Growth or profit? Strategic orientations and long‐term performance in China

• DOI: http://doi.org/10.1002/smj.3193
• Date: 01 November 2020
• Author: Nan Zhou,Seung H. Park
• Published date: 01 November 2020

RESEARCH ARTICLE

Growth or profit? Strategic orientations and

long-term performance in China

Nan Zhou

1

| Seung H. Park

2

1

Management Department, Business School of Nankai University, Tianjin, China

2

Center for Emerging Markets and Center for African Studies, Nanyang Business School, Nangyang Technology

University, Singapore

Correspondence

Nan Zhou, Management Department,

Business School of Nankai University,

No.121 Baidi Road, Nankai District,

Tianjin, China.

Email: zhounan38@hotmail.com

Funding information

Nankai University Asia Research Center,

Grant/Award Number: AS1906; National

Natural Science Foundation of China,

Grant/Award Number: 71902091;

Nanyang Center for Emerging Markets

Abstract

Research summary: This study investigates the long-

term performance of growth-oriented versus profit-

oriented strategies in emerging markets. Theoretical

justifications exist for superior performance for both

types of strategic orientations, but we argue each

orientation will have different implications on firms'

long-term survival in emerging markets. The growth-

oriented strategy faces a shortage of non-scale free

resources that would limit the firm's long-term survival,

while the profit-oriented strategy would improve the

chance of long-term survival by developing and leverag-

ing firm-specific advantages for sustained growth. The

study also examines the moderating effects of both the

level of non-scale free resources and the extent to

which the economic context favors growth. The empiri-

cal testing utilizes a sample of Chinese firms during

2008–2017.

Managerial summary: Emerging markets present

many growth opportunities. Firms often fall into the

trap of blindly pursuing these opportunities without

considering internal managerial capability. This study

presents the theory-based logic and empirical evidence

supporting the view that the profit-oriented strategy is

likely to outperform the growth-oriented strategy on a

long-term basis. The growth orientation strains mana-

gerial attention that is in short supplies in emerging

Received: 17 January 2018 Revised: 30 August 2019 Accepted: 30 August 2019 Published on: 15 July 2020

DOI: 10.1002/smj.3193

2050 © 2020 John Wiley & Sons, Ltd. Strat Mgmt J. 2020;41:2050–2071.wileyonlinelibrary.com/journal/smj

markets and leads to inefficiencies that cause a decline

in firm performance. These results are more apparent

when firms lack managerial capability and in the con-

text of growth-inducing economic policy during an eco-

nomic downturn.

KEYWORDS

emerging markets, firm survival, growth-oriented strategy, non-scale

free resources, profit-oriented strategy

1|INTRODUCTION

While growth and profit are relevant in any economy, balancing these strategic goals is particu-

larly important for firms in emerging markets (Park, Zhou, & Ungson, 2013). In emerging mar-

kets that are experiencing rapid economic growth, numerous opportunities create an

imperative for firms to pursue growth or risk losing out to faster-growing competitors in

attracting critical resources (Chen, Zou, & Wang, 2009). Firm profits are also critically impor-

tant in emerging markets, given that the underdevelopment of capital markets (Khanna, Pal-

epu, & Bullock, 2010) requires firms to generate sufficient financial returns to sustain and

enhance their competitive position (Park et al., 2013).

There is often an inherent tension in pursuing profit versus growth, especially when

resources are scarce. Firms in emerging markets often follow a sequential approach: first pursu-

ing either a growth- or profit-oriented strategy and placing the other on hold. The issue of

whether growth- or profit-oriented strategy will lead to desired performance outcomes, particu-

larly firm survivability, matters greatly in emerging markets, where limited resources and

growth-prone environments force firms to select one of the two strategic orientations.

This study applies the concept of non-scale free resources (e.g., human capital and superior

management teams): such resources are subject to opportunity costs and reduced rents when

applied across multiple sectors (Levinthal & Wu, 2010). These resources are thus limited to one

use or another versus those which a firm can allocate across broadly diversified markets or

products (Levinthal & Wu, 2010). A growth-oriented strategy requires extending the use of non-

scale free resources, such as managerial attention and people-based capabilities. Due to the

limited supply of such non-scale free resources in emerging markets, firms that adopt a growth-

oriented strategy are likely to suffer from declining profit margins, and thus be less likely to

survive in the long run. Conversely, a successful profit-oriented strategy improves long-term

survival, as the company develops firm-specific resources and advantages and its growth is lim-

ited to maximizing the value of resources within related segments. This study offers an empiri-

cal validation of the long-term consequences of the two different strategic orientations in an

emerging market where non-scale free resources such as managerial talents are rare and cannot

be acquired easily through the market due to institutional voids (Khanna &

Palepu, 1997, 2000). We further verify our principal claim by considering potential critical mod-

erating variables, such as managerial attention and environmental shock that affect the level of

non-scale free resources and growth-prone opportunities for companies in emerging markets.

The empirical testing utilizes a sample of Chinese firms from 2008–2017.

ZHOU AND PARK 2051