Working Capital Configuration And Its Effects On Performance In Different Strategic Choices

Working capital is a question concerned by academics and companies for a longterm, which is directly related to the liquidity, debt paying ability, profitability and riskmanagement. Thus, how to keep a rational working capital configuration and how toadjust working capital to keep a stable and good performance are two questions whichcompanies need to be considered. Besides, as a guideline of all operational decisionsand future developments, strategic choice is the most important factor which decidesworking capital. However, researches on working capital focused on working capitalconcept, working capital structure, working capital policy, the influence factors ofworking capital and the relationship between working capital and performance, fewstudies were found to be made from the perspective of strategic influence, and theredid not form a reasonable, effective and consolidated conclusion of the relationshipbetween working capital and strategy. Therefore, we examine the influence of strategicchoice on working capital configuration and how the relationship between the level ofworking capital ratio and the operational performance differs under different strategy.First, we conclude three categories of strategy, terminal market strategy, middlemarket strategy and hybrid strategy by clustering the strategic factors of wholesale andretail industry. Then, we analyze the difference of the way to configure working capital,the speed to adjust working capital to its target, and the effect of working capital onperformance for companies in different strategic choices.The empirical results suggest that working capital is configured and adjusted toits target in different ways under different competitive strategic choices, and willfinally influence performance. The adjustment extent in hybrid strategy is greater thanthose in other two strategies, and its performance is the best and stable while themarginal influence of working capital on performance is in the middle. Once acompany chooses the hybrid strategy and its working capital policy has been settled,the change of working capital will not change their performance too much as themarginal influence of working capital on performance is not that high. Conversely,Companies with terminal strategy has lower turnover rate, more cash and moreshort-term borrowings to maintain differentiation, and the working capital adjustmentand marginal influence of working capital on performance is the lowest. In middlemarket strategy, the turnover rate is the largest, and inventories and receivables to current assets are the most, as companies with this strategy probably provide theirproducts to clients as soon as possible. Although the adjustment extent is in the middle,they also concern on working capital, as the marginal influence of working capital onperformance is the largest which can lead their performance to be unstable.