The effect of strategic performance measures and market orientation on a firm’s performance

This study investigates the effect of strategic performance measures (SPM) on a firm’s performance in the service sector with and without the mediating effect of market orientation (MO).We analyse 107 data points with structural equation modellingSmartPLS. The results show that to use SPM has a positive effect on a firm’s performance, both directly and indirectly through the mediator of MO (customers).We do not involve MO (competitors), a completely different dimension.In addition, using the Sobel test We find that MO (customers) fully mediates the relationship between SPM and a firm’s performance. This research confirms that a firm does better when it consistently fulfils its customers’ needs and thus gains a sustainable competitive advantage. Previous studies of MO by management accounting researchers did not fully recognise the effect of the mediation. Corresponding author: Yuliansyah Yuliansyah Email addresses for the corresponding author: yuliansyah@feb.unila.ac.id First submission received: 23rd April 2018 Revised submission received: 25th July 2018 Accepted: 10th September 2018 Introduction The essence of business strategy is how ‘a company creates value for customers and differentiates itself from competitors in the marketplace’ (Simons, 2000, p. 6). In order to gain a sustainable competitive advantage, an organization should seek potential markets that differentiate it from its competitors. Such orientation may enable the organization to acquire a long-term competitive advantage with subsequently improved performance (Zhou, Brown, & Dev, 2009). However, market orientation (MO) has been investigated more in the marketing literature (e.g. Narver & Slater, 1990; Slater & Narver, 1995), than in management accounting (see: Cadez & Guilding, 2008; Guilding & McManus, 2002). For instance, Cadez and Guilding (2008, p. 841) note that ‘the inclusion of MO [...] was also partially motivated by a lack of recognition given to the construct by accounting researchers.’ This acknowledged gap motivates us to investigate the extent to which MO mediates the relationship between strategic performance measures (SPM) and performance. More specifically, using similar data in the Indonesian financial institutions, I rely on integrative strategic performance measurement as our SPM construct. We hypothesise that the use of SPM can enhance MO, in turn leading to improved performance. This belief is based on the fact that SPM generates a continuous flow of relevant information to achieve strategic goals, and to facilitate improvement when an organisation is in difficulties. Some scholars note that MO, too, is a process to generate information and sustainably to improve performance (Cravens, Greenley, Piercy, & Slater, 1997; Kumar, Jones, Venkatesan, & Leone, 2011; Slater & Narver, 1995) Journal of Business and Retail Management Research (JBRMR), Vol. 13 Issue 4 July 2019 www.jbrmr.com A Journal of the Academy of Business and Retail Management (ABRM) 169 In addition, MO is a way to respond to the market and swiftly to reorient in conditions of rapid dynamic change (Day, 1994; Narver & Slater, 1990). Furthermore, the central concept of MO is that firms can continuously meet the ever-changing needs of buyers (Narver & Slater, 1990). Thus, when a firm can respond to market requirements and focus on buyers, it can maintain long-term relationships with its customers and perform well. (Narver & Slater, 1990; Tajeddini, 2010). Based on this argument, we draw up the research framework in Figure 1 below: Figure 1: Research Framework Thus, I propose a research question: To what extent does SPM enhance a firm’s performance through mediation by MO? We study the service sector in firms listed on the Indonesian stock exchange. We agree with Kihn (2010), Chenhall (2005), Yuliansyah, Rammal, and Rose (2016), and Yuliansyah et al. (2016) that studies of management accounting in the service sector are quite limited. This study enriches. Also, by including MO, this study fills another gap in the literature of management accounting. Although marketing is widely discussed, its study in the field of management accounting is limited (Cadez & Guilding, 2008; Guilding & McManus, 2002). In today’s very competitive market, management control systems guide, monitor, and implement MO to stimulate performance. Again, this study adds to the literature of how management control systems can shift an organization’s MO and subsequently make performance better. This paper is divided into five sections. The next, section 2, is hypothesis development, followed by Section 3, research methodology, and Section 4, Structural Equation Modelling Test – Partial Least Square. The last part, 5, sets out our conclusions, recommendations, and procedural comments including limitations. Literature review and hypothesis development Strategic Performance Measures and market orientation SPM is a critical process, crucial to the success or failure of an organization, and it must be appropriate to the firm’s strategy(Baird, 2017; Pollanen, Abdel-Maksoud, Elbanna, & Mahama, 2017; Yuliansyah, Gurd, & Mohamed, 2017; Yuliansyah & Khan, 2015). Management accountants affirm that the purpose of SPM is to control and evaluate business strategy that has been previously decided (Chenhall, 2005; Naranjo-Gil & Hartmann, 2007; Riccardo, Monica, Anna, & Franco, 2015). Porter (1985) says that to achieve sustainable competitive superiority, an organization must choose between business strategies of low cost or of differentiation. Which is chosen depends on how much the organization can amend its MO. If the organization desires MO, it requires information that can formulate, evaluate, control, and detect if there is a problem. The information comes from a strategically oriented performance measurement system. Although work on strategic measures and MO is rare in the management accounting field, Guilding and McManus (2002) show that strategic management accounting has a positive relationship with MO. Therefore, we hypothesise the following: H1: There is a positive relation between strategic performance measures and market orientation. The relationship between market orientation and firm performance Market orientation is a source of sustainable competitive advantage in static markets (Huhtala, Vaniala, & Tikkanen, 2016, p. 73).The implementation of MO is related to the improvement of a firm’s performance(Jaworski & Kohli, 1993), becauseMO is a characteristic of organizations that consistently SPM Market orientation