1 A Classification of Quality/Cost Competitive Priorities in Japanese Manufacturing Firms

50 Pages·2015·0.27 MB·English

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A Classification of Quality/Cost Competitive Priorities in Japanese Manufacturing Firms:
Empirical evidence based on management accounting practices

Eisuke Yoshida✝
Zhiming Xu☨

Abstract
This study aims to examine whether there is a difference in management accounting practices
among the combination of quality/cost competitive priorities. Using cluster analysis, we explore
the combination of quality/cost competitive priorities. The classification suggests that 4
combinations exist, i.e. Disadvantaged, Cost-emphasis, Quality-emphasis, and Dual-emphasis.
The results of ANOVA show that larger extent regarding usage of cost and performance
measures in Dual-emphasis group, significant dysfunction of target cost management in Cost-
emphasis firms, and no organization size difference exists between Quality-emphasis and
Disadvantaged group. The classification develops operations management theory by providing
possibility of quality/cost priorities’ coexistence based on product development perspective. In
addition, these combinations’ variance proposes the contribution of management accounting
information in investigating competitive priorities’ relationship.

Keywords
Target cost management, quality management, competitive priority, operations performance,
cluster analysis, mail survey

✝Professor, Faculty of Business and Commerce, Keio University. Email:[email protected]: 2-15-45 Mita,
Minato-ku, Tokyo 1088345, JAPAN.
☨Doctoral student, Graduate school of Business and Commerce, Keio University. Email: [email protected]
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Introduction
This study aims to examine whether there is a difference in management accounting practices
among the combination of quality/cost competitive priorities. According to Skinner (1969, 1974)
and Hayes and Wheelwright (1984), competitive priorities denote a strategy which emphasize on
developing certain manufacturing capabilities that may enhance a plant’s or a firm-level position
in the marketplace. For more than 25 years, researchers from strategic management (e.g., Corbett
and Van Wassenhove, 1993; De Meyer, Nakane, Miller, and Ferdows, 1990; Frohlich and Dixon,
2001; Miller and Roth, 1994; Noble, 1995), operations management (e. g., Boyer and Lweis,
2002; Flynn and Flynn, 2004; Kathuria, 2000) and management accounting (e. g., Chenhall and
Langfield-Smith, 1998; Daniel and Reitsperger, 1991; Daniel, Reitsperger and Gregson, 1995;
Daniel, Reitsperger, Morse, 2009) provide the evidence that became proof or disproof of the
early pioneer works’ trade-off perspective. Boyer, Swink, and Rosenzweig (2005) and Swink
and Way (1995) identified the debate involves two theoretical perspectives: the trade-off and
cumulative model, which between the supporters of the proposition that trade-offs among quality,
cost, delivery, and flexibility are necessary versus supporters of a cumulative capabilities model
specifying that these priorities can be complementary and built simultaneously over time.
Prior studies of those two models are short of meticulous explanation about the cases that
is not suited to oneself, which is particularly apparent for the problem of quality and cost. Most
of these problems relating achievement of high-quality and low-cost, are closely related to the
management accounting perspective, an indispensable approach to the puzzle of operations
management research (Hansen and Mouritsen, 2007). For example, evidence regarding trade-off
priorities of quality and cost don’t tell us whether the usage of management accounting
information (Fry, Steele, and Saladin, 1995, 1998; Pierce and O’Dea, 2003) such as cost
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information (Karmarkar, Lederer, and Zimmerman, 1990) and manufacturing measurements
(Kaplan, 1983, 1990; Lillis, 2002), or organization size (Kathuria, 2000; Sanjay and Golhar,
1996) leads trade-off perceived firms to dual-emphasis, and without enough attention to the
coexistence of high-quality and low-cost from quality-cost researches’ knowledge (Atkinson,
Hamburg, Ittner, 1994; Atkinson, Hohner, Mudt, Troxel, and Winchell, 1991; Fine, 1986; Ittner,
1996; Ittner, Nagar, and Rajan, 2001). Similarly, in spite of cumulative model’s proposition that
quality-first competitive priority should be implemented rather than cost-first (Corbett and Van
Wassenhove, 1993; Noble, 1995), little work has been done to empirically investigate that cost-
first will inhibits effort to obtain sustainable competitiveness (Kato, 1993b; Shank and
Govindarajan, 1993; Yoshida, 2003).
Even more important, although product and process design are the most effective levers in
quality improvement and cost reduction (Anderson and Sedatole, 1998; Clark and Fujimoto,
1991), unfortunately, quality/cost competitive priorities classification that focus on product
development phase remains unclear. Hence, this research classifies quality/cost competitive
priorities using a product development view point of target cost management (TCM) practices.
Using survey data on the setting of TCM from Japanese manufacturing firms, we test that
4 combinations of quality/cost priorities exist, i.e. Disadvantaged, Cost-emphasis, Quality-
emphasis, and Dual-emphasis. We provide evidence about features in these four groups. First,
there are differences among Dual-emphasis group and the other two groups, Disadvantaged and
Quality-emphasis, in terms of the importance of financial and non-financial performance
measures, usage of actual costs and physical measure information. Second, the findings suggest
that product engineers’ exhaustion and suppliers’ fatigue, a part of the dysfunction of target cost
management (Kato, 1993b; Kato and Yoshida, 1998; Yoshida, 2003), is higher in the group of
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Cost-emphasis than that in the others. Furtherly, the organization size of Dual-emphasis group is
significantly larger than other groups’, but no difference exist between Disadvantaged and
Quality-emphasis.
As an exploratory analysis, the current research is one of the first step to classify the
quality/cost competitive priorities by mean of product development viewpoint and management
accounting practices, which offers two aspects of implications, and intends to contribute to
literatures in some different ways. To start with, we develop an interpretive model exploring
characteristics of quality/cost emphasis firms and find that quality-first cumulative capabilities
model is supported empirically. This model enriches the literatures in strategic management and
operations management research by showing that cost information and performance measures
diversity may be a contribution to Disadvantaged group’s possible development path to Dual-
emphasis group via Quality-emphasis. On the other hand, cost-first priority forwarding to the
achievement of high quality and low cost would meet a potential impediment regarding the
premature capability of target cost management, which offer a new insight into the
understanding of cost-first type trade-off perspective.
The reminder of this paper is structured as follows. The next section provides theoretical
development, background and introduces 4 research propositions. Then it moves to indicates
research method and variables measurement. The part of analyses will present the results of the
standard method of cluster analysis and ANOVA (analysis of variance), and subsequent section
regarding discussion. Finally, we provide the conclusions and implications for future research.
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Background and research propositions
Quality/cost competitive priorities’ trade-off vs. cumulative perspective
The perspective of quality/cost competitive priorities’ trade-off relationship is based on the
discipline of linkage between business strategy and manufacturing competitive capabilities. This
stream of research focuses the necessity to limit resources to the single manufacturing capability.
Skinner (1969) and Wheelwright (1978) suggest some important trade-off decisions in
manufacturing include the reliability and quality or low costs, Skinner (1974) also points out that
low-cost plant may be a mistake if the company sacrifice in the way of quality, flexibility and
delivery. Miller and Roth (1994) expand the works of Skinner (1969, 1974), they provide 3
groups regarding competitive capabilities which be named as Caretakers, Marketeers and
Innovators. Competitive capabilities of the highest rank including low price and high
conformance (quality), however, cannot be found in the same group via their cluster analysis.
The reexaminations for Miller and Roth (1994) found mixed results regarding whether
competitive capabilities of low price (low cost) and high quality can be observed in one group
simultaneously. In these researches, factors such as region (Flynn and Flynn, 2004; Frohlich and
Dixon, 2001; Zhao, Sum, Qi, Zhang, and Lee, 2006; Zhao, Yeung, and Zhow, 2002) and
organization size (Kathuria, 2000; Sum, Kow, and Chen, 2004) have been discussed to clarify
the consistency of Miller and Roth’s groups, but the coexistence of low-cost and high-quality
received little notice yet. Boyer and Lweis (2002) use transformation method to illustrate that
relationships between competitive priorities are fairly complex. They employ survey data
collected from managers and operators that have recently implemented advanced manufacturing
technology (AMT) and suggest that trade-offs among competitive priorities remain in operations
management decision making . In general, these papers find that most of firms are faced with
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manufacturing competitive capabilities’ trade-offs, but this stream of researches do not provide
systematic analysis to investigate why the trade-offs exists.
As an alternative approach to the trade-off perspective, researches pay close attention to
the relationship regarding quality improvement and cost reduction, and investigate whether and
how this trade-off is perceived by manufacturing firms’ managers. This approach arises from the
notion of “zero-defect” or “quality is free” (Crosby, 1979), which as an element of competitive
advantage (Powell, 1995). Zero-defect is against the concept of “acceptable quality level (AQL)”.
Hayes and Wheelwright (1984) furthered Skinner’s standpoint by investigating differences
between American and Japanese manufacturing firms. They find that the American concept of an
“acceptable quality level (AQL)” has not been adopted by the Japanese because the zero-defect
consciousness is acceptable, in spite of no direct evidence that zero-defect with low-cost in these
Japanese firms. Japanese manufacturing firms’ quality management is known as a synonym of
zero-defect consciousness introduced by a large number of literatures in quality management
(e.g., Cole, 1998; Flynn, 1992; Garvin, 1984, 1986; Imai, 1986; Ishikawa, 1985; Juran, 1993;
Schonberger, 1982; Takeuchi, 1981; Wheelwright, 1981; Xu, 1999) and management accounting
(e. g., Hiromoto, 1988; Johnson and Kaplan, 1987; Kaplan, 1983) literatures since 1980s.
However, Reitsperger and Daniel (1994, 1999) provide empirical evidence that substantial
proportions of Japanese operating managers who either disagree with “quality is free” notions or
are undecided, though their test related to the difference between Japanese and US managers’
quality consciousness. This result is similar to their longitudinal study of Japanese manufacturing
strategies for quality (Daniel et al., 2009), and another multinational investigation (DeMeyer,
Nakane, Miller, and Ferdow, 1989). Daniel and Reitsperger (1991), Daniel et al. (1995) and
Daniel, Lee and Reitsperger (2014) provide the evidence empirically, and explain that
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management control systems (such as quality goals and feedback) about quality performance
(such as reject rate) are more frequently provided to managers adhering to a zero-defect quality
strategy than to managers who are AQL proponents. In addition, Ittner and Larcker (1997)
indicate that organizations placing more emphasis on quality (rather than on low-cost) in the
strategic plan do tend to employ strategic control practices that are consistent with this strategic
emphasis. In this way, we can presume that quality-first and cost-first manufacturing firms are
distinct from each other. However, little research of this stream focus on evidence that high-
quality and low-cost as a performance does exist in manufacturing firms.
In contrast to studies which investigate the relationship between trade-off and zero-defect
consciousness, the other perspective of quality/cost competitive priorities holds that a cumulative
capabilities model (which is also be called “sand cone model”) and specifies that these priorities
can be complementary and built simultaneously over time. In particular, this stream of research
suggests a model which shows that to build cumulative and lasting manufacturing capability,
management attention and resource should go first toward quality improvement, while all others
efforts (such as flexibility) are further enlarged, direct attention can be paid to cost reduction
(Corbett and Wassenhove, 1993; Ferdows and DeMeyer, 1990). As a test of Hayes and
Wheelwright’s foundation (Hayes and Wheelwright, 1984), Flynn, Schroeder, and Flynn (1999)
demonstrate no trade-offs between dimensions competitive performance, and they find that
quality management process focus practices and world-class manufacturing (Hayes and Pisano,
1994) is also simultaneously related to competitive performance. Roth and Miller (1992) find
that superior financial performance firms hold more superior capabilities including quality and
price than poor performance firms, but not all manufacturing capabilities are equal. Their
capability profiles supports cumulative model which predicts that quality management must
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come first than price. Rosenzweig and Roth (2004) replicate and extend the empirically observed
cumulative capabilities models through committing path analysis on high-tech manufacturing
firms. Noble (1995) finds that quality is not only at the base of the cumulative model but is often
the multiple capabilities in his survey data from American, European and Korean manufacturing
factories, and he demonstrates that quality management is globally important. In addition, the
findings of Kruger (2012) also indicate that cumulative capabilities model can be supported by
South African businesses’ operation strategies. However, Flynn and Flynn (2004) using data
from 5 countries and 3 industries to test cumulative capabilities by regression analysis, which did
not find evidence support the sequential progression of cumulative capabilities, in spite of their
results support the cumulative relationship among capabilities. They suggest that it is highly
unlikely that the same sequence will be optimal under all circumstance. Zatzick, Moliterno, and
Fang (2012) propose that TQM is an “elaborating element” that achieves internal fit when the
core elements of the activity system are orientated toward a “cost leadership” rather than
“differentiation” strategic position. This finding suggests that quality priority will not be a
nostrum in creating sustainable competitiveness when firm forwarding to provide differentiated
products.

TCM and quality/cost competitive priorities
Although quality/cost competitive priorities’ trade-off and cumulative perspectives have been
widely discussed, few literature has discussed this issue from the viewpoint of product
development. According to the literature review of Brown and Eisenhardt (1995) which focus on
product-development, they suggest that product advantage include quality and cost should fit
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with core competence. In this paper, we explore the classification of quality/cost competitive
priorities based on TCM.
TCM means a system of profit planning and cost management at earliest stages of product
development that is price led, customer focused, design centered and cross functional (Ansari et
al., 1997; 2007). TCM aims to simultaneously achieve a target cost along with planning,
development and detailed design of new products (Tani et al., 1994), which may be a support for
the quality/cost competitive priorities in three aspects, regarding setting lower target costs and
developing more excellent quality.
First, Target costs are set at an aggressive level not only for the firm itself but also for
competitors, because target price are determined in the product market and target profit are
broken down from corporate targets (Cooper and Slagmulder, 1999; Kato, 1993a/b). According
to the equation of TCM, “Target cost = Expected sales price – Target profit,” target price is
given by marketplace and target profit is determined by organizational business strategy and
profit planning (Kato, 1993a/b; Monden and Hamada, 1991).
Second, TCM has multiple objectives including cost reduction, quality assurance, timely
introduction of new products into the market and product development to attract customers (Tani
et al., 1994). For example, as one core TCM tool and technique, quality function deployment
(QFD) is used in product concept stages of TCM to combine the relationships among
competitive offerings, customer requirements, and design parameters (Ansari et al., 1997), then
contribute to improve design quality (Anderson and Sedatole, 1998).
Third, concurrent engineering (CE), as a key concept of TCM, which is also called rugby
style product development (Takeuchi and Nonaka, 1986), overlaps phases of development (Imai,
Nonaka, and Takeuchi, 1985), or simultaneous engineering (Tani et al., 1994), characterized
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involvement of the managers of product planning, development, design, production preparation
and manufacturing as the cross-functional team in product development processes (Carter and
Baker, 1992). In addition, CE made up of four parts, i.e. the company assessment questionnaire,
the methods matrix, the dimensions map, and the priority roadmap. One of them, priority
roadmap presented here helps engineers “determine priorities for starting to bring the dimensions
into balance – the priorities for implementing the concurrent engineering vision for” (Carter and
Baker, 1992: p. 72) their company. In practical terms, quality competitive priories regarding
continuous improvement, CE providing direction for continuous improvement in the product and
process (Carter and Baker, 1992; Imai et al., 1985), using different managers and teams’ points
of view at different times (Carter and Baker, 1992; Tani, 1995), revealing production problems
earlier (Clark and Fujimoto, 1991). On the other hand, cost competitive priories mainly improve
the new product development performance, and CE usually contributes cost reduction by
innovation (Valle and Vazquez-Bustelo, 2009).
Different competitive priorities often relay on a product development that reflect firms’
business strategy and realize manufacturing competitive capabilities. In this paper, we propose
that quality/cost competitive priorities’ difference exists in product development phase of
manufacturing firms which use TCM.

Proposition 1. Based on the usage of TCM, manufacturing firms can be classified into different
groups regarding their emphasis on competitive priorities: cost or quality, and both.

Cost information and performance measurement for quality management
It is suggested that traditional cost accounting do not track sources of competitiveness such
as quality and flexibility timely and precisely in the global economy since 1980s (Johnson, 1990;