You are on page 1of 16

Accounting

,

Organizations

Pergamon

and Society, Vol. 22, No 6, pp. 557-572, 1997 CfJ 1997 Elsevier Science Ltd AU rights reserved. Printed in Great Britain 0361.3682/97 $17.00 + 0.00

PII:

SO361-3682(96)00048-7

CUSTOMER-FOCUSED MANUFACTURING STRATEGY AND THE USE OF OPERATIONS-BASED NON-FINANCIAL PERFORMANCE MEASURES: A RESEARCH NOTE

S. PERERA, CT. HARRISON Macquarie University and M. POOLE IBM Australia Ltd

Abstract This note follows and extends Abemethy and Lillis (Accounting, Organizations and Society, 1995) by examining: (i) whether firms which maintain a customer-focused manufacturing strategy also maintain an emphasis on non-financial (operations-based) measures in their performance measurement systems; and (ii) whether such an emphasis is associated with enhanced performance for those firms. Data are obtained via questionnaire survey of a random sample of manufacturing firms in Sydney, Australia. Support is found for the hypothesized association between customer-focus strategy and the use of non-financial performance measures (and hence for Abemethy and Liilis) but not for the link to organizational performance. $3 1997 Elsevier Science Ltd

It is well accepted that the competitive and technological environments of manufacturing have undergone massive change over the past quarter century (Howell & Saucy, 1987b; Johnson, 1990b; Samson et al., 1991). Increasing globalization, advances in manufacturing technology and new approaches to manufacturing management (Just-in-Time and Total Quality Control, for example) mean that manufacturing firms no longer operate in an environment of “stable demand for products, (and) high utilisation of factory capacity” (Samson et al., 1991, p. SO), nor one in which competitive strategy can be focused solely on cost leadership (Abernethy & Lillis, 1991, p. 227). Rather, the competitive and technological changes have meant that firms must now maintain a manufacturing strategy of customer focus, and concentrate on those factors which provide value to customers,
557

including not only low cost, but also high quality, flexibility of product characteristics and dependability of supply (Johnson, 1990a). With these changes has come the question of whether traditional cost and financially-oriented performance measurement systems remain appropriate contemporarily. Authors such as Kaplan (1990) Howell and Saucy (1987b), Vollman (1990) and Dent (1990) for example, have argued that such systems lack relevance in the new manufacturing environment in that they do not reflect, and are inconsistent with, the customer-focus factors of quality, flexibility and dependability which have now become critical to firm success. Worse, continued emphasis on cost and financial-based measures, which are essentially short-term, have been argued to be counter-productive in that they provide little incentive to improve customer-focus factors in

Samson et al. 37. they rely less on cost efficiency-based performance measures. These latter measures are seen increasingly to comprise non-financial (or operations-based) indicators given their ability to measure factors such as delivery schedule maintenance (dependability). Samson et al. but also a concomitant shift from cost and efficiency-based performance measures to ones which capture and reflect those strategies (Macintosh. however. p. PERERA et al. The next ‘As the focus of the study is on manufacturing strategies. p. 37. pp. Abernethy and Lillis (1995. A&L examined just one component of a customer-focused manufacturing strategy (flexibility). Banker et al. 241) note that “there has been little systematic study of the link between manufacturing strategy and control system design” generally. 36) and may even prejudice the pursuit of those factors (Dent. thus leaving open the question of whether an emphasis on non-cost-based measures is associated with enhanced performance in firms pursuing flexible strategies. and (ii) whether such an emphasis is associated with enhanced performance for firms pursuing a customer-focused strategy. Consequently. Abernethy and Lillis (1995) (hereafter A&L) examined the link between one component of a customer-focused manufacturing strategy.. the study examines: (i) whether firms which maintain a customer-focused manufacturing strategy also maintain an emphasis on non-financial (non-cost efficiency or operational) measures of performance. p. the non-financial performance measures covered are correspondingly restricted to operations-based measures and do not cover the broader range of non-financial measures applicable to organizations more generally. 1995. p. the literature has generally manufacturing argued that the changed environment requires not only the adoption of customer-focused manufacturing strategies. 1993).’ The paper is organized as follows. Abernethy & Lillis. product characteristic variation (flexibility) and product quality (Banker et al. 1990 p. While A&L found positive (negative) associations between cost efficiency measures and performance for firms following non-flexible (flexible) strategies. Following and extending A&L. they asked the questions: (i) do firms committed to manufacturing flexibility use perde-emphasize measures which formance accounting and other efficiency measures. 1995. and two aspects of control systems design. 1985. Additionally. and did so using interviews with managers in preselected industries.. p. quality and dependability). This is the purpose of the study reported in this note. few studies have examined empirically the links between customer-focused manufacturing strategies. 1993. flexibility. 34. manufacturing strategies (Samson et al. they did not examine directly the performance implications of non-cost efficiency measures. and (ii) is the performance of the firm enhanced when the performance measurement system is adapted to facilitate the implementation of manufacturing flexibility? A&L hypothesized and found that as firms move towards a strategy of manufacturing flexibility. 3). also leave an element of equivocality about the performance implications of non-cost (nonfinancial) efficiency measures for firms pursuing customer-focused strategies. 1991. p.. Despite these arguments. Smith. There is motivation. specifically the structural arrangements co-ordinating production activities and the performance measurement system. 1991.558 S. 243). With respect to the latter. Indeed. A&L also found some evidence that reliance on cost efficiency-based measures was positively associated with performance for firms following a non-flexible manufacturing strategy. for extending the research to examine customer-focused manufacturing strategies more generally (including the factors of cost. and negatively associated with performance for firms following a flexible strategy. 43-46. therefore. . the use of non-financial (operations-based) performance measures and performance in manufacturing organizations. The A&L study and results. 1991. and doing so with a different (survey) methodology involving a random sample of companies drawn from manufacturing industries...

p. Meredith (1987) offers a similar duality. three of the four dimensions of a customer-focused manufacturing strategy: (i) cost. customer-focus may also entail pre-manufacturing and post-manufacturing activities (such as product design and after-sales service/warranty). 1989) that manufacturers cannot pursue all four dimensions simultaneously because there are seen to be trade-offs between cost and quality. A way in which equal emphasis on all four dimensions may be attained is implicit in McNair et al. and (iii) dependability of supply (Chenhall. waste and non-value adding activities. (ii) quality. and how such a strategy may be attained. 1984. 139) recognized this by noting the Japanese approach to attaining a customer-focused manufacturing strategy through the sequential and progressive building of the four dimensions. as relating to the management process and the second to the manufacturing process. 1980) three generic strategies of cost leadership. and Nemetz and Fry (1988). (1989. these programs are directed towards. Advanced management practices AMP is drawn from Chenhall (1993) (who termed it advanced manufacturing practices) and is regarded as comprising management philosophies embodied in practices and pro grams used to enhance the manufacturing process with respect to customer-focus. The paper therefore relies on the four dimensions’ seen to constitute such strategy by. flexibility (through greater control over set-up times and product runs) and delivery dependability THEORY DEVELOPMENT AND HYPOTHESES FORMULATION Customer-focus As noted earlier. Following sections detail the method and variable measurement. Bu#a (1984) . the dimensions then hold equal priority. ranging from stand-alone pieces of equipment to fully integrated factories. require constant maintenance and form the competitive yardstick. flexibility and dependability of supply. Advanced manufacturing technology Advanced Manufacturing Technology (AMT) relates to the physical hardware of the manufacturing process and is defined here as consisting of technological advancements in automation able to be used in the production process. such as Porter’s (Porter. differentiation and focus. and cost and flexibility. In particular. and reflect. a customer-focused manufacturing strategy may be seen as comprising the dimensions of cost. Howell and Saucy (1987~) state that automation. In this study. seek to attain all four dimensions simultaneously. Once achieved. The first of these may be regarded ‘In a broader sense. after first elaborating on the concept of a customer-focused manufacturing strategy. De Meyer et al. quality. the environmental changes noted earlier mean that manufactuting firms both need to. we use the terms Advanced Management Practices (AMP) and Advanced Manufacturing Technology (AMT) to parallel these dual elements.CUSTOMER-FOCUSED MANUFACTURING STRATEGY 559 section outlines the theory giving rise to the hypotheses to be tested. allows an organization to attain the four dimensions of a customer-focused manufacturing strategy by reducing costs while. 1993). The emphasis of this paper is restricted to customer focus in manufacturing strategy. through programs (such as Just-in-Time Manufacturing) aimed at reducing or eliminating inventories. (1988) who argue that manufacturing excellence may be approached through combining processes geared towards (i) the elimination of non-value added costs and (ii) automation. enhancing quality (through increasing the accuracy with which products are made). and can. referring to “business techniques” and “manufacturing techniques”. through programs such as Total Quality Management and Employee Involvement. and must therefore prioritise the dimensions in line with more restrictive strategy choices. among others. However. at the same time. results and discussion. De Meyer et al.* It has been argued (Buffa.

Schroeder et al. cited in A&L. As such. 1990. p. . 1992). traditional financial performance measures are argued to rely on manufacturing assumptions of standardization. reasons for this expectation are drawn on here.560 S. an ability to specify unproblematic input/output relationships. Simons. p. of several. The typical absence of such characteristics in manufacturing environments involving competitive strategies of customerfocus is seen to render financial measures of manufacturing performance less relevant (Brownell & Merchant. These reasons underpin the expectation in Hypothesis 1 of this study. 1988. A&L (pp. traditional financial accounting measures are seen as too aggregate. flexibility and dependability of supply as simultaneous priorities within a customer-focused manufacturing strategy. the extent of implementation of AMP and AMT is used in this paper to proxy for the extent of customer-focus in a firm’s manufacturing strategy. 1985) (A&L. and is discussed only briefly here. the theory supporting these hypotheses is largely explicated in that paper.capture the critical success factors related to customerinitiated demands” (Macintosh. quality. as proxied by the degree of implementation of AMP and AMT. then they will be inadequate in supporting the customer-focused manufacturing strategy of which the dimensions are integral component parts. and (ii) is the mechanism by which those dimensions may be attained. 1985. 242-243) draw on Govindarajan (1988) Simons (1987). 1993. too short-term oriented. 242) and non-financial measures more relevant (Chenhall. p. 1983.. Hl : Increasing customer-focus in manufacturing strategy. 688). As a consequence..in a wellspecified and stable environment” (Kaplan. these measures are seen to be less capable of supporting the achievement of manufacturing strategic priorities associated with customer-focus than are the more direct and specific non-financial (operationsbased) measures of quality. With respect to the perceived trade-off between flexibility and cost. Second. (through lower defect rates and flexibility for delivery schedule adherence). and not sufficiently comprehensive or focused to capture the elements critical to customer-driven manufacturing strategies (Macintosh. 1987). and may therefore be used to operationalize. flexibility and dependability (Govindarajan. 243). flexibility and dependability as part of a The foregoing arguments suggest that the joint presence of AMP and AMT allows a firm to maintain the four dimensions of cost. the extent of a firm’s commitment to the four dimensions of a customer-focused manufacturing strategy. (1990) contend that computer-controlled process technologies are able to reduce this trade-off.PERERA et al. Two. and “mass production of a mature product with known characteristics. a firm following such a strategy will be expected to make use of non-financial performance measures targeting the specific operational aspects of quality. First. Thus. as proxied by the implementation of AMP and AMT. Two hypotheses are tested as follows. and Yamauchi (1988) demonstrated that robots were important in a Japanese motor vehicle manufacturing firm in allowing the simultaneous satisfaction of several objectives including quality. H2: Increasing use of non-financial performance measures is associated with enhanced performance for firms pursuing customer-focus in manufacturing strategy. p. 52). As this study is an extension of A&L. flexibility and dependability. Singleton-Green. Theory development ation and hypotheses formul- “effective performance measures (for customerdriven manufacturing strategies) will require a shift from measures which focus on manufacturing efficiency to measures which.. Brownell and Merchant (1990) Macintosh (1985) and Eccles (1991) to argue and demonstrate that . flexibility and cost. on the grounds that it both: (i) indicates. is associated with increasing use of non-financial performance measures. If traditional financial performance measures are inadequate in assessing achievement of the dimensions of quality.

By contrast. The theory underlying this argument is both instrumental and motivational.. to enhance performance in a firm pursuing a customer-focused manufacturing strategy. 52). p. it is expected that the use of non-financial performance measures will also be high for the reasons outlined previously in this section. the more a firm seeks to pursue simultaneously all dimensions of a customer-focused manufacturing strategy. the performance measures relevant to such a strategy involve indicators of the dimensions of quality. 130. reflecting a high commitment to both the management processes and technology associated with a customer-focused manufacturing strategy. p. Hayes et al. p. Ch. and will seek to maximize performance against. Hypothesis 2 follows that increasing use of such measures in firms pursuing a customer-focused manufacturing strategy (where that focus comprises these four dimensions and is proxied by the extent of implementation of AMP and AMT. p.3 Consequently. p. when the extent of implementation of both AMP and AMT are low. As such. the argument and the need for them to be supported . 36). p. 1993). The motivational premise of Hypothesis 2 is that managers have an incentive to concentrate on. such actions and decisions need to be informed by relevant and specific feedback on those dimensions. as well as cost. S). 1974. are empirical questions on which this study seeks to shed some light. Which of the two (AMP or AMT) is stronger in its association with the use of non-financial measures. when both AMP and AMT are high. cost. 1991. Nanni et al. (but) they do not pin down precisely what it is in your business that you are getting right or wrong (Singleton-Green. With respect to the former. Chenhall (1995. (1992. proxied by and reflected in the extent of implementation of AMP and AMT. Singleton-Green. performance of a customer-focused of financial by such measures Rather. METHOD AND VARIABLE MEASUREMENT Data were gathered by a questionnaire mailed to 200 managers of manufacturing firms/ divisions randomly selected from the Sydney. argue that for manager actions and decisions to be effective in achieving performance against ‘This argument limitations is not meant to deny the role of financial manufacturing measures strategy. and the nature of their interaction. As has been shown. NSW area using Riddell’s Business Who’s Who Australia (1994). Stated another way. 1993. 5. the greater the expected use of non-financial measures in performance evaluation. flexibility and dependability. Both implicit and explicit in the citations is the premise that aligning performance measures with strategic priorities is important in generating and directing manager actions towards the attainment of those priorities. The foregoing citations and evidence also support the expectation in Hypothesis 2. which together capture and facilitate those dimensions) will be associated with enhanced performance. 6) and Singleton-Green (1993) among others.CUSTOMER-FOCUSED MANUFACTURING STRATEGY 561 multiple measures approach. the dimensions of that strategy need to be embedded in the performance measurement system (Samson et aZ. Profit measures (as an example of financial measures) show the effects of non-financial activities and achievements. This is because there will be little perceived purpose in formally measuring operations-based performance indicators relevant to a customerfocused manufacturing strategy in the absence of such a strategy. is captured context. 1988. Only firms/divisions with measures. it is expected that the use of non-financial performance measures will also be low. reflecting a low commitment on the part of the organization to both the management processes (AMP) and technology (AMT) relevant to a customer-focused manufacturing strategy. 52) argues that the most important reason supporting the power of non-financial indicators to enhance performance in a customer-focused manufacturing environment is that “they (non-financial measures) deal with causes not effects”. in this strategic the customer-focus dimensions. those activities on which their performance is measured (Hopwood. as one of the four dimensions seeks to demonstrate by non-financial the measures. Indeed.. Singleton-Green (1993.

Two categories (“hand tools and manual machines” and “powered machines and tools”) were excluded as they essentially reflect the absence of automation. “automaticrepeats cycle”. Riddell’s directory provides names for senior managers and questionnaires were personally addressed. respectively. The four which were included (“single cycle automatics and self-feeding machines”. AMT. The instrument measures the degree of workhow integration (automation) as characterised by six categories (shown in the Appendix) ranging from hand tools to computer control. p. anchored on “Not used at all” and “Used to a great extent”. “self-measuring and adjustment-feedback” and “computer controlautomatic cognition”) all involve automation and increasing degrees of automation. %VhiIe this is a relatively old instrument. 1993. and involve committing the firm to a specific level of technology for a relatively long time.” *A copy of the questionnaire may be obtained from either of the university authors. etc. Senior level managers were chosen as respondents needed to be knowledgeable about their firm’s manufacturing strategy. it allows capture of the extent of implementation characteristic automation rather than the degree or extent of its implementation. A weighted measure of automation was used based on the argument that the intervals between the categories are not equal but increasing as the category moves from low to high. anchored on “To very little extent” and “To a great extent”. We acknowledge the permission of Professor Robert Chenhall to use the AMP scale he developed in our study. A second of automation.* Advanced management practices (AMP) AMP was measured with Chenhall’s (Chenhall. Telephone calls were made to confirm that these names were current or to obtain names of replacements. 13). production process. which is the of relevance to the study. Chenhall’s application of the instrument showed high construct validity with all items loaded onto a single factor with a criterion of 0. the extent to which the degree of automation represented by each category was used in their production process. Later instruments (such as Hendricks. Advanced manufacturing technology (AMlJ AMT was measured using an adaptation of the instrument developed by Inkson et al. The more sophisticated forms of automation are more expensive. Responses to four of the six categories were used to score the extent of automation. more than 50 employees were included. 1988. and the scores for the second. quality improvement. Results with the second . on a five-point Likert-type scale. while it is comparatively easier for firms with low degrees of automation to move to higher ones. 3 and 4. 13) instrument designed “to establish the extent to which divisions had progressed in the development of AMP”.40 (Chenhall. third and fourth categories by 2. “It is acknowledged that these weights are arbitrary. p. Respondents were asked to indicate the extent to which their organization had implemented these (AMP) programs on a five-point Likert-type scale.5 Respondents were asked to indicate. performance measurement systems and performance. 1993. multiplying the score for the first (lowest) auto mation level category by 1. This makes it difficult for firms that are already highly automated to become relatively more so. A simple weighting system was applied. The instrument comprises seven items (shown in the Appendix) assessing the extent to which an organization has implemented programs involving reduction of waste. and that the decision to use four categories is subjective measure were not substantively different and are reported where appropriate later in the paper. (1970).562 S. PERERA et al. cycle time improvement. The questionnaire contained questions designed to measure the variables of AMP. emphasis on nonfinancial performance measures and organizational performance. for example) capture the type of measure of AMT using all six categories in unweighted form was also used as a sensitivity test.

1990) and which therefore support the theory drawn on in the study. Although self-rating measures have sometimes been criticised for a potential leniency bias. profitability and return on assets over the past three years. Howell & Saucy.’ Respondents were asked to indicate on a fivepoint Likert-type scale. 1987b. To be classified as financial. Results with the relative measure were not substantively different and are reported where appropriate later in the paper. an item was financially aggregate. 109 were returned for a response rate of 54. anchored on “Well below (above) industry”. Four responses were excluded because of incomplete data. 1990. Following Chenhall (1993) performance was scored as the mean of the responses to the three questions. Examples of the non-financial measures are “product defects” and “number of product returns” relating to quality. (1994. anchored on “Of little or no importance” and “Of utmost importance”. This summation is consistent with the absolute (rather than relative) method of scoring used by Brownell (1985) to score emphasis on accounting performance measures8 Performance A self-rating instrument used by Chenhall (1993) and adapted from Swamidass and Newell (1987) was used to measure performance. flexibility and dependability. However. Classification of the measures into financial and non-financial followed A&L and Horngren et al. customer-focus factors. (1994. and even to the detriment of. ‘A relative measure. the generic term “sales” was used and included as a financial measure. and five new measures were added. including ‘It was pointed out by a reviewer that. for example. as the percentage of revenue derived from new products. This test. 1990. The full instrument. is given in the Appendix. “return on investment”. “sales” might be a component of a non-financial measure. These criteria were those underpinning the arguments for the relevance or irrelevance of traditional financially oriented performance measurement systems (Kaplan. the importance of each measure with respect to the extent of its use in their performance measurement systems. not specifically or directly reflective of customerfocus factors of quality.” Descriptive statistics. If used. depending on how it is used. In this study. RESULTS Of the 200 questionnaires mailed. “sales” and “material price variance”. and “on time delivery” (dependability). Vollman. it could be a measure of future positioning rather than current performance.5%. The emphasis placed on non-financial measures was determined by summing the scores for the 11 non-financial measures. suggest that nonresponse bias is not a problem in this instance. On a five-point Likert-type scale. 891). following Homgren et al. as is the case in the present study. the presence of nonresponse bias was tested using the analysis of early versus late responses suggested by Oppenheim (1966) p. respondents were asked to rate performance against industry average on each of the three dimensions of annual rate of growth in sales. containing 11 non-financial and four financial measures. was also used to test the robustness of the results. 9No follow up mailing was done because of time constraints. . Ten were selected from this list based on how well they represented the four dimensions of a customer-focused strategy. 890892). pp. The financial measures are “profit/net income”. relating the summed scores on the non-financial measures to those on the financial measures.CUSTOMER-FOCUSED MANUFACTURING STRATEGY 563 Non@zancial performance measures The extent of use of non-financial performance measures was measured by adapting the A&L instrument. and could potentially be enhanced by a tradeoff against. which comprised 18 performance measures. plus the comparatively full range of observed responses. this is less a concern where such bias is generic and where the ratings are needed for relative rather than absolute analysis. “ability to vary pro duct characteristics” (flexibility). 34). p. Dent.

regression model was fitted to the y =bO + b. with that between AMP and non-financial measures being higher at ~0. 195 l).606 (0.000) 0. is positive and significant (t=2.147 (0.140 (0. it is a relatively However.73 4. With respect to this hypothesis.487) 0.93 2. .236 (0.000) 0.77. PEREIU et al.000) alpha reliability statistics (Cronbach.564 S.51 10. p=O.344 (0.07 and explained 14% of the variance. Table 3 shows that the model has an adjusted R square of 39%. while the just attained six of the seven items in the measure on the first factor loaded at 0. TABLE 1.251 (0.010) 0.158 (0.82 0.58 3. Table 2 shows that the correlations between each of the two components of customer-focus (AMP and AMT) and the use of non-financial performance measures are positive and significant.135) 0. Descriptive statistics Observed Minimum 14 11 1 11 10 range Maximum 52 20 5 35 50 Cronbach alpha Variable Non-financial Financial Performance AMP AMT Mean 40.AMP The first hypothesis was that increasing customer-focus in manufacturing strategy. the first of these had an eigenvalue of 1.42 0.553 (0. 44% of the variance.28 16. Additionally. than between AMT and non-financial measures at r-=0.77 0.504. p=O. and that b. the ‘oAhhough the AMP measure attained a Cronbach + bp4MT +bglMPxAMT+e (1) where: Use of non-financial performance measures AMP = Advanced management practices AMT = Advanced manufacturing technology y = Table 3 presents the results of fitting equation (1). as proxied by the degree of implementation of AMP and AMT.81 S. hence.78 0.107) 0. for the variables measured are given in Table 1 and a correlation matrix in Table 2.O07). would be associated with increasing use of non-financial measures.OOO.606.41 Possible range Minimum Maximum 11 4 1 7 10 55 20 5 35 50 0.” following data. 6. seventh The analysis produced while the second two factors. the criterion loaded eigenvalue was also conducted.69 TABLE 2.153) 0.02 and explained with loadings greater of 3. p=O. a factor analysis alpha of 0. Additionally. indicating an interactive effect of AMP and AMT on the new measure and. than 0.62.36 29.O04.280 (0.40.004) matrix for independent Financial and dependent variables AMP Performance 0.280.068 (0. Correlation Non-financial Financial Performance AMP AMT 0.56 0.64 25.D.015) 0. The seventh was hem 6 in the Appendix.

. for firms which are pursuing a strategy of customer-focus through the employment of both advanced management practices and advanced manufacturing technology. the partial derivative of equation (1) for the use of non-financial performance measures with respect to AMP was taken as equation (2) below.115 -0. the partial derivative of equation (1) for the use of non-financial performance measures with respect to AMT was taken as equation (3) below.617 0. 8. The effect is positive with increasing implementation of AMP being accompanied by increasing use of non-financial performance measures.O19). using the relative measure p=O. Results of estimating hIANUFACTURING STRATEGY variable 565 of a model for the two-way interaction between AMP and AMT for the dependent use of non-financial performance measures Value 35. The Schoonhoven and this should be borne in mind in interpreting .345 -2. “This procedure has been used previously “The point of inflexion rather determined range by setting the partial derivative of AMT scores intervals dy/aAMP equal to zero lies at a value of AMT of -4.290 0. (one-tailed) 0.8 (determined by setting the partial derivative dy/dAMT equal to zero) lying within the observed range of AMP. irrespective of the level of AMT. n=105.007 use of non-financial performance measures.011 t-statistic 4. bl bz b? RZ=0.0. The vertical axis represents dy/dAMT and the horizontal axis the level of AMP.12 First. with the point of inflexion at a value of AMP of 22. and with the rate of increase of such measures becoming greater as the level of AMT increases.000 SD. although of emphasis on non-financial performance measures were also positive and significant with a smaller 1value than in the model using the absolute measure. The graph shows that the effect of changes in AMT on the use of non-financial measures is non-monotonic over the observed range of AMP. The graph shows that the effect of changes in AMP on the Figure 2 plots equation (3). To examine the nature of the interaction.CIJSTOMER-FOCUSED TABLE 3.175 0. the procedures This lies outside estimates the observed than confidence of 10 to 50. procedure requires the use of point and plots. significance 0.000 0 365 0. * ’ The extent of use of non-financial performance measures is dependent on the levels of both AMP and AMT.13 Second.41. the procedure suggested by Schoonhoven (1981) was used.504 p-value Variable Intercept AMP AMT AMPxAMT R’=0. support the argument that there is a greater emphasis on non-financial performance measures for firms in which both AMP and AMT are high.39.013 0. The vertical axis represents dy/dAMP and the horizontal axis indicates the level of AMT.40. therefore.027 F 3. by Mia (1989) and Harrison (1993) to explore the nature of interactive effects.273 0.098. The data.334 0. dy/dAMT = b2 + bgikfP (3) Figure 1 plots equation (2) using the regression coefficients from Table 3 and the observed range (of 10 to 50) for AMT scores. dy/dAMP = bl + b.e.26. i. This indicates that for low levels of “Results (k2.glMT (2) use of non-financial measures is monotonic over the empirically observed range of AMT.256 2.=23.074 0. adjusted Coefficient bc. again using the regression coefficients from Table 3. and the observed range for AMP scores (of 11 to 35).

------- : . 40 .. The effect of AMP on the relation between the use of non-financial performance measures and AMT....i 40 I 50 60 Fig. . -._...:.. 30 AMP ... .....566 S.. -2 _______ 0 10 I 20 . PERERA et al......--.‘..... . .. AMP (below 22 and. . Figure 3 plots the results of this regression showing separate lines for high and low AMP (AMP greater than 22 and less than or equal to 22...-. increasing levels of AMT are accompanied by decreasing use of non-financial performance measures. once firms begin to implement AMP to a greater extent (above 22) this is accompanied by increasing movement towards non-financial performance measures. . -..5 -1 l .....-.. __:... .5 . reflecting “very little” to “some” degree of implementation of AMP programs). : i l _* ~_________..-.- : 30 AMT :.. therefore. 1....... However..-.. 50 60 Fig.. 2.:.-.. An alternative method of visually representing the Schoonhoven analysis is to dicho tomize AMP at its point of inflexion and re-estimate the regression model in equation (1) with a dummy variable for AMP.. . 1 0 10 20 -. again.. _. . .... a.....--... dYldAMT 0 l -1.. .... .. ... . respectively).’ I . .... :.. by using the .....--I --. These lines are iocated.-...... -.. The effect of AMT on the relation between the use of non-financial performance measures and AMP..________ i .... 2 v- ..

Low AMP 20 *MT 30 Fig. The results of the analyses using this measure were not substantively different from those with the weighted.750. it should be kept in mind that the results of the interaction regression model (Table 3) indicate that firms’ use of nonfinancial performance measures is dependent upon both the level of AMP and AMT in interaction. suggest that the implementation of. four category measure. This lends considerable comfort to the robustness of the results of the study. In this measure. . 3. This indicates that the more (less) firms rely on non-automated technology. and the relative magnitudes of the correlations in Table 2. p=O. and commitment to. advanced management practices is a stronger stimulus to the use of nonfinancial performance measures than is the level of advanced manufacturing technology. The Schoonhoven analysis. summing the responses to these two items allows the firms in the sample to be distributed along a continuum representing the extent to which they use no (or minimal levels of) automation. ‘% footnote 6.O52). The interaction between AMP and AMT affecting the use of non-financial performance measures remained significant. The correlation between the summed scores on these two categories and the use of non-financial performance measures was negative and significant (?=-0. ‘* A complementary analysis was conducted using the responses to the two categories in the Inkson et al. but using the coefficients generated by the regression model with AMP as a dummy variable.p=O. observed range (of 10 to 50) for AhIT scores. responses to the first three (zero or low automation) categories were reverse scored and summed with responses to the last three categories. Although excluded from the AMT measure for the reason given earlier. instrument was also used as a sensitivity test. and the Schoonhoven analysis produced graphs of the same form as those in Figs 1 and 2.O42 one-tailed). it was noted that an unweighted measure of AMT using all six categories in the Inkson et al. The relation between AMT and the use of non-financial performance measures for high and low AMP.19O. although at a lower level (1=1. (1970) measure of automation that were excluded from the AMT measure used in the main analysis (“hand tools and manual machines” and “powered machines and tools”).CUSTOMER-FOCUSED MANUFACTURING STRATEGY 567 High AMP 30 Non-Financial Performance Meaeures 2. Nonetheless.

and supports. Some potential reasons for this result are given in the Discussion section. no support is found for the argument that increasing use of nonfinancial performance measures is associated with enhanced performance for firms pursuing a customer-focused strategy. the twoway) interaction terms may be neither stable nor interpretable in the higher order (here. (This term was also insignificant in the model r5Although not of direct concern to the questions asked.OOS). the less (more) they use non-financial performance measures. the scales have arbitrary origins and linear transformations are legitimate and trivial.17 DISCUSSION This study provides empirical evidence of the increased use of non-financial performance measures by firms pursuing a customer-focused The results of fitting this equation are reported in Table 4 which shows the coefficient b.435. This result is consistent with. indicating that increased use of non-financial performance measures is associated with enhanced performance for those firms implementing increased levels of advanced manufacturing technology. Southwood (1978) and Jaccard et al. the data show no evidence of a relation between increased customer-focus and increased use of financial performance measures.) Hence. they can change the regression coefficients. for the three-way interaction term is insignificant. respectively.15 Hypothesis 2 The second hypothesis was that increasing use of non-financial performance measures would be associated with enhanced performance for firms pursuing a customer-focused strategy built upon the joint components of AMP and AMT. A regression model of the form specified in equation (1) with the dependent variable of use of financial performance measures yielded no significant coefficients. standard errors and significance tests for all terms below the highest order interaction term. the three-way) interaction model. . p=O.16 While the results of fitting the model for AMP yielded an insignificant interaction coefficient. “Further caution is added here in that the interaction coefficient did not reach significance in the model using the relative measure of emphasis on non-financial performance measures. As such. and hence the lower order (here. The results should be treated with caution. This result is consistent with that from testing Hypothesis 1 using the relative measure of emphasis on non-financial performance measures (refer to footnote 11). Hence. ‘%e coefficients for the nvoway interactions cannot be estimated from the three-way interaction model given as equation (4). further analysis was undertaken by fitting separate two-way interaction regression models for the customer-focus components of AMP and AMT. as the R square for the AMT model was only 6%. The data used in the study are based on Likert-type scales and are therefore interval at best.568 S. the following three-way interaction regression model was estimated. the interaction coefficient for the AMT model was significant (t=2. the association between customer-focus (with its components of AMP and AMT) and the use of financial performance measures was also examined. the result of the main analysis. However. To examine this question. however. (1990) have shown that although such transformations are trivial theoretically. y =bo + b. PERERA et al. Following this finding.AMP + bzAMT + b3NF +b&PxAMT+b+MTxNF +bglMPxNF +b&MPxAMTxNF+e where: y AMP AMT NF = = = = Performance Advanced management practices Advanced manufacturing technology Use of non-financial performance measures (4) using the relative measure of emphasis on nonfinancial measures.

261 p-value Variable Intercept AMP AMT Non-financial AMPXAMT AMTx non-financial AMP x non-financial AMP x AMT x non-financial R*=0. a match between such a strategy and nonfinancial performance measures may be reflected in manager-affective outcomes such as increased satisfaction and motivation and reduced stress rather than in direct performance outcomes.265 -0. signiticance manufacturing strategy.005 0. The study also provides greater generalizability to A&L in that it found the association between manufacturing strategy and non-financial performance measures.CUSTOMER-FOCUSED TABLE 4.950 -0.292 0.341 0.022 -0. The only significant finding for performance was the interaction between the technology component of customer-focus and the use of nonfinancial measures. performance is a complex variable with a multiplicity of factors contributing to the level of global performance at any point in time.004 0. that is. the study also found that both these components in interaction are important in explaining management choices of performance measures. (l-tailed) 0.000 0.007 0.789 -0. it may reflect the anecdotal evidence noted in A&L that changes to the performance measurement system were considered less important than organizational structural arrangements in their ability to enhance performance under flexible manufacturing strategies.600 0. adjusted Ra=0. With respect to the latter. If so. However.497 0. 6.97.345 0. AMT and use of non-financial mance measures for the dependent variable of performance Coefficient bo b. the main benefits of increasing the use of operations-based measures may be motivational rather than instrumental.397 n=105.659 0.068 0. in the absence of a finding for customer-focus generally.003 0.216 0.007 -0.000 0. There may be several reasons for this.009 0. using four components of a customer-focused strategy rather than just one. the results support those of A&L (and add to the scarce empirical research) in providing evidence of management beliefs that changes in manufacturing strategies to emphasise quality. bz bs b4 bs bs b.07 S. The . flexibility. the results must be seen as failing to support the link to performance.12. the cross-sectional methodology employed and the measure of the performance variable.D. Results of estimating MANUFACTURING STRATEGY 569 perfor- a model for the three-way interaction between AMP. F7. Value 6.s7=1. The study was not able to find a consequential link to organizational performance. through aligning the formal performance measurement system (and subsequent systems of reward and compensation) with those factors that operational managers know they must pay attention to under a customer-focused manufacturing strategy. Thud.172 0. dependability and low cost should be accompanied by changes in formal performance measurement systems to place greater emphasis on non-financial (operations-based) measures.255 0.399 0.167 0.213 0. and with a different (survey) methodology and a broader-based random sample of manufacturing firms. the absence of results on performance might be a consequence of two related limitations of the study. and with no convincing argument for the technology component on its own. and consequently. Such structural arrangements were not examined in this study.491 0. While the results suggested that AMP (the management philosophy component of a customer-focus strategy) was a stronger stimulus to the use of non-financial performance measures compared to the AMT component.168 -0.006 -0.000 t-statistic 0.411 0. As such.06. Second. First.

but important limitation of the study is its cross-sectional nature. & Schroeder. Budgetary Systems and the control of functionally differentiated organizational activities. Future research focusing on changes in specific. 20.. therefore. More informed decisions and control actions. pp. The impact of manufacturing flexibility on management control system design. flexibility and dependability should enable managers to make more informed decisions and take specific control actions with respect to those aspects. Sydney. S. 39. with their comparative strengths of generalizability and causality. 7-10 July 1991. 33-55. and organisational performance: an empirical investigation. Journal of Management Accounting Research. M. M. M. (1985). 28. D. H.. Reliance on manufacturing performance measures. P. This may have reduced the strength of the association. R. the potential for reverse or reciprocal causality cannot be ruled out. Buffa. K. as well as the motivational effects of non-financial measures in this strategic environment. Banker. 388-397. might well capture performance effects not discerned in this study. (1990). We did not formally examine whether the performance measures were linked to pay and promotion consequences for the managers in the sample.. reflect longer-term performance effects of the hypothesized relationships. further research on this question using a longitudinal methodology and examining one or more organizations and their performance measurement systems both before and after adoption of a customer-focused manufacturing strategy would allow empirical testing of the direction of causality. JournaI of Accounting Research. In consequence. R. strategies of manufacturing flexibility. 227-233. 502-512. Meeting the competitive challenge. As for all such research. but not necessarily immediately. our measure is essentially one of short-term performance and may not. disaggregated components of performance. 23. Paper presented at the Accounting Association of Australia and New Zealand Conference. A. (1992). P. as well as shedding light on the process of systems adaptation. BIBLIOGRAPHY Abernethy. Organizations and Socieiy. A. (1993). Reporting manufacturing performance measures to workers: an empirical study. A. While theory and prior literature are available to suggest that manufacturing strategy precedes performance measurement systems change. As such. 5. (1993). Flexible manufacturing strategies: implications for organizational arrangements and manufacturing performance measures. H. our study is able only to show associations among the variables at issue.. M. Potter. R. in that information on specific aspects of quality. G. & Lillis. New York: Irwin Chenhall. A. performance measure used here may not have been strong enough or timely enough to capture the effects hypothesized. Journal of Accounting Research. Accounting. Paper presented at the Strategic Management Accounting Seminar. (1991). E. Brownell. . Accounting Communique.570 S. Chenhall. should translate into enhanced performance. A. (1995). and over a longer period of time. PERERA et al. or as captured by the global measure used in this study. Contemporary performance measurement. & Merchant. G. Conference Proceedings. both associational and longdifferent itudinal studies. such a directional implication is entirely theory-driven and cannot be imputed from the cross-sectional survey methodology. Macquarie University. In this way. & Lillis. Brisbane. Brownell. (1984). Plus. R. 241-258. The argument that emphasis on non-financial performance measures in a custoenvironment should mer-focused strategic enhance performance remains persuasive. A final. No. Australian Society of CPAs. will be valuable in building convergence in this area.. The budgetary and performance intluences of product standardization and manufacturing process automation. advanced manufacturing practices. Abemethy.

Accounting. Psycbometika. W. R. Accounting. Paper presented at University of New South Wales. Accounting. (1990~). Dent. Harrison.. (1992). Integrated performance measurement: management accounting to support the new manufacturing realities. J. NJ. (1995). J. Foster.. & Hickson.. 27-41. Academy ofManagement Journal. 70. A. 69. (1988). Howell.). RiddelJ Information Services (1994). S. In P. New York: Free Press. 135. Fegenbaum (Eds). T. L. A.173. 69. R. T. B. 10. J. California Management Review. R. Englewood Cliffs.. Strategic Management Journal. (1991). Johnson. (19876). & Ferdows. Ettlie. Major trends for management accounting. H. Pugh. & Clark.. R. 15. J. (1990). Congden. Dixon. Manufacturing strategy: the research agendafor the next decade. Organization context and strucmre: an abbreviated replication. D. cusfomers and value: bringing a global perspective to management accounting education. The business who’s who of Australia. 347-357. & Norris. V. T. Macintosh. Hayes. 349-377. P. M. S. McNair. (1985).. (1990). 319-339. Organizations and Society. D. R. Administrutive Science QuarterIy. S. Academy of Management Review. Flexible manufacturing organizations: implications for strategy formulation and organizational design. G. Munugement Accounting. R. S. Tut&i. D. Howell. Meeting the technology challenge: cost accounting in a JIT environment. T.. R. & Datar. Dynamic Manufacturing. CA: Sage Publications. R. Bumstein and A. Eccles. M.. C. NJ: Prentice-Hall International. E. 31.. Measuring manufacturing performance: a new challenge for management accounting research. J. Inc. 69. Porter. A. H. Hendricks. C. K. Performance measurement for competitive excellence. (1970). 14. Sydney. (1989). 26. C. Competitive strategy: techniques for analyzing industries and competitors. H. K. S. & Gopinath.). J. & Wan. S. Accounting and human behuviour. Interaction effects in multiple regression. 131-137. London: Accountancy Age Books. M. 25-31 Inkson. Measures for manufacturing excellence. Kaplan. J. L. N.: National Associarion of Accountants. The impact of participation in budgeting and job difficulty on managerial performance and work motivation: a research note. Oppenheim. B. (1988). Organizations and Society. Homgren. C. Coefficient alpha and internal structure of tests. J. 318-329. K. Mia. R. Tumey (Ed. Organizations and Society. Nakane. G.CUSTOMER-FOCUSED MANUFACTURING STRATEGY Chenhall. (1983). (1988). 3-25. J. (1987). In J. In R. 627-638. & Saucy. R. (1990). J. Johnson.. organization and control: some possibilities for accounting research. Sydney: Riddell Information Services. Flexibility: the next competitive battle. G. Journal of Management Accounting Research. K. R. Sarasota: American Accounting Association. Performance excellence in manufacturing and service organisations. 58.828-853. Kaplan (Ed. C. Management Accounting. Operating controls in the new manufacturing environment. (1988). The social software of accounting and information systems. Administrative Science Quarterly. Harvard Business Review. (1951).. (1993). Boston: Harvard Business School Press. The strategic advantages of the factory of the future. Applying cost accounting to factory automation. E. (1981). (1988). Cronbach. 571 . C. A. A. N. Accounting Review. W. (1980). New York: Free Press. The performance measurement manifesto. Measures for manufacturing excellence. Govindarajan. 686-705. Schoonhoven. (1989). B. 16. Schroeder.. Meredith. 165. (19906). Reliance on accounting performance measures ln superior evaluative style-the influence of national culture and personality. Nanni. (1966). Illuminating the blind spot: examining linkages between manufacturing technology and competitive strategy. T. l-19. Montvale. L. Mosconi. Reliance on manufacturing performance measures. E. London: Heinemann. W... A contingency approach to strategy implementation at the business-unit level: integrating administrative mechanisms with strategy. 297-334 De Meyer. J. H. J. & Fry. 4. S. 18. S. Hopwood. Strategy. (1994). S.. Professors. total quality management and organisational performance: an empirical investigation. Boston: Harvard Business School Press. Munugement Accounting.. A. New York: Wiley. Nemetz. & Saucy. B. A. R. Miller. (1990). 21-27.. Questionnaire design and attitude measurement. G. L. (1974). G. L. 29.. Newbuty Park. Jr. (1987a). Kaplan. 15. & Vollman. Cost accounting: a managerial emphasis. Boston: Kluwer. Jaccard.144. F. 24-30. Inc.. Wheelwright. Problems with contingency theory: testing assumptions hidden within the language of contingency “Theory”. 31.

research and development) in strategy formulation. Powered machines and tools. Profit/net income.g. P. 52-53.). Involvement of employees in quality improvement programs (e. Reports on whether standard product costs are met.). Iabour utilization/efficiency statistics. Computer control: automatic cognition. Number of customer complaints. Single cycle automatics and self-feeding machines. Smith. Performance excellence in manufacturing and service organisations. Evaluation of the abdity to vary product characteristics. Manufacturing strategy. PERERA et al. Measurement of machine utilization and down time . Involvement of functional personnel (manufacturing. Programs to redyce time delays in manufacturing and designing products (i e. (1987). Management Science. Southwood. 83. 509-524. (1993). Swamidass. AmericanJournal of Socioiogy. Application and evaluation of robots in Nissan. Automatic: repeats cycle. 1154-1203. improve cycle time). Sarasota: American Accounting Association. Australian Robot Association. M. 1995) On time delivery. B. Yamauchi. Singleton~Green. Programs to coordinate quality improvements between parts of the organization. W!_ T. Substantive theory and statistical interaction: five models. & Newell. environmental uncertainty and performance: a path analytic model. Changing manufacturing perfotmance measures. Reduction in set-up times. marketing. If it matters. Product defects. R. 1970) Hand tools and manual machines. Robots: coming of age: the proceedings of the international symposium and exposition on robots. K. Y. Strategic management accounting: issues and cases. training. M... (1995). E. 357-374. Sydney: Butterworths. (1978). measure it! Accountancy. In Jarvis (Ed. involvement in improvement teams). Simons. Self-measuring and adjusting: feedback. Accounting. (1987). 12. (1988). Rate of introduction of new products. 33. Advanced manufacturing technology (7nkson et al. APPENDIX Advanced managementpractices (Chenball. Performance measures (adaptedfrom Abernetby G LilIis. Vollman. Material purchase price variance Length of cycle time from order to delivery.572 S. (1990). 1993) Programs to improve the quality and reliable delivery of materials and components provided by suppliers. Tumey (Ed. Developing close contact between manufacturing and customers. Return on investment Number of product returns. Accounting control systems and business strategy: an empirical analysis. Organizations and Society. Sales. Programs to reduce waste or non-value added activities throughout the production process. B. 189-209. T. In P. 111.