviewing different types of the firms since the questions need to be suitable for the interviewees’ firm characteristics.

Samples and data collection

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Since it is a new topic and in order to ‘uncover and understand what lies behind (a) phenomenon about which little is known’ (Strauss & Corbin, 1990, p.19), an exploratory qualitative methodology (Lincoln, 1991) is used. Interviews will be used to derive new items that could not be easily found in the literature review. All the interviewees are managers of the medium-‐sized footwear-‐manufacturing firms. More than 95% of the firms are family-‐owned and the managers are still the owners. Thus it would be easier to get the information by interviewing the managers who also have long-‐term experience in the market regarding the strategic shifts. As for the interviews, there are semi-‐structured in-‐depth interviews (Punch, 2005), covering all the variables and elements mentioned in the conceptual model, while it is also flexible enough to obtain any future aspects that would be emphasized by the interviewees, which means that detailed factors can be explored. The main body of the interview consists of questions related to the main aspects of the model and the detailed hypotheses. After coding on the interview information, the variables can be identified. By comparing the interview data with information from literature, a model can be built to discuss why the medium-‐sized footwear firms change the strategies (from OEM to OBM).

Concerning the sample selection, firstly I talked with my friend’s brother to broaden my study, and then three interviewees were recommended by the Chamber when Mr. Zhen took me there. In other words, 4 interviewees out of 9 are not selected randomly, which might have some limitations (cf. Chapter 5). In order to make the study more scientific and convincing, the rest of the interviewees are selected randomly. Besides, the quotes in finding section are exactly the literal translation of what the interviewees described instead of interpretive analysis. Most of the interviewees do not have college educations and the interviews are made in Taiwanese (local dialect).

Case study

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studies involve data collection such as questionnaires and interviews as well as observations. They could be qualitative or quantitative or both (Eisenhardt, 1989). By applying case studies, the authors can achieve the aims such as providing description (Kidder, 1981) and test the theories (Pinfield, 1986; Anderson, 1983).

For this thesis, there are three types of firms, namely OEM, OBM and Hybrid. Since these three types of firms cover all 3000 footwear firms in Jinjiang, all three of them have to be included in our sample in order to make our research valid. For each type, this thesis does three interviews with representatives of three different firms. Then by these 9 interviews, the detailed information related to the main research question can be explored. After the interviews, there are comparisons of the organizations within each of the three types and between the three types.

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Chapter 4 Findings

In this chapter, the main answers to the questions will first be presented separately by type of organization. Then follow a within type comparison, namely the comparison between the three organizations of each type and a between type comparison, namely the comparison between the three types. Only when interviewees of all three organizations of a type agree with each other, a conclusion will be drawn about the relevance of the factor. Then in the end of this chapter, the results of all the sub-‐questions will be summarized.

As shown below, there are three types of organizations, namely OEM, OBM and Hybrid. And each type of organization has three firm interviewees. More detailed information about the interviewees is shown. (cf. appendix 5)

Interviewees Firm Foundation Year Mode Markets

A 2005 OEM Exports

B 1984 OEM Exports & Domestic

C 1997 OEM Domestic

D 2003 OBM Domestic

E 1990 OBM Domestic

F 1998 OBM Domestic

G 1993 Hybrid Exports to Domestic

H 1994 Hybrid Exports & Domestic

I 2008 Hybrid Exports & Domestic

Table 4.1: Interviewees Information List

OEM – Questions

Q1 Among the internal factors, to what extent are capital, firm performance, staff and

customer significant factors for the firms (OEM, OBM and Hybrid) when they are making strategic decisions?

OEM-‐Capital

(31)

the financial support, we could not do anything even though we have a lot of orders. So you can see how important capital is.” B said, “Capital is the most fundamental thing when we are doing business. We need money to hire employees, buy equipment and support the daily expenditure in the factory. To put it simply, without money, who is going to work for you?” Same as A and B, C said, “Money was the first step when we are doing business, as we need to buy the equipment and hire the workers.”

OEM-‐Firm performance

As the three interviewees reflected, their performance is the orders they get and the profits they can make from the orders. In terms of firm performance, A said, “Profits are the main aim of doing business. Whatever we do, we need to follow this purpose. If we do not achieve the defined level, of course, we need to change our strategies.” B said, “All the orders we received need to reach our limit. At least, with this order, we can support the burden of all the expenditure during the process. Otherwise, there is not point doing it.” C said, “Business is continuous. If we do not have good firm performance, no buyers would turn to us. Good firm performance can give us a guide that we should follow.”

OEM-‐ Staff

(32)

OEM-‐ Customers

As for customers, three OEM interviewees have different opinions. A said, “We keep long and harmonious relationship with all our customers. That is why we have continuous orders all the time and I guess this is also the reason why we have never thought about transformation.” B said, “We have to think more about customers. For example, if we do not have that many orders, we will have to lay off some employees. This is the fact. Our customers and the orders can decide our fate of business.” C said, “But our customers cannot affect any decision we make. We are separated. The only thing make us together is business.”

For the first sub-‐question, the results from three OEM interviewees can be summarized as follows: Factors/Interviewees A B C Capital + + + Firm Performance + + + Staff + + -‐ Customer + + -‐

Q2 Among the internal factors, to what extent are brand awareness of manager, R&D,

partnership with supply chain partners and capability of market knowledge and innovations significant factors for the firms (OEM, OBM and Hybrid) when they are making strategic decisions?

Chinese Medium Manufacturing Firms’ Strategic Shifts (OEM to OBM) Along with Performance from the Perspective of Organizational Capability