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ELSEVIER Int. J. Production Economics 52 (1997) 161-172
aFaculty of Business and Economics, Monash University, Churchill, Victoria. 3842. Australia
bBrunel University, United kingdom
Abstract
This paper is part of a larger study of competitive advantage, organisational innovation and organisational perfor-
mance. The paper is based on preliminary tests performed on Australian manufacturers participating in the Best Practice
Program. The main aim is to provide a conceptual model and establish critical constructs for operationalisation of the
main concept as seen by company executives. The purpose was to establish what managers consider the important items
for various scales in order to facilitate a common understanding between academics and practitioners. The findings are
interesting in that they indicate what practitioners believe to be important elements of the research constructs. The results
also indicate possible future findings by pointing out the relationships among the constructs.
Keywords: Competitive strategies; Organisational innovation; Organisational performance and Best practice
improved productivity and reduce production costs 3. Literature review and theoretical foundation
in manufacturing. In order to obtain this competitive
advantage, Sandvik pursues three main strategies: 3.1. Competitive advantage/strategies
1. Modular tool systems allow advanced machine
shop automation. Porter [9] considered that in the long term, the
2. Inbuilt quality from the start, with around 1000 extent to which a firm is able to create a defensible
new product variations annually. position in an industry is a major determinant of
3. Direct distribution (DD) computer network that the success with which it will out perform its com-
links production units to central warehouses in petitors. He proposed generic strategies by which
Sweden and Holland. Each order, no matter a firm can develop a competitive advantage and
where in the world it originates, is transformed create a defensible position. These strategies are
in seconds into a packing slip, and the goods are (i) cost leadership, (ii)differentiation and (iii)
shipped out within 24 h in Europe and 36 48 h focus. Porter argued that by adeptly pursuing the
in the rest of the world. Sandvik is one example cost leadership, differentiation, or focus strategies,
where competitive advantage and performance businesses can attain significant and enduring com-
are linked through various technological and petitive advantage over their rivals [9, pp. 11-15].
administrative innovations. Our study looks at Cost leadership is not based on offering the
these linkages from an Australian perspective. lowest price, but having the lowest cost and hence
increasing the potential for greater profit margins.
Cost leadership strategies require the exploitation
2. Purpose of any economies of scale, or resources offered by
technology and experience to reduce the overall
The research on organisational performance as cost of business. Cost leadership strategies do re-
an outcome of specific organisational structures is quire increased market share to enhance overall
well documented [1-4]. However, a relatively new profitability.
field of discourse is in the analysis of productivity as Differentiation is a strategy based on offering
an outcome of competitive strategies. Furthermore, a unique product, either by design, branding, tech-
much of this research remains exploratory in nology, features, or customer service. Depending
nature [5-8]. These previous researchers have in- on the level and degree of uniqueness provided by
vestigated singular elements that enhance competi- differentiation, price sensitivity of demand and the
tive advantage and therefore, result in incremental risk of substitution can be reduced. Differentiation
increases in organisational performance. Our study can also increase the loyalty of customers towards
was undertaken to address some of these gaps in the product brand. Since differentiation focuses
the present research base. The purpose of this study upon unique market needs, gaining maximum
was to: marketing share may be an overriding objective.
1. Identify the nature of competitive strategy However, an in-depth understanding of the market
organisational innovation and organisational dynamics is necessary to produce the right prod-
performance, in Australian manufacturing com- ucts for sustained competitive advantage through
panies participating in this study. differentiation.
2. Describe the relationships among organisa- A Focus strategy aims to satisfy the needs of
tional performance, organisational innovation a specific group of customers. Organisations that
and competitive strategy in these companies. decide to follow a focus strategy should gear their
3. Establish whether companies participating in resources to increase their market share within
the Best Practice Program understand the their specific segment, and thereby achieve lower
Australian Manufacturing Council Best Practice cost or differentiation within that segment. Speed
criteria. [10] argues that in order to pursue focus strategies,
In order to lay the groundwork for the study, a distinction can be made between segmentors
a review of the appropriate literature follows. and nichers. He suggests that segmenting can be
S. Yamin et al./Int. J. Production Economics 52 (1997) 161-172 163
considered as "simple focus" where a segmentor Because of different thrusts of strategies, profitable
selects a group of customers within the market companies tend to compete with one strategy only.
whose needs can be met by a smaller section of the Porter [9] has argued that the benefits of optimis-
industry. In comparison, a nicher selects a group ing the company's strategy for a particular target
within a market whose needs may be met economi- segment (focus) cannot be gained if a company is
cally by only one company. simultaneously serving a broad range of segments
(cost leadership or differentiation). Other authors
[-11, 12] support a similar line of reasoning.
3.2. Conceptualisation of competitive strategies An opposing perspective proposes that both low
cost and differentiation strategies may be simulta-
Two schools of thought have emerged regarding neously and profitably adopted by an enterprise.
the conceptualisation and adoption of competitive According to this notion, the adoption of a differen-
strategies. These are summarised as Porter's gen- tiation strategy would entail promoting higher
eric strategies of cost leadership, differentiation and product quality and involve bearing higher costs
focus. The first school of thought supports Porter across a number of functional areas in order to
in his assertion that the organisation has to choose support the differentiation strategy. However,
one of the generic strategies and devote total com- higher quality products would presumably channel
mitment of resources to it [11, 12]. greater market demand, allowing the company to
On the other hand, several other authors have adopt a low-cost strategy through the attainment
argued against Porter's assertion [9], and suggest of higher market shares facilitated by learning
that organisations should focus on a combination effects. Miller and Friesen [18, 19] derived an empi-
of strategies that best suit their circumstances rical taxonomy of business level strategies to deter-
[10, 13-17]. mine if Porter's [20] generic types would emerge in
The first school of thought maintains that viable consumer durable industries. The authors found
companies can seek either efficiency or differenti- that the cluster of business units that show distinc-
ation. The more efficiency is sought by manage- tive competencies in the areas of differentiation,
ment, the less differentiated the company would be, cost leadership and focus dramatically outperform
while greater differentiation would be associated all the others. In fact, Miller and Friesen ['18, 19]
with a less efficient company. Porter, representing found that success seems to be caused by the pos-
this school of thought, has conceptualised low cost session of strategic advantages, the more the better,
versus differentiation in terms of a continuum, with rather than strict adherence to Porter's [20] types.
low cost at one end and differentiation at the other They argued that this issue certainly warrants fur-
end. ther study as failure and success appeared to be
According to Porter [9, p 18]: systematic with poor performers exhibiting many
weaknesses and virtually no strengths, while good
A company will ultimately reach the point
performers show the opposite. This line of reason-
where further cost reduction requires a sacrifice
ing receives support from other researchers
in differentiation. It is at this point that generic
[13, 16, 21-25].
strategies become inconsistent and a company
Miller [23] argues that there are number of
must make a choice.
dangers associated with the exclusive pursuit of
This school of thought reasons that the value a single generic strategy. He claims that strategic
chain required for a low-cost strategy is qualitat- specialisation may leave serious gaps or weaknesses
ively different from the value chain required for in product offerings, ignore important customer
a differentiation strategy. The emphasis of a differ- needs, be easy for rivals to counter, and in the long
entiation strategy is on achieving (even at consider- run cause inflexibility and narrow the vision of the
able cost) superior quality and image throughout organisation.
the value chain, while the emphasis of a low-cost In support of Miller, Wright et al. [17] study of
strategy is on lowering cost wherever possible. 90 companies selected randomly from Dunn and
164 S. Yamin et al./lnt. J. Production Economics 52 (1997) 161-172
Bradstreet's Million Dollars Directory evaluated Organisational innovation in this paper has been
the performance of companies using multiple strat- conceptualised as having three dimensions namely,
egies against those using singular strategic foci. administrative, product and process innovations.
They concluded that companies which adopt mul- These forms of innovation have been shown to
tiple strategies such as low cost and differentiation relate to work redesign and work systems [44-46],
outperform businesses that compete mainly with skills enhancement [47], management systems
either one or the other. [48-51 ], change in incentives and design of innova-
tions [52], Total Quality Control (TQC) [28] and
just in time manufacturing (JIT) [30]. Innovation
3.3. Organisational innovation appears to have great impact on work productivity
and the overall performance of the organisation.
Many organisations are facing competitive chal-
lenges due to the rapid pace of technological
change. Industries dependent on highly sophisti- 3.5. Organisational performance
cated technologies or competing globally are parti-
cularly vulnerable to the need for continuous and Organisational performance has been tradition-
rapid alterations in organisational activities ally defined in narrow terms reflecting financial
[26, 27]. These conditions have led management performance. In this article we have broadened the
theorists and practioners alike to call for more conceptualisation so that overall organisational
creativity and innovation in product lines, manage- performance consists of an organisation's ability to
ment practices, and production processes [28 39]. meet short-term debt (liquidity), withstand short-
It is important to acknowledge from the outset that term losses, meet its interest payments, and cover
organisations do not always have the luxury of fixed costs (leverage), generate regular cash flow
selecting a design for innovation that provides through inventory turnover, and total assets turn-
a tight fit with all the contingencies they face. The over (activity), and achieve overall profitability
poorer the fit, the larger the number and magnitude through profit margin on sales and return on in-
of potential problems, thus requiring a firm to vestment (ROI). Chancy et al. [53] studied the
develop new capabilities. A tight fit is obviously relationship between innovation and performance
a desirable goal, however the environment is using financial indices such as stock prices and
dynamic, hence constant effort and investment earnings. They concluded that product innovation
is required to maintain congruence with the envi- has a positive effect on performance. Cohen and
ronment [40]. Levinthal [54] have found similar results for pro-
cess innovation. Other researchers [33,34,45]
have found that improved technology reduces cost
3.4. Manufacturing perspectives of innovation per unit and therefore improves performance.
These findings suggest that organisational perfor-
The years since 1960 have seen a long list of mance is related to organisational innovation.
developments and approaches that were identified However, the relationship between each of the vari-
as key solutions to problems in various manufac- ables of organisational innovation and competitive
turing industries. Applications of classification strategy is little understood or examined.
and coding and group technology systems emerged
in 1970. These greatly improved batch manu-
facturing efficiencies by taking advantage of 4. Conceptual framework
synergy, and by defining the most cost-effective
methods of producing each and every part. Some of Evidence of the relationships among organisa-
the technologies developed for manufacturing in- tional innovation and competitive strategy and or-
cluded CAD, CAM, MRP, MRPII, JIT, CIM etc. ganisational performance are rather problematic,
[41-43]. although several authors have studied these
S. Yamin et aL/Int. J. Production Economics 52 (1997) 161-172 165
relationships using different indices. Often how- strategies chosen are those developed by Porter
ever, limited relationships among these variables [-20]. We also note that some organisations can
have been studied [27, 33, 39, 55-58]. Our research gain competitive advantage through organisational
was undertaken in order to examine these relation- innovation. In line with the literature cited above,
ships in more detail, particularly from an Austra- organisational innovation could be of three distinct
lian perspective. A conceptual model for this origins that is, administrative innovation, product
research in shown in Fig. 1. innovation, or process innovation. In addition, or-
From our conceptual model the following are the ganisational performance has many aspects but we
principal features. Organisational performance de- also choose to operationalise only four of these
pends on the ability of the organisation to achieve namely, liquidity, leverage, activity and return on
a position of competitive advantage. A position of investment. These are the principal construct exam-
competitive advantage could be achieved through ined in this preliminary research.
many routes but for our purposes we choose to
investigate two of these. Competitive advantage
may be achieved through the use of an appropriate 5. Methodology
competitive strategy. In this sense appropriate
means congruent to the needs of the industry (or The data reported in this paper were obtained
macroenvironment) and in line with management from 39 manufacturers drawn from the total of 279
predispositions and capabilities. The competitive Australian companies involved in the 1991 Best
Administrative
Innovation Competitive ~ Organisational
Advantage Performance
Process
Innovation
Table 2
t-Tests for paired differences among items of competitive strategy
1 2 3 4 5 6 7 8
Competitive strategy
Cost leadership
1. Customer relationship 4.55 x
2. Improvement and utilisation of 4.46 0.44 x
assets
3. Improvement in skill base 4.09 1.86 2.16" x
4. Suplier-Vendor relationships 3.68 3.60** 3.40** 1.52 x
5. Adaptability 3.68 4.56*** 3.15"* 1.75 0.00 x
*p < 0.05, **p < 0.01, ***p < 0.001 Scale: 1 = not important, 2 = minimally important, 3 = moderately important, 4 = considerably
important, 5 = very important.
leadership was found to be significant. This prob- tween low cost strategy and product innovation.
ably suggests that in business to business relation- The correlation between low cost and process in-
ships, a focus strategy is most likely to be effective if novation was high, but not significant. This result is
it is also based on low cost. in the right direction, while the non-significance
The correlation between focus and differenti- may be due to limited sample size. The only other
ation strategies was highly significant. Porter significant relationships were process innovation
[20] did not specifically identify differentiated with adminstrative and product innovation, which
focus as a separate strategy, although many were significant at the p < 0.01 level. Overall, or-
other authors have suggested it [60]. The implica- ganisational performance was highly correlated
tions are that a focus strategy is most likely to be with low cost strategy, administrative innovation,
effective if it targets specific needs of the market and process innovation. The relationship between
segments. organisational performance and differentiation was
Cost leadership and administrative innovation high but not significant due to small sample size,
were found to be positively correlated. This sug- the same can be said of product innovation. In
gests that administrative innovation may be critical general, all the constructs were actually or poten-
to a low cost strategy. This implies that such activ- tially significantly related to organisational perfor-
ities as re-engineering, downsizing (right sizing) or mance. As suggested from Fig. 1, these results seem
re-organisation of tasks are neccessary to support to indicate that competitive strategies and organ-
for a low cost strategy. As would be expected from isational innovation are positively related to organ-
theory, there was no significant relationship be- isational performance.
S. Yaminet al./Int. J. Production Economics 52 (1997) 161-172 169
Table 3
t-Tests for paired differences among items of organisational innovation
1 2 3 4 5 6 7 8 9
Organisationai innovation
Administrative innovation
1. Customer focus 4.18 x
2. Training and development 4.18 0.00 x
3. Communications 4.09 0.29 0.42 x
4. Technology applications 3.81 1.70 1.25 0.90 x
5. Bench marking 3.50 3.81"** 2.10" 1.77 1.37 x
6. Participative decision making 3.31 2.24* 3.47** 2.99** 1.21 0.43 x
7. Changes in organisational structure 3.23 2.67* 4.11"** 2.99** 1.71 0.72 0.40 X
8. Reward and compensation 3.13 3.51"* 4.69*** 4.28*** 2.73** 1.32 0.61 0.38 x
9. Changes in human resource 2.73 6.20*** 5.57*** 4.81"** 5.90*** 2.94** 1.77 1.80 1.90
policy
Technical innovation
1. Total quality control 3.73 x
2. Holistic manufacturing 3.27 1.27 x
3. Flexible manufacturing 3.23 1.35 0.13 x
4. Computer aided design 2.59 2.87** 1.61 1.81 x
5. Computer aided manufacturing 2.46 3.41"* 2.81" 2.15" 0.44 x
6. Just in time 2.36 3.63** 2.34* 2.35* 0.60 0.23 x
*p < 0.05, **p < 0.01, ***p < 0.001 Scale: 1 = not important, 2 = minimally important, 3 = moderately important, 4 = considerably
important, 5 = very important.
Table 4
Correlation matrix for major constructs
Competitive strategy
Cost leadership (COSTLD) 1.00
Differentiation (DIFF) 0.08 1.00
Focus (FOCUS) 0.35* 0.57** 1.00
Organisational innovation
Administrative innovation (ADMINOV) 0.43* 0.19 0.30 1.00
Product innovation (PRODINOV) 0.02 0.14 -0.25 0.22 1.00
Process innovation (PROCINOV) 0.34 0.12 0.18 0.64*** 0.51"* 1.00
Performance (PERFORM) 0.52** 0.30 0.18 0.51"* 0.34 0.44* 1.00
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