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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 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) Article information: To cite this document: Luliya Teeratansirikool Sununta Siengthai Yuosre Badir Chotchai Charoenngam, (2013),"Competitive strategies and firm performance: the mediating role of performance measurement", International Journal of Productivity and Performance Management, Vol. 62 Iss 2 pp. 168 - 184 Permanent link to this document: http://dx.doi.org/10.1108/17410401311295722 Downloaded on: 03 March 2015, At: 18:26 (PT) References: this document contains references to 54 other documents. To copy this document: permissions@emeraldinsight.com The fulltext of this document has been downloaded 2165 times since 2013* Users who downloaded this article also downloaded: Kwee Keong Choong, (2013),"Understanding the features of performance measurement system: a literature review", Measuring Business Excellence, Vol. 17 Iss 4 pp. 102-121 http://dx.doi.org/10.1108/ MBE-05-2012-0031 Eva M. Pertusa-Ortega, José F. Molina-Azorín, Enrique Claver-Cortés, (2010),"Competitive strategy, structure and firm performance: A comparison of the resource-based view and the contingency approach", Management Decision, Vol. 48 Iss 8 pp. 1282-1303 http://dx.doi.org/10.1108/00251741011076799 André de Waal, Karima Kourtit, (2013),"Performance measurement and management in practice: Advantages, disadvantages and reasons for use", International Journal of Productivity and Performance Management, Vol. 62 Iss 5 pp. 446-473 http://dx.doi.org/10.1108/IJPPM-10-2012-0118 Access to this document was granted through an Emerald subscription provided by 448547 [] For Authors If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services. Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download. The current issue and full text archive of this journal is available at www.emeraldinsight.com/1741-0401.htm IJPPM 62,2 Competitive strategies and firm performance: the mediating role of performance measurement Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 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. Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 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 strategies 169 IJPPM 62,2 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 170 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. Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 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 Competitive strategies 171 IJPPM 62,2 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 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. Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 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 173 IJPPM 62,2 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 174 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, Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 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). Competitive strategies 175 IJPPM 62,2 Group Firm characteristics Company type Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 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 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 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 IJPPM 62,2 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 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 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 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. Competitive strategies 179 IJPPM 62,2 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 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 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 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 181 IJPPM 62,2 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) 182 experimental design research on the subject matter which show the causal relationships among these factors may also provide further insights. References Abernethy, M.A. and Guthries, C.H. 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(1999), Strategic Performance Monitoring and Management: Using Non-financial Measures to Improve Corporate Governance, Canadian Institute of Chartered Accountants. Further reading Srinivasan, A. (1985), “Alternative measure of system effectiveness: associations and implications”, MIS Quarterly, Vol. 9 No. 3, pp. 243-53. Corresponding author Sununta Siengthai can be contacted at: s.siengthai@ait.ac.th; sununta.siengthai@gmail.com To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:26 03 March 2015 (PT) This article has been cited by: 1. Riccardo Silvi, Monica Bartolini, Anna Raffoni, Franco Visani. 2015. The practice of strategic performance measurement systems. International Journal of Productivity and Performance Management 64:2, 194-227. [Abstract] [Full Text] [PDF] 2. Oyetola Emmanuel-Ebikake, Rajkumar Roy, Essam Shehab. 2014. 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[Abstract] [Full Text] [PDF] Supply Chain Management: An International Journal Performance measurements in the greening of supply chains Maria Björklund Uni Martinsen Mats Abrahamsson Article information: Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:23 03 March 2015 (PT) To cite this document: Maria Björklund Uni Martinsen Mats Abrahamsson, (2012),"Performance measurements in the greening of supply chains", Supply Chain Management: An International Journal, Vol. 17 Iss 1 pp. 29 - 39 Permanent link to this document: http://dx.doi.org/10.1108/13598541211212186 Downloaded on: 03 March 2015, At: 18:23 (PT) References: this document contains references to 33 other documents. To copy this document: permissions@emeraldinsight.com The fulltext of this document has been downloaded 3965 times since 2012* Users who downloaded this article also downloaded: Kenneth W. Green, Pamela J. Zelbst, Jeramy Meacham, Vikram S. Bhadauria, (2012),"Green supply chain management practices: impact on performance", Supply Chain Management: An International Journal, Vol. 17 Iss 3 pp. 290-305 http:// dx.doi.org/10.1108/13598541211227126 Tritos Laosirihongthong, Dotun Adebanjo, Keah Choon Tan, (2013),"Green supply chain management practices and performance", Industrial Management & Data Systems, Vol. 113 Iss 8 pp. 1088-1109 http://dx.doi.org/10.1108/ IMDS-04-2013-0164 Aref A. Hervani, Marilyn M. Helms, Joseph Sarkis, (2005),"Performance measurement for green supply chain management", Benchmarking: An International Journal, Vol. 12 Iss 4 pp. 330-353 http://dx.doi.org/10.1108/14635770510609015 Access to this document was granted through an Emerald subscription provided by 448547 [] For Authors If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services. Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download. Performance measurements in the greening of supply chains Maria Björklund, Uni Martinsen and Mats Abrahamsson Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:23 03 March 2015 (PT) 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 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:23 03 March 2015 (PT) 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 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:23 03 March 2015 (PT) 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 31 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:23 03 March 2015 (PT) 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. 32 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:23 03 March 2015 (PT) 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 Downloaded by UNIVERSITY OF WESTERN SYDNEY At 18:23 03 March 2015 (PT) 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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