International Journal of Productivity and Performance Management
Competitive strategies and firm performance: the mediating role of performance
measurement
Luliya Teeratansirikool Sununta Siengthai Yuosre Badir Chotchai Charoenngam
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IJPPM
62,2
Competitive strategies and firm
performance: the mediating role
of performance measurement
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168
Received 26 February 2012
Revised 30 July 2012
Accepted 24 September 2012
Luliya Teeratansirikool
School of Management, Asian Institute of Technology, Pathumthani,
Thailand and Faculty of Liberal Art and Management Science,
Prince of Songkla University, Surat Thani, Thailand
Sununta Siengthai and Yuosre Badir
School of Management, Asian Institute of Technology,
Pathumthani, Thailand, and
Chotchai Charoenngam
School of Engineering and Technology,
Asian Institute of Technology, Pathumthani, Thailand
Abstract
Purpose – The purpose of this paper is to examine the mediating role performance measurement
plays in the relationship between competitive strategies and firm performance.
Design/methodology/approach – This study conducted a mail-survey of Thai listed companies
in 2009. A total of 101 Thai listed companies’ executives, each representing their company,
participated in this study. The SPSS version 11.5, path-analytical model is adopted to analyze the
survey data obtained.
Findings – This study finds that generally, all competitive strategies positively and significantly
enhance firm performance through performance measurement. Specifically, firms’ differentiation
strategy not only has a direct and significant impact on firm performance but also it has indirect and
significant impact on firm performance through financial measures. Cost leadership strategy that
firms pursue does not directly affect firm performance. However, it does so indirectly and significantly
through financial performance measures.
Research limitations/implications – Future research could consider the use of longitudinal data to
ascertain more clearly these causal relationships.
Practical implications – The paper offers managerial implications that whether a firm
chooses to pursue cost leadership or differentiation strategies, a strong emphasis on
performance measurement will ensure the positive impact on firm performance in a fierce
competitive environment.
Originality/value – This paper adds to the existing theoretical discussion and analyses the research
and findings on the mediating role of performance measurement on the relationship between competitive
strategy and firm performance.
Keywords Competitive strategy, Performance measurement, Firm performance,
Performance management, Thailand
Paper type Research paper
International Journal of Productivity
and Performance Management
Vol. 62 No. 2, 2013
pp. 168-184
r Emerald Group Publishing Limited
1741-0401
DOI 10.1108/17410401311295722
The authors are grateful to the Asian Institute of Technology and the Prince of Songkla
University for providing them with research support without which this research would not have
been successfully implemented. The authors also thank the Editor, Dr Thomas Burgess, and
anonymous reviewers for their critical and valuable comments which improved this manuscript
significantly. Any remaining errors are the authors’ sole responsibility.
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1. Introduction
Performance measurement plays a key role in developing, implementing and
monitoring a strategic plan. It enables managers to evaluate whether organizational
objectives have been achieved, and is further used to develop and compensate
managers. It helps managers monitor whether the company is moving in the
direction they want it to go. However, to the authors’ knowledge there has been no
study on the relationship between competitive strategy, performance measurement,
and firm performance. In particular, no relevant evidence exists in Thailand.
Literature review of existing studies shows that there are different performance
measurement systems (Chenhall and Langfield-Smith, 1998). Thus, it is important
to ask what the most appropriate performance measures are which should be aligned
to competitive strategy. Managers still face the issue of effective performance
measurement, and may be overwhelmed with performance data (Maltz et al., 2003;
Moullin, 2007). In this paper, we argue that a competitive strategy can help a firm
achieve its competitive advantage only when appropriate performance measurement is
used and that a good fit between the competitive strategy and performance
measurement will lead to higher firm performance.
This study examines the relationship between competitive strategy and firm
performance as well as the mediating role of performance measurement. Previous
studies only analyze the indirect effect of performance measurement on the
relationship between differentiation strategy and firm performance (Spencer et al.,
2009). Our study adds to the existing theoretical discussion and analyses by
investigating specifically the mediating effect of performance measurement on the
relationship between two main types of strategies proposed in Porter’s model,
namely, cost leadership and differentiation strategies, and firm performance through
performance measurement.
We develop a theoretical framework that hypothesizes the mediating effect of
performance measurement on the relationship between competitive strategy and
firm performance. This paper aims to contribute to a better understanding on which
characteristics of performance measurement are appropriate to each type of
competitive strategy proposed in Porter’s model. It also aims to investigate the
impact of such performance measurement on firm performance in the context of
Thai industries. In addition, we offer managerial implications with respect to
choosing appropriate performance measurements to align with formulated
competitive strategy in order to enhance firm performance. It is our assertion that
performance measurement has a significant role and is a significant tool in
implementing competitive strategies that can lead to improved firm performance.
This paper is structured as follows. It first reviews the relevant literature and
develops the theoretical framework and hypotheses. Then, the research methodology
and data collection are described. Finally, data analysis and discussion of results as
well as a conclusion are provided.
2. Theoretical framework and hypotheses
2.1 Competitive strategy and firm performance
Strategy is a set of decisions and actions that managers make and take to attain
superior company performance compared to rivals (Parthasarthy, 2007, p. 7).
Business-level strategies are significant in explaining variations in firm profitability
and long-term performance (Beard and Dess, 1981). Porter’s model of competitive
strategy is considered in this study because of its popularity, well-defined structure,
Competitive
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clarity, simplicity and generality, and the way it complements two other approaches
for the analysis at the aggregate level (Ormanidhi and Stringa, 2008). The
two main typologies are cost leadership and differentiation. Focussed cost
leadership and focussed differentiation are excluded in this study. Focussed
cost leadership and focussed differentiation strategies concentrate on narrow
product or market segments and are appropriate for companies with the constrained
resources that serve niche markets. Thus, focussed strategies are not considered
in this study.
Cost leadership strategy is an integrated set of actions taken to produce goods or
services with unique features that are sold to customers at the lowest cost compared
to competitors or at reduced cost to achieve superior profitability. Dess and Davis
(1984) find that the overall low-cost cluster has the highest average return on assets.
Power and Hahn (2004) find that cost leadership strategy provides a statistically
significant performance advantage. Allen and Helms (2006) find a cost leadership
strategy relates to organizational performance.
A differentiation strategy is an integrated set of actions taken to produce goods or
services (at acceptable cost) that customers perceive as being different in ways that are
important to them. A study of the profit impact of a marketing strategy (PIMS) by
Phillips et al. (1983) finds a significant and positive relationship between differentiation
and market share. Firms choose from among two business-level strategies to establish
and defend their desired strategic positioning against rivals. In the past, some studies
found that firms prefer cost leadership as a competitive strategy to enhance firm
performance. A number of studies find that firms that choose differentiation as
competitive strategy outperform their competitors.
Scholars have discussed various reasons why firms need to choose an appropriate
competitive strategy to enhance their performance. Porter (1985) concludes that
firms that choose and implement generic strategies achieve sustained competitive
advantage. However, the literature shows no consistency regarding the direction
of the relationship between competitive strategy and firm performance. Thus, we
hypothesize the following:
H1.
There is a relationship between a competitive strategy and firm performance.
H1a. There is a relationship between cost leadership and firm performance.
H1b. There is a relationship between differentiation strategy and firm performance.
2.2 Competitive strategy and performance measurement
A firm formulates a strategy to attain its long-term goals using a control system to
measure progress toward goals and make necessary adjustments.
Empirical studies confirm that there is some relationship between business strategy
and performance measures along various dimensions. Kaplan and Norton (1996) claim
that performance measurement has a critical role in translating strategy into action.
McAdam and Bailie (2002) find that performance measures linked to strategy are more
effective. Maltz et al. (2003) suggest that the final set of performance measures would
depend on the firm’s strategy. Performance measurement also has a supporting role
in strategic planning (Tapinos et al., 2005). To be effective, a firm’s business strategy
should align with its management control system. Otherwise, the managers will not be
able to know whether the firm is making progress toward its goals.
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The existing literature reflects a relationship between competitive business strategy
and performance measures in various dimensions (Olson and Slater, 2002; Maltz
et al., 2003; Gosselin, 2005). Each strategy is unique and requires different types of
performance measures. Defender and prospector firms are competitive strategies
classified by Miles and Snow (1978). Defender firms tend to use financial measures, while
prospector firms prefer to use non-financial measures. A defender is a survivor whose
main aim is to protect its current business and focus on manufacturing existing designs
more efficiently through competitive pricing. A prospector firm continuously explores
and exploits new products or market opportunities to achieve high growth. Prospector
firms tend to take a differentiation strategy and cost leadership seems more likely to be
taken by defender firms. Thus, a firm with a differentiation strategy may prefer to use
non-financial measures and a cost leadership firm tends to use financial measures.
In testing different types of strategy and firm performance, Simons (1987) finds that
defender firms tend to rely more on financial measures such as short-term budgets to
compensate their managers. Olson and Slater (2002) find that the high-performing and
low-cost defenders place greater emphasis on financial perspective and less emphasis
on customers and innovation and growth perspectives. However, they find that
prospectors, high-performing analyzers, and high-performing differentiated defenders
place greater emphasis on non-financial perspectives. Similarly, Gosselin (2005)
finds that defenders seem to use non-financial measures less frequently in Canadian
manufacturing firms.
Govindarajan and Gupta (1985) report that firms following a “build” strategy
(increasing sales and market share) tend to place emphasis on non-financial measures
(such as new product development, market share, R&D, customer satisfaction) greater
than firms following a “harvest” strategy (maximizing short-term earnings). Ittner
et al. (1997) find that the relative weight placed on non-financial measures is greater in
firms following an innovation-oriented “prospector” strategy than in firms following
a “defender” strategy. Previous studies generally use Miles and Snow’s model and are
largely conducted in western countries. This study, however, adopts only the two
competitive strategies proposed in Porter’s model which are implemented specifically
in the Asian context. In addition, the extent to which organizations use multiple
measures to actually link their performance measures more closely to strategic
priorities has not been investigated (Banker et al., 2001).
Based on the above, we hypothesize:
H2. There is a relationship between a competitive strategy and performance
measurement.
H2a. There is a relationship between cost leadership strategy and performance
measurement.
H2b. There is a relationship between differentiation strategy and performance
measurement.
2.3 Performance measurement and firm performance
Performance measurement across a range of critical success factors is critical to the
survival of the business and derives from the competitive strategy. Performance
measures provide a set of mutually reinforcing signals that direct managers’ attention
to the important strategic areas that translate to organizational performance outcomes
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172
(Dixon et al., 1990). They also guide managers’ behavior toward key organizational
outcomes. Performance measures can be used to improve an organizational process
(Neely et al., 1996) by focussing on business processes that deliver value to customers
(Bititci et al., 1997; Neely and Adams, 2001) and ultimately have a significant positive
link with firm performance (Fleming et al., 2009; Joiner et al., 2009) and organizational
excellence (Moullin, 2007). Considering each type of performance measures, nonfinancial measures are better predictors of a firm’s long-term performance (Kaplan and
Norton, 2001; Hoque, 2004). In contrast, Perera et al. (1997) find no association between
the use of non-financial performance measures and perceived firm performance
in organizations that follow a “customer-focussed” manufacturing strategy. This
is supported by Neely et al.’s (2004) study, which finds no relationship between
non-financial measures and performance. Jusoh et al. (2008) find no significant effect of
using financial and customer measures on firm performance. However, financial
measures are still used, especially in unstable environments. (Gosselin, 2005)
The literature is inconclusive on whether performance measurement, namely,
financial and non-financial measures, is associated with firm performance. Studies in
the Asian context are scarce. Thus, it is worth investigating the relationship between
performance measures and firm performance because performance measures help
managers monitor and assess their firm’s progress toward strategic goals and
objectives. Based on the above discussion, we hypothesize the following:
H3.
Performance measurement is associated with firm performance.
H3a. Financial performance measures are associated with firm performance.
H3b. Non-financial performance measures are associated with firm performance.
2.4 Competitive strategy, performance measurement, and firm performance
A performance measurement system (PMS) has a critical role in translating strategy into
action (Kaplan and Norton, 1996) as well as providing a supporting role in strategy
development (Tapinos et al., 2005). Empirical studies confirm that there are relationships
between strategy and performance measures (Maltz et al., 2003; Gosselin, 2005). Strategy
also has an indirect relationship to firm performance. Hoque (2004) finds a significant
and positive association between management’s strategic choices and firm performance
when management uses non-financial measures for performance evaluation. Joiner et al.
(2009) find that both non-financial measures and financial measures, which are
associated with a flexible manufacturing strategy, enhance firm performance. Spencer
et al. (2009) find an indirect association between differentiation strategic priorities and
organizational performance through the use of non-financial and financial performance
measures. However, previous studies suggest contradictory results. For example, a study
by Verbeeten and Boons (2009) gives no support for the claim that aligning performance
measurement to the strategic priorities of a firm positively affects performance.
Moreover, there is only one study which uses Porter’s model of strategy.
Thus, there is inconclusive evidence of the relationships among strategic priority,
performance measurement and firm performance, especially in the Asian context.
Hence, in this study, we hypothesize that:
H4. There is an indirect association between a competitive strategy and firm
performance through the use of performance measures.
H4a. There is an indirect association between a cost leadership strategy and firm
performance through the use of financial performance measures.
Competitive
strategies
H4b. There is an indirect association between a differentiation strategy and firm
performance through the use of financial performance measures.
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H4c. There is an indirect association between a cost leadership strategy and firm
performance through the use of non-financial performance measures.
H4d. There is an indirect association between a differentiation strategy and firm
performance through the use of non-financial performance measures.
3. Method
3.1 Sample and data collection
The study sample comprises all Thai listed companies which drive investment in the
economic sector. Thai listed firms are sources of employment, income distribution, and
taxes and reflect objective economic growth.
The questionnaire in this study was based on the relevant literature review. For the
content validity, we used the literature review as well as consulting subject matter
experts in performance measurement for the scale instrument development (Conca
et al., 2004; Govindarajan, 1988). Since the questionnaire was developed in English,
and a Thai version was distributed, back translation from English to Thai and then
from Thai to English was conducted to confirm the accuracy of the content. The Thai
version was tested to determine whether statements were clear and understandable
and was reviewed by experts again after the content was revised. Then the revised
Thai version was used in the pre-testing with CEOs of 20 firms before mailing the
questionnaires.
A cross-sectional questionnaire survey was administered to 561 Thai listed
companies in manufacturing and service industries in December 2009. It is efficient
and economical in terms of budgeting to gather cross-sectional information (Chenhall,
1997; Hoque, 2004; Gosselin, 2005). Each company was initially contacted by telephone
to identify the name of the most suitable person within each business unit, his or her
job title and the business unit’s current address. These sample respondents includes
chief executive officers (CEOs), chief executives within business units or vice
presidents or senior managers in strategy divisions or senior managers of human
resources. The questionnaires were sent to CEOs after they were contacted by phone.
The reason that only the CEO level was taken as our sampling frame is because they
are the ones who provide vision, decide on the firm’s mission and strategies and
oversee the strategy implementation process. The questionnaire is addressed to the
CEO of sample firms. If the CEOs did not answer by himself, they would assign some
other person who was in the related executive position and concerned business unit
to complete the survey. A follow up letter was sent to non-respondent firms about
four weeks after the initial mail survey. Then, about two weeks later, we called
non-respondents by telephone to follow up in an attempt to increase the response rate.
101 completed and usable questionnaires were eventually received, a response rate of
18 percent. A t-test was used in detecting any bias between early and late responses,
but no significant difference was found among the two sets of observations.
The data obtained were analyzed by using statistical software SPSS Version
11.5. The analytical methods used were factor analysis, correlation, regression, and
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path analysis. An exploratory factor analysis method was used to identify the
dimensions of competitive strategy. The factor analysis method has been used by
many researchers (Gosselin, 2005; Allen and Helms, 2006; Jusoh et al., 2008; Joiner et al.,
2009). The ordinary least squares regression for path analysis allows a dependent
variable in one equation to become an independent variable in another equation
(Schumacker and Lomax, 1996). Thus, it was used to investigate the association
between competitive strategy and firm performance through sets of measures. Path
coefficients are also used to decompose correlations between dependent and
independent variables into their direct and indirect effects to determine mediating
effects (Asher, 1983). This method has been used by Joiner et al. (2009) who tested
the mediating role of performance measurement on the relationship between a firm’s
strategic orientation to flexible manufacturing strategy and organizational
performance.
4. Measures
4.1 Competitive strategy
In this study, the measures of two main types of Porter’s model of competitive
strategies were obtained from the literature review and then supported by practitioner
experts. Samples of the measures include: a focus on producing higher quality
products/services than competitors, a focus on producing a variety of product/services,
a focus on vigorous pursuit of cost reduction, and a focus on process improvement
through manufacturing function rather than the development of new products.
Respondents were asked to indicate the degree of emphasis their firms had given to
strategic priorities over the previous three years on a five-point Likert scale ranging
from 1 (the least emphasized) to 5 (the most emphasized). A principal component
analysis (PCA) with varimax rotation with sample size4100 (Hair et al., 1998) was
used to determine the groups. Two factors are examined: cost leadership and
differentiation. Cronbach’s a was used to test the reliability, yielding the Cronbach’s a of
cost leadership and differentiation at 0.54 and 0.85, respectively.
The results of factor analysis confirm the items defining the characteristics of cost
leadership strategy and differentiation strategy as suggested in the literature. This
suggests the validity of item measurement. Calculating summated scales by averaging
all items in each identified factor leads to the two types of competitive strategy
classification. Among the sample respondents, 64 companies were then classified
as differentiation strategy and 37 companies as cost leadership by taking the highest
average mean value which reflects more dominant characteristics of each firm’s
strategy.
4.2 Performance measurement
A modified version of Le Cornu and Luckett’s (2000) instrument was used in this study.
Some items were deleted from and some added to the original list. The final measures
contained 34 performance items, and respondents were asked to rate the extent to
which these performance measures have been commonly used by their business units
on a five-point Likert scale ranging from 1 (not at all) to 5 (to a very great extent).
Classification of the measures into financial and non-financial measures was based on
prior classifications made by Horngren et al. (1994, pp. 890-2) and Waterhouse and
Svendsen (1999). To be classified as financial, an item has to be able to be expressed
in monetary terms, and/or be specifically or directly reflective of financial value rather
than customer-focussed factors. In all, ten items were used as financial measures,
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including sales revenues, operating income or profit before tax, cost of goods sold, and
total expenses, with 24 items used as non-financial measures, including customer
satisfaction, number of customer complaints, on-time delivery, employee health and
safety. Reliability tests were also performed on the two-scaled items. The financial
measure sub-scale (Fin) has the Cronbach a coefficient of 0.76, while the non-financial
sub-scale (Nonfin) has the Cronbach a coefficient of 0.91, suggesting high reliability.
4.3 Firm performance
Firm performance was measured using an instrument developed by Govindarajan and
Gupta (1985), Abernethy and Stoelwinder (1991), Abernethy and Guthries (1994),
Chong and Chong (1997), Chenhall and Langfield-Smith (1998), Mia and Clarke (1999),
Hoque (2004) and Joiner et al. (2009). The instrument includes: increase of sales or
revenues, cash flow from operations, return on investment, return on equity, market
share, new product development, market development, the quality of products and
services, personnel development, employee job satisfaction, employee productivity, and
employee commitment or loyalty to the firm. There were advantages in using a welltested and robust instrument widely used in the context of strategic management
studies. An additional indicator is profit margin, the most popular indicator suggested
in the literature. Respondents were asked to indicate changes in the performance of
those indicators in the last three years on a scale from 1 ¼ decreased tremendously to
5 ¼ increased tremendously. A weighted average performance index was obtained
for each firm. The performance represents recent improvements in actual firm
performance as perceived by the respondents. Collier et al. (2004) analyze the necessity
of using perceptual data in large-scale surveys examining the development of strategy
and highlight that “although perceptions may not always equate with reality, they are
important because they are likely to be the basis of behavior.” The degree of changes in
performance was used as a weighted average for all performance indicators. The
Cronbach’s a coefficient value was 0.90, indicating satisfactory internal reliability of
the scale.
4.4 Control variables
The study uses industry and the nature of the competitive environment to control for
the effect they may have on firm performance.
5. Results
Table I reveals that about 58.4 percent of the companies are from manufacturing
industry. 75 percent of the companies have operated for more than 20 years. About
55 percent of the respondents are male and 77 percent are within the age group of 31-50
years. The majority are directors and managers of the firm.
Table II shows the descriptive statistics (mean, standard deviation, skewness,
and kurtosis) and reliability coefficients for all variables, and the correlation
matrix among the variables. There are significant correlations for all variables of
competitive strategy, performance measurement, and firm performance except for
cost leadership and firm performance. The correlations between the variables in
Table II are generally o0.6, indicating the absence of multi-collinearity. Further
diagnosis of collinearity among the variables using variance inflation factors
(VIFs) suggests very low VIFs for all the variables. Because each of the VIFs is
substantially o10, there is little reason to suspect multi-collinearity among the
variables (Hair et al., 2006).
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Group
Firm characteristics
Company type
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176
Company’s age
Respondent’s profile
Gender
Age
Respondent’s job position
Table I.
Profiles of respondents
and their firms
Variable
1.
2.
3.
4.
5.
1
2
n
%
Manufacturing
Service
Total
o10 years old
10-20 years old
420 years old
Total
59
42
101
6
19
76
101
58.4
41.6
100
5.9
18.8
75.2
100
Male
Female
Total
Under 30 years old
31-40 years old
41-50 years old
More than 50 years old
Total
Chief executive officer
Vice president
Assistant vice president
Director
Manager
Total
55
46
101
6
39
38
18
101
7
14
13
33
34
101
54.5
45.5
100
5.9
38.6
37.6
17.8
100
6.9
13.9
12.9
32.7
33.7
100
3
Cost leadership
0.54 0.38** 0.20*
Differentiation
0.85
0.26**
Financial measures
0.76
Non-financial measures
Firm performance
4
5
0.31**
0.38**
0.52**
0.91
0.12
0.48**
0.34**
0.21*
0.90
Mean SD Skewness Kurtosis
3.35
3.57
4.12
3.09
3.79
0.80
0.92
0.51
0.75
0.55
0.04
0.48
0.14
0.21
0.63
0.74
0.16
0.73
0.44
0.14
Table II.
Descriptive statistics,
correlation coefficients
and reliability coefficients Notes: *,**Correlations significant at 0.01 and 0.05 levels (two-tailed), respectively. Cronbach’s a for
reliability test is shown on the diagonal line
for main variables
The reliability of the measures was assessed through Cronbach’s a coefficients. The
items of each variable were developed based on previous studies. The Cronbach’s a for
each measure are shown on the diagonal in Table II and range from 0.54 to 0.91.
Although one is slightly below 0.60, many researchers noted that a’s of between 0.50
and 0.60 are generally acceptable for exploratory research (Nunnally and Bernstein,
1994; Gupta and Somers, 1996).
Ordinary least squares regression-based path analysis was adopted to test the
hypotheses. This technique allows a dependent variable in one equation to become an
independent variable in another equation, and it is often employed to test relatively
simple relationships (Schumacker and Lomax, 1996). We used this technique to show
the relationship between strategy and performance measurement, the relationship
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between performance measurement and firm performance, and the indirect
relationship between strategy and firm performance via performance measurement.
The use of multiple regressions requires certain assumptions about the data,
especially in relation to distributional characteristics. Data screening was conducted
to ascertain that the data satisfied the relevant assumptions for multiple regressions.
Two conditions were met. First, no evidence of multi-collinearity was found by
considering the VIF for each variable, which was found to be lower than two and well
below the benchmark. Second, the data approximately followed a multivariate
normal distribution based on kurtosis and skewness analyses. As a rule of thumb, a
variable is reasonably close to normal if its skewness and kurtosis have values
between 1.0 and þ 1.0 (Hair et al., 2006).
Four main models were developed to test the study hypotheses shown in Table III.
The regression results for competitive strategy and performance measurement are
reported for Model 1. Models 2, 3, and 4 report the regression results for performance
measurement and firm performance (Model 2); competitive strategy and firm
performance (Model 3); and competitive strategy, performance measurement, and
firm performance (Model 4). Each sub-model is presented in Figures 1 and 2. In each
case, the regression results were used to compute the magnitudes (standardized
b coefficients) of the direct effects in the path models, and the method was also used
to test the significance of the mediating effects.
Cost leadership model
Path coefficient
t-value
Impact of
Financial measures on
Firm performance
Non-Financial measures on
Firm performance
Cost leadership on
Financial measures
Non-financial measures
Firm performance
Differentiation on
Financial measures
Non-financial measures
Firm performance
0.33**
3.40
0.23**
2.61
0.19
1.82
0.03
0.28
0.20*
0.31**
0.12
1.99
3.29
1.17
0.26**
0.38**
0.48**
2.63
4.12
5.44
Financial
measures
0.31**
Nonfinancial
measures
Notes: *p < 0.05; **p < 0.01
Table III.
Path coefficients
for the models
0.33**
0.12
Cost
leadership
177
Differentiation model
Path coefficient
t-value
Notes: *po0.05; **po0.01
0.20*
Competitive
strategies
Firm
performance
0.19
Figure 1.
Path model for cost
leadership strategy
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178
5.1 Result of hypotheses testing
The results of the path analytic model for testing all hypotheses are presented in
Figures 1 and 2. H1a states that there is a relationship between cost leadership
strategy and firm performance. This hypothesis is rejected because the results show an
insignificant relationship between cost leadership and firm performance. In contrast,
a differentiation strategy is significantly associated with firm performance and thus
H1b cannot be rejected.
H2 states that there is a relationship between a competitive strategy and
performance measures. This hypothesis is supported since both cost leadership
and differentiation strategies are significantly associated with all performance
measurement components. The result supports both H2a and H2b.
H3 states that performance measurement is associated with firm performance.
This requires that at least one significant path exists between the performance
measurement dimensions and firm performance. Financial measures link firm
performance for both the cost leadership and differentiation models which support
H3a. H3b is rejected because non-financial measures are not associated with firm
performance for either types of strategy. These results suggest that H3 cannot be
rejected.
To test H4, path coefficients were used to examine the total effects of competitive
strategy on firm performance through two performance measurement dimensions.
We then compared them with the direct effect of competitive strategy on firm
performance. The indirect effect is calculated by multiplying the contributing path
coefficients. Table IV shows the direct, indirect and total effects of the competitive
strategy components on firm performance. The indirect effect is calculated by
multiplying the contributing path coefficients. For example, the indirect effect of
differentiation on firm performance through financial measures (0.06) is obtained by
multiplying the coefficient from differentiation to financial measures (0.26) by the
coefficient from financial measures to firm performance (0.23). The total effect (0.54) is
the sum of the direct (0.48) and indirect effects (0.06). Table IV shows the direct,
indirect, and total effects of the competitive strategy components of cost leadership and
Financial
measures
0.26**
0.23**
0.48**
Firm
performance
Differentiation
Figure 2.
Path model for
differentiation strategy
Table IV.
Total effects of
competitive strategy
on firm performance
Nonfinancial
measures
0.38**
0.03
Note: **p < 0.01
Impact of effect
Financial measures
Direct Indirect Total effect
Cost leadership on firm performance
Differentiation on firm performance
0.12
0.48
0.06
0.06
0.18
0.54
Non-financial measures
Indirect
Total effect
0.06
0.01
0.18
0.49
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differentiation on firm performance. For H4 to be rejected, the total effect of the
competitive strategy on firm performance through performance measurement should
be less than the direct effect of each competitive strategy on firm performance.
The total effects of cost leadership and differentiation on firm performance through
performance measurements are greater than the direct effect of cost leadership and
differentiation on firm performance. These results imply that H4 (H4a-H4b) cannot be
rejected. Table IV suggests that the amount of total effect in all relationships is higher
than direct effect. It indicates that both types of performance measures, financial, and
non-financial measures, mediate the relationship between the two types of competitive
strategies and firm performance.
6. Discussion and conclusions
The results offer further insights into the relationship between competitive strategy
and firm performance by exploring the mediating role of performance measurement.
Consistent with the literatures, this study finds an indirect effect between competitive
strategic priorities and firm performance through the use of performance measurement
(Spencer et al., 2009; Joiner et al., 2009). However, the result contradicts the study of
Verbeeten and Boons (2009) which finds no support for the claim that performance
measurement of the strategic priorities of the firm positively affects performance.
Verbeeten and Boons (2009) conducted their research on medium- and large-sized
firms operating in the Netherlands and they consider strategy in term of specific
strategic priorities such as the importance of market/customer orientation, innovation,
and personnel development. Joiner et al. (2009) and Spencer et al. (2009) examined
Australia’s largest manufacturing companies and considered strategy in term of
flexible manufacturing strategy and differentiation strategy, respectively. The results
of this study support those of Joiner et al. (2009) and Spencer et al. (2009). This is
possibly because this study also deals with large listed firms while Verbeeten and
Boon’s (2009) study deals with medium- and large-sized firms. This study suggests
that in the Thai context, firms use financial measures with any type of competitive
strategy in order to enhance firm performance. Thus, most firms would still behave
more like defender firms as defined by Miles and Snow (1978).
Our results fully support the importance of using both financial and non-financial
performance measures for firms pursuing a cost leadership strategy and a
differentiation strategy, consistent with the conventional theories (McAdam and
Bailie, 2002; Maltz et al., 2003; Gosselin, 2005). Differentiators tend to place a high
emphasis on the use of non-financial measures (Govindarajan and Gupta, 1985; Ittner
et al., 1997) while cost leadership firms place a greater emphasis on financial measures
(Simons, 1987; Olson and Slater, 2002; Gosselin, 2005). Our empirical results also
provide support for the surprising findings of Simons (1987), which reveal that
differentiators also use financial measures, and for Olson and Slater (2002), who find
that defender firms use non-financial measures less frequently.
In line with previous research (Dixon et al., 1990; Neely et al., 1996; Bititci et al., 1997;
Neely and Adam, 2001; Moullin, 2007; Fleming et al., 2009; Joiner et al., 2009), this study
finds that performance measurement has a positive influence on firm performance.
Firms use financial measures to enhance performance while non-financial measures
are not often used to enhance firm performance, supporting the studies of Perera et al.
(1997), Neely et al. (2004), and Gosselin (2005). However, these results contradicts the
findings of Kaplan and Norton (2001) and Hoque (2004) which conclude that nonfinancial measures are better predictor of firm performance.
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180
Financial measures are direct reflections of current profitability and operating
efficiency functioning as a “dashboard” to monitor and continually enhance the firm’s
financial performance (Simons, 1990). Financial measures can also be used as
indicators for future earnings potential, which publicly-traded firms cannot afford to
neglect when reporting to their stakeholders in order to attract more capital and
increase public confidence. However, non-financial measures are also important
because they are more actionable and future-oriented, and their use can improve
an organization’s capabilities for future planning and strategy implementation
(Perera et al., 1997). In this study, financial measures are significantly associated with
non-financial measures, with the correlation coefficient of 0.52 presented in Table II.
Therefore, financial measures such as sales revenues, operating income or profit before
tax, cost of goods sold, and non-financial measures, such as customer satisfaction,
number of customer complaints, on-time delivery, employee health and safety, are
important for firm performance.
Effective performance measures should provide a map that guides managers’
behaviors toward critical firm outcomes such as profit, cash flow, new product
development, and personnel development. Hence, the study findings support the idea
that the use of performance measures can enhance firm performance. Additional
statistical analyses were made and we found that the measures firms prefer to use,
as indicated to a great extent in the questionnaire and chosen by more than 50 firms
including sales revenues, cost of goods sold, operating income, sales growth, and
customer satisfaction. The findings suggest that only one non-financial measure, customer
satisfaction, is related to firm performance.
The study also provides evidence of the relationship between a competitive strategy
and firm performance in the Thai context. Differentiation is significantly associated
with firm performance, contrary to the findings of Power and Hahn (2004), Allen and
Helms (2006), and Dess and Davis (1984), which find a positive association between
cost leadership and firm performance. This is because differentiation can be a way of
achieving a low-cost position. When such a position is not available, a firm may have
to base its sustainable competitive advantage on the simultaneous and continuous
pursuit of both low cost and differentiation (PIMS study by Phillips et al., 1983).
Our study demonstrates that competitive strategies with appropriate performance
measurement can improve the competitiveness of Thai listed firms.
An important aspect of strategy development is the translation of firm-level
competitive strategies into performance measures. We demonstrate that even in less
developed economies, performance measures represent a way that firms can achieve
their strategic objectives. We find a significant relationship between competitive
strategy and performance measurement. Our findings confirm that performance
measurement allows firms to implement their competitive strategies. Of the two
performance measures components, our findings indicate that only financial
measures appear to significantly influence firm performance. In addition,
financial measures are more important than non-financial measures in mediating the
relationship between competitive strategy and firm performance especially in the
context of Thailand.
This study finds that a differentiation strategy has a significant direct relationship
with firm performance while cost leadership does not. However, both cost leadership
and differentiation strategies influence firm performance through financial measures.
These findings are not only interesting but also unexpected. The underlying
assumption in the literature is that aligning both financial and non-financial measures
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with competitive strategy will lead to enhanced firm performance. As the result of the
study is inconclusive, we therefore cannot refute those assumptions.
Although the alignment of competitive strategy with non-financial measures do not
lead to significant improvements in performance, the alignment of competitive
strategy with financial measures leads to significant improvements in firm
performance. Thus, it appears that firms in developing economies faced with
increased competition brought about by trade liberalization and other reforms will
benefit greatly from an emphasis on financial measures in combination with their
selected competitive strategy.
There are a few limitations in this study. Since we designed our study specifically to
examine Thai listed companies, interpreting our results beyond that domain should be
done with caution. Both the competitive strategy and PMS instruments used here are
still relatively new in the literature and could be refined in future studies. A limitation
associated with the measurement of PMS was the use of performance measures. It is
possible that the reported lack (or low level) of use could mean either that the measures
were not available, or were available but not useful. Further research is required to
improve this measure. Another limitation is that the use of self-assessed performance
has been criticized due to the potential for bias, and therefore the results must be
interpreted in light of this caveat. Further, there may be variables omitted from the
model in this study that may also moderate, or mediate, the relationship between
different performance measures and firm performance. Anecdotal evidence suggests
that not all organizations experience improved performance through the development
of performance measures. However, this is the first time this model is tested. There is
no other evidence to support that the implications of our model would be similar or
applicable to other countries. Since our model is derived from the relevant literature
review, we believe that it can apply to other economies to some extent, particularly
developing economies similar to Thailand. Finally, the path model implies causality.
The results of this study contribute in many ways. It extends the existing research
and findings on the mediating role of performance measurement on the relationship
between two types of Porter’s competitive strategy model, namely, differentiation
strategy and cost leadership strategy, and firm performance. The findings challenge
the assertion of the previous studies such as those of Govindarajan and Gupta (1985)
and Ittner et al. (1997) that differentiation strategy tends to emphasize the use of nonfinancial measures.
However, our findings are consistent with others studies such as Spencer et al.
(2009) which find that financial and non-financial measures act as mediating role on
the relationship between differentiation strategy and firm performance. Moreover, this
study provides useful insights into the significant role of performance measures as a
tool for managers in implementing competitive strategies that can lead to improved
firm performance. Managers and designers of performance measurement tools should
pay particular attention to financial measures in implementing both types of Porter’s
competitive strategies.
6.1 Agenda for future research
As Campbell-Hunt (2000) points out, although the paradigm of competitive strategy is
now over two decades old, it has yet to prove its adequacy as a descriptive framework
and move beyond its propositions about the performance consequences of different
strategic designs. Further research on the relationship between strategy and firm
performance, in a different context as well as the use of longitudinal data or carefully
Competitive
strategies
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182
experimental design research on the subject matter which show the causal
relationships among these factors may also provide further insights.
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Corresponding author
Sununta Siengthai can be contacted at: s.siengthai@ait.ac.th; sununta.siengthai@gmail.com
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Maria Björklund, Uni Martinsen and Mats Abrahamsson
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Department of Management and Engineering, Logistics Management, Linköping University, Linköping, Sweden
Abstract
Purpose – In response to increasing demands on improved environmental performance, companies need to develop their capabilities in assessing the
environmental performance of their operations. Knowledge among practitioners as well as solid research results in this area is lacking. This paper aims
to present a framework of dimensions, which are important to consider regarding environmental measurement in supply chain management. The paper
also aims to present a practical example on how environmental performance measurements can be a success by applying these dimensions.
Design/methodology/approach – Literature regarding logistics management and performance measurement is coupled with theories regarding
environmental logistics and green supply chain management. A framework is developed. A case study based on four actors in a reverse supply chain is
used to illustrate the framework.
Findings – The paper outlines important aspects to consider in the design of environmental performance measurements in supply chain management
and identifies shortcomings in existing research. The case presents successful examples of how environmental performance measurements can be
applied across managerial levels as well as company borders in a supply chain.
Practical implications – The literature review shows shortcomings in the measuring tools applied today. The case provides examples of how these
shortcomings can be addressed.
Originality/value – This paper addresses the intersection between environmental logistics and performance measurements. The case shows how
environmental performance measurements can be applied over a single company’s borders by including four different actors in the supply chain.
Keywords Environmental logistics, Logistics measurement and performance, Green performance measurement, Supply chain management,
Environmental management
Paper type Research paper
decision making and as indicators of business performances.
Already in 1995, Noci (1995) described that managers in
Sweden, Norway and Denmark consider improvements in
environmental performance as one of the basic competitive
priorities.
There is a lack of knowledge regarding how to measure
environmental performance in supply chain management.
The linkage between environmental activities in the supply
chain and organizational performance is according to Vachon
and Klassen (2008) not thoroughly examined. According to
Hervani et al. (2005) green supply chain management
performance measurements are virtually non-existent. These
statements are further supported by the findings of
Cuthbertson and Piotrowicz (2008) describing that
performance measurement approaches seldom include
environmental aspects. They describe guidelines for
enhancement and development of environmental supply
chain management performance measurement tools as one
important issue to address in future research. The limited
understanding of environmental management in the supply
chain has also hampered the development of a widely
accepted framework that would characterize and categorize
environmental activities in the supply chain (Vachon and
Klassen, 2008). In addition McIntyre et al. (1998a) states that
there seems to be no place for the environment in future
1. Introduction
In response to the increased external environmental demands,
such as stricter regulations and increased customer demands,
companies need to develop their capabilities in assessing,
managing and controlling the environmental performance of
their operations. A growing number of companies have begun
developing and using environmental sustainability indicators
(Veleva et al., 2003). Supply chain managers must consider
the impact of their performance on the natural environment
(Zhu et al., 2008; Zsidisin and Sifert, 2001). The companies’
environmental performance can be very important
performance drivers to measure in order to capture
important information that can be used to increase the
competitive advantage. The findings of Cuthbertson and
Piotrowicz (2008) suggest that environmental criteria are
increasingly important to develop sustainable business
practices. Both researchers and practitioners that investigate
supply chain measurements must remember to consider not
only financial but also environmental aspects. The case study
of Vasileiou and Morris (2006) shows that greater importance
is now given to environmental factors both as influences on
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1359-8546.htm
The authors wish to acknowledge and thank the case company Returpack
Svenska AB for providing them with all empirical data. The authors also
wish to thank VINNOVA for financially supporting the research project
“Competitive business models to meet future demands on sustainable
logistics systems” of which this article is a part.
Supply Chain Management: An International Journal
17/1 (2012) 29– 39
q Emerald Group Publishing Limited [ISSN 1359-8546]
[DOI 10.1108/13598541211212186]
29
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Performance measurements in the greening of supply chains
Supply Chain Management: An International Journal
Maria Björklund, Uni Martinsen and Mats Abrahamsson
Volume 17 · Number 1 · 2012 · 29 –39
supply chain measurements, and that the environment runs
the risk of being sidelined.
The need for more knowledge regarding environmental
performance across different actors in the supply chain is
recognised by practitioners. When communicating
environmental performance to logistics service providers and
shippers we have discovered a scepticism regarding the
content of some environmental business offerings. One
example is the use of environmental performance
measurements regarding the logistics services. Both shippers
and logistics service providers singled out the lack of reliable
environmental measurements and measurement systems as
one important area to address in future research.
Environmental performance measurements adjusted to a
logistics setting are needed and wanted among both logistics
service providers and shippers. The demand is also rising due
to the fact that environmental measurements are becoming an
important part of several logistics service provider’s business
offering, as well as a way to differentiate the product, i.e. the
logistics service, in a very competitive market. These
shortcomings show a need for a systematic way to design
environmental performance measurement systems regarding
supply chain management. One important point of departure
is to identify important dimensions that ought to be
considered when measuring environmental performance in
supply chain management.
The purpose of this paper is threefold:
1 To make a synthesis of what has been published on green
measuring in supply chain management and thereby
assessing the state of the art in the field.
2 To analyse strengths and shortcomings in prior research
within the field based on an identification of important
dimensions to consider when measuring environmental
performance in supply chain management.
3 To provide a practical example showing that it is possible
to succeed with environmental performance measurement
in supply chain management by applying the dimensions
identified.
2.1 Literature review
The literature review aimed at identifying articles within the
field of performance measurement and environmental
logistics and supply chain management. A total number of
12 searches (see Table I) were made and 1,137 articles were
identified. The search terms had to be included in the title or
abstract in order to get a hit.
The literature review was intentionally meant to cover a
large scope of literature, in order not to miss any important
articles. However, most of the 1,137 articles found did not
address the right subjects. Many of the articles were not about
measurements or measuring, but about different measures, or
actions, to take. Those hits did not fit into the predefined
criteria. Regarding the term “environment”, most hits were
not about the natural environment, but instead about the
surrounding environment described in contingency factors
etc. Regarding the search term supply, many of the articles
dealt with energy supply, which did not fit into this study. The
term transport also resulted in a large number of hits. Many of
them included public transportation or transportation that
does not fit into the purpose of this article, e.g. particle
transport. And many of the purchasing articles dealt with
consumer buying behaviour and marketing, which was not
considered relevant for this article. Finally a number of 17
articles were identified that fulfilled the criteria set for the
literature. The articles are presented in Table II.
Table I Number of hits in the literature review
logistic *
supply
transport *
purchas *
environment *
green *
Sustainab *
97
293
326
131
10
42
43
20
14
79
61
21
Note: measur * was used in all 12 searches
The outline for this article is as follows: in the section
following this introduction, the research design for this paper
will be presented, followed by a description of the case study.
Next, a framework with important dimensions is presented,
together with the findings from the articles. A presentation of
the case structured in accordance with the dimensions in the
framework follows. The paper ends with a discussion of the
findings made and outlines future research needs.
Table II Relevant articles found in the literature review
2. Research design
Literature reviews and a case study are applied in this paper.
Literature regarding logistics management principles and
performance measurement are coupled with theory regarding
environmental logistics. The literature review addressed
purpose one and two of this paper. The third purpose is
addressed with a case study. Most of the case study was
performed before the literature review was conducted for the
purpose of providing guidance to the company. However, the
findings from the literature review and the framework
developed showed that this case is a good way to illustrate
how a supply chain can succeed with environmental
performance measurement taking all the identified
dimensions into consideration.
30
Author(s)
Year
Azzone and Noci
Bickel et al.
Cuthbertson and Piotrowicz
Facanha and Horvath
Gerbens-Leenes et al.
Hervani et al.
Keller et al.
Krikke et al.
Lakhal and H’Mida
Lu et al.
Markley and Davis
McIntyre et al.
McIntyre et al.
Vachon and Klassen
Vasileiou and Morris
Veleva et al.
Zhu et al.
1998
2005
2008
2005
2003
2005
2002
2003
2007
2007
2007
1998a
1998b
2007
2006
2003
2008
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Performance measurements in the greening of supply chains
Supply Chain Management: An International Journal
Maria Björklund, Uni Martinsen and Mats Abrahamsson
Volume 17 · Number 1 · 2012 · 29 –39
2.2 Case study
Seuring (2008) investigates case study research in sustainable
supply chain management and supply chain performance
management and indicates several deficiencies regarding the
way case studies are presented within these two areas. Since
our study lies in the borderland between these areas we find
these deficiencies important to address. He points at the
importance of: justifying the selection of case(s), addressing
how the information was analysed as well as presenting how
the rigor of the research was ensured. Furthermore, he
describes the research as just approaching one stage of the
supply chain and the data collection via a few interviews and
an analysis of the companies’ homepages. This points to the
need for more in depth studies of supply chain oriented cases.
The case was selected since the companies’ environmental
performance measurements in supply chain management
show how to overcome several of the shortcomings identified
in the literature review. Furthermore, it is a case that consists
of more than one actor, i.e. the four actors: retailers,
wholesalers, breweries and the reverse company Returpack
Svenska AB (Returpack). (For more information visit: www.r
eturpack.se)
Information has mainly been gathered by the use of semistructured interviews with the logistics manager,
environmental manager, financial manager and managing
director at Returpack as well as representatives from
wholesalers, breweries and retailers.
To estimate the economical and environmental impact of
the changes suggested in the supply chain internal
documentation regarding the system was used (costs,
distances, volumes, storage, handling costs). Observation
was also to a minor extent used to provide an understanding
of the production unit.
Several researchers participated in the gathering of the data.
To increase the trustworthiness of the case description,
written case documentations were presented to Returpack’s
managing director, environmental manager, and financial
manager for approval.
The estimation of the environmental impact from
transports was done with the use of information provided
from a Swedish independent organization, The Network for
transport and the environment (NTM). One shortcoming in
environmental calculations is that the use of source, method
and estimations made can result in very different outcomes.
However, the data available on NTM’s homepage is decided
in collaboration between representatives from all the different
transport modes, which largely increases the trustworthiness
of this data (for more information visit: www.ntm.a.se). There
are other ways of calculating environmental impact from
transports, for example those suggested by Freight Best
Practice (Freight Best Practice, 2009a,b). However, these
methods are not used in this paper.
Table III Framework dimensions
Caplice and Sheffi (1995)
Dimensions in this article
Comprehensive
Causally oriented
Vertically integrated
Horizontally integrated
Internally comparable
Stakeholder perspective
The purpose of measuring
Managerial levels of measuring
Measuring across the supply chain
Combination of measurements
framework is also presented. One additional criterion used by
Caplice and Sheffi (1995) was useful, which we chose to leave
out because this would require judgements that are difficult to
do on the information presented in the articles solely. The
framework dimensions are applied in order to systematically
sort the content of the 17 articles.
3.1 Stakeholder perspective
The influence from stakeholders such as governance,
customers and suppliers are often described as important
driving forces and enablers in environmental performance.
Caplice and Sheffi (1995) write that it is important that a well
designed logistics performance measurement system captures
all relevant constituencies and stakeholders of the process.
They state that most measurement systems forget for example
the customer perspective.
Most of the articles found in the literature have a company
or supply chain focus. For example Markley and Davis (2007)
focus on the company when writing about the natural
resource based view of the firm (NRBV), while Cuthbertson
and Piotrowicz (2008) focus on the supply chain in their
study of found measurements. However, the article of Bickel
et al. (2006) is different. The focus is more on society as a
whole. The authors discuss the impact of transports on
human health, plants and animals, building materials,
agriculture and ecosystems. Measurements covered by the
authors are used in order to reduce transport impact on these
stakeholders.
Some of the authors (e.g. Lu et al., 2007 and Zhu et al.,
2008) write about stricter regulations that requires more
environmental focus from different actors. Accordingly,
Facanha and Horvath (2005) write that environmental
awareness is increasingly important to society, government
and industry. Furthermore, Hervani et al. (2005) present a
performance measurement system in which external
stakeholders like customers, suppliers, the community,
regulators and Non-Governmental Organizations (NGO’s)
are influencing the environmental performance indicators.
Both Lu et al. (2007) and Zhu et al. (2008) mention the
increasing community and consumer pressures on companies
to become more environmentally aware. Markley and Davis
(2007) discuss environmental performance affecting both
customer and employee satisfaction. Furthermore,
Cuthbertson and Piotrowicz (2008) found some
measurements linked to the customers in their research.
However, they thought there was a lower level than expected
of these measures. Moreover, Zhu et al. (2008) write about
green supply chain management as a means to achieve
corporate profit and market shares. Market shares are closely
related to customers, as well as corporate profit. The latter is
also of interest for shareholders.
3. A multidimensional classification framework
This section is based on the literature review and addresses the
first purpose of the study. In order to present the findings in an
organised way we use a framework with main themes within
the area of measuring, here called dimensions. One important
point of departure in the identification of dimensions was a
framework developed by Caplice and Sheffi (1995). However,
we developed the framework further. The dimensions in the
framework are summarized in Table III, where the original
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Performance measurements in the greening of supply chains
Supply Chain Management: An International Journal
Maria Björklund, Uni Martinsen and Mats Abrahamsson
Volume 17 · Number 1 · 2012 · 29 –39
Lu et al. (2007) write about measuring supplier’s
performances in order to evaluate the suppliers based on
their environmental performance. This seems to be done
merely from the company’s point of view, and the supplier
interests do not seem to be considered in the measuring.
measuring the present effects of historical decisions instead of
measuring in order to provide support for the present and
future management. The time views in focus are described as
being too short and having too large a focus on reducing costs
and time.
The measurement system proposed by Lu et al. (2007) aims
at monitoring, measuring progress and evaluating the
environmental status of potential suppliers. The measures
suggested (such as percentage of suppliers having an EMS
and environmental report or the reusability of materials used
and how easily the product can be disassembled) do however
indicate that the measures capture the present situation and
not on the future environmental potentials of the different
suppliers.
According to Hervani et al. (2005) the time focus in
environmental measures (i.e. historical, present or future) is
dependent on the organisation’s evolutionary stage in
environmental management. Reactive organisations focus on
complying with new laws while proactive organisations not
only measure compliance with new laws but measures also in
order to gain information to green the business and develop in
a more green direction.
3.2 The purpose of measuring
There are many reasons as to why organisations measure their
performance. Some examples presented in the literature are to
see progress, identify success, report performance, evaluate
performance, confirm what they already know, reveal what
they do not know, understand their processes, assist
operational personnel, identify problems and bottlenecks,
form new objectives and targets, determining future courses
of action and to confirm priorities (Gunnasekaran et al. 2004,
2007; Holmberg, 2000a,b; Neely, 1998).
Caplice and Sheffi (1995) describe the importance of the
logistics measurement system tracking activities and
indicators that influence both future as well as current
performance. They state that financial metrics are lagging
indicators with an internal focus while non-financial measures
tend to indicate future performance. Depending on the
purpose of the performance measuring the time focus can be
on historical (e.g. see progress, report and evaluate
performance), present (e.g. assist operational personnel) or
future performance (e.g. form new objectives and targets,
determining future courses of action and confirm priorities).
One article found in the literature review states that
defining the overall goal(s) of the system measured ought to
be the point of departure in any performance measurement
system within green supply chain management (Hervani et al.,
2005). The literature provides several examples of purposes
with regard to performance measurement. For example,
several reasons for measuring supply chain performance are
identified in a literature review conducted by Cuthbertson
and Piotrowicz (2008), such as increasing the understanding,
collaboration and integration between supply chain members.
Measuring can also help an organisation target the most
profitable market segments or identify a suitable service
definition.
According to Hervani et al. (2005) the basic purpose of
performance measurement in green supply chain
management is external reporting, internal control
(managing the business better), and internal analysis
(understanding the business better and continuous
improvement). Performance measurement can also have
other purposes such as to determine the efficiency and
effectiveness of an existing system or to compare competing
alternative systems, as well as being an important “support”
in the planning, design, implementation and monitoring of
systems. Zhu et al. (2008) describe similar purposes with
performance measurement as they state that practitioners can
use different forms of scales to measure green supply chain
management for continuous improvements, implementation
of green supply chain management, and benchmarking.
Bickel et al. (2006) presents a totally different purpose for
their measuring as they take a societal perspective regarding
the negative environmental impact from transport. Their
purpose is to be able to quantify the external costs of
transportation.
The literature review by McIntyre et al. (1998b) describes
the criticism by several authors regarding the focus of the
measures. There seems to have been a large focus on
3.3 Managerial levels of measuring
According to Caplice and Sheffi (1995) it is of large
importance that the logistics measurement system is
vertically integrated, i.e. that the measurement system
translates the overall firm strategy to all decision makers
within the organisation. They argue that the measurement
system ought to be linked to decisions of all managerial levels;
strategic, tactical as well as operational.
Several researchers describe the key characteristics of
management decisions taken on the three managerial levels.
Strategic level measures influence top management decisions.
Changes on this level are characterised by long time horizons
and cover infrastructure planning, such as additional facilities,
locations and make/buy decisions. Tactical decisions are taken
by middle level management and include for example capacity
planning and utilisation of the equipment. Finally operational
decisions made by lower level management address matters
such as scheduling and routing. Authors point to the
importance of vertical integration describing the tactical
plan as a key input for the operational plan (Vanteddu et al.,
2006; Gunasekaran et al., 2004).
McKinnon (2003) describes managerial levels in his
decision framework describing how decisions on different
levels influence the environmental impact of freight transport
operations. The levels are:
.
logistics physical structures (numbers, locations, and
capacity of factories, warehouses, shops and terminals);
.
pattern of trading links (selection of suppliers, distributors
and customers);
.
scheduling of production and distribution (translate
trading links into discrete freight flows); and
.
management of transport resources (choice, routing and
loading of vehicle).
Aronsson and Brodin (2006) have further developed this
framework, showing that decisions at different levels both
create opportunities and set limitations for decisions made on
other levels, and thereby pointing out the importance of
vertical integration. Decisions made at a higher structural
level set limitations and provide opportunities for lower levels.
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Performance measurements in the greening of supply chains
Supply Chain Management: An International Journal
Maria Björklund, Uni Martinsen and Mats Abrahamsson
Volume 17 · Number 1 · 2012 · 29 –39
Several of the literature sources point at the importance of
linking environmental performance measurement to strategy,
and environmental performance is also described as providing
a strategic advantage (Markley and Davis, 2007).
Hervani et al. (2005) state that measures are best developed
with derivation from and links to corporate strategy and that
the performance measurement for green supply chain
management (GSCM/PM) must fit within the strategy of
the supply chain. Furthermore they write that measures
should be present at multiple levels and they present a wide
variety of measures; fugitive non-point air emissions, spill and
leak prevention, total energy use and total fuel use. The
authors state that these measures have implications for all
managerial levels (strategic, tactic and operational). Both
strategic and operational personnel play important roles in the
environmental performance measurement. Top management
must provide financial and strategic support for
environmental performance measurement, while operational
personnel must be involved in training and data acquisition to
effectively implement the measurement system.
Also McIntyre et al. (1998b) describe the importance of
environmental performance metrics being strategic in
orientation. However, their study shows that companies
seldom incorporate strategic implications of environmental
performance. Furthermore, they did not identify any
literature describing how companies’ environmental
management strategies have been integrated in the
management decision-making.
Even though the research of Cuthbertson and Piotrowicz
(2008) has its starting point in the supply chain, the authors
found a lack of supply chain focus in their empirical data
containing 50 documented cases. Most of the cases focused
on internal issues at company level, often measuring the
performance of functions, instead of on the whole supply
chain. Also, the authors came to the conclusion that
environmental aspects often were ignored when measuring
supply chains.
Most studies measure single internal functions or activities
instead of measuring across the supply chain. Vasileiou and
Morris (2006) state that issues of sustainability have tended to
concentrate on a particular stage of the supply chain, rather
than on the supply chain as a whole. Furthermore, in the
literature review conducted by McIntyre et al. (1998b), the
authors found that certain discrete elements of the supply
chain have been environmentally developed, but writes that a
risk arises when viewing any of the aspects in isolation.
Even though many authors promote measuring
environmental performance in supply chains (e.g. Veleva
et al. 2003; Hervani et al., 2005; Markley and Davis, 2007),
there is also recognition in the difficulty in doing just that.
Veleva et al. (2003) point out the difficulty of measuring
environmental impact caused by the supply chain, because of
the issue of data availability. Hervani et al. (2005) also stress
the complexity of including customer/supplier input when
measuring across organizational boundaries. Nonetheless,
Facanha and Horvath (2005) write that Life Cycle Analysis
(LCA) is a well-established approach when assessing
environmental impacts of supply chains. The data collected
when using LCA can be used to reengineer supply chains in
order to improve their environmental performance. The
authors use LCA to establish whether outsourcing of logistics
functions or keeping the functions in-house have the most
environmental impact. Thus, the authors measure
environmental performance across company borders.
Cuthbertson and Piotrowicz (2008) fit measures into the
process perspective or the function perspective. No
environmentally related measurements seem to belong to
the process perspective, while some function measurements
are of interest in the environmental measurement. Process
oriented measurements are of importance in order to measure
the environmental impact from a supply chain perspective.
3.4 Measuring across the supply chain
Caplice and Sheffi (1995) describe the importance of
horizontally integrated performance measurement systems,
i.e. that the measurement system includes all pertinent
activities, functions, and departments along the process and
that they encourage integrating operations along the entire
supply chain. They stress the importance of applying process
oriented measurements.
Fabbe-Costes and Jahre (2008) carry out a literature review
aiming at investigating the number of organisations or
participants in the “integrated supply chain”. The categories
applied by them span from limited dyadics (integration
between focal company and its supplier or customer) via
limited triadic (integrations of suppliers- focal companycustomers) and extended supply chains. Their findings show
that even if many of the papers reviewed discuss the
importance of an extended scope only a small extent
actually present measurements that do so.
Most of the articles found in the literature review write about
measuring environmental performance in supply chains.
Vachon and Klassen (2008) have studied the effect
environmental collaboration in supply chains has on
manufacturing and environmental performance by measuring
environmental cooperation between companies and their
suppliers and customers. Veleva et al. (2003) suggest that
many companies’ major environmental impact is not at their
own plants. Rather, they are found in the supply chain or in
product use or disposal. So, in order to measure the overall
environmental impact of a company, there is a need to consider
the supply chain of the company. Lakhal and H’Mida (2007)
analyses the structure of the supply chain in a Canadian
petroleum refinery company, from supplier to client, and
studies actual contaminants through the supply chain.
3.5 Combination of measurements
According to Caplice and Sheffi (1995) it is important that
measurements are internally comparable, i.e. that they
recognize and allow for trade-offs between the different
aspects of performance. Both practitioners and researchers
realise the importance of financial and non-financial
performance measures, however most companies have failed
to represent them in a balanced framework (Gunasekaran
et al., 2004). It is important that the performance
measurements applied not only focus on financial aspects of
a firm since this can make the firm adopt a skewed approach
that does not fully support the overall supply chain objectives
(Vanteddu et al., 2006). Keller et al. (2002) shows an
increased use of multi item scales in the research published in
the leading logistics journals. However, Holmberg (2000b)
state that the measurements applied in the performance
measurement systems often is too isolated and incompatible.
Several of the articles present environmental measurements
that can be grouped together into measurement systems.
33
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Performance measurements in the greening of supply chains
Supply Chain Management: An International Journal
Maria Björklund, Uni Martinsen and Mats Abrahamsson
Volume 17 · Number 1 · 2012 · 29 –39
Some of the most frequently reoccurring environmental
measurements in the articles studied are: air emissions
(e.g. Hervani et al., 2005; Bickel et al., 2006; Veleva et al.,
2003; Azzone and Noci, 1998), energy use (e.g. Hervani et al.,
2005; Zhu et al., 2008; Veleva et al., 2003; Azzone and Noci,
1998; Gerbens-Leenes et al., 2003), recycling (e.g. Lu et al.,
2007; Veleva et al., 2003), fuel use (e.g. Cuthbertson and
Piotrowicz, 2008) and water use (e.g. Hervani et al., 2005;
Azzone and Noci, 1998; Gerbens-Leenes et al., 2003).
McIntyre et al. (1998b) bring up examples where companies
are constructing environmental performance methodologies that
support the existing logistics performance measurements.
However, Vasileiou and Morris (2006) show in their research
that economic factors tend to be prioritised over environmental
and social, although there is a clear interdependency between
these factors. Nonetheless, Facanha and Horvath (2005) use
economic, environmental and social metrics in their Life Cycle
Analysis of logistics outsourcing. Interdependency can also be
found in Azzone and Noci (1998), who suggest a performance
measurement system where environmental measurements are
linked to four different economic categories, namely: revenues,
incremental contribution margin, internal efficiency costs and
operation costs/investments. Ultimately the environmental
measurements are linked to measures regarding the economic
value creation of a company. Also Zhu et al. (2008) show
examples of environmental measurements that are linked to
economic performance.
Hervani et al. (2005) write that the performance management
tool “the balanced scorecard” can be used when measuring
environmental performance. Measures in the balanced
scorecard belong to one of four perspectives, namely financial,
customer, internal process and learning and growth. The
authors give many examples of environmental measurements
belonging to all four of these perspectives, e.g. disposal costs,
green products, certified suppliers and percentage of renewable
resource use. Cuthbertson and Piotrowic...
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