STRATEGIC PRIORITIES, MANAGEMENT CONTROL SYSTEMS, AND MANAGERIAL PERFORMANCE: AN EMPIRICAL STUDY. Submitted by. A thesis submitted in total fulfilment

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1 STRATEGIC PRIORITIES, MANAGEMENT CONTROL SYSTEMS, AND MANAGERIAL PERFORMANCE: AN EMPIRICAL STUDY Submitted by John Stephen Sands, B.Bus GCUCGU, B. Bus USQ, M. Phil Grif A thesis submitted in total fulfilment of the requirement for the degree of Doctor of Philosophy Centre for Organisational Governance and Performance Management (COGAP) Department of Accounting, Finance and Economics Griffith Business School Griffith University Queensland, Australia June 2006

2 Abstract Literature questioned the accuracy and appropriateness of the description and prediction propositions underlying the elements of Porter s theory of generic competitive strategies. Two common conclusions evolved from these criticisms. Firstly, future strategy research should develop a more accurate and more relevant description of strategic priorities for today s business environment. Secondly, an examination of a range of strategic and organisational variables within a contingency framework may provide more powerful insight into what contributes to an effective competitive strategy. However, the dominating emphasis on accounting controls and accounting information in past management accounting contingency-based research has been criticised. This criticism occurs because the focus of the research is not broad enough to capture modern approaches needed to achieve effective control and to cope with increased competition and market globalisation. For example, evidence suggests that middle management are involved in activities of strategic significance and the new styles of strategic decision making rely on middle management participation beyond the budgetary setting process. Modern management systems, such as the balanced scorecard (BSC), place an emphasis on administrative and personal controls so that the objectives of the chosen strategy can be communicated and reinforced. Therefore, the involvement and psychological empowerment of middle management in the strategic decision process are elements of the control mechanism needed to develop emergent competitive strategies for timely implementation in today s dynamic business environment. This contemporary view sees management control systems (MCS) as a more active set of control elements so that it can provide individual managers with information and power to achieve their goals. Therefore, academic commentators have concluded that future research needs to focus on contemporary dimensions of MCS and behavioural outcomes to maintain the relevance of MCS contingency-based research. Consequently, there were four objectives for this study. The first objective of this research aimed to provide a more accurate description of the dimensions of the differentiation strategy. This has been achieved by adopting competitive methods that prior studies derived from a number of strategy theories (e.g., Miles and Snow [1978], Hofer and Schendel [1978], and Porter [1980]). Competitive methods have been i

3 described as the composition of different strategic dimensions that might be used to characterise a particular generic strategy. These more specific descriptions of strategy have been labelled strategic priorities by other researchers. The first aim of the second objective was to establish a more accurate description of organisations strategic orientations that have greater generalisability than Porter s notion about the mutually exclusive implementation of his broadly described typologies. For the second aim of the second objective, the research aimed to provide a better prediction about an organisation s performance ability compared to Porter s financial performance proposition that requires the selection of a single priority as an organisation s strategic orientation. The results of the confirmatory factor analysis, within a structural equation modelling (SEM) technique, support the description of more specific dimensions of the differentiation strategy. Similarly, the cluster analysis indicates organisations adopt a single strategic priority, no strategic priority, or different combinations of these strategic priorities as their strategic orientations. Furthermore, the ANOVA and post hoc tests results show no significant difference in above-average performance when organisations place an emphasis on one or more of the four strategic priorities. Such results suggest that a more accurate prediction of organisations performance may be based on one strategic priority or multiple strategic priorities in an organisation s strategic orientation. Additionally, the results are consistent with prior findings that do not support the accuracy of Porter s descriptions or prediction propositions. The third and fourth objectives examine the relationships that require path analysis to identify the direct and indirect effect of variables on relationships examined in this study. The third objective concerns the set of relationships between four strategic priorities and managerial performance. The regression analysis produced two significant positive (Product & Service Quality and Cost Leadership) and one significant negative (Product Innovation) relationship results. The use of the more descriptive dimensions of differentiation strategy provides new evidence that adds to the body of knowledge for a direct relationship between Product & Service Quality and managerial performance. Finally, the fourth objective of this study examined the mediating effects of control elements, middle management involvement and empowerment, on the relationships between each of these specific strategic priorities and managerial performance. To achieve this objective, this research investigated, firstly, the four strategic priorities- ii

4 involvement relationships and the four strategic priorities-empowerment relationships. Separate relationships between involvement and managerial performance as well as empowerment and managerial performance are examined. Results suggest significant different relationships exist between Product & Service Quality, Marketing/Brand Image, and Product Innovation strategic priorities and involvement as well as between these strategic priorities and empowerment. These significant different relationships results would not be available for researchers who examined differentiation or prospector strategy as a single variable. Furthermore, all relationships between involvement and managerial performance or empowerment dimensions and managerial performance were found to be significant and extend the scope of the findings by prior management accounting studies. Finally, significant or meaningful indirect (mediating) effects for each relationship were calculated using the results of the path analysis. Indirect effect calculations suggest that the mediating effects of middle management involvement as well as their influence and competence (two dimensions of empowerment) depend upon the selected strategic priority. The indirect effects for involvement, influence, and competence intimate they have a mediating effect on the separate relationships between Product & Service Quality, Marketing/Brand Image, and Product Innovation strategic priorities and managerial performance. However, involvement and influence do not have a mediating effect on the Cost Leadership strategic priority-managerial performance relationship. Additionally, the calculations suggest that only middle management s competence mediates the relationship between the Cost Leadership strategic priority and managerial performance. Also, the computations intimate that while autonomy does not mediate the relationship between Product Innovation and Marketing/Brand Image strategic priorities and managerial performance, autonomy does have a negative mediating effect on the Product & Service Quality-managerial performance and Cost Leadershipmanagerial performance relationships. iii

5 Statement of Authorship This work has not previously been submitted for a degree or diploma in any university. To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made in the thesis itself. John Stephen Sands iv

6 Abstract Statement of Authorship Table of Contents List of Figures List of Graphs List of Tables Acknowledgements Table of Contents CHAPTER 1 Introduction Motivation for the Study An Overview of the Study An overview of Stage 1: Porter s competitive strategy-financial performance relationship An overview of Stage 2: Relationship between each strategic priority and performance and mediating effects of involvement and empowerment on each strategic priority-performance relationship Page An overview: Strategic priorities managerial performance relationship An overview: Mediating effects of involvement and empowerment on each strategic priority-performance relationship 1.3 Objectives of the Study Research Questions Contributions of the Study Organisation of the Study 19 CHAPTER 2 Literature Review Definitions of Strategy in Strategy Research The Theory of Business (Competitive) Strategy Scope of competitive strategies and source of competitive advantage propositions Performance outcomes of singular strategy source adoption proposition Attempts to integrate strategy typologies into alternative theoretical models Identifying competitive characteristics similarities among strategy typologies Strategic priorities within the competitive differentiation strategy First method used to identify strategic priority dimensions of differentiation Second method used to identify strategic priority dimensions of differentiation Unquestioned adoption of established differentiation strategy attributes 43 i iv v xi xii xiii xv v

7 Adopting established differentiation strategy attributes after further analysis Page Strategic priority dimensions, strategic orientation clusters, and performance Summary of strategic priorities, strategic orientation, and performance findings Strategic and Organisational Variables within a Contingency Framework Strategy and managerial performance Strategy and organisational controls Structure: An organisational macro control of MCS Elements of the macro control Organic-Mechanistic structural forms of MCS Strategy and involvement of middle management in the strategic decision process Strategy and psychological empowerment of middle management in the strategic decision process Effects of elements of the control mechanism on managerial performance Involvement of middle management and managerial performance Psychological empowerment of middle management and managerial performance Summary of elements of the control mechanism on managerial performance Chapter Overview 88 CHAPTER 3 Theoretical Model and Hypotheses Development Research Problems Research Problem One: Two elements of Porter s Theory of Generic Competitive Strategy Theoretical model of strategic priorities and hypothesis development Theoretical model of strategic orientations and hypothesis development Theoretical model for above-average performance and hypothesis development Summary of discussions for research problem one Research Problem Two: Strategy and Elements of the Control Mechanism within a Contingency Framework Strategic priorities definition Middle management involvement in the strategic decision process definition Middle management s psychological empowerment in the strategic decision process Autonomy dimension of empowerment definition Influence dimension of empowerment definition Competence dimension of empowerment definition vi

8 Page Strategic priority Elements of the Control mechanism relationships Strategic priority Middle management involvement relationship hypotheses Innovation-Involvement relationship hypothesis Product and Service Quality-Involvement relationship hypothesis Marketing/Brand Image-Involvement relationship hypothesis Cost Leadership-Involvement relationship hypothesis Strategic priority Psychological Empowerment relationship hypotheses Innovation-Empowerment relationship hypothesis Product and Service Quality-Empowerment relationship hypothesis Marketing/Brand Image-Empowerment relationship hypothesis Cost Leadership-Empowerment relationship hypothesis Research Problem Two: Relationships between Strategic Priorities and Managerial Performance and Relationships between Control Elements and Managerial Performance Managerial performance definition Strategic priority Managerial performance relationship hypotheses Innovation Managerial performance relationship hypothesis Product and Service Quality Managerial performance relationship hypothesis Marketing/Brand Image Managerial performance relationship hypothesis Cost Leadership Managerial performance relationship hypothesis Middle management involvement and their performance relationship Middle management psychological empowerment and their performance relationship Middle management s autonomy and their performance Middle management s influence and their performance Middle management s competence and their performance Research Problem Two: Mediating Effect of Control Elements on each Specific Strategic Priority-Managerial Performance Relationship Mediating effect of middle management involvement hypotheses Mediating effect of middle management s psychological empowerment hypotheses 3.6 Chapter Summary 175 CHAPTER 4 Theoretical Model and Hypotheses Development Rationale for the Research Method Sample Selection vii

9 Page 4.3 Participants Descriptive statistics of demographic data Administration of Survey Survey Design Pilot study of printed survey Web-based survey design and data integrity verification Pilot study of Web-based survey Instrument Components Descriptive statistics Strategic priorities measures Involvement measure Measures for three dimensions of empowerment Autonomy and influence measures Competence measure Managerial performance measure Financial performance measure for Strategic Business Units (SBUs) Summary 222 CHAPTER 5 Results Confirmatory Factor Analysis (CFA) Techniques and Results using Structural Equation Modelling Cluster Analysis and ANOVA Techniques and Results Cluster analysis and results ANOVA and results Path Analysis Technique: Advantages, Limitations, and Assumptions Sample Size: Ratio of Cases to Independent Variables (IVs) Absence of Outliers among Variables Absence of Multicollinearity and Singularity among Variables The Existence of Normality, Linearity, Homoscedasticity and Independence of Residuals of the Variables Path Analysis Results The Relationship between Four Strategic Priorities (Product Innovation, Product & Service Quality, Marketing Brand Image and Cost Leadership) and Middle Management Involvement in the Decision Process: Testing Hypotheses H 3.1 to H viii

10 5.4.2 The Relationship between Four Strategic Priorities (Product Innovation, Product & Service Quality, Marketing Brand Image and Cost Leadership) and Three Dimensions of Middle Management s Psychological Empowerment (Autonomy, Influence, and Competence) in the Decision Process: Testing Hypotheses H 4.1 to H Testing the Relationship between Four Strategic Priorities (Product Innovation, Product & Service Quality, Marketing Brand Image and Cost Leadership) and Middle Management s Autonomy in the Decision Process Testing the Relationship between Four Strategic Priorities (Product Innovation, Product & Service Quality, Marketing Brand Image and Cost Leadership) and Middle Management s Influence in the Decision Process Testing the Relationship between Four Strategic Priorities (Product Innovation, Product & Service Quality, Marketing Brand Image and Cost Leadership) and Middle Management s Competence in the Decision Process The Relationship between Four Strategic Priorities (Product Innovation, Product & Service Quality, Marketing Brand Image and Cost Leadership) and Managerial Performance: Testing Hypotheses H 5.1 to H The Relationship between Involvement and Three Dimensions of Middle Management s Psychological Empowerment (Autonomy, Influence, and Competence) in the Decision Process and Managerial Performance: Testing Hypotheses H 6a to H 6b Calculations and Discussions on the Direct, Indirect and Total Effects of the Four Strategic Priorities on Managerial Performance Page Results Summary Chapter Summary 289 CHAPTER 6 Discussion of Results, Limitations, and Conclusions Discussion about the Results Results for Strategic Priorities, Strategic Orientations and Financial Performance Hypothesis H Hypotheses H 2.1 and H Results for Strategic Priorities, Involvement, Psychological Empowerment and Managerial Performance Hypotheses H 3.1 to H Hypotheses H 4.1 to H Hypotheses H 5.1 to H Results for the Relationship between both Involvement and Psychological Empowerment and Managerial Performance Hypothesis H 6a Hypotheses H 6b.1 to H 6b ix

11 Page Results for the Mediating effect of both Involvement and Psychological Empowerment on the Relationships between the Four Strategic Priorities and Managerial Performance Hypotheses H 7.1 to H Hypotheses H 8.1a, to H 8.2d Hypotheses H 8.1a, H 8.1b, H 8.1c, and H 8.1d Hypotheses H 8.2a, H 8.2b, H 8.2c, and H 8.2d Summary for Sections to Implications of the Results of the Study Research Implications Implications for Practice Limitations of the Study Chapter Summary and Conclusions 332 Appendices Appendix A: Critiques of Two Elements of Porter s Theory of Generic Business Strategies Appendix B: Critiques of Alternative Theory of Generic Business Strategies 350 Appendix C: Strategy-Performance (Level) Relationship examined by Prior Research and Discussion about interpretation of Maloney and Mia [1998] Strategy variable s β Appendix D: Extract from pages 5 and 7 of Year Book Australia Industry structure and performance Article years of change in Australian industry, Australian Bureau of Statistics Web site Appendix E: Administration Processes for Confidential Web-based Survey 364 Appendix F: Screen Print of Web-based Survey Screens 372 Appendix G: Web-based Survey Testing Sub-section Screen prints of 385 Outcomes Appendix H: Survey Document: Multi-dimensional strategic priorities, decision process and performance Measures used for PhD from Electronic Webbased survey 391 Appendix I: Complete Organisational Performance Factor Analsyis 398 Appendix J: Goodness of Fit Statistics for Each Involvement, Empowerment, and 400 Managerial Performance Factor Appendix K: Computation of Path Co-efficients 401 Appendix L: Results of Skewness and Kurtosis Statistical Methods with Associated 416 Histograms Appendix M: Composite Path Analysis Model Summary between (A I ) Four Strategic priorities, (B) Involvement & Three Dimensions of Psychological Empowerment, & (C) Managerial Performance 418 Appendix N: Path analysis DE and IE calculations 419 References x

12 List of Figures Figure Description Page 1.1 Flow Chart of Thesis Miller and Dess [1993] Three-Dimensional View of Porter s Framework Langfield-Smith s [1997] Three-Dimensional View of Integrating Strategy Variables 2.3 Kald et al s [2000] Hypothetical Relationship between Strategic Pattern, Strategic Mission, Strategic Position, and Use of Management Control Contingency Control Framework Strategic Decision Processes: An Integrative Contingency Control Framework An Overall View of the Conceptual Model for Research Questions 1a and 1b An Overall View of the Conceptual Model for Research Questions 2a and 2b Theoretical Model of Strategic Priority Description Theoretical Model of Multi-Dimensional Strategic Priorities and Strategic Orientations Theoretical Model for Long Term Above-Average Performance The Relationships between Strategic Priorities and Control Mechanism Variables 3.7 Relationships between Strategic Priorities and Managerial Performance, as well as Relationships between Control Elements and Managerial Performance 3.8 The Mediating Effect of Control Elements on Specific Strategic Priority- Managerial Performance Relationships 3.9 The Model between (A I ) Four Strategic priorities, (B) Involvement & Three Dimensions of Psychological Empowerment, & (C) Managerial Performance 5.1 Confirmatory Factor Analysis Measurement Model for Product Innovation Strategic Priority 5.2 Confirmatory Factor Analysis Measurement Model for Product & Service Quality Strategic Priority 5.3 Confirmatory Factor Analysis Measurement Model for Marketing/ Brand Image Strategic Priority 5.4 Confirmatory Factor Analysis Measurement Model for Cost Leadership Strategic Priority 5.5 Statistical Model of Multi-Dimensional Strategic Priorities and Strategic Orientations 5.6 Path Analysis Model between (A I ) Four Strategic priorities, (B) Involvement & Three Dimensions of Psychological Empowerment, & (C) Managerial Performance 5.7 Path Analysis Model between (A I ) Four Strategic priorities, (B) Involvement & (C) Managerial Performance 5.8 Path Analysis Model between (A I ) Four Strategic priorities, (B) Autonomy (Dimension of Psychological Empowerment), & (C) Managerial Performance 5.9 Path Analysis Model between (A I ) Four Strategic priorities, (B) Influence (Dimension of Psychological Empowerment), & (C) Managerial Performance 5.10 Path Analysis Model between (A I ) Four Strategic priorities, (B) Competence (Dimension of Psychological Empowerment), & (C) Managerial Performance xi

13 List of Graphs Graph Description Page 4.1 Contribution of the Service Industry Group to the Australian GDP Normality Test for the Regression of the Four Strategic Priorities and Middle Management Involvement in the Strategic Decision Process (Equation 5.1) 5.2 Normality Test for the Regression of the Four Strategic Priorities and Middle Management s Autonomy in the Strategic Decision Process (Equation 5.2) 5.3 Normality Test for the Regression of the Four Strategic Priorities and Middle Management s Influence in the Strategic Decision Process (Equation 5.3) 5.4 Normality Test for the Regression of the Four Strategic Priorities and Middle Management s Competence in the Strategic Decision Process (Equation 5.4) 5.5 Normality Test for the Regression of the Four Strategic Priorities, Middle Management s Involvement, Autonomy, Influence as well as Competence in the Strategic Decision Process and Managerial Performance (Equation 5.5) 5.6 Linearity, Homoscedasticity, & Independence of Residuals of The Variables Test for the Regression of the Four Strategic Priorities and Middle Management s Involvement in the Strategy Decision Process (Equation 5.1) 5.7 Linearity, Homoscedasticity, & Independence of Residuals of The Variables Test for the Regression of the Four Strategic Priorities and Middle Management s Autonomy in the Strategy Decision Process (Equation 5.2) 5.8 Linearity, Homoscedasticity, & Independence of Residuals of The Variables Test for the Regression of the Four Strategic Priorities and Middle Management s Influence in the Strategy Decision Process (Equation 5.3) 5.9 Linearity, Homoscedasticity, & Independence of Residuals of The Variables Test for the Regression of the Four Strategic Priorities and Middle Management s Competence in the Strategy Decision Process (Equation 5.4) 5.10 Linearity, Homoscedasticity, & Independence of Residuals of the Variables Test for the Regression of the Four Strategic Priorities, Middle Management s Involvement, Autonomy, Influence as well as Competence in the Strategy Decision Process and Managerial Performance (Equation 5.5) xii

14 List of Tables Table Description Page 2.1 Integration of Strategies based on Similarities in Competitive Characteristics Strategic Priority Dimensions of Competitive Strategy Source Approaches Strategic Priorities and Strategic Orientations (Clusters of Strategic Priorities) Summary of Demographic Data Summary of Five Business Sub-Unit Categories Response Rate Details Strategic Priorities Factors (including Reliability and Construct Validity Tests) a Inter-Item Correlation Matrix for Innovation Factor b Inter-Item Correlation Matrix for Product & Service Quality Factor c Inter-Item Correlation Matrix for Marketing/ Brand Image Factor d Inter-Item Correlation Matrix for Cost Factor Involvement Factor (including Reliability and Construct Validity Tests) Inter-Item Correlation Matrix for Involvement Factor Autonomy and Influence Dimensions of Empowerment (including Reliability 206 and Construct Validity Tests) 4.9a Inter-Item Correlation Matrix for Autonomy Factor b Inter-Item Correlation Matrix for Influence Factor Competence Dimension of Empowerment (including Reliability and Construct 209 Validity Tests) 4.11 Inter-Item Correlation Matrix for Competence Factor Descriptive Statistics for Managerial Performance Matrix of Intercorrelations among the Nine Dimensions and the Overall Rating 216 of the Mahoney et al [1963] Managerial Performance Instrument 4.14 Rotated Component Matrix (a) Loadings for Nine Dimensions of Managerial 218 Performance Instrument 4.15 Three-Item Financial Performance Factor (including Reliability and Construct 221 Validity Tests) 5.1 Goodness of Fit Statistics for each Strategic Priority K-Means Cluster Analysis Results Description of Strategic Priority(ies) Emphasis for each Strategic Orientation Tests of Between-Subjects Effects Post Hoc Tests: Strategic Orientation 4 Clusters Multiple Comparisons Homogeneous Subsets Mean: Financial Performance Factor Correlation matrix between Four Strategic Priorities; Involvement, 249 Psychological Empowerment Dimensions; and Managerial Performance 5.8 Collinearity Diagnostics A I to B Regression Analysis Hypotheses H 3.1 to H 3.4, Equation (5.1) Four A I (four IVs) Coefficients & Dependent Variable: Involvement (Bi) 262 xiii

15 Table Description Page 5.10 A I to B Regression Analysis Hypotheses H 4.1a, H 4.2a, H 4.3a, & H 4.4a, Equation 266 (5.2) Four A I (four IVs) Coefficients & Dependent Variable: Autonomy (Bii) 5.11 A I to B Regression Analysis Hypotheses H 4.1b, H 4.2b, H 4.3b, & H 4.4b, Equation 268 (5.3) Four A I (four IVs) Coefficients & Dependent Variable: Influence (Biii) 5.12 A I to B Regression Analysis Hypotheses H 4.1c, H 4.2c, H 4.3c, & H 4.4c, Equation 271 (5.4) Four A I (four IVs) Coefficients & Dependent Variable: Competence (Biv) 5.13 A I to B to C Regression Analysis Hypotheses H 5.1, H 5.2, H 5.3, H 5.4, H 6a, H 6b.1, H 6b.2, & H 6b.3 using Equation (5.5) consisting of Four A I, Bi, Bii, Biii, & Biv (Eight IVs) on Dependent Variable: Managerial Performance (C) Statistics Summary of Path Coefficients Calculations of IE, DE, and TE for Hypotheses H 7.1 to H Calculations of IE, DE, and TE for Hypotheses H 8.1a to H 8.2d Summary of Results for Testing Hypotheses H 1 to H Summary of Calculation Results for Hypotheses H 7 to H Summary of Relationships and Results for Hypotheses H 1 to H 8.2d 295 xiv

16 Acknowledgements To my current supervisors, Professor Lokman Mia and Dr Liz Jones, I would like to express my gratitude for their guidance and support with my PhD programme. I also wish to thank my original principal supervisor Professor Iselin for his valuable support and encouragement until his retirement from Griffith University in Furthermore, I am grateful to Professor Mia and Dr Jones for their willingness to accept these supervisory roles and, despite their heavy workload, the hours they devoted to provide me with constructive and invaluable comments for my PhD project. The successful completion of this doctoral research has been possible with the help of many individuals and organisations. Firstly, I wish to thank middle management of organisations who voluntarily provided their important responses to my Web-based survey. Secondly, I am grateful to Professor Chew Ng for her support as the Head of Department with my application for Academic Studies Program leave during semester , which enabled the collection of the data for this thesis. Thirdly, I am thankful to Professor Liz Fulop as Dean of Research within Griffith Business School for providing financial support through a Research Fellowship Scholarship (RFS) for PhD Completion. This research fellowship provided the opportunity to buy out teaching time in semester so that I could finalise my PhD project. The thesis also benefited from the constructive comments of Associate Professor Carolyn Windsor, Associate Professor John Campbell, Dr Lanita Winata, Dr Nava Subramaniam, Dr Mohammad Tahir, Dr Peta Stevenson-Clarke and Dr Anoop Patiar who were participants at the research days in June 2005 and November 2005, which were organised by the Centre for Organisational Governance and Performance Management (COGAP). The assistance provided Dr Craig Zimitat with the design of my Web-based survey was greatly appreciated. I also wish to thank my colleagues Dr Lisa McManus, Ms Robyn Cameron, Dr Graham Bornholt, Dr Bryan Morgan, Mr Zoltan Murgulov, Dr Ratnam Algiah, Ms Svetlana Vlady, Professor Saroja Selvanathan, Professor Antony Selvanathan, Professor Zahriul Hoque, Dr Patti Cybinski, and Dr Hume Winzar for their time to discuss statistical and academic aspects of my thesis. Finally, I wish to thank my wife, Desley. Her help, unfailing support, sacrifices, and continuing love have provided me with the strength to complete this thesis. xv