RELATIONSHIP BETWEEN BUSINESS STRATEGIES FOLLOWED BY SERVICE ORGANIZATIONS AND THEIR PERFORMANCE MEASUREMENT APPROACH

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1 RELATIONSHIP BETWEEN BUSINESS STRATEGIES FOLLOWED BY SERVICE ORGANIZATIONS AND THEIR PERFORMANCE MEASUREMENT APPROACH Carlos F. Gomes, School of Economcs, ISR- Insttute of Systems and Robotcs, Unversty of Combra, Av. Das da Slva Combra Portugal, Mahmoud M. Yasn, Department of Management & Marketng, East Tennessee State Unversty, P.O Box Johnson Cty, TN 37614, ABSTRACT Ths study emprcally examnes the consstency among strategc orentatons, compettve methods and performance measurng approaches for a cross sectonal sample of Portuguese servce organzatons. The results of factor and cluster analyss appear to ndcate that the surveyed organzatons are sufferng from msalgnment between ther strategc orentatons and the performance measurement approaches used to montor them. These organzatons are n need of use dynamc performance measurement approaches whch allow them to dynamcally realgn ther strateges to the market changes. INTRODUCTION In the past, servce organzatons tended to operate as closed operatonal systems. As such, these systems chose tradtonal generc organzatonal strateges whch stressed operatonal effcency. These generc strateges where supported by tradtonal compettve methods, whch n turn also emphaszed effcency. The performance measurement approach utlzed tended to stress tradtonal, fnancal and operatonal measures. The nterdependences among organzatonal strategy, compettve methods, and performance measurement approach were defned n terms of nternal consstency. Recent changes, n form of servce technology, servce compettve envronment, and relatons to customer, have forced servce organzatons to re-engneer ther compettve strategc models. Ths reengneerng effort left ts marks on organzatonal strategy. However, ths effort may have not yet ncorporated compettve methods and consstent new performance measurement approaches. As such, havng an nnovatve, mxed strategy, whch s supported by tradtonal compettve methods and effcency based performance measures may not result n a sustanable compettve strategc advantage. In ths context, servce managers are facng ncreasng pressure to mprove the dfferent aspects of ther organzatonal performance [1][5]. On the other hand, the relatonshp between busness strategy, compettve methods, and performance measurng approach, represent serous challenges to servce organzatons. As these organzatons strve toward sustanable compettve strategc advantage n a dynamc marketplace, the msmatch between strategc orentaton and performance measurement approach could lead to a strategc falure. Motvated by the need to contnuously mprove servce performance through the utlzaton of effectve compettve methods and strateges, the objectve of ths research s to analyze the relatonshp between the compettve methods and strateges utlzed by servce organzaton and ther performance measurement profles.

2 LITERATURE REVIEW For the purpose of ths research, two streams of lterature were nvestgated. Relevant lterature related to the dfferent approaches used by servce organzatons to mplement ther strateges, and the relevant lterature related to the dfferent facets of organzatonal performance measurement and practces n servce operatonal settngs were revewed. Mchael Porter s strategc typology [37] has been accepted by most scholars and executves, as one of the man frameworks toward effectve strategc choces [9]. Ths framework has been one of the most used to study the strategc behavor of manufacturng organzatons [3]. Examples of utlzng Porter s framework contnue to be found n many manufacturng ndustres n dfferent busness cultures [3][12][17][34][44]. Although Porter s framework was utlzed ntally n manufacturng organzatons, t found ts way to servce organzatons. Examples of utlzng ths framework n servce ndustres can be found n lterature, such as n bank [11], retalng [36], government/not-for-proft [2], and hosptalty[16]. An examnaton of ths lterature tends to pont to the utlzatons of Porter s generc strateges both n the pure forms, and n hybrd-mx forms. For a detaled meta-analyss please see [9]. Typcally organzatons ncluded n these studes were Small and Medum Enterprse (SMEs). In recent years, such organzatons have been consdered as the engne whch drves economc growth globally [42]. However, n the past, SMEs, generally, dd not utlze nformaton technologes effectvely to shape ther strateges due to the lack of resources, and needed sklls [15][31]. More recently, however such organzatons are begnnng to utlze more and more of the nternet resources, n order to create global busness relatonshps [7]. In today s marketplace, these organzatons are beng called upon to broaden and ntegrate ther nformaton technology resources n order to create compettve strategc advantages [31][37][43].. Mchael Porter contended that the Internet technology could be vewed as strategcally sgnfcant, f ts practcal applcatons create new value [39]. In response to envronmental changes, several authors studed the utlzaton of Porter s framework n an e-busness context [25][29][28][30].. Based on the lterature revew relatng organzatonal performance measurement, t seems that servces organzatons are begnnng to utlze broader frameworks, such as the Balanced Scorecard, to measure and manage the dfferent aspects of organzatonal performance[8][13][20][21][27][33][40]. However, the servce performance measurement lterature appears to have several gaps related to the nature and scope of performance measures utlzed by servce managers. In general, the lterature revewed related both to performance measurng and strategc orentatons clearly underscores the need for more research n the relatonshp between ths to mportant ssues of servce organzatons. Only two artcles focusng on ths relatonshp were found [23][45]. In ths context, the match between the strategc orentaton of servce organzatons and the performance measurng approach used by them represent an area where more research s needed. Instrument METHODOLOGY The research nstrument used n ths study was desgned based on the works of [14][27][19]. For the purpose of ths study, sxty-three performance measures were used. These measures encompassed

3 performance aspects related to servce qualty and customer satsfacton, process effcency, servce and process nnovaton, and compettve envronment, qualty/ndependence of management, human resource management, and socal responsblty. For each of sxty-three performance measures utlzed, executves of Portuguese servce organzatons were asked to ndcate the predctve value (relevance), the performance nformaton avalablty, and the extent of ther utlzaton. Thrty-three compettve methods were also ncluded n the nstrument. Twenty-one questons were derved from a semnal work on generc strateges [14]. Fve varables dealt wth the strategc orentatons of manufacturng Portuguese organzatons [27]. Fnally, seven new varables related to e- busness strateges, envronment health and safety n the workplace standards, and nformaton technologes utlzaton, were ncluded. For each of the thrty-three compettve methods utlzed, executves of servce organzatons were asked to ndcate ther relevance to organzatonal strategy. Sample and Data Analyss For the purpose of ths study a random sample of fve hundred (500) organzatons was obtaned from a database, whch ncludes the largest ffteen hundred (1500) Portuguese servce organzatons. Sx-nne (69) completed responses were receved. Seventeen (17) were returned because the frms do not exst anymore, or due to unwllngness to partcpate n the study. Ths resulted n a response rate of approxmately 14.3%. Ths response rate s consstent wth lterature [6][26][35][46]. The partcpatng executves were asked to provde nformaton regardng number of employees, type of certfcaton acheved, and the extent of utlzaton of ntegrated performance measurement systems n ther servce organzatons (see Table 1). In the frst phase of the data analyss, factor analyss was used to extract the underlyng dmensons (factors), representng the strateges followed by the studed organzatons. The second phase of the data analyss was focused on nvestgatng the exstence of groups of organzatons wth smlar compettve factors consdered crtcal to enhancng organzatonal performance. A cluster analyss was used to group the organzatons nto strategc groups. For ths purpose, the herarchcal agglomeratve technque (Wards s method) was used. Ths technque s desgned to recognze outlers and to determne the approprate number of clusters [22]. As a result of applyng ths technque, the sample was reduced to sxty four (64) responses. The number of cluster was set to four (4). The non-herarchcal (K-means) cluster analyss was the used to dentfy the strategc groups. The thrd phase of the data analyss utlzed multple regresson analyss to evaluate the profle of the executves n terms of the relatve utlzaton of fnancal and non-fnancal measures. The lnear relatonshp tested was based on the varables ncluded n the nstrument. The frequency of utlzaton of the performance measures (FU) was assumed to be a functon of ts predctve value (PV) and of the ease wth whch nformaton for the measure could be acqured (EA). The fourth phase of the data analyss utlzed gap analyss to gan a better understandng of the relatve mportance of the non-fnancal measures. Fnally, the relatonshp between profle of the executves n terms of the relatve utlzaton of fnancal and non-fnancal measures and ther strategc orentatons were analyzed. Factor Analyss Results RESULTS Usng the Kaser-Myer-Olkn test, sample adequacy for all varables was analyzed. A sample adequacy overall value of 0.75 was obtaned. Ths value reached the value consdered acceptable n the lterature

4 for ths type of analyss [22]. The prncpal component method wth a Varmax rotaton was used to extract relevant factors. The results of the Bartlett test confrmed the approprateness of the factor analyss procedure as used. Based on the factor analyss procedure, the followng seven-factor soluton was obtaned, explanng 69.4 percent of the total varance (Table 2): Servce Operatonal Innovaton Reputaton and Servce Innovaton Cost and Servce Performance Marketng and Dstrbuton Leadershp E-Servce Practces Servce Marketng Innovaton Standards and Servce Effcency Cluster Results In the frst phase of the data analyss, the compettve methods that executves of servce organzatons tended to value were grouped nto several factors representng strategc dmensons. The relatonshps among these strategc dmensons are explored next. For ths purpose, cluster analyss s used. The observaton unt for the cluster analyss s based on each extracted factor. Therefore, the average of the measures ncluded n each factor s calculated. Based on the cluster analyss procedure, a four-cluster soluton, wth sgnfcant dfferences between all strategc dmensons was obtaned. Regresson Results In order to nvestgate the profle of the partcpants n relaton to ther extent of utlzaton of fnancal and non-fnancal measures, the lnear functon to be estmated s: FU α 0 α 1 PV. α 2 EA e The regresson results shown n Table 3 ndcate that the R 2 vares between 77,7% and 95,2%. Ths means a hgh percent of the total varablty n the frequency of utlzaton has been explaned by the predctve value and ease of nformaton acquston. One may speculate that organzatons of each strategc group, due to dfferent strategc orentatons, may tend to emphasze certan performance aspects n comparson to ther counterparts. Due to the potental lnk between strategy orentaton and performance measurement practces, ths ssue was explored usng the followng multple regresson model. FU α 0 α 1 PV α 2 EA α SG e 3 Based on the results of all pared models, the coeffcent of the varable SG only was found statstcally sgnfcant ( =0.05) for the pars AB and AD. Therefore, t s concluded that sgnfcant dfferences exst between the executves of strategc groups A, B and A, D wth respect to the profle of utlzaton of the measures studed.

5 Strategc Group Profles Group A - Ths group ncludes nneteen organzatons (29.7% of the sample), whch tended to assgn the lowest scores to all the seven strategc dmensons. Organzatons n ths group are neglectng mportant strategc dmensons related to costumers, namely e-servce and cost (Table 4). They are manly usng compettve methods related wth operatonal effcency. These organzatons are neglectng the servce marketng nnovaton, whch can make or break ther future strategc survval. Ther performance measurng profle s showng a low utlzaton of mportant performance dmensons, such as the process nnovaton, the socal responsblty, and the qualty of management. Ths profle also shows a clear msalgnment of compettve methods and performance measurng approach. However these organzatons are tryng to overcome ths problem usng mportant performance measures whch can mprove ther strategc orentaton. The model representng ther performance profle (Table 3) shows that the performance measures utlzaton s much more sensble to the predctve value than to the nformaton avalablty. As such, the executves are tryng to use performance measures relatng the nvolvement of ther man stakeholders, even wth a hgh cost of nformaton. Although they are showng a tradtonal/fnancal performance measurng profle, they are also strugglng to capture and to measure the employee and customer nvolvement. Group B - Ths strategc group ncludes twenty organzatons (31.3% of the sample). Fve of the seven strategc dmensons are not sgnfcantly dfferent from other groups. They are dfferentatng based on cost and E-servces (Table 5). The Servce Marketng Innovaton strategc dmenson s the lowest strategc choce among organzatons n ths group. It seems that they are usng e-busness on a cost leadershp strategy. Ther performance measurng profle s showng a low utlzaton of mportant performance dmensons, such as the process nnovaton, the socal responsblty, and the qualty of management. Lke wth organzatons of the strategc group A, ths profle also shows msalgnment of compettve methods and performance measurng approach. However, n a dfferent way of organzatons of strategc group A, these organzatons may feel too expensve to obtan nformaton, even they consder very mportant to mplement and mantan ther strategc orentaton. Although the model related wth ther performance profle (Table 3) shows that the performance measures utlzaton s more sensble to the predctve value than to the nformaton avalablty, ths seems not to be suffcent to promote the utlzaton of measures that could mprove ther strategc compettveness. They are only prepared to pay for nformaton related wth future nvestments. However ths s not suffcent. Group C - Ths strategc group ncludes nne organzatons (14.1% of the sample), whch tended to utlze a hybrd generc strategy, wth an equal emphass on all strategc dmensons (Table 6). Ths strategc behavor can be labeled as a typcal stuck-n-the-mddle based on Porter s classcal generc strategc model. These organzatons appear not to value enough the cost of servce. Accordng the regresson results, the performance measurng profle of organzatons from strategc group C s not sgnfcant dfferent ( =0.01) from organzatons of the other strategc groups. In ths case, the msalgnment of compettve methods and performance measurng approach s dffcult to dentfy snce these organzatons are not followng a clear strategc orentaton. However, lke organzatons of strategc group A, they are makng effort to use performance measures that they attach hgh predctve value, even they need to pay to obtan nformaton-related. To be noted that the model representng ther performance profle (Table 3) shows that the performance measures utlzaton s almost equal sensble to the predctve value and to the nformaton avalablty. As such, usng performance measures relatng the nvolvement of ther man stakeholders, even wth a hgh cost of nformaton, seems to be a decson based on a random choce, or suggested by external busness actors. To be noted that, ths strategc group nclude the organzatons of hghest dmenson of the sample.

6 Group D - Ths group ncludes sxteen frms (25.0% of the sample), whch tended to assgn the hghest scores to all seven strategc dmensons. Market Leadershp n ths group s the second least emphaszed, compared to the other strategc choces (Table 7). Ths group s clearly facng the new market challenges wth all the strategc weapons they can master. Ther performance measurng profle, lke organzatons of strategc group A, s showng a low utlzaton of mportant performance dmensons, such as the process nnovaton, the socal responsblty, and the qualty of management. Ths profle also shows a msalgnment of compettve methods and performance measurng approach. However, the model representng ther performance profle (Table 3) shows that the performance measures utlzaton s much more sensble to the predctve value than to the nformaton avalablty. Reflectng ths profle, executves of these organzatons are usng performance measures relatng to the employee nvolvement and to the servce responsveness, even wth a hgh cost of nformaton. Due to ths performance profle, these organzatons are presentng a more nnovatve approach to measure ther organzatonal performance, ncludng fve non-fnancal measures wth nformaton defct n the group of the seven more used performance measures. They are also tryng to match ther performance measures wth ther compettve methods CONCLUSION Usng a sample of Portuguese servce organzatons, ths research ntended to analyze the dynamc relatonshp that defnes the balance between performance and strategc orentatons for servce organzatons. In the process, the consstency between the performance measurement approach and the strategc compettve orentatons s examned. Based on the results of the factor analyss, cluster analyses, and regresson analyss procedures, the followng conclusons and mplcatons are hghlghted. Frst, although most of the servces organzatons ncluded n the dfferent strategc groups are stll emphaszng tradtonal strategc orentatons, followng a closed system orentaton, some of them are tryng to follow more nnovatve compettve methods (strategc groups D). Ths s not an easy task due to the dffcultes to deal wth resstance to nnovaton [10]. However managers of these servces organzatons appear to be movng toward the open system perspectve. Second, managers of servces organzatons are stll, to a certan extent, emphaszng the fnancal nature of ther organzatonal performance. Although these managers are begnnng to utlze non-fnancal measures of performance, t does not appear that such measures are beng currently gven the same mportance as ther fnancal counterparts. Therefore, the balance between fnancal and non-fnancal performance measurement practces has not yet been reached by most of servce organzatons. However, managers of some servce organzatons appear to be makng efforts to acheve ths balance. Thrd, research results pont to a generalzed msalgnment between strategc orentatons and performance measurement profles of servce organzatons. Ths s an nterestng result because could not be dentfed f the two stream research were analysed separately. Overall, t appears that managers of servce organzatons belongng to strategc group D are aware of the urgent need to follow an open system strategc and operatonal orentaton. However, perhaps due to market dynamcs, are falng to correctly measure the compettve resources necessary to support ther strateges. In ths context, these managers need to utlze a dynamc performance management system that allows them to overrde ths msmatch between strategc orentaton and performance measurement practces. References, tables, fgures, and exhbts avalable upon request from Mahmoud M. Yasn