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The mediating role of human Sustainable

innovation
capital and management strategy

accounting information system in

the relationship between 1289
innovation strategy and internal Received 7 February 2018
Revised 1 October 2018

process performance and the 16 November 2018

11 March 2019
13 May 2019

impact on corporate 15 August 2019

Accepted 7 September 2019

financial performance
Benny Hutahayan
Faculty of Administrative Science, University of Brawijaya, Indonesia

Abstract
Purpose – Analyze the importance of sustainable innovation strategy applied in manufacturing companies in
Indonesia which affects the company’s financial performance through several mediating variables.
Design/methodology/approach – The population in this research was medium and large manufacturing
company business units in East Java. Business units are part of a company considered as the profit center. The
business unit as the unit of analysis in this research is part of the organization that: (1) is responsible for the
production and marketing of a product or set of products; (2) is formed by product type; (3) has its own
competitors which are different from competitors of other business units or divisions within a parent company;
(4) has a manager who is responsible and has authority over the planning and implementation of strategies to
achieve the specified profit target.
Findings – Innovation strategy has a significant effect on financial performance. Human capital does not
significantly mediate the relationship between innovation strategy and financial performance. Capital
performance and internal performance do not mediate the relationship between innovation strategy and
financial performance. Management accounting information system does not mediate the relationship between
innovation strategy and financial performance. Internal process performance mediates the relationship
between innovation strategy and financial performance. Management accounting information system and
internal process performance mediate the relationship between innovation strategy and financial performance.
Originality/value – The difference in findings confirms that this research needs to be conducted. On the other
hand, there is no research that has comprehensively tested the mediating effects of Human Capital and
Management Accounting Information System in the relationship between Innovation Strategy and Internal
Process Performance and the Impact on Corporate Financial Performance. The originality of this research can
be seen in the use of contingency theory which narrows the gap between the industrial organization (I/O)
paradigm and the resource-based view (RBV) regarding competitive advantage and performance. Specifically,
this research introduces innovation strategy, human capital, management accounting information system, and
internal business process performance as the contingency factors that affect financial performance. Second,
empirically, this research tries to reduce the gap in empirical research by offering new research model and new
research establishment at the level of strategic business units (SBU) in manufacturing companies in East Java.
This research is expected to be useful for policy decision making, especially for managers who want to improve
strategic business unit’s financial performance.
Keywords Innovation strategy, Financial perormance, Capital intellectual, Internal process performance
Paper type Research paper
Benchmarking: An International
Journal
1. Introduction Vol. 27 No. 4, 2020
pp. 1289-1318
Globalization results in a rapid and continuous development of business sector. The © Emerald Publishing Limited
1463-5771
development results in business uncertainty and fierce development among business entities. DOI 10.1108/BIJ-02-2018-0034
BIJ To win such dynamic business competition, companies should develop competitive
27,4 advantages and apply innovative strategies (Porter, 1996). At present, organizations face
challenges along with changes in the business environment. Management must be more
professional in managing its resources to improve organizational performance (Xiao Qu et al.,
2012; Zigan et al., 2008). Organizational performance is multidimensional because it includes
financial and non-financial performance. Meybodi (2015) indicates that managers with high-
level positions as well as managers from large organizations placed higher emphasis on
1290 strategic benchmarking performance measures. Financial and non-financial performance
must run “harmoniously” to make an organization achieve comprehensive performance
(Davis and Cobb, 2010; Dowling and Helm, 2006; Juhl et al., 2002; Petersen and Schoeman,
2008; Sacrist
an-Navarro et al., 2011; Selvarajan et al., 2007; Thrikawala, 2011; Skrinjar et al.,
2008). Management performance measurement using one aspect or perspective cannot
inform comprehensive performance (Bhargava et al., 1994).
Business success is determined by innovation (Un and Sanchez, 2010; Thrikawala, 2011).
Innovation is a process that utilizes skills and resources to achieve performance. Innovation
in the new products development is accomplished by developing new production and
operations systems to fulfill customer needs (Jones, 2004; Jusoh and Parnell, 2008). Terziovski
(2002)has confirmed the impact of innovation on company performance (customer
satisfaction, productivity, and technological competitiveness). Innovation makes
organizations become more competitive. Competitive advantage is crucial for every
organization to win the competition (Un and Sanchez, 2010; Jonsson and Devonish, 2009;
Ortega et al., 2010; Parnell, 2011). For sustainable competitive advantage, benchmarking goes
beyond the operational level and moves into a wide range of value chain, strategic,
operational, and project levels (Hong et al., 2012).
Competitive advantage is shown by above-average returns and can be achieved by
implementing strategies (Bowen et al., 2009; Mazanai and Fatoki, 2011; Dafna, 2008; Lockyer,
and Roberts, 2009). In making innovation, an organization needs to develop a formal and
comprehensive strategy. The alignment of procurement strategy with overall business
strategy is important for superior firm performance (Bag et al., 2018). This strategy reveals
organizational goals in innovation, i.e. the explanation and the management of the planned
innovation. The dimensions of innovation strategy consist of leadership orientation, process
innovation, product innovation, internal sources of innovation, external sources of
innovation, implementation of innovation, and investment level (Zahra and Dass, 1993).
The successful implementation of innovation strategy will have a significant impact on
organizational performance. It is supported by Resource-Based Theory (RBT) which states
that competitive advantage is driven by internal factors or resources in an organization
(Barney, 1991; Aboyassin and Abood, 2013; Skrinjar et al., 2008). Contingency theory
supports the relationship between innovation and financial performance by stating that the
organizational design will be effective only in certain conditions (Otley, 1980). Contingency
Theory was used in this study as the theory explains design of an organization effectively
and is applicable universally in certain condition. Different conditions make a different
design. In short, organizational design is only suitable for certain conditions. Innovation
strategy is one of the contingent factors that affect financial performance in intense
competition conditions (Zigan and Zeglat, 2010).
The innovative solutions derived through the process are applicable to policy makers,
researchers and practitioners (Shrotriya et al., 2018). The competencies which have been
identified are supply-demand coordination and product pricing, logistics, marketing,
procurement, manufacturing simplicity and product quality and preventive maintenance
(Dubey et al., 2014). Successful implementation of innovation strategy requires the role of
competent and reliable company’s accounting information system. The information era is
controlled by information and knowledge. This also increases attention to the role of human
capital (Stewart, 1997; Hong et al., 2007; Abhayawansa and Abeysekera, 2008). Human capital Sustainable
is an important factor in determining the value of an organization (Hong et al., 2007; Guthrei, innovation
2001; Abraham and Asher, 2006). Harrison and Sullivan (2000) also argue that organizational
success is strongly influenced by the organizational effort that positively maximizes the
strategy
value of human capital. This opinion is supported by Bontis (1998). Bontis et al. (1999) assert
there is a positive and significant relationship between human capital and business
performance. As one of the important drivers of competitive advantage, human capital must
meet certain strategic criteria. Each strategy requires certain HR competencies to create 1291
competitive advantage (Wickramasinghe and Zoyza, 2009).
Innovation strategy applied on an ongoing basis depends on contingency factors. The
contingency approach also states that the effect of strategies (including innovation strategy)
on performance depends on structural arrangement including management control system,
human resource capabilities, and internal process performance (Chenhall, 2006). Innovation
strategy can be transformed into performance improvement. However, it requires the support
of the internal and external environment of the organization (Bisbe and Otley, 2004).
Intellectual capital, management accounting information system, internal process
performance, and customer performance variables can be used as the mediating variables.
Management requires reliable information to make good decisions (Verdu-Jover and
Gomez-Gras, 2008). According to Chenhall and Morris (1986), an accurate and reliable
accounting system must have criteria of broad scope, timeliness, aggregation, and
integration. A management accounting information system which provides information
for the management to make better decisions requires information technology (Abernethy
and Guthrie, 1994; Oparanma et al., 2009). Every strategy, including innovation strategy,
requires specific information. Innovation strategy influences the design of management
accounting information system in terms of broad scope, timeliness, aggregation, and
integration. There is a strong interaction between business strategy and management
accounting information system (Vasarhelyi and Alles, 2008; Sori, 2009; Ali et al., 2012;
Abdallah, 2014).
Competent human resources as well as accurate and reliable management accounting
information system have a significant effect on internal process performance. Internal
processes relate to innovation process, operations process, and service-after-sale process
(Tavitiyaman et al., 2012; Tuanmat and Smith, 2011). Innovation strategy is also associated
with a more efficient production process, more timely delivery to customers, and better after-
sales services. Continuous implementation of sophisticated innovation increase performance
of company (Weerawardena, 2003). Manufacturing company should make innovation and
carry out product development in relation to performance in order to increase productivity
and keep up with global competition. Results from Moffet et al. (2008) indicate that new lead,
forward looking, predictive benchmarks need to be developed to support lead benchmarking
and performance measurement activities. Good internal process management improves
performance in terms of production efficiency, cost savings, quality improvement, and
increased asset utilization (Tavitiyaman et al., 2012; Bititci et al., 2011). Management
accounting information system plays an important role in improving the internal process
performance (Davis and Cobb, 2010; Emeka and Worlu, 2012; Grande et al., 2011; Goh et al.,
2012; Bititci et al., 2011). Good internal process performance is related to overall good business
performance. This illustrates the logic of the research model in the relationship between
innovation strategy and financial performance through human capital, management
accounting information system, and internal process performance.
This research was conducted in the manufacturing sector in Indonesia for the following
reasons: (1) the growth of the manufacturing sector in Indonesia fluctuated since 2012, (2)
exports of the manufacturing sector in Indonesia in 2015 was ranked third after the Special
Capital Region and East Kalimantan with a contribution of 10.04 percent to Indonesia’s
BIJ exports, (3) Indonesia contributed the largest to GDP of 22.71 percent, (4) The level of
27,4 competition is getting tighter in Indonesia because of foreign competitors, and (5) imported
products enter Indonesia before the ASEANEconomic Community (AEC) era. Therefore,
manufacturing companies need to implement innovation strategy supported by competent
human resources, good management accounting information system, and business process
performance to achieve excellent financial performance in the global competition era.
This research aims to present the importance of sustainable innovation strategy applied in
1292 manufacturing companies in Indonesia which affects the company’s financial performance
through several mediating variables. Variables used in the model include Innovation
Strategy, Intellectual Capital, Management Accounting Information System, and Internal
Process Performance.
The originality of this research can be seen in the use of contingency theory which
narrows the gap between the industrial organization (I/O) paradigm and the resource-based
view (RBV) regarding competitive advantage and performance. Specifically, this research
introduces innovation strategy, human capital, management accounting information system,
and internal business process performance as the contingency factors that affect financial
performance. Second, empirically, this research tries to reduce the gap in empirical research
by offering new research model and new research establishment at the level of strategic
business units (SBU) in manufacturing companies in Indonesia. This research is expected to
be useful for policy decision making, especially for managers who want to improve SBU’s
financial performance.
Some research gap in previous studies is presented in Table I. The difference in findings
confirms that this research needs to be conducted. On the other hand, there is no research that
has comprehensively tested the mediating effects of Human Capital and Management
Accounting Information System in the relationship between Innovation Strategy and Internal
Process Performance and the Impact on Corporate Financial Performance.
This research has several contributions. First, theoretically, this research narrows the
theoretical gap between the Industrial Organization (I/O) and Resource-Based View (RBV)
paradigms by introducing the Contingency Theory. In particular, this research introduces
innovation strategy, human capital, management accounting information system, and
internal business process performance as the contingency factors that affect financial
performance. Second, empirically, it tries to reduce the gap in empirical research by offering
new research models and new research establishment at the SBU level in manufacturing

Previous study show Previous study show

No Relationship significantly effect insignificant effect

1 Innovation strategy to management Huang et al. (2010) Allen (2000)

accounting information system Azisand Osada (2010) Wonglimpiyarat (2004)
2 Innovation strategy to human capital Cabrilo et al. (2014) Prajogo and Oke (2016)
Gatesand Langevin (2010)
Scarpellini et al. (2017)
3 Human capital to internal process Sands et al. (2016) –
performance Johnson, (2002)
Rompho and Siengthai
(2012), Peng et al. (2007)
4 Management accounting information Oktal et al. (2016) Fadzil et al. (2005)
system to internal process performance Blasiniand Leist (2013) Arif et al. (2005)
5 Internal process performance to financial Birou et al. (2011) McIvor et al. (2009)
Table I. performance Pool et al. (2017)
Research gap Lin (2015)
companies in Indonesia. Finally, this research is expected to be useful for policy decision Sustainable
making, especially for managers who want to improve SBU’s financial performance. innovation
The results of this study are expected to contribute to East Java company’s management.
It is specifically aimed at manufacturing companies regarding the importance of innovation
strategy
in implementing strategies, management accounting information systems, and intellectual
capital in improving company performance to challenge free trade. In addition, there are also
theoretical benefits which contributed to the existing theoretical gaps in I/O and RBT theories
by including contingency theory; contributed to previous research gaps related to I/O and 1293
RBT theory by including the following contingency variables: intellectual capital, accounting
information systems, internal process performance and customer performance; provide an
explanation on the causality of innovation strategies, the role of intellectual capital, a reliable
management accounting information system, the performance of the company’s internal
processes, customer performance and financial performance; and expand theoretical models
by adding contextual variables in contingency theory. The contextual variables are
intellectual capital, management accounting information systems, internal company process
performance, and customer performance on strategy and financial performance relationship
as mediating variables.

2. Development of empirical hypothesis

2.1 The I/O Paradigm versus the RBV Paradigm
I/O theory explains that external factor (industry) is more pivotal than internal one in
achieving competitive advantage. Bird (1990) in his study described that heterogeneity,
complexity and change of environment in an industrial sector influence intensity of strategic
planning of a company. At the opposite, the Resources Based Theory stated that internal
factor is far more important than external one (industry) in achieving competitive advantage.
Teece et al. (1997) argue that competitive advantage depends upon resource company has. It
is in accordance to previous studies that internal resource company or organization has is the
source of competitive advantage.
There are two paradigms about the way an organization creates competitive advantage
and above-average returns, i.e.: (1) Industrial Organization (I/O), and (2) Resource-Based View
(RBV). The I/O paradigm is put forward by industrial economists, especially Porter. This
paradigm states that external environmental factors, especially industrial factors, have a
significant effect on company performance. This theoretical statement is supported by
several studies (Ireland, at al, 2003). Most research shows that industrial factors affect the
performance of about 20 percent.
The RBV states that sustainable competitive advantage must be achieved with certain
internal factors (resources) within the company. The RBV focuses on the resources and
capabilities that determine the company performance. Resources consisting of assets, skills,
and abilities determine the empowerment process towards the creation of company
competitiveness and improvement of social welfare. Teece et al. (1997) assert competitive
advantage depends on the company resources. Barney (1986) states that resources can be
defined generally as assets, organizational processes, company attributes, information, and
knowledge controlled by the company which can be used to develop and implement their
strategies. Furthermore, Barney et al. (2001) confirm that a company is a collection of
resources, competencies, and abilities. Differences in a company’s resources, competencies,
and abilities compared to its competitors will determine its competitive advantage.
Resources must fulfill the following characteristics: (1) value, which means that resources
must have strategic value for customers and organizations, (2) rareness, which means that
resources must be scarce and unique in the sense of being difficult to find among competitors,
(3) imperfect imitability, which means that organizations that do not have these resources
BIJ cannot replicate these resources, (4) non-substitutability, which means that resources cannot
27,4 be replaced by alternative sources (Barney, 1986). The knowledge-based theory also identifies
that knowledge, which is marked by rareness and imperfect imitability, is an important
source for achieving competitive advantage in the competition era. The capacity and
effectiveness of an organization to produce, share, and deliver knowledge and information
determines the value of the company. This will be the basis of sustainable long-term
organizational competitive advantage (Edvinsson and Malone, 1997; Bontis et al., 2002; Choo
1294 and Bontis, 2002).

2.2 Resource-based theory (RBT) in the relationship between strategy and performance
Resource-Based Theory states that internal factors, in achieving competitive advantage, are
more important than external factors of companies (industries). The contention of
Resource-Based Theory is on how a company can compete with other companies to gain a
competitive advantage in managing the resources they have accordingly to the company’s
capabilities. According to Resource-Based Theory, to provide optimal results, resources must
meet these following criteria: (1) valuable, meaning that resources will be valuable if they can
provide strategic values to the company; (2) scarce, meaning that resources must be unique, in
the sense of being difficult to find among competitors and becoming company potentials (3)
imperfect imitability, meaning that resources can be a company’s source of sustainable
competitive advantage only if other companies cannot get or replicate them; and (4)
non-substitution, meaning that resources cannot be substituted by other alternative
resources. RBT researchers have suggested that it will be beneficial for companies to run
strategies which are currently not applied by any other competitors.
Resources Based Theory stated that key competence is the basis of competitive advantage
of company, its strategic advantage as well as its ability to obtain above-average returns.
Resources Based Theory also pays attention to strategy to develop competitive advantage
and creation of new asset (Ireland et al., 2003; Priem and Butler, 2001; Teece et al., 1997).
Previous related studies stated that rare resource is source of competitive advantage.
Strategic management consists of development and exploitation of resource and unique
capability of company to manage and further development the resource.
2.2.1 Contingency theory. Contingency theory refers to situational factors or contingency
factors that affect the organizational performance. Otley (1980) affirms there is no
organizational design that can be applied universally anywhere or under any conditions
effectively. Design can only be appropriate in certain contexts or conditions. Therefore, the
contingency approach can explain why the accounting system can differ from one condition
to another. Based on these findings, it can be concluded that there are three concepts
influencing the effectiveness of the accounting system, i.e.: (1) technology, (2) organizational
structure, and (3) environment. Appropriate contingency approach needs to be applied in
analyzing and designing a control system, especially in management accounting system
(Harash et al., 2014). Implementation of Contingency Theory encourages researchers to
identify fit condition for particular design of organization and development of supporting
theories. Otley (1980) noted that underlying thesis of Contingency Theory is there is not one
concept or design of organization that can be implemented anywhere (universally) or in any
circumstances effectively. As an addition, Contingency Theory also stated that influence of
strategy (including innovative strategy) towards performance depends on structural
management, which includes management control system, human resource and
performance of internal process (Chenhall, 2006).
Most researchers in management accounting have conducted research to examine the
relationship between the design of management accounting information system and
contextual variables or contingency factors, such as environmental uncertainty, task
uncertainty, organizational structure and culture, strategy, and uncertainty. The contingency
approach is also used to explain what contingent factors affect competitive advantage or the Sustainable
company performance. innovation
2.2.1.1 The relationship between innovation strategy and financial performance. Financial
performance is the most important aspect for the shareholders. It shows the interest or focus
strategy
of shareholders on the basis of shareholder value. Financial performance shows whether the
company’s strategy contributes to bottom-line improvements. According to Kaplan (2009),
the company’s excellent financial performance can be improved in two ways, i.e. growth
strategy and productivity strategy. Organizations are able to generate profits by increasing 1295
productivity through innovation, product innovation, and process innovation. Productivity
improvement can be achieved by: (1) reducing direct and indirect costs or using financial and
physical assets more efficiently and (2) reducing working capital and fixed capital needed to
support certain levels of business. The linkage strategy in the financial perspective arises
when organizations achieve a balance between growth and productivity. There are three
main indicators used to measure financial performance, i.e.: (1) revenue growth, (2) reduced
costs or cost savings and increased asset utilization, and (3) increased customer value.
Innovation is defined as the process in an organization about the skills and resources
utilization to develop new products and/or services or to make new production and
operations systems to meet customer needs (Jones, 2004). Innovation plays an important role
in creating value, such as penetrating new markets, maintaining existing market share, and
increasing competitive advantage. Innovation is an important element of business strategy.
By having innovation, the organization has strong weapons to win the competition.
Innovation is also the focus of academic and industrial research. Extensive studies have
addressed the various problems faced by companies about how to achieve a sustainable
competitive advantage in global competition (Hitt et al., 2001; Kuratko et al., 2005). The
purpose of innovation is not only to reduce costs, but also to improve the products and
services quality, design better products, extend the products lifecycle, and respond to
customer needs and demands. In addition, innovation is very important to develop new
products and services, new organizational models, and new marketing techniques.
Research shows that companies must be more innovative to win the competition
(Evangelista et al., 1998). Global competition forces companies to innovate by reducing
production costs and increasing technological capabilities and product innovation.
Companies need to manipulate their work structures and organizations, improve core
competencies, develop new structures to respond to new market conditions and customer
demand, set different markets, enhance collaboration with other companies, and invest in
innovation (Ulusoy et al., 2001), Innovation determines the success and failure in achieving
excellent performance (Hamel, 1999).
The effect of innovation on company performance indicator (customer satisfaction,
productivity, and technological competitiveness) has been demonstrated by Terziovski
(2002). Terziovski (2002) suggests three (3) types of strategies, i.e. (1) integrated innovation
strategy, (2) incremental innovation strategy, and (3) radical innovation strategy. The
research results show that the integrated innovation strategy has a little effect on
performance. This is because companies, in general, have not yet reached the stage of system
integration and the ability to operate on the network. Incremental innovation strategy is more
appropriate to be used as incentives for sustainable innovation, while radical innovation
strategy is suitable to produce rapid changes in products and processes. Based on previous
arguments, the first hypothesis is developed.
H1. Innovation strategy has a significant effect on financial performance
2.2.1.2 The role of human capital, management accounting information system, and
internal process performance. Strategic management scholars believe that strategy affects
performance. Innovation is a key factor for the organizational success. Through innovation
BIJ strategy, companies can create a competitive advantage in global competition. Innovation
27,4 strategy basically requires a change (Barney, 1991). Bartoli and Hermel (2004) study reveals
that strategic information system requires sustainable change and innovation management.
Some studies suggest that innovation has become part of the business strategy (Christensen
and Overdorf, 2000; Pyka, 2002; Christensen, 2001; Govindarajan and Trimble, 2005).
Innovation can be considered as a strategy and must be aligned with business strategy (Ward
and Pepard, 2002; Galliers and Leidner, 2003). Research on innovation examines how
1296 organizations design and implement innovation along with strategy. Terziovski (2002)
proposes three alternative innovation strategies, i.e.: (1) incremental, (2) radical, and (3)
integrated. A study conducted by Ward and Peppard (2002) shows how strategic factors can
affect the speed, effectiveness, and progress of information technology.
Every strategy requires competent human capital. Human capital plays an important role
in the information era because the effectiveness of strategy implementation depends heavily
on the human capital readiness. An innovation strategy will require competencies aligned
with the strategy needs. Human capital is part of the intellectual capital. The role of
intellectual capital is very important in determining the strategy success and in achieving a
sustainable competitive advantage. Through proper human capital management, an
organization can transform its resources to achieve its goals and objectives. Human
capital management requires the integration of intellectual assets and business strategy as
well as adaptation to dynamic internal and external changes. Flexibility is a key factor in the
successful implementation of business strategy.
Integrating human capital management into strategy requires a good understanding of
ways to deal with human capital values, to identify undervalued or underused assets, and to
assess risks and benefits in managing human capital. The role of intellectual capital in
improving performance can be evaluated from three dimensions of intellectual capital
indicators: (1) human capital, (2) structural capital, and (3) customer capital. Several studies
have been conducted in developed countries, such as the United Kingdom (Brooking, 1997;
Roos and Ross, 1997), Canada (Bontis, 1998; Miller, 1996), and United States (Stewart, 1997).
Several studies have also been conducted in developing countries, such as Taiwan (Tsan and
Chang, 2003) and Malaysia (Bontis et al., 2000). In Indonesia, similar studies conducted by
Sianipar (2009) and Solikhah et al. (2010) find that intellectual capital has a positive effect on
financial performance, while Kuryanto and Muchamad’s (2008) study does not prove that
intellectual capital has a positive effect on the company’s market value.
Human capital is believed to play an important role in increasing company value and
financial performance. Firer and Williams (2003), Tan et al. (2007), and several researchers
have proven that intellectual capital has a positive effect on the company’s financial
performance. Knowledge on intellectual capital is an extension of organizational learning and
business information system influenced by information technology and human capital.
Information technology focuses on information collection, storage, and processing, while
human capital focuses on the knowledge and learning enhancement and highlights the role of
individuals and groups in the knowledge dissemination process. Typology of prospector
strategy (Miles and Snow, 1978) and differentiation strategy (Porter, 1985) put higher
emphasis on innovation to overcome business uncertainty and fierce competition in business
sector. Previous studies mentioned that innovation is an inseparable part of business strategy
that requires intellectual capital (Christensen and Overdorf, 2000; Pyka, 2002). Based on this
argument, the second hypothesis can be formulated as follows.
H2. Human capital mediates the relationship between innovation strategy and financial
performance
To perform the strategy effectively, the organizational management requires human capital
in accordance with the strategy requirements. Reliable structural capital influences
performance of internal process which eventually will affect customer performance. Kaplan Sustainable
(2009) states that human capital as an intangible asset does not have a direct effect on innovation
financial performance but through business process performance improvement. Innovation
in implementation of strategy influences financial performance through intellectual capital or
strategy
structural capital, and performance of internal process in this case. Based on this argument,
the third hypothesis is formulated.
H3. Human capital and internal process performance mediate the relationship between 1297
innovation strategy and financial performance
To implement the strategy effectively, the organizational management requires a reliable
information system that can provide information for better decision making. Match
between information and need of decision-maker will improve quality of decision made, and
eventually performance of company (Gerloff, 1991). Management accounting information
system plays an important role in generating reliable information for managers to make
better tactical and strategic decisions. Innovation strategy requires specific information
that is different from other business strategies. A reliable management accounting
information system can produce information needed by managers to make better decisions
in creating a good financial performance. This argument leads to the fourth hypothesis as
follows.
H4. Management accounting information system mediates the relationship between
innovation strategy and financial performance
Business financial success is determined by innovation (Hamel, 1999). Innovation utilizes
skills and resources to improve business performance. Management innovates in products or
processes to meet customer needs (Jones, 2004). Terziovski (2002) has proven the impact of
innovation on internal process performance (customer satisfaction, productivity, and
technological competitiveness). Better internal processes improvement makes the
organization becomes more competitive and creates a better financial performance. This
argument also leads to the fifth hypothesis.
H5. Internal process performance mediates the relationship between innovation strategy
and financial performance
As stated earlier, each strategy requires specific information that is different from the
information needs of other strategies. The implementation of innovation strategy also
requires specific information. Therefore, innovation strategy influences the design of
management accounting information system in order to produce the type of information
needed by the strategy.
A study by Otley (1980) reveals that the contingency approach can be used to analyze and
design management accounting system to provide information which can be used for various
purposes that affect the better internal process performance. The study results show the
contingency approach for management accounting system proves that there is no universal
management accounting system that can be applied appropriately to all organizations in each
state. In management accounting research, the contingency approach is needed to evaluate
environmental factors (intensity of competition, strategy, environmental uncertainty) that
can affect more effective and reliable accounting system for management to improve internal
process.
Companies implementing innovation strategy will continuously monitor the market
opportunities, commit to change, and respond quickly to competitors. Innovative companies
also constantly develop new market opportunities that require flexible and innovative
structures. As a result, future-oriented external information and non-financial information
are needed by managers to make better decisions. Thus, the wide range of information
BIJ provided by management accounting system will be very useful in this kind of decision
27,4 making (Abernethy and Guthrie, 1994).
Innovation strategy affects all organization aspects including information that must be
provided by management accounting information system. Bromwich (1990) argues that
management accounting information system can help management face the challenges of
competitive markets that focus on increasing the company value added to surpass its
competitors and help managers to monitor performance in the competitive environment.
1298 Conformity between information needed by decision-makers and management accounting
information system will certainly improve the decisions quality and increase overall
organizational performance in terms of better internal process performance, customer
performance, and financial performance (Gerloff et al., 1991). )
Mia and Chenhall (1994) suggest that the management accounting information system
characteristics are able to improve the organizational performance. Chia (1995) concludes
that a high level of decentralization and the management accounting information system
characteristics, i.e. broad scope, aggregation, timeliness, and integration will further improve
the organizational performance. The study results are supported by Chong and Chong (1997)
who find that the broad scope characteristic of the management accounting information
system is an important antecedent variable in improving performance. Mia and Clarke (1999)
examine the relationship between market competition intensity, management accounting
information system, and company performance. The study results conclude that the use of
information in management accounting information system mediates the relationship
between market competition intensity and company performance. In Indonesia, a study
conducted by Musmini (2003) in manufacturing companies provides evidence that the use of
information in management accounting information system is positively related to
organizational performance.
Several studies have been conducted on the management accounting system design which
is influenced by a number of environmental variables and organizational attributes, such as
environmental uncertainty, technology, organizational size (Hayes, 1977; Gordon and
Narayanan, 1984; Govindarajan, 1984). The results still do not provide consistent results.
Various research results can be caused by variations in cultural strategies and between
organizations (Otley, 1980; Gani and Jermias, 2006). Based on previous arguments, the sixth
hypothesis is developed.
H6. Management accounting information system and internal process performance
mediate the relationship between innovation strategy and financial performance
Based on the theoretical foundation, the research model is developed and presented in
Figure 1. This model illustrates that financial performance is influenced by innovation
strategy mediated by human capital, management accounting information system, and
internal process performance.

3. Research method
This research used a quantitative approach and aimed to provide empirical evidence about the
effect of innovation strategies on financial performance through or mediated by intellectual
capital, management accounting information systems, internal process performance, and
customer performance in business units of manufacturing companies in Indonesia. This
research employed a survey method. The data were collected through questionnaires
delivered to the respondents (samples) who had been selected by certain procedures. Then,
data analysis and hypothesis testing were conducted to obtain empirical findings.
The population in this research was medium and large manufacturing company business
units in Indonesia. Business units are part of a company considered as the profit center.
 Human
Sustainable
Capital (M1) innovation
H2 strategy
H2, H3
H3

Innovation H1 Financial
Strategy (X) Performance (Y) 1299
H5 H3,H5,H6

Internal Process
Performance (M3)

H4,H6 H4
H6

Management Figure 1.
Accounting Information
System (M2)
Conceptual model

According to Anthony et al. (1992), “business units or divisionalization when such

organizations . . . are responsible for both the manufacturing and marketing of a product or
family of products”. Hansen and Mowen (2007) define divisionalization as a process of
decentralization based on the type of produced goods or services or by geographical. As the
profit center, division managers measure their performance based on sales and costs or
obtained profits. Kotler and Keller (2012) mention business units as strategic business units
(SBUs) which have the following characteristics: (1) A related single business or business
group and each has a separate plan. (2) Having its own competitors. (3) Having a manager
responsible for strategic planning and achieving certain profit targets and controlling
various factors that influence profit achievement.
Based on the description above, the business unit as the unit of analysis in this research is
part of the organization that: (1) is responsible for the production and marketing of a product
or set of products. (2) is formed by product type (3) has its own competitors which are different
from competitors of other business units or divisions within a parent company. (4) has a
manager who is responsible and has authority over the planning and implementation of
strategies to achieve the specified profit target.
According to the Statistics Indonesia, medium and large manufacturing companies are
manufacturing companies with more than 100 employees. According to data from the
Ministry of Industry, there were 1,266 manufacturing companies with various business fields
until the beginning of 2014. After further analysis on the number of manufacturing
companies in Indonesia that managed production processes or processing raw materials into
finished goods, 389 companies were determined.
The unit of analysis of this research was the business unit. If it was assumed that one
business unit was taken from one company, then the population of this research was 389
business units. Sample determination was done by Yamane’s approach (1973) as quoted by
Singh and Masuku (2014) with the following formula:
N
n¼
1 þ ND2
where:
n 5 number of samples
BIJ N 5 population size
27,4 D 5 specified precision or percent looseness of inaccuracy due to sampling errors that can
be tolerated.
By using this formula, the research sample was at least 80 respondents or 21 percent. The
researchers used questionnaires which were sent directly to respondents through surveyor
personnel and by fax or e-mail to 389 selected manufacturing companies (not including
1300 companies used as the trial). As an effort to increase the response rate, an interview was made
via telephone before the questionnaire was sent. Respondents in this research were business
unit managers or business unit financial managers or resource managers or operations
managers. In this case, the questionnaire could be filled by the business unit manager or the
business unit financial manager or the resource manager or the operations manager. The
business unit manager was chosen as the respondent because the business unit manager is
the top leader who determines the policy and understands the system in the business unit s/he
leads and has the authority to carry out the innovation strategy. Financial managers,
resource managers, and operations managers were also selected as respondents because they
are considered to have adequate professional knowledge relating to the management
accounting information system development and have the authority in innovation, human
resources management, and the company’s operations process.
The questionnaires were analyzed related to the completeness of the filling and then
tabulated. A total of 135 respondents filled out the questionnaire completely. It meant the
response rate of the questionnaire was 35 percent of the total population. Based on this
formula and based on several previous studies, the number of samples fulfilled the
requirements for further analysis.
Operational definitions of the variables in this research are as follows: First, innovation
strategy is defined as the respondents’ perceptions about their unique ways to achieve
sustainable competitive advantage and excellent performance. To measure innovation
strategy, we used two indicators developed by Terziovski (2002), i.e.: (1) product innovation
and (2) process innovation. Dynamic scale from 1 to 7 was used as measures.
Second, human capital is defined as the respondent’s perception about the human resource
design needed by management to make better decisions, especially to support the
formulation and implementation of innovation strategy. To measure human capital, we
adopted an instrument developed by Bontis et al. (2002). Perceptual scale from 1 to 7 was used
as a measure.
Third, management accounting information system is defined as the respondents’
perceptions about the accounting system design that produces management accounting
information needed by management to make better decisions, especially to support the
formulation and the implementation of innovation strategy. To measure management
accounting information system, we applied an instrument developed by Chenhall and Morris
(1986). This includes four dimensions of: (1) broad scope, (2) aggregation, (3) integration, and
(4) timeliness.
Fourth, internal process performance is defined as the respondents’ perceptions about
value chain performance or strategic activities carried out by SBU to support consumer
satisfaction and/or productivity strategies from the financial perspective. To measure the
internal business process performance, four indicators were developed by Kaplan and
Norton (1992), i.e.: (1) operational management process, (2) customer management
process, (3) innovation management process, and (4) regulatory and social management
process.
Fifth, financial performance is defined as the respondents’ perceptions about SBU’s
financial condition compared to previous years. To measure financial performance, financial
indicators were developed by Kaplan and Norton (1992), i.e.: (1) improving the cost structure,
(2) increasing asset utilization, (3) expanding revenue opportunities, (4) and increasing Sustainable
customer value. Likert scale from 1 to 7 was used as a measure. innovation
Data analysis in this study was carried out using Structural Equation Modeling (SEM)
based on variance, using Partial Least Square (PLS) tools. This statistical analysis was
strategy
selected because it has several advantages (Hair et al., 2010; Kock, 2014). First, SEM-PLS is
suitable for model that involves variables that cannot be measured directly, and has taken
into account measurement error. Secondly, SEM analysis is able to test in simultaneous
manner, similar to model used in this study. Third, component-based SEM (PLS) is able to 1301
make sophisticated model estimation with small samples. The use of variant-based SEM is
because this research is exploratory or an extension of existing theories. This research
expands on contextual variables in contingency theory. In addition, the use of SEM is based
on variants because it is not based on many assumptions, for example processed data does
not have to be multivariate normal distribution. Data analyzed with PLS does not have to be
normally distributed, because it does not assume a certain distribution. PLS can use nominal,
categorical, ordinal, interval, and ratio data. Weighted forecasting (weight estimate) is used to
create a variable score component obtained based on the specifications of the inner model (a
structural model that connects latent variables).

4. Results and findings

4.1 Analysis results
This research focuses on the mediating effects of human capital, management accounting
information system, and internal process performance in the relationship between innovation
strategy and financial performance. Data were analyzed using structural equation modeling
(SEM) and processed using Partial Least Square (PLS) 4.0 to test the hypotheses.
Two procedures were performed to test the hypotheses. First, we examined the direct
effect of the innovation strategy on financial performance. Second, if the direct effect was
significant, we continued with a second test to prove the mediating effect of human capital,
management accounting information system, and internal business process performance in
the relationship between innovation strategy and financial performance. The mediating
effect test was performed using the beta coefficient difference approach. The steps were
described as follows: (1) to examine the value of beta as a direct effect measure of the
independent variables on the dependent variables without involving mediating variables, (2)
to examine the value of beta as a direct effect measure involving mediating variables, (3) to
examine the effect of independent variables on mediating variables, and (4) to examine the
effect of mediating variables on the dependent variables (Hair et al., 2010; Kock, 2010,
2011, 2014).
Before hypothesis testing on structural equations, it was necessary to test the validity and
reliability of the instrument. Table II shows the results of the instrument validity and
reliability test.
Table II shows that all latent variables have fulfilled the validity requirements because the
p-value of each indicator is below 5 percent. Composite Reliability and Cronbach’s Alpha
values also show that the research instruments in each variable are proven to be reliable with
a total value above 0.5.
Table III presents the goodness–of-fit model. From Table II, it can be concluded that the
overall results of the Model Fit and Quality Indices are very good and they meet all of the
criteria so that the analysis can be proceeded.
4.1.1 Direct effect test. This direct effect test was conducted to test hypothesis 1 which
states that innovation strategy has a significant effect on financial performance. Table IV
shows the direct effects of innovation strategy on financial performance. Innovation has a
significant effect on financial performance with a beta value of 0.73 (p-value less than 0.01).
BIJ
27,4 IS FP IPP AIMS HC Std. Error p-value
Combined loadings and cross-loadings
is1 0.92 0.114 0 -0.051 -0.037 0.085 <0.001
is2 0.92 -0.114 0 0.051 0.037 0.097 <0.001

1302 fp1 -0.239 0.836 -0.003 -0.044 0.105 0.062 <0.001

fp2 -0.229 0.855 -0.05 0.087 0.071 0.057 <0.001
fp3 0.055 0.917 0.133 -0.066 -0.066 0.075 <0.001
fp4 0.385 0.895 -0.086 0.025 -0.098 0.091 <0.001
ipp1 0.2 -0.039 0.837 0.065 -0.04 0.066 <0.001
ipp2 -0.271 0.028 0.844 0.003 0.073 0.064 <0.001
ipp3 -0.172 -0.107 0.897 -0.083 0.001 0.054 <0.001
ipp4 0.253 0.122 0.855 0.021 -0.034 0.058 <0.001
bs 0.094 -0.001 0.05 0.855 0.081 0.091 <0.001
tl -0.431 0.347 -0.252 0.442 0.146 0.209 0.018
agg 0.128 -0.178 0.08 0.86 -0.156 0.105 <0.001
hc1 0.071 0.136 -0.051 -0.069 0.757 0.07 <0.001
hc2 -0.175 -0.201 0.211 0.062 0.794 0.107 <0.001
hc3 0.072 -0.079 -0.098 0.06 0.886 0.077 <0.001
hc4 0.097 0.062 -0.031 0.007 0.805 0.052 <0.001
hc5 -0.075 0.101 -0.022 -0.074 0.757 0.118 <0.001
Composite Reliability Coefficient
0.917 0.93 0.918 0.777 0.899
Cronbach's Alpha Coefficient
0.819 0.899 0.881 0.571 0.859

Note(s): IS: Innovation Strategy; HC: Human Capital; MAIS: Management Accounting
Table II. Information System; IPP: Internal Process Performance; FP: Financial Performance
Validity test and
reliability test Gray shade signifies the discriminant variables

This means that 1 variance in the innovation strategy improvement increases 0.73 variances
in financial performance. Table II shows the value of r-square is 0.53, which means that data
variation in innovation strategy explains 53 percent data variation in financial performance.
In conclusion, the results confirm that innovation strategy has a significant effect on financial
performance. Therefore, the first hypothesis is accepted.
4.1.2 Indirect effect test. After the goodness of fit model was fulfilled, the calculation of the
estimated coefficients on the full model was conducted. Statistical test results from the
complete model are presented in Table IV. The second hypothesis states that human capital
mediates the relationship between innovation strategy and financial performance. The
results show the following: (1) Innovation strategy (IS) significantly affects human capital
(HC) with a p-value of less than 0.01 and a beta coefficient of 0.44; (2) Human capital (HC) does
not significantly affect financial performance (FP) with a p-value of0.31 and a beta coefficient
 Analysis
Sustainable
No Model fit and quality indices Criteria fit Results Ket innovation
strategy
1 Average path coefficient (APC) p < 0.05 0.730 Very
(p < 0.001) Good
2 Average R-squared (ARS) p < 0.05 0.533 Very
(p < 0.001) Good
3 Average adjusted R-squared (AARS) p < 0.05 0.530 Very 1303
(p < 0.001) Good
4 Average full collinearity VIF (AFVIF) Acceptable if ≤ 5, ideally ≤ 3.3 2.042 Ideal
5 Tenenhaus Godness of Fit (GoF) Small ≥ 0.1, medium ≥ 0.25, 0.656 Ideal
large ≥ 0.36
6 Simpson’s paradox ratio (SPR) Acceptable if ≥ 0.7, ideally 5 1 1.000 Ideal
7 R-squared contribution ratio (RSCR) Acceptable if ≥ 0.9, ideally 5 1 1.000 Ideal
8 Statistical suppression ratio (SSR) Acceptable if ≥ 0.7 1.000 Ideal
9 Nonlinear bivariate causality direction Acceptable if ≥ 0.7 1.000 Ideal Table III.
ratio (NLBCDR) Goodness of Fit model

of 0.03. In conclusion, the second hypothesis is not supported because one path does not
significantly mediate the relationship between innovation strategy and financial
performance.
The third hypothesis states that human capital and internal process performance mediate
the relationship between innovation strategy and financial performance. The results show
the following: (1) Innovation strategy (IS) significantly affects human capital (HC) with a p-
value of less than 0.01 and a beta coefficient of 0.44; (2) Human capital (HC) does not
significantly affect internal process performance (IPP) with a p-value of 0.38 and a beta
coefficient of 0.08; (3) Internal process performance (IPP) has a significant effect on financial
performance (FP) with a p-value of less than 0.01 and a beta coefficient of 0.44. In conclusion,
the third hypothesis is not supported because one path does not significantly mediate the
relationship between innovation strategy and financial performance.
The fourth hypothesis states that management accounting information system (MAIS)
mediates the relationship between innovation strategy and financial performance. The

Beta p-
No Hypothesis coefficient value Remark

H1 Innovation strategy has a significant effect on financial 0.73 0.01 Support

performance
H2 Human capital mediates the relationship between innovation 0.44 0.01 Not
strategy and financial performance 0.03 0.31 Support
H3 Human capital and internal process performance mediate the 0.44 0.01 Not
relationship between innovation strategy and financial 0.08 0.38 Support
performance
H4 Management accounting information system mediates the 0.48 0.01 Not
relationship between innovation strategy and financial 0.09 0.36 Support
performance
H5 Internal process performance mediates the relationship between 0.71 0.01 Support
innovation strategy and financial performance 0.44 0.01
H6 Management accounting information system and internal 0.48 0.01 Support Table IV.
process performance mediate the relationship between 0.17 0.01 Hypothesis testing on
innovation strategy and financial performance 0.44 0.01 the relationships
Note(s): Support Hypothesis if both p-value < 0.05 between variables
BIJ results show the following: (1) Innovation strategy (IS) significantly affects the management
27,4 accounting information system (MAIS) with a p-value of less than 0.01 and a beta coefficient
of 0.48; (2) Management accounting information system (MAIS) does not affect financial
performance (FP) with a p-value of 0.36 and a beta coefficient of 0.09. In conclusion, the fourth
hypothesis is not supported because one path does not significantly mediate the relationship
between innovation strategy and financial performance.
The fifth hypothesis states that internal process performance (IPP) mediates the
1304 relationship between innovation strategy and financial performance. The results show the
following: (1) Innovation strategy (IS) significantly affects internal process performance (IPP)
with a p-value of less than 0.01 and a beta coefficient of 0.71; (2) internal process performance
(IPP) has a significant effect on financial performance (FP) with a p-value of less than 0.01 and
a beta coefficient of 0.44. In conclusion, the fifth hypothesis is supported because both paths
significantly mediate the relationship between innovation strategy and financial
performance.
The sixth hypothesis states that management accounting information system (MAIS) and
internal process performance (IPP) mediate the relationship between innovation strategy (IS)
and financial performance (FP). The results show the following: (1) Innovation strategy (IS)
significantly affects management accounting information system (MAIS) with a p-value of
less than 0.01 and a beta coefficient of 0.48; (2) Management accounting information system
(MAIS) has a significant effect on internal process performance (IPP) with a p-value of less
than 0.01 and a beta coefficient of 0.17; (3) Internal process performance (IPP) has a significant
effect on financial performance (FP) with a p-value of 0.01 and a beta coefficient of 0.44. In
conclusion, the sixth hypothesis is supported because all paths significantly mediate the
relationship between innovation strategy and financial performance.
The empirical results show that the first hypothesis which states innovation strategy
affects financial performance theoretically supported is predicted. The second hypothesis
which states that human capital mediates the relationship between innovation strategy and
financial performance is not empirically supported. Theoretically, innovation strategy
requires competent human capital to carry out the strategy effectively. This relationship is
empirically supported by this research. However, the effect of human capital on financial
performance is not supported. Human capital cannot directly affect financial performance.
Competent human capital makes better business process. This is in accordance with Kaplan
and Norton (1997) that human capital as part of intangible assets produces tangible assets
through strategies reflected in business process activities. This argument explains the reason
why the relationship between innovation strategy, financial performance, human capital is
not empirically supported.
The third hypothesis which states that human capital and internal process performance
mediate the relationship between innovation strategy and financial performance is not
empirically supported. Theoretically and empirically, this research shows that innovation
strategy requires competent human capital. However, this research empirically proves that
human capital is unable to make a better internal process performance. This is
understandable because competent human capital will not be able to work properly
without being supported with information capital (systems, databases, etc.) and
organizational capital (leadership, alignment, teamwork, culture) as suggested by Kaplan
and Norton (1997). Competent human capital is only part of the intellectual capital. This
argument explains the reason why the relationship between innovation strategy–human
capital–internal process performance–financial performance is not empirically supported.
The fourth hypothesis which states that management accounting information system
mediates the relationship between innovation strategy and financial performance is not
empirically supported. This research empirically proves that innovation strategy has a
significant effect on management accounting information system. However, empirically it
does not prove that management accounting information system affect financial Sustainable
performance. Management accounting information system does not directly affect innovation
financial performance. A reliable management accounting system must produce useful
information for decision making to create excellent business processes. Management
strategy
accounting information system is also part of intangible assets. It must be supported by
competent managers to improve internal process performance. This argument explains the
reason why the relationship between innovation strategy–management accounting
information system–financial performance is not empirically supported. 1305
The fifth hypothesis which states that internal process performance mediates the
relationship between innovation strategy and financial performance is empirically
supported. The results show the important role of internal process performance related to
excellent financial performance. This is understandable because innovation strategy must be
clearly expressed in every business management process, including the operations
management process, the customer management process, the innovation management
process, and the social management and regulatory process (Kaplan, 2009). This argument
explains the reason why the relationship between innovation strategy–internal process
performance–financial performance is empirically supported.
The sixth hypothesis which states that management accounting information system
and internal process performance mediate the relationship between innovation strategy
and financial performance is empirically supported. Again, these findings explain the
important role of internal process performance as a strategy manifestation in supporting
SBU’s financial performance in Indonesia. The role of management accounting system in
providing useful information for managers in supporting the strategy implementation is
also revealed.

4.2 Discussion
4.2.1 The relationship between innovation strategy, human capital, internal process
performance, and financial performance. Corporate human capital and internal process
performance do not mediate the relationship between innovation strategy and financial
performance. Innovation strategy influences the needs of human capital with ideal
competencies. However, human capital does not affect internal process performance.
Manufacturing companies in Indonesia have good internal process performance, although
not supported by competent human capital.
The role of human capital in manufacturing companies in Indonesia in the implementation
of sustainable innovation strategy is very important. The booming condition of
manufacturing companies in Indonesia requires the role of qualified human capital, but
the research results find the lack of human capital role empowerment. It certainly impacts on
the poor internal process performance, as evidenced by the statistical test that the
relationship between human capital and internal process performance is not significant.
Human capital of manufacturing companies in Indonesia has not been able to make value
creation for the companies. The essence of human capital lies in the employee intelligence.
With their creativity and intelligence, the employees of manufacturing companies in
Indonesia have not been able to do their best at work, causing the companies do not get the
best from their employees. With all given efforts, the employees have not been able to make
the companies different compared to other companies. Most manufacturing companies in
Indonesia do not have the employees with ideal competencies. It results in the employees not
being able to work with teams, having ideas, and not being able to plan according to the
schedule.
Structural capital is the ability of an organization or company to fulfill the company’s
routine processes and structures that support employees’ efforts to produce optimal
intellectual performance and overall business performance. Some examples of structural
BIJ capital are the company’s operations system, manufacturing process, organizational culture,
27,4 management philosophy, and all forms of intellectual property owned by the company.
Manufacturing companies in Indonesia have not optimized the employee ability related to
structural capital. The company’s operations system, manufacturing process, organizational
culture, management philosophy, and all forms of intellectual property owned by the
company have not been fully utilized optimally by manufacturing companies in Indonesia.
Most manufacturing companies in Indonesia do not have a clear procedure operations system
1306 because the companies do not have a database for relevant information. It results in very
small ideas developed by the companies.
Manufacturing companies in Indonesia have also not been able to explore the employee
potential related to customer capital for the corporate value creation. The company’s strategic
policies have not yet led to market orientation and prioritized consumer satisfaction.
Therefore, the companies still need to make substantial consumer-oriented investments to
make them becomes the market determinants. Maintenance of relationships with consumers,
knowing the best consumers, and involving them in decision making as important factors to
attain the company success has not been achieved.
Good internal process performance has an effect on financial performance as previously
discussed. This is supported by Terziovski (2002) that innovation influences internal process
performance which subsequently affects customer performance and financial performance.
Therefore, innovation in the strategy implementation will affect internal process performance
because innovation in the strategy implementation will increase the company productivity,
which in turn has an effect on financial performance.
Operations Management process is the production of goods or services through the
transformation of input into output. This activity is related to making immediate decisions in
daily business by prioritizing the level of efficiency in the use of limited resources. Operations
management process governs management, within the meaning of continuous steering over
every business process and supporting process. The results show that 46 percent of
respondents answered strongly agree, 47 percent of respondents answered agree, and 7
percent of respondents gave neutral answers to questions related to Operations Management
process. This shows that manufacturing companies in Indonesia have performed operations
processes well.
Customer Management process includes the companies’ ways in getting customers,
maintaining customers, and managing their product brands. The results show that 44
percent of respondents answered strongly agree, 47 percent of respondents answered agree,
and 75 percent of respondents gave neutral answers to questions related to Customer
Management process. This shows that manufacturing companies in Indonesia have
implemented customer management process well.
Innovation process is an important part of internal process performance which is a part of
strategy implementation. The results show that 46 percent of respondents answered strongly
agree, 46 percent of respondents answered agree, and 8 percent of respondents gave neutral
answers to questions related to innovation process. This shows that manufacturing
companies in Indonesia have executed product and process innovation process well.
Regulatory and Social process helps organizations continuously get the right to operate in
communities and countries where goods are produced and sold. Companies manage and
report regulatory and social performance related to several important dimensions, i.e.:
environment, security and health, employee practices, and community investment. The
results show that 50 percent of respondents answered strongly agree, 47 percent of
respondents answered agree, and 3 percent of respondents gave neutral answers to questions
related to Regulatory and Social Process. This shows that manufacturing companies in
Indonesia have performed Regulatory and Social processes well. Therefore, human capital
and internal process performance do not mediate the relationship between sustainable Sustainable
innovation strategy and financial performance. innovation
4.2.2 The relationship between innovation strategy, internal process performance, and
financial performance. Internal process performance fully mediates the relationship between
strategy
sustainable innovation strategy and financial performance. Product innovation, process
innovation, and technology implementation are very important in innovation strategy. The
innovation strategy implementation influences internal process performance which includes
Operations Management process, Customer Management process, Innovation process, and 1307
Regulatory and Social Process.
A good internal process performance will improve efficiency which in turn has an effect on
good customer management process, which sequentially also has an effect on financial
performance. Operations Management process is the production of goods or services through
the transformation of input into output. This activity is related to making immediate
decisions in daily business by prioritizing the level of efficiency in the use of limited resources.
Operations management process governs management, within the meaning of continuous
steering over every business process and supporting process. The results show that 46
percent of respondents answered strongly agree, 47 percent of respondents answered agree,
and 7 percent of respondents gave neutral answers to questions related to Operations
Management process. This shows that manufacturing companies in Indonesia have
performed operations processes well. Customer Management process includes the
companies’ ways in getting customers, maintaining customers, and managing their
product brands. The results show that 44 percent of respondents answered strongly agree,
47 percent of respondents answered agree, and 75 percent of respondents gave neutral
answers to questions related to Customer Management process. This shows that
manufacturing companies in Indonesia have implemented customer management
process well.
Innovation process is an important part of internal process performance which is a
part of strategy implementation. The results show that 46 percent of respondents
answered strongly agree, 46 percent of respondents answered agree, and 8 percent of
respondents gave neutral answers to questions related to Innovation process. This
shows that manufacturing companies in Indonesia have executed product and process
innovation process well. Regulatory and Social process helps organizations continuously
get the right to operate in communities and countries where goods are produced and
sold. Companies manage and report regulatory and social performance related to several
important dimensions, i.e.: environment, security and health, employee practices, and
community investment. The results show that 50 percent of respondents answered
strongly agree, 47 percent of respondents answered agree, and 3 percent of respondents
gave neutral answers to questions related to Regulatory and Social Process. This shows
that manufacturing companies in Indonesia have performed Regulatory and Social
processes well.
In this research, manufacturing companies in Indonesia always improve the efficiency in
operations management process and are customer-oriented in operations process by
products and processes innovation. Manufacturing companies in Indonesia also pay close
attention to the prevailing regulations (rules) and always do social process for the
stakeholders’ interest as explained in the previous discussion.
The above explanation is supported by Jones’s (2004) and Terziovski’s (2002) research
results. Innovation is defined as a process in the organization in utilizing skills and resources
to develop new products and/or services or to build new production and operations systems
to meet customer needs (Jones, 2004) Terziovski (2002) provides evidence that innovation has
an effect on internal process performance indicators, such as company productivity.
BIJ Sustainable innovation strategy has an effect on financial performance if there is a good
27,4 internal process performance. Therefore, internal process performance mediates the
relationship between sustainable innovation strategy and financial performance.
4.2.3 The relationship between innovation strategy, management accounting information
system, and financial performance. Management accounting information system does not
mediate the relationship between sustainable innovation strategy and financial performance.
The research results conclude that approximately 52 percent of manufacturing companies in
1308 Indonesia pay little attention to the importance of management accounting information
system. It can be seen in the relatively very simple hardware and software owned by the
companies. However, 48 percent of manufacturing companies in Indonesia have used a
reliable management accounting information system.
Innovation strategy in all companies’ aspects applied by the companies will have an effect
on information needs in the strategy implementation. It is in line with Bromwich’s (1990)
research results which explain that information in Management Accounting Information
System can help the companies face challenges in the market competition. The results also
describe that information in the Management Accounting Information System focuses on
increasing the companies’ value added so that the companies have a competitive advantage
that exceeds their competitors. It will also help managers monitor their company’s
performance in a competitive and uncertainty environment. Management accounting
information system as one of the management accounting products plays a role to help to
predict the consequences that may occur on various alternative actions taken in various
activities such as planning, controlling, and decision making.
The characteristics of the information available in the company’s management
accounting are said to be effective and efficient if they can support information users to
make correct, accurate, and timely decisions. Research conducted by Gerloff et al. (1991)
explains that the suitability, accuracy, correctness, and relevance of the information in the
company with the needs of decision-makers will improve the decision quality to be taken and
ultimately can improve company performance. The applied strategy also has an effect on the
need for a reliable information system including the information system provided by
management accounting. Reliable, trustworthy, and timely Information accounting system
according to Chenhall and Morris (1986) is information having broad scope, aggregation,
timeliness, and integration. Innovation in strategy implementation will determine the need for
a reliable management accounting information system. Therefore, innovation in strategy
implementation determines the need for a reliable management accounting information
system. However, in this research, a reliable accounting information system has no effect on
financial performance. Therefore, the management accounting information system does not
mediate the relationship between sustainable innovation strategy and financial performance.
4.2.4 The relationshipbetween innovation strategy, management accounting information
system, internal process performance, and financial performance. Management accounting
information system and internal process performance mediate the relationship between
sustainable innovation strategy and financial performance. The research results indicate that
manufacturing companies in Indonesia in their strategy implementation emphasize the
reliability of management accounting information system. Suitability between information
and the needs of decision-makers will improve the decision quality to be taken and ultimately
can improve company performance (Gerloff et al., 1991).
It is in line with researches conducted by several researchers including Clemons and Row
(1991); Mahmood and Mann, 1993; Kettinger et al., 1995; Ross et al., 1995 which conclude that
information technology needed in management accounting information system provides
opportunities for global companies to improve coordination and control, or it can also be used
to gain competitive advantage in the world market because it has an effect on internal process
performance. Innovation in information technology becomes an important factor in strategy.
Innovation strategy implemented by the company will determine the need for a reliable Sustainable
management accounting information system having broad scope, aggregation, timeliness, innovation
and integration in order to achieve good internal process performance which consecutively
has an effect on good financial performance. Therefore, innovation in the strategy
strategy
implementation determines the need for a reliable management accounting information
system that ultimately affects the internal process performance which has an effect on
financial performance.
A reliable Management Accounting Information System has an effect on financial 1309
performance if there is a good company’s internal process performance as described in the
previous discussion. Therefore, management accounting information system and internal
process performance fully mediate the relationship between sustainable innovation strategy
and financial performance.

4.3 Research limitations

First, on the implementation of a sustainable innovation strategy, this research does not
consider the product lifecycle stage. In this case, the researchers do not consider the position
of the companies’ product cycle. The researchers do not identify whether the company’s
product life cycle is in the introduction stage, growth stage, maturity stage or decline stage.
The researchers assume that the companies are at the same product lifecycle stage. It is
because the product life cycle is getting shorter with the increasingly intense competition.
Secondly, data on manufacturing companies taken from the Ministry of Industry and
Trade in Indonesia have been grouped in medium and large manufacturing companies. In
this case, the researchers do not further identify the grouping of medium and large
manufacturing companies.

4.4 Implication
The results of this study inform manufacturing companies in Indonesia about the importance
of continuous innovation and information technology in the implementation of their
strategies so that companies have competitive advantages and have competitiveness in the
face of globalization and the importance of combining financial and nonfinancial measures by
aligning measures with corporate strategy relationship between cause and effect between
financial and non-financial measures. The results of this study contributed to increasing the
concern of business unit managers or the same level in Indonesia about the importance of an
adequate accounting information system so that the company is able to provide a reliable
accounting information system for decision making and the role of intellectual capital
because intellectual capital meets the criteria as a unique resource that is able to create a
competitive advantage of the company so that it can create value for the company.
The implications of this study theoretically provide improvements in accounting
education in Indonesia. The results of this study contribute to increasing the awareness of
academics in relation to the improvement of the accounting education curriculum. Bridge
theoretical gap between I/O and RBT using Contingency variables, namely intellectual
capital, accounting information system, performance of internal process, and customer
performance. Provide theoretical explanation on causal relationship on innovative strategy,
role of intellectual capital, reliable management for accounting information system,
performance of internal process of a company, and customer and financial performance.
Develop theoretical model by involving contextual variables in Contingency Theory, namely
intellectual capital as moderating variable, accounting information system management,
performance of internal process of a company, customer performance towards relationship
between strategy and financial performance. This study yields findings in the form of the
latest management accounting information systems practices that are being widely used by
BIJ the business world. The practice of the management accounting information system should
27,4 be included in the lecture material, for example in the form of a management accounting
laboratory so that students get the latest knowledge related to management accounting
information systems. The results of the study, can be used as a basis for evaluating material
and curriculum by the management of education management accounting and IAI
compartment of Educator Accountants. Up to date accounting teaching materials in
accordance with accounting practices to answer criticism from the public which states that
1310 the topic of accounting research only revolves around academics and the results are only used
for academics. As an addition, this study contributes to management of company,
particularly manufacturing company since it discusses importance of innovation in
implementation of strategy, management of accounting information system and
intellectual capital in increasing performance of company to deal with free trade.
5. Conclusions and recommendations
Based on the research results, it can be concluded that innovation strategy has a significant
effect on financial performance. Human capital does not significantly mediate the relationship
between innovation strategy and financial performance. Capital performance and internal
performance do not mediate the relationship between innovation strategy and financial
performance. Management accounting information system does not mediate the relationship
between innovation strategy and financial performance. Internal process performance mediates
the relationship between innovation strategy and financial performance. Management
accounting information system and internal process performance mediate the relationship
between innovation strategy and financial performance.
Research Suggestions: To Improve Practices in the Companies: (1) The research results
provide information for manufacturing companies in Indonesia about the importance of
sustainable innovation and information technology in the strategy implementation so that
companies have competitive advantages and competitiveness in facing globalization. (2) The
research results contribute in increasing the awareness of business unit managers or equivalent
especially in Indonesia about the importance of an adequate accounting information system so
that the companies are able to provide reliable accounting information system for decision
making and about the role of intellectual capital because intellectual capital meets the criteria as
unique resources that can create the companies’ competitive advantage to make value creation
for the companies. For further research: (1) In this research, the application of a sustainable
innovation strategy does not consider the product life cycle stages. Therefore, the next research
needs to consider the product lifecycle stages. (2) In this research, the analysis of intellectual
capital is a combination of human capital, customer capital, and structural capital. Therefore,
the next research needs to analyze the components of intellectual capital individually.
However, it is plausible that a number of limitations might have influenced the results
obtained. Firstly, this research did not consider the stage of the product life cycle and did not
analyze the element of individual intellectual capital. Thus, further studies are expected to
consider the product life cycle stage which identify whether the company’s product life cycle is
in the introduction stage, growth stage, maturity stage or decline stage. Secondly, the
respondents were put together, not categorized based on the types of company they were from
(go public and non-go public manufacturing company). Therefore, further studies are expected
to divide the respondents into the two groups (go public and non-go public). Besides, this
research only involved manufacturing companies running production processes, so further
studies are expected to involve companies engaged in services. Lastly, questions on the
questionnaires could not explore causal relationships between indicators as in the BSC concept.
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BIJ Appendix
27,4
No Variable Indicator Number of questions

1 Strategy Innovation 6
Technology
2 Intellectual capital Human capital 24
1318 Customer capital
Structural capital
3 Management accounting information Broad scope 18
system Timelines
Integration
Aggregation
4 Internal process performance Operations management 4
process
Customer management process
Innovation process
Regulatory and social processes
5 Customer performance Product/ServMIe 3
Attributes
Relationship
Image
6 Financial performance Growth of income 4
Cost reduction or savings
Table AI. Increase in asset use
Instrumentation Grid Total questions 59

Corresponding author
Benny Hutahayan can be contacted at: benny.hut.ub@gmail.com

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