Interpersonal Relationship Matters: Commitment to Employees, Guanxi and Effectiveness of Strategy Implementation in Chinese SMEs

The purpose of this study is to investigate whether the efforts firms make in maintaining interpersonal relationships have a positive influence on their performance. We examined the interpersonal relationships of a firm in two parts: (1) internal relationship - an organization’s commitment to its employees’ well-being (OCE) and (2) external relationship - managerial ties with the top executives of the other firms (business guanxi) and with government officials (political guanxi). More importantly, this study looked for whether OCE and guanxi would promote the profitable execution of competitive strategies (cost leadership, marketing differentiation and innovative differentiation). For this purpose, four hypotheses were developed and data was collected from 245 small and medium-size enterprises (SMEs) in a major industrial complex in China and analyzed with SPSS 20.0. The results were as follows: (1) OCE and guanxi both have a positive relationship with the financial and strategic performance of a firm. (2) The interaction between OCE and each different strategy showed different effects on a firm’s performance. Also, the interaction between guanxi and different strategies went the same way. This indicates that even though maintaining good interpersonal relationships would improve a Chinese SME’s performance, its importance and influence direction varies depending on which strategy is carried out. Such results suggest that business firms need to know the elaborate roles and meanings of interpersonal relationships in China.