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Competitive strategy, performance measurement and organizational performance:

empirical study in Thai listed companies

Luliya Teeratansirikool* and Sununta Siengthai**

The purpose of this research is to examine the relationship between competitive strategy, performance measurement, and organizational performance in listed companies in Thailand. About 101 Thai listed companies executives participated in this study. Using SPSS version 11.5, path-analytical model is adopted to analyze the survey data obtained. This study finds that overall competitive strategy positively and significantly enhances organizational performance through performance measurement. Specifically, it is found that the differentiation strategy of firms has not only direct and significant impact on the organizational performance but also has indirect and significant impact on organizational performance through financial measures. Our results further show that cost leadership strategy that firms pursue does not directly affect organizational performance. However, it does so indirectly and significantly through financial performance measures. Thus, whether a firm chooses to pursue a cost leadership or a differentiation strategy, a strong emphasis on performance measurement will ensure the positive impact on organizational performance in an intense competitive environment.

Field of Research: competitive strategy, performance measurement, organizational performance _______________________ * Luliya Teeratansirikool, Ph.D. Candidate at the School of Management, Asian Institute of Technology and a lecturer, Prince of Songkla University, Thailand. Email: st107853@ait.ac.th, luliya_t@yahoo.com ** Dr. Sununta Siengthai, Associate Professor of HRM/IR, School of Management, Asian Institute of Technology,P.O. Box 4, Klong Luang Pathumthani 12120,Tel: (662)-524-5661,Fax: (662)-524-5667 http://www.som.ait.ac.th, Email: s.siengthai@ait.ac.th sununta.siengthai@gmail.com

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I. Introduction

Globalization makes the world small and interdependent. It also has greatly increased the competition in business especially in the recessionary period. Facing this pressure, firms try to compete and retain their business by finding a way to achieve its competitive advantage. Listed companies in Thailand, with no exception, are also faced with this competitive challenge. In the past decade, numerous studies have found significant association between competitive strategy and organizational performance (Allen and Helms, 2006; Ortega, 2009). Selecting appropriate competitive strategy which is supported by organization and management system is important because it is the way firms use to achieve a competitive advantage (Porter, 1980, 1985; Simons, 1987, 1990; Dent, 1990; Miles and Snow, 1978; Kaplan and Norton, 1992; Nanni, Dixon, and Vollman, 1992; Waterhouse and Svendsen, 1999; Hoque, 2004). It also impacts the competitive strengths and firms performance (Anderson et al, 1989). Many studies also have found the relationship between competitive strategy and performance measurement. The management system plays a key role in developing a strategic plan, evaluating the achievement of organizational objectives and compensating managers (Ittner and Larcker, 1998a). It also helps managers in tracking whether they are moving in the direction they want. However, it still remains a critical and much debated issue among academics and practitioners of what are the most appropriate performance measures to align to competitive strategy. Managers are still struggling with the issue of performance measurement, and are overwhelmed with performance data. Hence, this study aims to investigate the relationship between competitive strategy, performance measurement, and organizational performance.

II. Literature Review Competitive strategy and organizational performance To achieve sustained competitive advantage, firms can choose and implement a generic strategy (Porter, 1985). Parthasarthy (2007, p. 7) describes strategy as a set of decisions and actions that managers make and take to attain superior company performance relative to rivals. Beard and Dess (1981) find both corporate-level strategy and business-level strategies are significant in explaining variation in firm profitability. The business strategy choices are found to be significant in explaining firm profitability (Beard and Dess, 1981) and its long-term performance. Two main typologies of competitive strategy are cost leadership and differentiation. The cost leadership strategy is an integrated set of actions taken to produce goods or services with unique features that are acceptable to customers at the lowest cost relative to that competitor or reduce cost structure in order to achieve superior profitability. Allen and Helms (2006) find that cost leadership strategy has only one significant tactic- minimizing distribution costs that affect organizational performance. Dess and Davis (1984) find that the overall low cost cluster has the higher average return on assets. Differentiation strategy is an integrated set of actions taken to produce goods or services (at acceptable cost) that customers perceive as being

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different in ways that are important to them. A profit impact of marketing strategy (PIMS) study by Phillips, Chang, and Buzzell (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. However, Porter (1998) and the PIMS study by Phillips, Chang, and Hill (1983, ibid) suggest that differentiation can be a way of achieving a low-cost position and there often is no unique low-cost position, a firm may have to base its sustainable competitive advantage on the simultaneous and continuous pursuit of both low cost and differentiation.Porter (1985) suggest that the combination of cost and differentiation strategies will result in poor performance and unlikely to generate a sustainable competitive advantage except in the most exceptional circumstances that such a combination results in a sustainable competitive advantage. However, some other studies have found that some firms have successfully employed combination strategies (Dess, and Davis, 1984; Kim, and Lim, 1988; Parthasarthy and Sethi, 1993).

Performance measurement: Performance measurement is the way to measure performance across a range of critical success factors that are derived from the competitive strategy and critical to the survival of the business. A performance measure can be used to control and improve organisational processes (Neely, et al., 1997). Performance measures provides a set of mutually reinforcing signals that direct managers attention to strategically important areas that translate to organisational performance outcomes (Dixon et al., 1990) and guides managers behaviour toward key organisational outcomes. Performance measures can be used to improve an organizational process (Neely et al., 1996) by focusing on business processes that deliver value to the customers (Bititci et al, 1997; Neely and Adams, 2001) and ultimately have a significant positive link with organizational performance (Fleming et al, 2009; Joiner et al., 2009) and organizational excellence (Moullin, M., 2007).

Organizational performance:

The strategy literature reveals contradictory results on the link between singular generic strategy and performance. Empirical studies confirm that there are some relationships between strategy and performance measures in various dimensions (Maltz et al., 2003; Gosselin, 2005; Pongatichat and Johnson, 2008). Kaplan and Norton (1996) suggest that a performance measurement system have a critical role in translating strategy into action and also has a supporting role in the development of strategies (Tapinos et al., 2005). While, the alignment between the measures, measurement framework and the strategy is not linear but the relationship must be continually reviewed and related as a dynamic and complex issue (McAdam and Bailie, 2002). Hence, strategic priorities of firm affect performance measurement. Gosselin (2005) finds a significant relationship between the types of measures and contextual factors like strategy, decentralization, and environmental uncertainty, and also found that defender firms seem to use less frequently non-financial measures in Canadian manufacturing firms. While Chenhall (1997) suggest strategy should be linked to operations via effective costing and performance management system (PMS). Joiner et al. (2009) have found that a flexible manufacturing strategy utilizes

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non-financial as well as financial performance measures; and the performance measures are associated with higher organizational performance via non-financial and financial measures. While Verbeeten and Boons (2009) suggest no support for the claim that aligning the PMS to the strategic priorities of the firm positively affects performance. The use of economic profit measures is associated with culture, size and industry, while use of non-financial performance measures is correlated with the growth priorities of the firm. Hoque (2004) found an indirect effect between differentiation strategic priorities and organizational performance through the use of performance measurement systems. He also finds a significant and positive association between managements strategic choice and performance through managements high use of non-financial measures for performance evaluation. Spencer et al. (2009) study the mediating role of both non-financial and financial performance measures in the relationship between differentiation strategies and organizational performance; they focus on only differentiation strategy and conducted within the Australian manufacturing sector. Hence, they suggest for further study to test the relationship between cost leadership and performance measures.

Thus, there are inconclusive evidences of the relationship between strategic priority, performance measurement and organizational performance especially in the Asian context. As Campbell-Hunt (2000) points out, the paradigm of competitive strategy is now over two decades old, but it has yet to prove its adequacy as a descriptive framework or move beyond its propositions about the performance consequences of different strategic designs. Further research on the relationship between strategy and organizational performance, including potential moderators of this relationship, is clearly needed in order to advance strategic management theory.

Based on the literature reviews, the following hypotheses are formulated:

Hypothesis 1: competitive strategy is positively related to performance measures.

Hypothesis 2: performance measurement has a positive influence on organizational performance.

Hypothesis 3: competitive strategy has a positive influence on organizational performance

Hypothesis 4: There is an indirect positive association between a strategic emphasis

on each competitive strategy and organizational performance through the use of

performance measures.

III. Data and Methodology Sampling Frame: A survey was administered to 561 Thai listed companies in manufacturing and service industries. 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 units current address. These sample respondents include chief executive officer (CEO), chief executive within business unit or vice president or

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senior manager who is related to strategy divisions or senior manager of human resource department. The questionnaire was sent to chief executive officer and then telephone calls to follow up. One hundred and one (101) completed and usable questionnaires were received which is the response rate of 18%.

Measurement of variables A model was developed in this study, based on the relevant literature review, which hypothesizes the relationships between the four independent variables including two variables for competitive strategy, two for performance measurements, and the dependent variable, which is organizational performance. The 5-Likert scale measurement items were used for all variables. The original research instrument was then developed based on the literature review (see, i.e., Govindarajan, 1984; Govindarajan and Gupa, 1985; Abernethy and Stoelwinder, 1991, Abernathy and Guthries, 1994, Chong and Chong, 1997, Chenhall and Langfield-Smith, 1998; Le Cornu and Luckett, 2000; Hoque, 2004; Hitt, Ireland, and Heskisson, 2005; Parthasathy, 2007; and Joiner et al., 2009). The data were analyzed using SPSS version 11.5.

IV. Findings and Discussion Profiles of sample respondents Table 1 suggests that most of the companies (58.4%) are manufacturing. Over half of the companies operate more than twenty years. About 55% of the sample firm respondents are male and 77% are within the age group of 31-50 years old. The majority of them (i.e., 67%) are director and managers of the firm.

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Table 1: Profiles of Sample Firm Respondents Characteristics Group n % Company type Manufacturing 59 58.4 Service 42 41.6

Total 101 100

Companys age < 10 years old 6 5.9 10-20 years old 19 18.8 >20 years old 76 75.2

Total 101 100

Respondents profile Gender Male 55 54.5 Female 46 45.5

Total 101 100

Age Under 30 years old 6 5.9 31-40 years old 39 38.6 41-50 years old 38 37.6 More than 50 years old 18 17.8

Total 101 100

Respondents job position Chief executive officer 7 6.9 Vice president 14 13.9 Assistant Vice President 13 12.9 Director 33 32.7 Manager 34 33.7

Total 101 100

Descriptive statistics and correlation matrix for competitive strategy, performance measurement, and organizational performance.

Table 2 shows the correlations among the variables. There are significant correlations for all variables of competitive strategy, performance measurement, and organizational performance except cost leadership and organizational performance. The correlations between the variables in Table 2 are generally less than 0.6 indicating the absence of the multicollinearity.

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Table 2 Means, standard deviation, correlations and reliability coefficient

Variable 1 2 3 4 5 Mean s.d. skewness Kurtosis

1. Cost leadership 0.540 0.381** 0.196* 0.314** 0.117 3.35 0.80 -0.036 -0.739

2. Differentiation 0.851 0.256** 0.383** 0.480** 3.57 0.92 -0.484 -0.155

3. Financial measures 0.760 0.515** 0.339** 4.12 0.51 -0.135 -0.725

4. Non financial measures 0.914 0.207* 3.09 0.75 0.212 -0.442

5. Organizational performance

0.902 3.79 0.55 -0.632 -0.142

Note: **Correlation is significant at the .01 level(2-tailed) *Correlation is significant at the .05 level(2-tailed). Cronbachs alpha for reliability test is shown on the diagonal line.

The reliability of the measures was assessed through the determination of the Cronbach alpha coefficients. The items of each variable were from previous studies. The reliability coefficients measures by Cronbachs alpha of each measure are shown on the diagonal in Table 2. The reliability coefficient range from 0.540 to 0.914. Although one of them is slightly below 0.60, many researchers have noted that alphas of between 0.50 and 0.60 are generally acceptable for exploratory research. (Srinivasan, 1985; Nunnally and Bernstein, 1994; Gupta and Somers, 1996)

Result from path analysis

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). This technique was used to show the relationship between strategy and performance measurement, the relationship between performance measurement and organizational performance, and the indirect relationship between strategy and organizational performance via performance measurement.

The use of multiple regressions requires certain assumptions of the data, especially in relation to distributional characteristics. Data screening was conducted to ascertain that the data satisfied the relevant assumptions for multiple regressions. First, no evidence of multicollinearity was found by considering variance inflation factors for each variable. Second, data were found that 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 +1.0.

Four models have been developed to test the study hypotheses (see Table 3). The regression result for competitive strategy and performance measurement is reported in Model 1. Models 2, 3 and 4 report respectively the regression results for performance measurement and organizational performance (Model 2); competitive strategy and organizational performance (Model 3); and competitive strategy, performance measurement and organizational performance (Model 4). In each case,

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the regression results were used to compute the magnitudes (standardised beta coefficients) of the direct effects in the path models, and the method was also used to test the significance of the mediating effects.

Result of Hypotheses

The results of the path analytic model for testing H14 are presented in Table 3 Hypothesis 1 (H1) states that competitive strategy is positively related with performance measurement. This hypothesis is supported. It is found that both cost leadership and differentiation strategies are significantly associated to all performance measurement components. Similarly, H2 states that performance measurement has a positive influence on organizational performance. This requires that at least one significant path exists between the performance measurement dimensions and organizational performance. Financial measures are found to link to organizational performance for both the cost leadership and differentiation models. These results indicate that H2 cannot be rejected. H3, which states that competitive strategy has a direct positive influence on organizational performance, requires that a positive and significant path exists between at least one of the competitive strategy components and organizational performance. The results indicate that cost leadership is not significantly associated to organizational performance, while differentiation is significantly associated to organizational performance. Thus, the result is inconclusive and H3, therefore, cannot be rejected. The results also show significant paths from both cost leadership and differentiation to financial measures and significant paths from financial measures to organizational performance. While, both all dimensions of competitive strategies show significant paths to non-financial measures, but non-financial measures show insignificant effect on organizational performance.

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Table 3: Path coefficients for the model

Impact of Cost Leadership model Differentiation model

Path coefficient t-value Path coefficient t-value

Financial measures on

- Organizational performance 0.329** 3.395 0.231** 2.609

Non Financial measures on

- Organizational performance 0.189 1.817 0.027 0.284

Cost leadership on

- Financial measures 0.196* 1.992

- Non financial measures 0.314** 3.288

- Organizational performance 0.117 1.173

Differentiation on

- Financial measures 0.256** 2.632

- Non financial measures 0.383** 4.121

- Organizational performance 0.480** 5.444

* P

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indirect effect of differentiation on organizational performance through financial

measures (0.059) is obtained by multiplying the coefficient from differentiation to

financial measures (0.256) by the coefficient from financial measures to

organizational performance (0.231). The total effect (0.539) is the sum of the direct

(0.480) and indirect effects (0.059). Table 4 shows the direct, indirect, and total

effects of the competitive strategy components of cost leadership and differentiation

on organizational performance. For H4 to be rejected, the total effect of the

competitive strategy on organizational performance through performance

measurement should be less than the direct effect of each competitive strategy on

organizational performance. The total effects of cost leadership and differentiation on

organizational performance through performance measurements are greater than

the direct effect of cost leadership and differentiation on organizational performance.

These results imply that H4 cannot be rejected.

Discussion The goal of this study was to examine the relationships between competitive strategy and performance measurement, and their impact on organizational performance. The result fully supports the importance of using both non-financial and financial performance measures for firms pursuing both cost leadership and differentiation strategies. This is consistent with the conventional view that differentiators tend to place a high emphasis on the use of non-financial measures (Porter, 1980; Govindarajan and Gupta, 1985; Hoque, 2004). The empirical results also provide support for the surprising findings of Simons (1987) that differentiators also use financial measures. Our study also has found that firms use financial measures to enhance organizational performance while non-financial measures are not. Financial measures are direct reflections of current profitability and operating efficiency, which unction as the 'dashboard' to monitor and continuously enhance the firm's financial performance (Simons, 1990). Financial measures can also be used as an indicator for future earnings potential, which publicly-traded firms simply 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 in future planning and strategy implementation. For this study, financial measures are significant association with non-financial measures, correlation coefficient 0.515, show in Table 2. Therefore both financial and non-financial measures are important to organizational performance. In other words, effective performance measures should provide a map that guides managers' behaviors toward critical firms outcomes, such as, profit, cash flow, new product development and personnel development. Hence, the findings of this study support the idea that the use of performance measures can enhance organizational performance.

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Our results also offer further insights into the relationship between strategy and organizational performance by exploring the mediating role of performance measurement. Consistent with the work of Hoque (2004), he found empirical support for an indirect effect between differentiation strategic priorities and organizational performance through the use of performance measurement system. Finally, our study was conducted within the Thai listed firms where firms face domestic and international competition in addition to rapid shifts in customer demands. Our study further demonstrates that competitive strategies, designed with appropriate performance measurement could further enhance the competitiveness of Thai listed firms.

V. Conclusion An important aspect of strategy development is the translation of firm level

competitive strategies into performance measurement. We have demonstrated that

even in less developed economies performance measures represent one of the

means through which firm level strategic objectives can be achieved. We found

significant relationship between competitive strategy and performance measurement.

Our findings confirm that performance measurement is the means through which a

firm can implement its competitive strategies. Of the two performance measures

components, our findings indicate that only financial measures appear to significantly

influence organizational performance.

We have found direct relationship between differentiation strategy and organizational

performance, while cost leadership did not. However, both cost leadership and

differentiation strategies influences organizational performance through financial

measures. In that sense, the results are not only interesting but also unexpected.

The expectation in the literature is that aligning both financial and non-financial

measures with competitive strategy will lead to enhanced organizational

performance. As the result is inconclusive, we therefore cannot refute those

expectations.

Although the alignment of competitive strategy with non-financial measures did not

lead to significant improvements in performance, the alignment of competitive

strategy with financial measures leads to significant improvements in organizational

performance. Thus, it appears that firms in developing economies which are 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.

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