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IJSM, Volume 12, Number 3, 2012 ISSN: 1555-2411

INTERNATIONAL JOURNAL OF
STRATEGIC MANAGEMENT






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Managing Editors:

Professor Alan S. Khade, Ph.D. Professor Detelin Elenkov, Ph.D. (MIT)
California State University Stanislaus Angelo State University, Texas, USA







A Publication of the
International Academy of Business and Economics
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International Journal of Strategic Management, Volume 12, Number 3, 2012
ii
International Journal of Strategic Management
Volume 12, Number 3, 2012 ISSN: 1555-2411


Managing Editors: Dr. Alan S. Khade, California State University Stanislaus, USA
Dr. Detelin Elenkov, Angelo State University, Texas, USA
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Dean/Dr. Bhavesh M. Patel, Ahmedadab University, Ahmedabad, Gujrat, India
Dr. Tahi J. Gnepa, California State University-Stanislaus, Turlock, CA, USA
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Dr. Dale H. Shao, Marshall University, Huntington, West Virginia, USA
Dr. Lokman Mia, Griffith University, Brisbane, Queensland, Australia

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International Journal of Strategic Management, Volume 12, Number 3, 2012
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International Journal of Strategic Management


Volume 12, Number 3, 2012, ISSN: 1555-2411



A Welcome Note from the Managing Editors:

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Detelin Elenkov, Ph.D.(MIT)
Managing Editors
International Journal of Strategic Management, Volume 12, Number 3, 2012
iv

International Journal of Strategic Management
Volume 12, Number 3, 2012; ISSN: 1555-2411





Page
MODERN COST MANAGEMENT STRATEGY IMPLEMENTATION AND FIRM
PERFORMANCE: EVIDENCE FROM CHEMICAL MANUFACTURING BUSINESSES IN
THAILAND
Kanoknate Prempree, Mahasarakham University, Thailand
Phapruke Ussahawanitchakit, Mahasarakham University, Thailand
1
RISK TOLERANCE: A BEHAVIOURAL ANALYSIS
Everton Anger Cavalheiro University of Cruz Alta
Kelmara Mendes Vieira Federal University of Santa Maria
Paulo Srgio Ceretta Federal University of Santa Maria
14
INTELLECTUAL CAPITAL ORIENTATION AND SUSTAINABLE PERFORMANCE OF MEDICAL
SERVICE BUSINESS: AN EMPIRICAL STUDY OF PRIVATE HOSPITALS IN THAILAND
Sumittra Jirawuttinunt, Mahasarakham University, Thailand
Kannika Janepuengporn, Mahasarakham University, Thailand
25
HUMAN RESOURCE MANAGEMENT POLICIES AND PRACTICES (HRMPP): SCALE
VALIDATION IN THE UNITED STATES
Gisela Demo, UCLA Anderson School of Management, Los Angeles, California, USA
Ksia Rozzett, University of Braslia, Braslia, Brazil
41
ACTIVITY-BASED COST MANAGEMENT STRATEGY AND CONTINUOUS PERFORMANCE
IMPROVEMENT: EVIDENCE OF THAI ELECTRONIC FIRMS
Pitachaya Kaneko, Mahasarakham University, Thailand
Phapruke Ussahawanitchakit, Mahasarakham University, Thailand
67
STRATEGIES IMPLEMENTATION AND EVALUATION OF THAILAND PUBLIC SECTOR TO
IMPROVE PRIVATE SECTOR PERFORMANCE
Viput Ongsakul, National Institute of Development Administration (NIDA), Thailand
83
COMPETITIVE ADVANTAGE IN THAI SERVICE BUSINESSES: INVESTIGATING THE EFFECTS
OF ORGANIZATIONAL DESIGN EFFECTIVENESS
Anirut Pongklee, Mahasarakham University, Thailand
Sakcharoen Pawapootanont, Mahasarakham University, Thailand
88
ROLES OF RISK MANAGEMENT STRATEGY IN GOAL ACHIEVEMENT: EVIDENCE FROM
THAI LISTED FIRMS
Sutika Rukprasoot, Mahasarakham University, Thailand
Phapruke Ussahawanitchakit, Mahasarakham University, Thailand
98
SOYBEAN BRAZILIAN PRICES PREDICTABILITY VIA BOX-JENKINS METHOD
Everton Anger Cavalheiro University of Cruz Alta
Kelmara Mendes Vieira Federal University of Santa Maria
Paulo Srgio Ceretta Federal University of Santa Maria
Juliano Nunes Alves University of Cruz Alta
114

TABLE OF CONTENTS



MODERN COST MANAGEMENT STRATEGY IMPLEMENTATION AND FIRM PERFORMANCE:
EVIDENCE FROM CHEMICAL MANUFACTURING BUSINESSES IN THAILAND

Kanoknate Prempree, Mahasarakham Business School, Mahasarakham University, Thailand
Phapruke Ussahawanitchakit, Mahasarakham Business School, Mahasarakham University, Thailand


ABSTRACT

Cost management strategy is important for business management effectiveness as it supports decision
making, enhances competitive advantage and increases firm performance. This study aims at
investigating the relationships among cost management strategy of three dimensions: cost containment,
cost avoidance, and cost reduction, operational planning effectiveness, decision making quality, resource
management capacity, and firm performance. A questionnaire was used to collect the data from 168
chemical manufacturing firms in Thailand. The results of this study show that cost avoidance focus and
cost reduction capability have a significant positive relationship with firm performance. In sum, this study
contributes to managerial by providing the knowledge that firm performance can be increased by cost
management strategy implementation. Because the sample is only chosen from one industry as
chemical manufacturing, the generalizability may need to be confirmed. Future research should cover a
broader industrial manufacturing in order to increase the external reliability.

Keywords: Cost Management Strategy, Operational Planning Effectiveness, Decision Making Quality,
Resource Management Capacity, Firm Performance, Environmental Uncertainty

1. INTRODUCTION

In the past two decades, business organization has been facing a change of business environments,
such as increasing the competition of global firms respond to these conditions with better management
approach (Kumar and Shafabi, 2011). The competition forces manufacturing firms to create the
operational effectiveness and maintain their profitability; the most important managerial tools are cost
management strategy (Zengin and Ada, 2010), and cost management strategy is considered as critical
factors to increase revenue for the success companies (Kumar and Shafabi, 2011). Cost management
strategy supports decision making and improves competitive advantage that results in a better resource
allocation (Ellram and Stanley, 2008). In addition, cost management may be an integral feature of overall
businesses management effectiveness and facilitate to determine accurately estimated cost before
process starting and can help to forecast cost occurrence in the future. Cost management strategy
effectiveness helps to finish the task with the spending of limited allocated resources and makes valuable
to firms such as working capital invested reduction, lower cost per unit, and better quality of the process
and product (Groth and Kinney, 1994).

Cost management often refers to cost cutting and its commonly approached that firm managers use to
respond to the decreasing sustainable profitability (Anderson, 2007). A number of prior research studied
cost management with respect to supply chains, value chain management, target cost, activity-based
costing, just in time (JIT), and inter-organizational cost management (e.g. Agndal and Nilsson, 2009;
Anderson 2007; Anderson and Dekker, 2009; Backstrom and Lind, 2005; Nicolaou, 2002; Cooper and
Slagmulder, 2004). Although, cost management had been investigated, few of prior research studied
cost management of three dimensions. The present paper fills this niche, therefore the purpose of this
paper is to study cost management strategy of three dimensions: cost containment, cost avoidance, and
cost reduction. This paper studies the relationships among cost management strategy implementation,
operational planning effectiveness, decision making quality, resource management capacity, and
environmental uncertainty. The key research questions are: (1) how cost management strategy
implementation relates to operational planning effectiveness, decision making quality, resource
management capacity, and firm performance, (2) how the moderating effect of environmental uncertainty
impacts on the relationships among cost management strategy implementation, operational planning
effectiveness, decision making quality, and resource management capacity, (3) how operational planning
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 1



H10a-c
H11a-c
H12a-c
H4, H5, H6
Modern cost management
strategy implementation
Cost containment orientation
Cost avoidance focus
Cost reduction capability

Operational
planning
effectiveness

Decision making
quality
Resource
management
capacity

Firm
performance

Environment
uncertainty
H7
H8
H9
H1a-c
H2a-c
H3a-c
effectiveness and resource management capacity relates to decision making quality, and (4) how
decision making quality relates to firm performance.

The remaining of this paper is organized as follows. The second section describes the literature reviews
and hypotheses developments. Research methods described in the third and the fourth sections explain
the results and discussions. The fifth involves contributions and the last section is a conclusion that
includes limitations and directions of future research.

2. LITERATURE REVIEWS ON MODERN COST MANAGEMENT STRATEGY IMPLEMENTATON AND
FIRM PERFORMANCE AND HYPOTHESES DEVELOPMENTS

The relationships among modern cost management strategy implementation, operational planning
effectiveness, decision making quality, resource management capacity, environment uncertainty and firm
performance of chemical manufacturing businesses in Thailand are elaborately investigated. The
conceptual model that links the aforementioned relationships is as shown in Figure 1.


FIGURE 1
A CONCEPTUAL MODEL OF THE RELATIONSHIPS BETWEEN MODERN COST MANAGEMENT
STRATEGY IMPLEMENTATION AND FIRM PERFORMANCE





























2.1 Modern Cost Management Strategy
Cost management is the process of controlling and planning cost structures toward cost behavior
(Seuring, 2002). The purpose of cost management is to maximize the firms profit (Agrawal, Mehra and
Siegel, 1998). Cost management starts with the understanding of what event generates cost and after
that cost management can be doing well (Groth and Kinnery, 1994). Cost is changed by several events
such as inflation, supply and demand effects, technological innovations, and production process change,
Control variables
Firm size, Firm age
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 2



while information technology can help to acquire cost information and enhance cost management
effectiveness (Groth and Kinnery, 1994).

This study defines modern cost management strategy as three forms: (1) cost containment focuses on
constraining future fixed cost or unit variable cost increases, (2) cost avoidance refers to the eliminated
activities that generate costs of non-added values, and (3) cost reduction refers to an attempt to attain
lower current fixed costs and variable costs associated with an essential activity (Groth and Kinnery,
1994).

Cost containment techniques such as standard costing and budget system limit the highest cost that
could be incurred. For effectiveness of these systems of cost containment requires monitoring which
utilizes cost information reporting as product costing that provides the importance of up-to-date cost
information (Cooper and Slagmulder, 2004). Also, cost avoidance techniques, for example, value chain
management appropriately considers how cost is lower through the chain linked (Ellram and Stanley,
2008), and just in time (JIT) potentially manages lowest inventory cost, production efficiency and product
quality (Nicolaou, 2002).

Techniques of cost reduction include (1) value engineering that reduces cost in the product design stage
such as reducing the number of product components, eliminating operating cost, improving labor and
mechanical processes, replacing expensive parts by appropriate economically viable parts, pressured by
suppliers to aggressively reduce costs (2) kaizen costing or continuous improvements that sets goals of
cost-reduction and empowers workers to discover the approach to achieve costing goals, and (3)
functional group management techniques that refer to the separation of the production process into
autonomous groups and treating each group as a profit center that helps the group better understand the
contribution of group to the overall profitability of organization (Cooper and Slagmulder, 2004).

Limited resource and apparent continuous competition influence firms to better managing cost of
production by implementing standard costing, budget system, monitoring cost information, and focusing
on value added activities by eliminating non-value added activities through supplier coordination, and
emphasizing on cost structure by analyzing cost and finding the way to reduce costs in the stage of pre-
production. Firms with cost management strategy implementation are able to know when the amount of
cost will incur in the future if they have current and future cost information. Thus, managers can achieve
effective operational planning to make better decision making strategies and higher resource
management capacities. As discussed above, the three forms of cost management strategy
implementation can help managers enhance operational planning effectiveness, decision making quality,
and resource management capacity. Thus, the hypotheses are proposed as follows:

Hypothesis 1: Cost containment orientation will positively relate to (a) operational planning
effectiveness, (b) decision making quality, and (c) resource management capacity.

Hypothesis 2: Cost avoidance focus will positively relate to (a) operational planning effectiveness,
(b) decision making quality, and (c) resource management capacity.

Hypothesis 3: Cost reduction capability will positively relate to (a) operational planning
effectiveness, (b) decision making quality, and (c) resource management capacity.

2.2 Firm performance
Salter (1995) suggested that performance measurement of corporate and business unit has three
dimensions: (1) effectiveness, (2) efficiency, and (3) adaptability. Some indicators of three dimensions are
returns on investment, sales growth, and new product success, respectively. Furthermore, Salter (1995)
argued that relative performance measures appropriate surrogates for objective measures in the single-
industry sample. Morgan (2012) suggested that business performance consists of two aspects: market
performance and financial performance. Market performance relates to customer behaviors. Higher sales
volume, customer satisfaction increases, customer loyalty, and growth of market shares are indicators of
market performance while the financial performance is measured in accounting terms. This study
defines firm performance as a goal achievement and financial performance that are indicated by the net
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 3



income goal achievement, sales amount and market share increases, the better return on investment,
and the growth and continuance of overall performance (Chai-Amonphaisal and Ussahwanitchakit, 2010;
Tantiset and Ussahwanitchakit, 2010).

Business operation focus on highest potential profit and a common approach is a cost control that is
expected to produce the greatest overall financial performance (Healthcare Financial Management
Association, 2012). Cost management strategy implementation success might generate value to the firm,
for example, the greater control production activities results in better quality of procedure and lowers the
unit cost of goods and cost variance. In addition, the consequence of the cost management success is
firm value increasing and profit improvement that positively affects firms value greater than pricing (Groth
and Kinney, 1994). Therefore, it can be expected that cost management implementation will increase firm
performance. Thus, the hypotheses are proposed as follows:

Hypothesis 4: Cost containment orientation will positively relate to firm performance.

Hypothesis 5: Cost avoidance focus will positively relate to firm performance.

Hypothesis 6: Cost reduction capability will positively relate to firm performance.

2.3 Operational Planning Effectiveness
Operational planning is a basic process that all management procedures must implement for
management success. The operational planning is explained in three points: (1) setting a goal of a
functional department of the effort and behavior guidance of employee performance, (2) the standard for
the operations and (3) the goals of functional unit aligns with operational planning to be able to control the
group or individual performance (Chai-amonphaisal and Ussuhawanichakit, 2010). Operational planning
effectiveness can occur through managers who do better planning to increase efficient performance.
Thus, operational planning effectiveness is able to enhance better decision making and achieve the goal,
vision and mission of firms (Chai-amonphaisal and Ussuhawanichakit, 2010).

The definition of operation planning of this study is the existence of a framework of operation that is
consistent with functional units and among the departments. The clearance process and method of the
operational success evaluation system; the resource spending according to the particular planning; and
the organization management goes along with the firms objective setting (Chai-Amonphaisal and
Ussahwanitchakit, 2010; Hanpuwadal and Ussahwanitchakit, 2010). Firms with operation planning
effectiveness may enhance decision making quality and after that firms can attain better performance. As
discussed above, a hypothesis is proposed as follows:

Hypothesis 7: Operational planning effectiveness will positively relate to decision making quality.

2.4 Resource Management Capacity
Resource management is defined as the analyzing of resource requirements, the allocation of resources
to each functional unit sufficient for efficiently operating to accomplish functional unit goals (Hanpuwadal
and Ussahawanitchakit, 2010), and the correct and efficient spending of resources. When firms are able
to better analyze, allocate, spend, and manage the resources, firms are able to make better decisions
about the returns of the new project investments, and could remove or enter new products and product
mixes. Therefore, the capacity of resource management could influence decision making quality and lead
to better performance. As discussed above, a hypothesis is proposed as follows:

Hypothesis 8: Resource management capacity will positively relate to decision making quality

2.5 Decision Making Quality
Decision making is a primary activity of managers (Martinsons and Davison, 2007). Decision making is
the selection process of a particular alternative for implementation and this process is supported by the
evaluation of each alternative to assign quantitative values to consider available information about the
alternative (Nutt, 1976). Decision making for this paper is defined as the possibility of an alternative
setting and the effort to use better decision making consistent with the firms objectives (Chai-
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 4



Amonphaisal and Ussahawanitchakit, 2010) that leads to achieve better firm performance. Therefore, a
hypothesis is proposed as follows:

Hypothesis 9: Decision making quality will positively relate to firm performance.

2.6 Environment Uncertainty
Environment uncertainty exists in a situation that decision-makers feel that they are not able to accurately
define probability of the particular events or the change takes place, and the three common definitions of
environment uncertainty are: (1) the state uncertainty refers to an inability to identify probability of the
future events, (2) the effect of uncertainty refers to an insufficiency of cause-effect relationships
information, and (3) the response uncertainty is an inability to forecast the outcomes accurately or
consequences of the decision (Ashill and Jobber, 1999). Ashill and Jobber (1999) suggests that the level
of environmental uncertainty depends on two characteristics of the environment: variability and
complexity. Environment variability means the degree and frequency of environmental change, and
environment complexity means the level of task environment relative with few or large number of factors.
The level of complexity and variability of external environment includes customers, competitors,
regulation, and labor unions (Ashill and Jobber, 1999; Habib, Hossain and Jiang, 2011).

This research defines environment uncertainty as the external threat or instability of various aspects of
the external business environment such as available material, economic, technological, and
competitiveness, when firms perceive environment uncertainty, its effort to apply the new strategies and
methods of operation, are meant improve the operational process, and adjust the way of predicting the
consequent impacts of response environment uncertainty (Mathuramaytha and Ussahawanitchakit,
2010).

Decision-makers who perceive the greater environment uncertainty are likely to rely on non-financial
management accounting information to deal with external environment uncertainty more effectively
(Hoque, 2004). Similarly, firms need better cost management strategy to avoid risk of environment
uncertainty, for example, firms use just-in-time technique for cost avoidance and the risk of obsolete
inventory are eliminated, reduce cost variance by standard costing using, and improve product design for
fewer component parts and then reduce risk from the unpredictable of availability and prices of material
fluctuation (Groth and Kinney, 1994). From external business environment uncertainty characteristics
which firm is facing, firms would increase cost management strategy implementation for increasing
operational planning effectiveness, decision making quality and resource management capacity.
According to rationales discussed above, it can be expected that environment uncertainty might increase
the relationships among cost management strategy implementation and operational planning
effectiveness, decision making quality, and resource management capacity. Therefore, the hypotheses
are proposed as follows:

Hypothesis 10: Environment uncertainty positively moderates the relationships between cost
containment orientation and (a) operational planning effectiveness, (b) decision making quality,
and (c) resource management capacity.

Hypothesis 11: Environment uncertainty positively moderates the relationships between cost
avoidance focus and (a) operational planning effectiveness, (b) decision making quality, and (c)
resource management capacity.

Hypothesis 12: Environment uncertainty positively moderates the relationships between cost
reduction capability and (a) operational planning effectiveness, (b) decision making quality, and
(c) resource management capacity.

3. RESEARCH METHODS

3.1 Sample Selection and Data Collection Procedure
In this study, the manufacturers of chemical products in Thailand were selected as the sample. Chemical
business industry is attractive to research due to its industrial base of others. Chemical industries in
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 5



Thailand and is mixed and contained with products that require imported material and standard
ingredients of material, thus chemical businesses require cost management strategy implementation. The
sample was obtained from the database of the Department of Business Development in Ministry of
Commerce of Thailand. A questionnaire-mailed survey was used to collect the data from 168 chemical
product manufacturing firms. A cover letter, a return- addressed envelope and a copy of the questionnaire
were sent directly to the accounting executives as a key informant whom has knowledge about cost
management strategy and firm performance. With regard to 168 observations of this paper, the number is
enough for the regression analysis that follows to Hair, Balck, Babin, and Anderson, (2010), who
suggests that the desired level of sample size for multiple regression analysis is between 15 to 20
observations for each independent variable is sufficient.

To test potential of non-response bias and to consider possible problems with non-response errors, a
comparison of the first and the second wave data is recommended by Armstrong and Overton (1977).
The results showed no significant differences between early and late respondents. As a result, non-
response is not a problem with this study.

3.2 Questionnaire Development and Variable Measurement

3.2.1 Questionnaire Development
A questionnaire was developed based on prior researches related to cost management strategy. It
consists of six parts and all constructs were measured by multiple-item scales. Part one asks for personal
information of the informant. Part two includes a question of the general information and history of
business such as total assets, number of employees, and firm age. Part three through Part five, includes
questions asked to measure each of constructs in a conceptual model. Items are designed by a five-point
Likert scale, ranging from 1 (strongly disagree) to 5 (strongly agree). Finally, an open-ended question for
informants suggestion and opinions are included in part six.

3.2.2 Variable Measurement

3.2.2.1 Dependent Variable
Dependent variable is firm performance that refers to the success and achievement of firms goal. Four-
item scale was adopted from Chai-Amonphaisal and Ussahwanitchakit (2010) and one-item was adapted
from Tantiset and Ussahwanitchakit, (2010) to measure firm performance including profitability, goal
achievement, and sale amount and market share increasing.

3.2.2.2 Independent Variables
Independent variables comprise six variables. First, cost containment orientation refers to control the
occurred current fixed and variable cost. Three-item scale was developed to assess the degree of a firms
implementation of cost containment. Second, cost avoidance focus refers to the elimination or avoidance
cost of unvalued-added activities. Three-item scale was developed which relates to the extent of firm
implement cost avoidance. Third, cost reduction capability relates to the effort to reach in lowering current
fixed and variable costs associated with essential activity. To measure the extent of firm adopted cost
reduction, three-item scale was developed. Fourth, operational planning effectiveness relates to the
operating procedure, the appropriated resource allocation, and the operating management alignment with
firm goal. Two-item scale was adopted from Hanpuwadal and Ussahwanitchakit (2010) and two-item
scale was adopted from Chai-Amonphaisal and Ussahwanitchakit (2010) for measuring the level of
operational planning effectiveness. Fifth, decision making quality involves the firms ability to identify
possibility alternative and making decision that consistent with firm objectives and the consequences of
the decision. The extent of decision making quality was measured by five-item scale adopted from
Tantiset and Ussahwanitchakit (2010). Finally, resource management capacity involves the capability of
adequate budget setting for the operation unit or the project of the usefulness and efficiency of resources
spending. Three-item scale was adopted from Hanpuwadal and Ussahwanitchakit (2010) for measuring
the degree of resource management capacity.



INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 6



3.2.2.3 Moderating Variable
Moderating variable is environment uncertainty that refers to the insecurity, rapid and over time change of
environment and unable to predict the future events or outcomes of decision and firm needs to seek the
best way to improve the operational process to deal with environmental uncertainty. Two-item scale was
adapted from Mathuramaytha and Ussahwanitchakit (2010) and one-item scale was developed to
measure the degree of environmental uncertainty perception.

3.2.2.4 Control Variables
Control variables are firm characteristics that include firm size and firm age. Size and age of firms may
affect firm performance due to the large size and more operational experience may be able to accomplish
the better performance (Tantiset and Ussahwanitchakit (2010). Firm size was measured by total asset
and firm age was measured by number of years that firm has been operating. Dummy variable was used
to proxy firm size and firm age. Total asset equals or higher than 50,000,000 Baht was represented by
dummy value 1 and dummy value is 0 when total asset is lower than 50,000,000 Baht. To measure firm
age, dummy value is 1 for more than 15 years and value is 0 for less than or equal 15 years.

3.3 Reliability and Validity
Some constructs of this paper in the conceptual model were developed as new scales and adopted from
prior researches. The face and content validity were verified by accounting academic experts.
Confirmatory and exploratory factor analysis was utilized to examine the underlying relationship of a large
number of items and to verify whether it can be reduced to a smaller set of factors. The factor analyses
were done individually on each set of the items representing a particular scale; this approach is used for
the limited observations reason. Factor loading values if greater than 0.50 are generally considered
necessary for practical significant (Hair et al., 2010). All factor loadings are greater than cut-off 0.50. The
measurement reliability was evaluated by Cronbach alpha coefficients. Generally agree on lower limit for
Cronbach alpha is 0.70 (Hair et al., 2010). The scales of all measures meant appear to generate internal
consistency between multiple measurements of a variable. Table 1 shows that the value of factor
loadings indicated construct validity and Cronbach alpha coefficients indicated acceptable reliability for
multiple-item scales.


TABLE 1
RESULTS OF MEASURE VALIDATION

Items Factor Loadings Cronbach Alpha
Cost Containment Orientation (CCO) 0.73-0.86 0.72
Cost Avoidance Focus (CAF) 0.76-0.83 0.70
Cost Reduction Capability (CRC) 0.82-0.85 0.78
Operational Planning Effectiveness (OPE) 0.69-0.86 0.79
Decision Making Quality (DMQ) 0.75-0.79 0.82
Resource Management Capacity (RMC) 0.80-0.89 0.79
Environment Uncertainty (ENU) 0.82-0.92 0.86
Firm Performance (FP) 0.63-0.91 0.89


3.4 Statistical Techniques
To test the hypotheses of the relationships among cost management strategy, operational planning
effectiveness, decision making quality, resource management capacity, environmental uncertainty, and
firm performance of chemical manufacturing businesses in Thailand employ the ordinary least squares
(OLS) regression analysis. With regard to independent-dependent relationships and metric-nonmetric
data and the objective of this study that is to predict the change of dependent variable response to
changes of independent variables, OLS is an appropriate method for examining hypotheses relationships
(Hair et al., 2010). To understand the relationships in this study, the research models of these
relationships are demonstrated as follows.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 7





Equation 1: OPE = 0
01
+
1
CCO +
2
CAF +
3
CRC +
4
SIZE +
5
AGE +

Equation 2: OPE = 0
02
+
6
CCO +
7
CAF +
8
CRC +
9
ENU +
10
(CCO*ENU) +

11
(CAF*ENU) +
12
(CRC*ENU) +
13
SIZE +
14
AGE +

Equation 3: DMQ = 0
03
+
15
CCO +
16
CAF +
17
CRC +
18
SIZE +
19
AGE +

Equation 4: DMQ = 0
04
+
20
CCO +
21
CAF +
22
CRC +
23
ENU +
24
(CCO*ENU) +

25
(CAF*ENU) +
26
(CRC*ENU) +
27
SIZE +
28
AGE +

Equation 5: DMQ = 0
05
+
29
OPE +
30
RMC +
31
SIZE +
32
AGE +

Equation 6: RMC = 0
06
+
33
CCO +
34
CAF +
35
CRC +
36
SIZE +
37
AGE +

Equation 7: RMC = 0
07
+
38
CCO +
39
CAF +
40
CRC +
41
ENU +
42
(CCO*ENU) +

43
(CAF*ENU) +
44
(CRC*ENU) +
45
SIZE +
46
AGE +

Equation 8: FP = 0
08
+
47
DMQ +
48
SIZE +
49
AGE +

Equation 9: FP = 0
09
+
50
CCO +
51
CAF +
52
CRC +
53
SIZE +
54
AGE +

4. RESULTS AND DISCUSSION

Table 2 shows the descriptive statistics and correlation matrix of all variables. To consider the possible
problems of multicollinearity, variance inflation factors (VIFs) were used to verify the correlated of any
single independent variable with a set of other independent variables. The VIFs range from 1.00 to 1.72,
as recommended by Hair et al., (2010), it is well below the cut-off value of 10 indicating that the
independent variables are not correlated with each other. Therefore, there are no significant
multicollinearity problems encountered in this study.


TABLE 2
DESCRIPTIVE STATISTICS AND CORRELATION MATRIX

Variables CCO CAF CRC OPE DMQ RMC ENU FP
Mean 4.26 3.79 4.18 4.08 4.05 3.99 4.21 3.89
Standard Deviation 0.57 0.74 0.66 0.55 0.58 0.58 0.62 0.67
Cost Containment Orientation (CCO)
Cost Avoidance Focus (CAF) 0.46***
Cost Reduction Capability (CRC) 0.53*** 0.35***
Operational Planning Efficiency (OPE) 0.61*** 0.33*** 0.44***
Decision Making Quality (DMQ) 0.55*** 0.46*** 0.45*** 0.69***
Resource Management Capacity (RMC) 0.47*** 0.46*** 0.45*** 0.64*** 0.72***
Environment Uncertainty (ENU) 0.27*** 0.22*** 0.33*** 0.17** 0.24*** 0.14
Firm Performance (FP) 0.28*** 0.33*** 036*** 0.42*** 0.47*** 0.41*** 0.39***
**p0.05, ***p<.01


The OLS regression analysis results of the hypotheses testing are shown in Table 3. Hypotheses 1-3 are
to test the relationships among first dimension of cost management strategy as cost containment
orientation (CCO) and operational planning effectiveness (OPE), decision making quality (DMQ), and
resource management capacity (RMC), the results show that CCO significant positively related to OPE,
DMQ, and RMC (
1
= 0.52, p 0.01;
15
= 0.37, p 0.01;
33
= 0.22, p 0.01), thus Hypothesis 1 is
supported. Hypothesis 2 tests the relationships among second dimension as cost avoidance focus
(CAF) and OPE, DMQ, and RMC, the results show that CAF has the significant positive relationship with
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 8



DMQ and RMC (
16
= 0.22, p 0.01;
34
= 0.29, p 0.01) but did not significantly relate to OPE, thus
Hypothesis 2 is partially supported. Third dimension, cost reduction capability (CRC), has the
significant positive relationships with OPE, DMQ, and RMC (
3
= 0.14, p 0.10;
17
= 0.16, p 0.05;
35
=
0.22, p 0.01), hence Hypothesis 3 is supported.

The relationships between three dimensions of cost management and firm performance were tested, the
results showed that CAF and CRC significant positively related to firm performance (
51
= 0.23, p 0.01;

52
= 0.25, p 0.01) but CCO had no significant relationships, thus Hypotheses 5, 6 are supported but
Hypothesis 4 is not. Hypothesis 9 tested the positive relationships between DMQ and firm performance
and the result of Hypothesis 9 is supported (
47
= 0.46, p 0.01).


TABLE 3
RESULTS OF REGRESSION ANALYSIS
a

Independent Dependent Variables
Variables OPE OPE DMQ DMQ DMQ RMC RMC FP FP
CCO 0.52*** 0.51*** 0.37*** 0.34*** 0.22*** 0.19** 0.03
(0.08) (0.08) (0.08) (0.08) (0.08) (0.08) (0.09)
CAF 0.05 0.06 0.22*** 0.23*** 0.29*** 0.30*** 0.23***
(0.07) (0.07) (0.07) (0.07) (0.07) (0.07) (0.08)
CRC 0.14* 0.18** 0.16** 0.19*** 0.22*** 0.26*** 0.25***
(0.07) (0.08) (0.07) (0.08) (0.80) (0.08) (0.09)
ENU -0.06 0.01 -0.05
(.0.07) (0.07) (0.07)
CCO*ENU -0.14** -0.10 -0.03
(0.07) (0.07) (0.07)
CAF*ENU 0.13** 0.11 0.12**
(0.06) (0.06) (0.06)
CRC*ENU 0.47 0.10 0.10
(0.06) (0.06) (0.06)
OPE 0.38***
(0.06)
RMC 0.47***
(0.06)
DMQ 0.46***
(0.07)
SIZE -0.17 -0.23 -0.33** -0.35** -0.25** -0.05 -0.11 0.17 0.07
(0.13) (0.14) (0.13) (0.13) (0.10) (0.14) (0.14) (0.15) (0.15)
AGE -0.12 -0.12 -0.05 -0.04 0.12 -0.23 -0.19 -0.19 -0.19

(0.13) (0.13) (0.13) (0.13) (0.10) (0.14) (0.13) (0.15) (0.15)
Adjusted R
2
0.39 0.40 0.40 0.41 0.61 0.33 0.36 0.20 0.15
*p0.1, **p<.05, ***p<.01,
a
Beta coefficients with standard errors in parenthesis.


Hypothesis 7 tests the relationships between OPE and DMQ, OPE significant positively related to DMQ
(
29
= 0.38, p 0.01). Hypothesis 8 examines the relationships between RMC and DMQ and the results
indicate that RMC significant positively related to DMQ (
30
= 0.47, p 0.01). Therefore, Hypotheses 7
and 8 are supported. Environment uncertainty (EUN) significant negatively moderates the relationships
between CCO and OPE, and does not significantly moderate the relationships between CCO and DMQ
and RMC, thus Hypothesis 10 is not supported. EUN significant positively moderates the relationship
between CAF and OPE and RMC (
11
= 0.13, p 0.05;
43
= 0.12, p 0.05), thus Hypothesis 11 is
partially supported. Hypothesis 12 is not supported due to the fact that ENU does not significantly
moderate the relationships between CRC and OPE, DMQ, and RMC. Firm size shows mixed results and
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 9



it significantly negatively relates to DMQ. Firm age does not significantly relate to OPE, DMQ, RMC, and
firm performance.

The results indicate that firms implemented with modern cost management strategy, cost containment
and cost reduction have the operational planning effectiveness, decision making quality, and resource
management capacity. Firms that focus on cost avoidance have decision making quality and resource
management capacity. In addition, firms which emphasis on cost avoidance and cost reduction are able
to achieve their goals and better performance. The results suggest that operational planning effectiveness
and resource management capacity enhance the quality of decision making, and the consequences are
firm performance improvement. These results are similar to those of Amoako-Gyampah and Acquaah
(2008), which showed that operational efficiency impacted on quality production and leaded to better firm
performance. Likewise, the study of James and Elmezughi (2010) reports that firms with cost leadership
and activity-base costing having higher firm performance. Particularly, the results of this paper show that
firms with the cost management strategy can enhance decision making quality and lead to superior firm
performance. On the other hand, some of the results are not consistent as expected the operational
planning effectiveness does not depend on cost avoidance focus, and cost containment does not relate to
firm performance. The result suggests that firms with control cost techniques such as standard costing
and budgeting do not have a direct effect on performance. However, it has an indirect effect on firm
performance through decision making quality.

There is mixed evidence of the moderating effect of environmental uncertainty on the relationships among
three dimensions of cost management strategy implementation and operational planning effectiveness,
decision making quality, and resource management capacity. The positive significant moderating effect
of environment uncertainty on the relationships among cost avoidance focus and operational planning
effectiveness and resource management capacity is consistent relevant to Lal and Hassels (1998) study.
They found that when the environment is uncertainty, managers will have higher perceived with more
sophistication management accounting system usefulness. Environment uncertainty significant negatively
moderates the relationships between cost containment and operational planning effectiveness. The
possible reason is when the rapid environment uncertainty happens and firms are unpredictable or firms
are unable to increase the operational planning effectiveness to respond to uncertainty timely. Likewise,
Hoques (2004) studied that the reported environment uncertainty had no significantly direct effect on
organizational performance and had no significantly indirect effect through managements use of non-
financial performance measures.

Firm size significant negatively relates to decision making quality, it indicates that large firms which are
more formal cause will have lower communication effectiveness and decreasing decision making quality.
Firm age did not significantly relate to all variables. This result suggests that operational planning
effectiveness, decision making quality, resource management capacity and firm performance do not
depend on the period of business running.

5. CONTRIBUTIONS

5.1 Theoretical Contribution
The paper intends to clearly elaborate the relationships of cost management strategy, operational
planning effectiveness, decision making quality, resource management capability, firm performance and
the moderating effect of environmental uncertainty. Theoretical contribution of this study is providing
knowledge for management accounting literature about cost management in terms of three dimensions:
cost containment, cost avoidance, and cost reduction that impact on firm performance.

5.2 Managerial Contribution
The results of this study provide important implications for firms executive as they indicate the positive
relationships among cost management strategy, operational planning effectiveness, decision making
quality, resource management capacity, and firm performance. To utilize the knowledge, firms can
achieve goals and attain better performance when they implement cost management strategy. Therefore,
these results help firms executives specify and consider the cost management strategy for
implementation.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 10






6. CONCLUSION

Business competition forces firms to create the effective operation and retain profitability. Cost
management strategy is an important managerial tool for response to these conditions (Zengin and Ada,
2010). This study examines the relationships among cost management strategy, operational planning
effectiveness, decision making quality, resource management capacity, and firm performance and the
moderating effect of environmental uncertainty of chemical manufacturing businesses in Thailand. 168
chemical product manufacturing firms are the sample of this study. The results suggest that firms which
implement cost management strategy of three forms: cost containment, cost avoidance, and cost
reduction enhance operational planning effectiveness, decision making quality, resource management
capacity, and firm performance while environmental uncertainty gives rise to a mixed moderating effect.
The sample of this study is 168 chemical manufacturer businesses in Thailand which many limit the
generalizability, thus future research should cover the broader industries in order to increase the
reliability. Furthermore, the moderating effect of environmental uncertainty is not significant and with
mixed signs suggesting that future research should include other moderating variables to study.

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AUTHOR PROFILES:

Kanoknate Prempree earned her M.S. from Thammasat University, Thailand in 1999. Currently, she is a
Ph.D. (Candidate) in Accounting at Mahasarakham Business School, Mahasarakham University,
Thailand.

Dr. Phapruke Ussahawanitchakit earned his Ph.D. at Washington State University, USA in 2002.
Currently, he is an associate professor of accounting and Dean of Mahasarakham Business School,
Mahasarakham University, Thailand.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 13
RISK TOLERANCE: A BEHAVIOURAL ANALYSIS

Everton Anger Cavalheiro University of Cruz Alta
Kelmara Mendes Vieira Federal University of Santa Maria
Paulo Srgio Ceretta Federal University of Santa Maria

ABSTRACT

The traditional perspective of financial theory suggests an implicit rationality on decision making.
Historically, researches have revolved around demographic, social and economic heuristics, thus
neglecting the emotional, cognitive and behavioral suppositions, related to financial decision making.
In this sense, this study aims to evaluate which are the determining factors for risk tolerance. So, we
carried out a survey on 815 individuals residing in Santa Maria, Julio de Castilhos and Cruz Alta,
Brazil. Afterwards, we performed a CFA and, eventually, a regression analysis. Generally and
consistently, the suppositions for rationality were refuted, though consistent to the Prospect Theory,
validating the numerous studies that demonstrate the violation of the rationality suppositions. The
heuristics which are traditionally used in order to determine the level of risk tolerance have not shown
to be significant in this research. The cognitive, emotional and behavioral dimensions of decision
making have shown to be significant.

Keywords: risk; risk tolerance; Behavioral Finance


1. INTRODUCTION

The premise that currently supports most of the modern economic and financial theory is based on
the rationality held by the economical agents. This conceptual aspect suggests that all economical
agents are completely rational and that they use all the available information in the best way possible.
As a consequence, individuals will choose their optimal option that will in turn maximize their
satisfaction (Mosca, 2009).

We can find in this context of rationality for financial decision the Expected Utility Theory (EUT) that
was shaped by Von Neumann and Morgenstern (1944). EUT is an axiomatic theory that is based in
the premise that the rational human being makes decisions by comparing the promised utility for each
alternative (multiplying the expected utility for each option by the respective probability and choosing
the highest value).

One of the main axioms in EUT is the one on rationality, which subsidizes the one on utility and
suggests that individuals will make their choices based in expected utility, so as to maximize their
wealth. However, Allais (1953), as well as Edwards (1961), Quiggin (1982), Segal (1989), Quiggin
and Wakker (1994), demonstrated that human beings often violate the rationality axiom, as suggested
by EUT.

Among financial decisions, behavior facing risk is one of the central themes. Risk tolerance is a
determining factor when it comes to choosing how to allocate assets and, as a consequence, it
directly influences the creation of products and the definition of investment and funding strategies. In
this context, several studies seek to identify factors that influence risk tolerance, but many questions
are yet to be answered, especially regarding its determinants.

Several heuristics are used in order to determine the level of risk tolerance in individuals, which
suppose a strong correlation between the demographical and social/economical characteristics.
However, few studies demonstrate the influence of the cognitive, behavioral end emotional
dimensions on financial decision making.

Considering the importance of risk tolerance, the setback of financial theories that approach
rationality, the discrepancy of results when compared to determining factors and the scarcity of
studies that demonstrate the influence on cognitive, emotional and behavioral dimensions in risk
tolerance, this research sought to answer the following question: which are the determining factors in
risk tolerance for financial decisions?

INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 14
2. REVIEW

2.1 The traditional perspective on risk and the Expected Utility Theory
Risk, according to the traditional conception, is objective and of a quantitative nature. It is based in
past information (occurrence of an event followed by a statistical evaluation) so as to make a decision
in order to increase the safety of results. In this sense, risk definition, according to EUT, supposes
that the investor evaluates the investment risk according to the change that it carries as far as wealth
is concerned.

Ricciardi (2004) states that according to EUT, risk is analyzed by relating the expected return in terms
of utility. Another relevant point to be highlighted is that EUT works with the concept that the investor
is perfectly rational when making decisions, always preferring the alternative that presents a greater
increase of his expected wealth.

Moore (1968) described it as objective risk: the word risk commonly denotes only future events
where the probabilities for the alternative results are known. Probability is a measure for the relative
frequency for an event and is strictly applicable to events that are repeated in nature. Thus, it shows
distribution, and such observations can be analyzed and statistical inferences can be carried out.
When there are a great number of observations available, the highest frequency observed, bias-free,
gets closer to the objective risk, via the probability for the event to happen.

The Expected Utility Theory (EUT) is the main theory to process a in a statistical manner the
problems regarding economical decision. It was initially launched by Von Neumann and Morgenstern
(1944), although there is evidence, in the case of Baron (2008), e.g., that the first scientific work on
EUT was developed by Daniel Bernoulli, in 1738, as an attempt to solve the Saint Petersburg
Paradox.

Utility can be defined as the level of satisfaction that somebody has when consuming a good or
performing an activity. The terms utility or preference are frequently used in order to define the
decision makers attitude facing the choice. They basically refer to the relationship between
alternatives, in which the decision maker prefers one instead of the other always choosing the one
that offers more expected utility, as quoted by Pindyck and Rubinfeld (2005).

According to EUT, a rational individual always needs to have imperative preferences, i.e., one must
never abstain from acting rationally. In this concept, a rationally acting individual must agree and act
consistently to the presented axioms. Meanwhile, some evidence for inconsistencies was found in
some of these axioms.

2.2 The cognitive and behavioral perspective on risk
The basic assumption of modern finance states that man is a rational being and a maximizer for
expected utility. However, literature on markets irrationality is fertile. The idea that markets could
behave in an irrational manner was against the principles of expected utility.

However, according to Kahnemann and Riepe (1998), financial decisions are made in times of high
complexity and great uncertainty. Often, the moments emotional stress at the moment of financial
decision is huge. This ambiance makes the investor trust intuition which often plays a crucial role in
financial decisions. This is the context where the prejudices that push them away from rationality
come up.

In this sense, discussion on human rationality and, as a consequence, the validity of EUT, has
opened a new path for a new area in Finance that is currently being developed and called Behavioral
Finance. This area is commonly defined as the application of Psychology to Finance, in an attempt to
explain the financial decision of individuals.

For Behavioral Finance, decisions made according to a problem follow, in some cases, an identifiable
pattern that can and should be contemplated by an economical and financial model. The field of
Behavioral Finance is precisely the identification of how emotions and cognitive mistakes may
influence the decision making process and of how such behavioral patterns can determine changes in
the market.

INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 15
2.2.1. Excessive confidence bias
Excessive confidence, or overrating personal skills, is maybe the behavioral bias that has a greater
number of studies confirming its existence. For some researchers it gets to be the element with the
strongest influence on the decision making process. It is vastly observed in individuals who imagine
they own a decision making skill that is superior to the average population. Biais, Hilton, Mazurier and
Pouget (2002) created an experimental market to study the influence of excessive confidence on the
performance of investment portfolios. In this study, researchers demonstrate that, the more an
individual suffers from excessive confidence, the worse the performance for his investment portfolio
is, when compared to other investors.

Pompiam (2006) quotes that, in its most basic form, excessive confidence maybe summarized as
unjustified faith in an intuitive reasoning, in judgments or cognitive skills. The concept of excessive
confidence bias is based in the set of cognitive and psychological experiences that directly influence
the decision making process, overestimating both the anticipating skills and the precision of the
information that underlies them. Fallaciously, they tend to compare the amount of information to its
quality, making an individual believe that the more information he has, the more prepared he will be,
without even analyzing its validity.

Another perverted consequence of excessive confidence is the reluctance in assuming a mistake.
This feeling of aversion to regret shapes another bias that is commonly studied in Behavioral Finance:
cognitive dissonance.

2.2.2. Cognitive Dissonance
When a new piece of information starts conflict with pre-existent perceptions, individuals often feel a
mental discomfort, which is a phenomenon known as cognitive dissonance. In Psychology, cognitions
represent attitudes, emotions, beliefs and values, and cognitive dissonance corresponds to an
unbalanced condition that takes place when contradictory cognitions collide. According to Pompain
(2006), the concept of cognitive dissonance inscapes the answer of individuals when trying to
harmonize cognitions and, thus, to relief their mental discomfort. Pompain (2006) quotes that the
difficulty to accept the mistake in a decision is perceived as a contestation of such decision and this
becomes an emotional threat. Most people avoid dissonant situations or even ignore potentially
relevant information so as to avoid psychological conflicts. Scholars have identified different aspects
of the cognitive dissonance and that participate in the decision making process: selective perception
and selective decision making. Individuals who suffer from selective perception only register
information that confirms the path chosen, thus producing an incomplete vision of reality and, as a
consequence, imprecise. Since they are unable to objectively analyze the available evidence, they
become more and more likely to make calculation and prejudiced mistakes in their future decisions.

On the other hand, selective decision making takes place when the commitment to the decision is
high, thus forcing the individual to rationalize his actions in such a way that they do not enter a conflict
with his decision, even when there is an exorbitant economical cost to it. Many studies show that
individuals will subjectively and continuously reinforce decisions or commitments made or taken in the
past. In order to weather the dissonance that comes from recognizing mistakes in the past, investors
often associate their failures to external events opposite to assuming a bad decision. Naturally,
people who lose the opportunity of learning from their past will be prone to new calculation mistakes,
thus renewing the anxiety cycle, discomfort, dissonance and denial. Another bias that is associated to
cognitive dissonance is the self-attribution bias.

2.2.3. Self-attribution bias
Self-attribution bias refers to the tendency individuals have to attribute their success to innate
features, such as talent for anticipating or their own intelligence, although their failures are often
attributed to external influences, such as bad luck. Pompian (2006) quotes that the self attribution bias
is a cognitive phenomenon that makes individuals attribute their negative results to situational factors
and their gains to innate factors of their own nature. This bias can be divided into analysis forms: self-
enhancing bias, which represents how prone individuals are to claim an irrational degree of credit for
their success; self-protecting bias, represents the corollary to the irrational denial of responsibility for
failure.

The author concludes that the self-enhancing bias may be explained by a cognitive approach,
because individuals are naturally more biased to credit their success rather than their failures, since
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 16
they intend to have success, instead of failing. Self-protecting bias can be explained from an
emotional point of view. Psychologists argue the human beings need to keep their self-esteem by
instigating psychological protection, so as to decrease the psychological pain of assuming guilt for
wrong decision. The irrational attribution of success and failure can harm an investor in two primary
ways. First, people who are not able to understand their own mistakes are, as a consequence, unable
to learn from their own mistakes. Second, investors grant a disproportional credit to the positive
results of their investments, making them excessively confident about their future decisions.

2.2.4. Excessive Optimism Bias
Investors may be excessively optimistic about markets, economy and the potential value increase of
assets they have invested in. According to Pompian (2006), many investors believe a bad investment
will not happen to them, but only to others. These neglects may harm the profitability of their
investment portfolios, because individuals may not recognize the potential consequences of their
investment decisions. Daniel Kahneman and Daniel Lovallo describe the excessive optimism bias in a
more technical way. Researchers marked a tendency of investors to adopt an internal vision, with a
clear personal involvement, instead of an external vision, without personal involvements. The external
vision, not passionate, evaluates the current situation regarding results obtained in the past, relating
and analyzing them in the most unbiased way possible. The process of external vision replaced by
internal vision is the one that distinguishes excessive optimism, thus harming the rational decision
and implying in predictions that are too pink, influenced by feelings that are related to present
situations in a biased manner. Pompian (2006), quotes that most investors are inclined towards an
internal vision, influenced by their feelings. This approach, according to the author, is traditional and
rooted, and it comes in an intuitive way. Since the path to think about an investment is complex, due
to the need to analyze the available data and to pay special attention to unique or uncommon details,
the perception of the need to gather stats about a case rarely comes up in an investors mind.

2.2.5. The fear of missing a gain opportunity
Mosca (2009) comments that the fear of missing a gain opportunity in a specific investment that
others are participating in is a stronger motivator for the acquisition of a specific asset, when
compared to the fear a financial loss, as long as most of his peers have made the same mistake.
Such fear of being left out is the main fuel that drives the herd movements and, consequently, the
forming of bubbles.

Research led by DeMarzo, Kremer and Keniel, Stanford and Duke Universities, confirm that most
fear, not the loss itself, but the risk of seeing their investments having a worse performance when
compared to other investors. These researchers demonstrate that individuals care first about the
wealth compared to other people or members of their community. So, for these authors, fear #1,
regarding managing their property, is to be poor while other get richer.

Generally, people and companies follow the behavioral pattern of their peers because, by acting in
such a way, they are fighting the risk that other might be investing in the next big winner, while they
are out (MOSCA, 2009). There is, hence, a strong influence or pressure exerted by the observed or
assumed behavior of our peers, where the final decision to allocate assets ends being determined by
the perception of the evolution of wealth when compared to the other members of the group.

2.3 The emotional and social perspective on risk
Nofsinger (2005) quotes that finances have followed modern economy quite a lot, which seems to be
seen as a branch of exact sciences. To that respect, neoclassical finance theory tends to ignore the
influence of social factors in the finance decision context, and a great part of the Traditional Finance is
modeled in a Robinson Crusoe-like economy, i.e., isolated from the social system to which it belongs
to. For the author, economy is not a physical system, but yet a complex system of human interactions.
Humor affects the way investors analyze judgments (Nofsinger, 2002).

People in a good mood make more optimistic judgments than people in a bad mood. Being in a bad
mood makes investors more critical; it helps them exercise a more detailed analysis. As an
alternative, people in a good mood will tend to use less critical ways to process information. That
aspect particularly affects relatively abstract decisions, about which people do not have complete or
exact information. Naturally, this situation perfectly describes the investment context. According to the
author, bad mood causes a more critical analysis of judgments and good mood tends to cause
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 17
decisions taken without much analysis. So, investment decision making is directly influenced by the
individuals mood.

Nofsinger (2005) comments that conversation is important for stock market. Brokers interact with
clients and other brokers. Analysts communicate with executives. Individual investors talk to their
families, neighbors, colleagues and friends about investments. Shiller (1995) perform their research in
institutions and on individual investors about their communication patterns.

Authors conclude that the directing of interpersonal communications is very important in investments
decisions. Hong, Kubik, and Stein (2005) analyze portfolio managers so as to test the premise that
fund managers that work in the same city are more prone to exchanging investment ideas by word of
mouth. Authors demonstrate that managers in the same city are more prone to exchange the same
type of stocks and conclude that investments are consistent to the information that is being distributed
by these interactions.

3. METHOD

This research was carried out with the inhabitants of Santa Maria, Julio de Castilhos and Cruz Alta
(Brazil). A total of 815 questionnaires were applied. The main technique to define the determining
factors for risk tolerance was the Exploratory Factorial Analysis. In order to answer the problem of this
research we used the multivariate technique, called multiple regression analysis.

Risk tolerance is a concept that has implications for individual investors, as well as managers in
finance, or investment managers, for example. Droms and Strauss (2003) quotes that, for individual
investors, risk tolerance will determine the adequate composition of assets in an optimized portfolio,
as far as risk and return are concerned regarding each individuals needs. The tool for collecting data
was adapted from Droms and Strauss (2003) so as to determine the level of the individuals risk
tolerance.

The tool for collecting data was adapted from Droms and Strauss (2003)so as to determine the level
of the individuals risk tolerance. In order to make this measure more quantitative, the participant was
given the possibility of assigning a score (0-10), depending on how much he/she agreed with each
one of the six questions. When assigning a zero score, the participant showed not to agree to the
statement and when assigning ten, he/she utterly agreed. With the new scale, the sum of the values
pointed out by the participants for each of the six questions could range from zero (totally intolerant to
risk) to sixty points (totally tolerant to risk).

4. RESULTS

In order to find the determining factors for risk tolerance, we initially performed a factorial analysis.
Adequacy and specificity tests performed on the sample were considered satisfactory, because the
results from the Kaiser-Meyer-Olkin (KMO) equals 0,828 and the Bartletts test showed a qui-square
equal to 6.447,219 and significance equal to 0,000. Table 1 shows variance explained by factors with
eigenvalues superior to 1.

Table 1: Extracted Factors and respective eigenvalues and explained variance
Factor Eigenvalue
Explained variance
Percentual Accumulated
1 5,913 25,709 25,709
2 2,221 9,655 35,364
3 1,972 8,574 43,938
4 1,371 5,96 49,898
5 1,339 5,82 55,718
6 1,177 5,116 60,834
7 1,047 4,553 65,387


Table 1 shows that the seven selected factors (with eigenvalues bigger than 1) explain, altogether,
65.39% of the data total variance, excluding other 16 factors that showed eigenvalues smaller than or
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 18
equal to 1. On Table 2 we show the factorial cargo on each of these seven factors, as well as the
variables for each factor.

Table 2: Factorial cargo obtained for each factor and respective variable
Variable
Factors
1 2 3 4 5 6 7
Enjoys a lot of luxury in life
0,7
7
Enjoys owning things that impress people
0,7
4
Better life if had many things that does not have now
0,7
3
Would be much happier if could buy more things
0,6
5
Upset if unable to buy all desired things
0,6
0
Money means pleasure
0,5
0
Afraid of losing an opportunity everyone takes
0,7
8
Relieved because own mistake is the same as everyone
elses
0,7
5
Afraid of having worse results than others
0,7
1
Make same decisions as most people
0,6
1
Tranquility / peace
0,8
2
Enthusiasm
0,7
9
Happiness
0,7
5
Able to identify the best moment to invest
0,7
9
Gains are a direct result of his/her competence
0,7
8
Instincts contribute for choosing investments
0,7
1
Prefers spread payments even if total is more expensive
0,7
7
Buys on spread payments instead of waiting to have money
0,7
1
Finds it normal to get into debt so as to buy things
0,6
6
Comments if there is loss
0,8
6
Comments if there is profit
0,8
3
Cognitive disonance
0,8
0
Losses are caused by invisible factors
0,7
9


All factors presented satisfactory factorial cargo (bigger or smaller than 0.50) and hence we kept them
for this study, such as suggested by Hair et al. (1998) cargo greater than 0.30 is significant.

After estimating the factorial cargo, we named the factors. The first factor was called materialism for
the interest in material goods and emotional association, whether by acquisition, or by the
impossibility of acquiring such goods. Fournier and Richins (1991) quote that society nowadays lives
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 19
an era of compulsive materialism. Authors have studied materialism in several different countries and
concluded that the popular meaning of materialism involves notions of possessing or achieving the
best, and wishing for wealth as an objective itself. For these authors, this notion is associated to
objectives, such as the search for happiness, demonstration of social status, self-affirmation and
feeling of superiority.

The second factor was called the left out effect, because a common way to simplify the decision
making process is simply to follow the pack; to do what everyone else is doing. We have the innate
necessity to act according to the other members of the group in which we are in. Mosca (2009) quotes
that acting in such a way brings comfort and security, even because making a mistake along with
others is less awkward.

Pompain (2006) quotes that when we act differently from our social group, our subconscious enters a
conflict with pre-existent perceptions and individuals often feel a mental discomfort a phenomenon
known as cognitive dissonance. Cognitions, in Psychology, represent attitudes, emotions, beliefs and
values, and cognitive dissonance is an unbalanced condition that takes place when contradictory
cognitions cross. Psychologists conclude that individuals perform pseudo-rationalizations so as to
synchronize their cognitions and keep their psychological stability. Thus, individuals modify their
behaviors or cognitions in order to reach a new cognitive harmony. However, such changes are not
always made in a rational way. Such pseudo-rationalizations can make individuals ignore potentially
relevant information so as to avoid psychological conflicts, thus elevating their risk tolerance level.

The third factor was called emotion, because both the psychologists and the economists that
analyzed the role of emotion in decision making realized that feelings and emotions that are
unattached to the subject can affect decisions (Loewenstein, Weber, Hsee, & Welch, 2001). The term
unattached, in this context, means that emotions are not related to the decision to be made.
Nofsinger (2001) quotes that emotions interact with the evaluations cognitive process and end up
leading to a decision. Sometimes, emotional reactions diverge from reasoning and logic so as to
determine the decision making process. In fact, the more complex and uncertain the situation is, the
more emotions influence the decision (Forgas, 1995). Cavalheiro et al. (2011) quotes that financial
decisions are complex and include uncertainty and can be influenced by feelings, emotions or mood.
That is called misattribution bias, i.e., people generally let themselves being unduly influenced by
feelings when making a financial decision.

The fourth factor is called self-attribution bias via self-enhancement. Self-attribution bias is a cognitive
phenomenon that makes an individual associate their negative results to situational factors and their
gains to innate factors of their nature (Pompian, 2006). This bias can be divided into analysis forms:
a) self-enhancing bias, that represents how prone individuals are to claim an irrational degree of credit
to their success and b) self-protecting bias, representing the corollary effect to the irrational denial of
responsibility for failure. The fifth factor is called indebtedness.

The sixth factor is called talking about investments. People learn from interacting with each other.
The human-being observes other peoples behavior because he wants to interpret what they are
thinking, but what he really likes is to take the most of the conversations social interaction. People
talk about subjects that they are enthusiastic about, topics that they are interested in and even about
what upsets them. Conversation is an important way to get information and detect emotional
reactions, and this helps to make an opinion.

The last factor was called self-attribution bias by self-protection. Self-protection bias is taken as the
attribution of personal failure to external influences, such as bad luck (Pompiam, 2006). Self-
protection bias can be explained from an emotional point of view, for the human need to keep self-
esteem. This effect is connected to the difficulty humans have in recognizing their mistakes, because
this recognition takes the individual to a level of unwanted psychological pain, directly influencing
financial decisions.

In order to evaluate the liability of factors generated from the factorial analysis, we used Cronbachs
Alpha. According to Hair et al. (1998), Cronbachs alpha should be bigger than 0.6 (because it is
considered to be an exploratory factorial analysis). On Table 3, we show the variables that make up
each factor and their respective results for Cronbachs alpha.

INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 20
Table 3: Variables and Cronbachs alpha for each factor
Factor Variables Cronbachs alpha
Materialisme 88, 86, 80, 84, 90 e 74 0,8282
Being left out effect 60, 59, 61 e 58 0,7911
Emotion 44, 45 e 43 0,7429
Self-enhancement 32, 34 e 35 0,7188
Indebtedement 87, 83 e 81 0,6487
Talk about investments 36 e 38 0,7584
Self-protection 31 e 33 0,4813

On Table 3 self-protection stands out with a Cronbachs alpha smaller to the one established by Hair
et al. (1998) and, since it is no longer possible to exclude any variable because there are only two, we
calculated the variables average for each factor. In order to check the influence of variables and
factors on risk tolerance, we performed a multiple regression analysis. Risk tolerance was considered
as an exogenous variable. Results of the chosen model, via stepwise, are shown on Table 4.

Table 4: Regressors, weights and coefficient significance of the OLS regression model in order
to explain the exogenous variable risk tolerance
Regressors Coef. std. deviation t test t test sig. FIV
Emotion factor 0,698272 0,14154 4,9330 0,0000 1,2060
Being left out effect factor 0,397497 0,14311 2,7770 0,0056 1,5880
Cash-on.stock effect 0,295800 0,09810 3,0150 0,0026 1,2710
Cognitive disonance 0,399484 0,10626 3,7600 0,0002 1,2000
Self-protection 0,446919 0,10104 4,4230 0,0000 1,2710
Excessive confidence bias 0,509397 0,11599 4,3920 0,0000 1,4820
Risk as an opportunity 0,438070 0,10048 4,3600 0,0000 1,1650
Self-attribution factor 0,676986 0,13476 5,0240 0,0000 1,3940
Save before you spend 0,331377 0,10160 3,2620 0,0012 1,2640
Already incurred in cost 0,346609 0,09310 3,7230 0,0002 1,2540
Spending on expensive
things
0,270591 0,10385 2,6060 0,0093 1,3700
Excessive confidence 0,210590 0,09934 2,1200 0,0343 1,2230
Excessive optimisme 0,338406 0,13329 2,5390 0,0113 1,4080

The Stepwise model selected 13 regressors, 3 factors of which were used (emotion, self-attribution
and being left out effect) and 10 variables. The determination coefficient (adjusted R
2
) was 0.93. We
can observe on Table 4 that all values for the t test were significant, as well as the ones for the f test
(811,634 and sig. 000). The Akaike Information Criteria was equal to 5.713,168 and the Schwarz
Criteria was equal to 5.774,309. On the other hand, the White test for heterocedasticity rejected the
null hypothesis Qui-square = 381,476245 with sig. 0,000), indicating the existence of heterocedascity,
of a specification error, or both, although the FIV index suggests the inexistence of multicollinearity.
In order to correct the heterocedascity effect, we performed a new estimate for the parameters, now
with variances and standard deviation with a corrected heterocedascity according to White

Table 5: Regressors, weights and coefficients significance of the minimum square model with
corrected heterocedascity in order to explain the exogenous variable risk tolerance
Regressors Coef. std. deviation T test T test sig. FIV
Emotion factor 0,949704 0,107794 8,8100 0,0000 1,1230
Being left out effect 0,459063 0,140252 3,2730 0,0011 1,5590
Cash on stock effect 0,253982 0,096049 2,6440 0,0083 1,2280
Cognitive disonance 0,386345 0,118740 3,2540 0,0012 1,1940
Self-protection 0,703214 0,097752 7,1940 0,0000 1,1870
Excessive confidence 0,492706 0,125111 3,9380 0,0001 1,4670
Risk as opportunity 0,459499 0,097596 4,7080 0,0000 1,1420
Self-attribution bias 0,751971 0,115600 6,5050 0,0000 1,3410
Save before you spend 0,358285 0,088313 4,0570 0,0001 1,1600
Already incurred in cost 0,360764 0,091277 3,9520 0,0001 1,2400
Spending on expensive
things
0,276512 0,107104 2,5820 0,0100 1,3110
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 21
On Table 5 we can observe that all t test values were significant (the variables for excessive
optimism and excessive confidence bias were excluded from the model because they were not
significant at the t test).

The sample determination coefficient (adjusted R
2
) was 0.3492. Although the sample determination
coefficient had been inferior to the previous mode, the Akaike Information Criteria and the Schwartz
Criteria were 3.380,183 and 3.431,918, respectively. All FIV indicators were close to one,
indicating the absence of multicollinearity in this model.

The Qui-square test (0.651 and sig 0.72220), for residual normality (Doornik-Hansen test), accepted
the null hypothesis for equal distribution of data with normal distribution.

5. FINAL CONSIDERATIONS

The basis that supports most of the financial theories is founded upon the utter rationality of
economical agents. This approach suggests that all economical agents are totally rational and use all
available information in the best possible way. The heuristics used so as to determine the risk
tolerance level of individuals and that suppose a strong correlation between demographic, social and
economical features have not shown to be significant in this research. The cognitive and emotional
dimension of the decision making process has shown to be significant.

Emotion and cognitive bias such as: self-attribution, excessive trust, cognitive dissonance, being left
out effect, cash on stock effect and already incurred in costs have shown to be significant in this
research, thus showing cognitive and emotional features during the decision making process, that are
traditionally neglected in risk tolerance studies.

Considering that the regression estimated model attends to the basic presuppositions, it is possible to
state that, for the selected sample, emotion have a direct and positive association to an individuals
risk tolerance. This association that can be understood as the misattribution bias validates
Nofsinger (2001), who demonstrates that this bias generally makes people permeable to being
influenced by feelings when making a financial decision. Via this result, it is possible to conclude that
people in a good mood make more optimistic judgments than people in a bad mood, and tend to use
less critical ways to process information, thus elevating their tolerance level.

Humans show a natural tendency to follow the decisions made by the group. This behavioral effect
can be observed by the being left out effect. The factor, in the selected sample, showed a positive
association to risk tolerance, and it was possible to conclude that the bigger the effect, the bigger the
risk tolerance is. This result contributes to what DeMarzo, Kremer and Keniel at Stanford and Duke
Universities, suggest they confirmed that most individuals do not fear loss itself, they are afraid of
watching their applications having a worse performance than other investors. People and companies
tend to follow their peers behavior, because when acting that way they are fighting the fear that other
people may be investing in the next big investor, whereas others would be out. The being left out
effect is potentially harming because it makes people assume more risks in their financial decisions
and, hence, they would tend to neglect their ability to assume risks, which can lead to damage to their
patrimony, by unduly exposing it to risk.

Empirical international literature demonstrates that, after having profit or loss, people feel inclined to
assuming greater risks. People who gamble call it cash in stock and, after making some money,
amateurs do not consider it their money. Regression showed that, for the selected sample, the
increase of this effect is associated to an increase of risk tolerance which could generate an increase
in markets negotiations, since investors could believe that they would be risking something that does
not belong to them.

The Cognitive Dissonance variable has shown to be directly and positively associated to risk
tolerance. This result can be understood as human nature to dissociate the acknowledgement of
guilt for ones mistakes in decisions made by individuals. Assuming guilt for ones own negative
results is to assume that the wrong decisions were made and that generates a mental discomfort that
in turn leads to psychological pain. In order to balance or even avoid such discomfort, it is easier to
associate negative results in decisions to external aspects. It was possible to observe in this research
that, for the selected sample, the lack of acknowledgement was directly and positively associated to a
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 22
greater risk tolerance level. This result tends to be harming, since when avoiding acknowledgement
for ones mistakes, one cannot learn from those mistakes, which can lead to the same mistakes and
recurrent negative results in their investments portfolios.

The misattribution bias shows two sides: self-enhancement and self-protection. Self-protection has a
similar origin to the previous variable, since one avoids the association between the errors guilt and
the decision-maker. The basic difference is that the mistake is associated to unpredictable
circumstances, which would decrease the psychological pain coming from making the wrong decision.
This variable showed to be positively associated to risk; so, we can conclude that, for the selected
sample, a greater effect is associated to a greater risk tolerance and - just like in the previous effect -
assuming new risks without even learning from previous mistakes could lead to persistent negative
results.

The self-attribution bias showed a positive relation to risk tolerance, thus indicating that the bigger the
effect of this bias, the bigger the risk tolerance is. This bias might be the most harming one, because
it makes individuals believe they have a superior capacity than they really have. This belief leads to a
greater level of self-confidence, less attention to details and, as demonstrated in our research, a
greater risk tolerance, which is particularly concerning, because it could lead to wrong decision when
allocating assets.

The excessive confidence bias showed a significant and positive relationship to risk tolerance in this
research. This result validates Nofsinger (2001) demonstrating that individuals who show excessive
confidence underestimate the risk they are taking. Underestimating risks can lead to choices that
carry an unwanted risk level, thus not considering the capacity one has to take them, as well as a
possible psychological pain of seeing that the obtained results are inferior to what was expected. This
bias should, preferably have minimal influence when managing wealth, because of the loss coming
from potentially biased decisions.

Materialism, due to the need for consuming expensive objects, has shown to be positively and
significantly associated to risk tolerance. Empirical literature demonstrates that the popular meaning
of materialism involves notions of owning or achieving the best. Damage associated to this factor
takes place when one loses track of the objective for which one is taking a risk. Taking a risk
exclusively for the wish of a new standard of wealth, without parameters or final objective may make
individuals assume more and more risks without realizing the potential damage associated to their
decisions. On the other hand, aversion to debts, for the need to save before you spend, has shown to
be positively related to risk tolerance; this fact, along with other quoted variables, may also be harmful
by restricting opportunities for investments.

According to traditional economical theories, people should consider present and future costs and
benefits when making a decision, not considering past costs. However, we have the natural tendency
to avoid this dissociation, especially when there is a need to acknowledge mistakes in the past. This
bias has shown to be associated to risk tolerance, that can generate unwanted results while investing
time and assets that have consistently shown to be harmful. The decision to keep assets with loss
has shown to be a natural protection against the pain associated to acknowledging wrong decisions,
but it is inconsistent with the assets wealth.

When looking for the answer to the research problem, it was possible to observe that the financial
decision is influenced by biases that positively influence risk tolerance. Perhaps the most significant
message to take from this research can be interpreted by the need of self-knowledge, in order to
minimize such effects when making a financial decision, o as to avoid potentially harmful risks, for not
answering the capacity to take risks.

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INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 24

INTELLECTUAL CAPITAL ORIENTATION AND
SUSTAINABLE PERFORMANCE OF MEDICAL SERVICE BUSINESS:
AN EMPIRICAL STUDY OF PRIVATE HOSPITALS IN THAILAND

Sumittra Jirawuttinunt, Mahasarakham Business School, Mahasarakham University, Thailand
Kannika Janepuengporn, Mahasarakham Business School, Mahasarakham University, Thailand


ABSTRACT

The purpose in this study is to examine the relationships between intellectual capital orientation (human
capital, structural capital and relational capital) and sustainable business performance via knowledge
management effectiveness and organizational innovation. In addition, it also explores the moderating
effects of transformational leadership in the relationships of the model. Here, 102 private hospitals in
Thailand are chosen as the sample of the study. According to medical service business in Thailand, the
results of OLS regression analysis indicate that three dimensions of intellectual capital orientation have
significant influence on sustainable business performance through knowledge management effectiveness
and organizational innovation. For the moderating effects, transformational leadership increases only
some relationships. Potential discussion with the research results is effectively implemented in the
research. Theoretical and managerial contributions are explicitly provided. Conclusion and directions of
the future research are highlighted.

Keywords: Intellectual Capital, Human Capital, Structural Capital, Relational Capital, Transformational
Leadership, Knowledge Management Effectiveness, Organizational Innovation and Sustainable Business
Performance

1. INTRODUCTION

In the modern economic perspectives, knowledge can be viewed as the most powerful weapon for
business competition (Nonaka and Toyama, 2003; Youndt et al., 2004). Accordingly, Guthrie (2001) and
Juma and Payne (2004) argued that winning companies do not gain benefits with only tangible assets,
but they mostly emphasis on access to intangible assets such as intellectual capital (IC). More than 50%
of firms value creation in todays economy is expected to come from the success of the firms intellectual
capital rather than the use of material goods (Chareonsuk and Chansa-ngavej, 2008). Many researchers
claim that three important factors of intellectual capital are human capital, structural capital, and relational
or customer capital that can be seen as a source of competitive advantage in the organization because it
cannot be easily imitated and substituted by competitors (Bontis et al., 2000; Roos et al., 2001;
Sharabati et al., 2010). Hence, intellectual capital orientation becomes a part of strategic assets of the
firm to gain sustainable competitive advantage.

From organizational point of view, a number of academics have recognized that IC directly affects
organizational innovation and firm performance. (Edvinsson,1997; Hsu and Sabherwal, 2011; Marr et al.,
2003) However, in a rapidly changing business environment, knowledge resources does not warranty
sustained competitive advantages of firm because changes can be disruptive and unpredictable (Hsu and
Sabherwal, 2011). Consequently, the interpretation of direct effects between IC and innovation, and
between IC and firm performance, should be considered. Even though intellectual capital perspective has
been widely applied to various researches, only few researches clearly explain how and why IC has been
transformed into innovation and business performance either directly or indirectly. Thus, this paper tries to
bridge both direct and indirect relationships between IC, organizational innovation and business
performance based on KM and IC literature by using KM effectiveness as the mediation.

In medical service business, IC is essential for business and survival (Veltri et al., 2011). This business is
knowledge-intensive industry, highly innovativeness and well balance in the use of people-centered and
process-centered (Peng et al., 2007). It is believed that development of IC model specific to the health
care sector is particularly significant because of the high degree of management complexity of health care
business, in which professional skills, know-how, technological innovation and relational capabilities are a
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 25

symbol of an important driving force in achieving high performance (Veltri et al., 2011). Although, the
value of IC in medical service business is able to highlight the key features of a successful firm, the
attention of IC research has so far not been investigated within the context of medical service sector.
Hence, the private hospitals in Thailand were chosen to be investigated for this study as they are a part of
medical service business that can generate tremendous revenue for the country by using IC as product of
excellence (Thailand Productivity Institute, 2012). Particularly, Thai government now has systematically
promoted health care service business as a medical hub of Asia in the year 2015 (The National Economic
and Social Development Board, 2012). This causes private hospital in Thailand to increase medical
service innovation by focusing on IC and KM effectiveness in order to gain sustainable business
performance.

Here, intellectual capital orientation is defined as the sum of knowledge that firm intent to utilize for
gaining competitive advantage and its components are human capital (knowledge, skill, competencies
and individual abilities), structural capital (system, structure, strategy, and culture) and relational or
customer capital (interactions among individuals and their network of relationships) (Edvinsson, 1997;
Petty, and Guthrie, 2000; Roos et al., 2001; Sharabati et al., 2010). This research suggests that firms with
IC orientation turn to the major challenge for formulating corporate value such as KM effectiveness,
organizational innovation and ultimately, leading to sustainable business performance.

Absolutely, the main aim of this research is to empirically examine the role of intellectual capital on KM
effectiveness, organizational innovation and sustainable business performance of a specific medical
service business, the private hospitals in Thailand. Moreover, the moderating variable as transformational
leadership is also highlighted. The main research questions is how intellectual capital orientation affect
KM effectiveness, organizational innovation and sustainable business performance, and how
transformational leadership moderates KM effectiveness, organizational innovation and sustainable
business performance relationships. This paper contributes to existing literature by providing the evidence
of the impact of IC on KM effectiveness, organizational innovation and sustainable business performance
in medical service business sector.

This research is outlined as follows: The first part presents the literature reviews on IC orientation that
leads to KM effectiveness, organizational innovation and sustainable business performance. The second
details research methods, including data collection, measurement, statistics, and results are discussed
and shown. Consequently, contributions, limitations, future directions, and conclusion are presented.

2. RELEVANT LITERATURE REVIEWS AND RESEARCH HYPOTHESES DEVELOPMENT

The knowledge-based view of firm (KBV) as the theoretical lens explains how IC orientation (human
capital, structural capital and relational capital) affects sustainable business performance. KBV focuses
on the importance of knowledge resources as the most important assets in leveraging and managing firm
competitiveness. Moreover, knowledge-based capabilities are considered the most strategically important
ones to create and sustain competitive advantage (Nonaka, 1991; Barney, 2001). IC is viewed as the
stock of knowledge assets that are owned by organization and drive organizational value creation
capabilities (Marr 2004). In this research, IC consists of human capital, structural capital and relational
capital. The strength of IC which influences the management of knowledge has potential to converting
individual tacit knowledge into organizational knowledge, and transforming knowledge into valuable one
to company (Shih et al., 2010). Thus, firms with high IC orientation as a key success factor to improve
productivity tend to enhance KM effectiveness (Hsu and Sabherwal, 2011) organizational innovation
(Subramaniam and Youndt, 2005) and lastly, achieve sustainable business performance (Chen et al.,
2005; Cohen and Kaimenakis, 2007). Moreover, transformational leadership plays a critical role to
increase the relationships of IC and business performance (Zagorek et al., 2009). Accordingly, a
conceptual model of this research is shown in Figure 1.





INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 26

FIGURE 1
CONCEPTUAL MODEL OF THE RELATIONSHIPS BETWEEN
INTELLECTUAL CAPITAL ORIENTATION AND SUSTAINABLE BUSINESS PERFORMANCE



2.1 Intellectual Capital Orientation (IC)
The intellectual capital perspective has since been adopted by a number of academics; many definitions
are being proposed for complex concept. A review of previous research defined IC as a collection of
intangible assets (resources, capabilities, and competence) that drive organizational performance and
value creation (Roos and Roos, 1997; Bontis, 1998). According to a new interpretation, IC is defined as
the sum of all knowledge assets utilized for competitive advantage and to create wealth for the
enterprises (Bontis, 2004; Subramaniam and Youndt, 2005). Nahapiet and Ghoshal (1998) and Phusavat
and Kanchana (2007) suggest that any knowledge capabilities, creativities, organizational structure, and
relations that can generate knowledge storage and transform to value belong to the classification of IC. A
broader IC definition points out that it is the difference between a companys market value and book value
(Schiuma and Lerro, 2008). Although there is not yet a consensus in literature on dimensions of IC, many
academics point out that IC is composed of three dimensions: human capital, structural capital and
relational or customer capital (i.e. Bontis, 1998; Ross et al., 2001; Sharabati et al., 2010) whereas
Subramanian and Youndt (2005) propose three elements of IC as human capital, organizational capital
and social capital. Likewise, Chen et al., (2004) allocated IC into four categories: human capital, customer
capital, structural capital and innovation capital. In addition, Tseng and Goo (2005) categorized IC
framework in terms of human capital, organizational capital, innovation capital and relationship capital.
According to Schiuma et al., (2008), IC is arranged into five elements: human capital, structural capital,
organizational capital, social capital and stakeholder capital. From the categorization mentioned above,
there are different definitions and classifications of intellectual capital due to different research
backgrounds. In this research, intellectual capital orientation is defined as the sum of knowledge that
firms are intent to utilize for gaining competitive advantage and its components are human capital
(knowledge, skill, competencies and individual abilities), structural capital (system, structure, strategy, and
culture) and relational capital (interactions among individuals and their network of relationships), following
IC aspects in healthcare sector of Peng et al., (2007).

Human Capital (HC). The term human capital refers to the degree of competencies, knowledge, skills,
experience and abilities of individual employee that creates economic value (Youndt et al., 2004; Wiig,
1997). Human capital plays an important role as invisible and strategic assets and facilitates the business
strategy to create competitive advantage (Hatch and Dyer, 2004). In addition, human capital including
education, training, know-how and capabilities directly associates with greater productivity (Marimuthu et
al., 2009). The study of Peng et al., (2007) confirms that human capital is the most important and reflects
the mission of healthcare service. Characteristics of human capital such as creativity, skill and expertise
tend to generate new idea and knowledge that supports KM success (Jennex and Olfman, 2005). It is
obvious that the way to achieve the success of KM could reach a certain degree of impact on employees
human capital (Birasnav and Rangnekar, 2010). Furthermore, Hsu and Sabherwal (2011) suggest that
human capital is positively associated with knowledge capabilities. Hence, increasing employee skills and
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 27

abilities are expected to create future returns through knowledge management effectiveness and
business performance. A review literature also suggests that human capital with the value of creativity of
employee improves innovativeness (Santos-Rodrigues et al., 2010). A recent study of Alshekaili and
Boerhannoeddin (2011) asserts that knowledge management mediates the relationship between human
capital and innovation performance. Furthermore, the study of Zerenler et al., (2008) asserts that
employee capital is positively related to innovation performance. Drawing from KBV, Hatch and Dyer
(2004) find that human capital had a significant impact on sustained firm performance. Thus, the
hypothesis is proposed as follows:

Hypothesis 1: Human capital is positively associated with (a) knowledge management
effectiveness, (b) organizational innovation and, (c) sustainable business performance.

Structural Capital (SC). Structural capital is defined as everything owned by the organization that
supports employees in their work and remains with an organization even when people leave (Longo and
Mura, 2011; Roos et al., 1997). Structural capital consists of four core elements: system, structure,
strategy and culture which improve productivity through knowledge-sharing, retention and well-organized
procedure (Huang and Hsueh, 2007). In healthcare service, service quality, information technology,
reporting system and hospitals image are essential (Peng et al., 2007). Also, Birasnav and Rangnekar
(2010) propose that structural capital such as problem solving approach, communication-oriented culture
and innovative-supportive culture improves KM activities. In addition, Hsu and Sabherwal (2011)
proposed that organizational capital such as technology, structure, and strategy is positively affected
knowledge capability. The study of Tai-Ning et al., (2011) indicated that structural capital is the system
and procedures that improve business efficiency through innovative capabilities. Following Jassawalla
and Sashittal (2002), firms with innovative-supportive culture provide organizational innovation According
to the empirical study of Zerenler and Hasiloglu (2008), structural capital is positively associated with
innovation performance in automotive supplier industry. Previous studies conducted by Bontis et al.,
(1998) and Sharabati et al., (2010) assert that structural capital is positively related to business
performance. Hence, these ideas lead to posit the following hypothesis:

Hypothesis 2: Structural capital is positively associated with (a) knowledge management
effectiveness, (b) organizational innovation and, (c) sustainable business performance.

Relational Capital (RC). Relational capital is defined as the values which is created through the
relationships between an organization and its stakeholders such as customers, competitors, partners,
suppliers, shareholders, and society (Sharabati et al., 2010). Relationships between employees and
external stakeholders stimulate the creation, acquisition, and exploitation of knowledge, while intra-firm
relationships are a source of knowledge development and exchange (Longo and Mura, 2011). Since
cultivating a good cooperation with stakeholders, knowledge possesses by customers, competitors and
partners may be beneficial to corporate innovation and influence the development of products or process
(Amara and Landry, 2005) From KBV, knowledge acquires from the partner can be utilized to create the
competitive capabilities and performance. The study of Liu et al., (2010) indicates that relational capital
influences the acquisition of knowledge among alliance outcomes. In addition, Kale et al., (2000) use
relational capital as a part of latent variables in a study of factors influencing the formation of inter-firm
alliances and find a positive correlation between relational capital and knowledge transfer. Furthermore,
prior study of Hsu and Fang (2009) shows that relational capital actually improves new product
development performance through organizational learning capability. Likewise, Hsu and Sabherwal
(2011) conclude that relational knowledge possessed by teams can be utilized for innovation. According
to Carmeli and Azeroual (2009), relational capital builds knowledge combination capabilities and leads to
radical and incremental innovations. Further, a number of studies show that relational capital positively
affects business performance (i.e. Amiri et al., 2010; Huang and Hsueh, 2007; Sharabati et al., 2010).
Hence, the following hypothesis is formulated:

Hypothesis 3: Relational capital is positively associated with (a) knowledge management
effectiveness, (b) organizational innovation and, (c) sustainable business performance.


INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 28

2.2 Knowledge Management Effectiveness (KM)
Knowledge management effectiveness is defined as the effective phrase for a group of processes and
practices used by organizations to increase their value (Marr et al., 2003). KM involves creating a learning
culture to continuously create, share, and use knowledge for the purposes of developing new
opportunities (Nonaka and Toyama, 2003). According to Zheng (2005), KM effectiveness comprises three
components: knowledge acquisition effectiveness, knowledge sharing effectiveness, and knowledge
application effectiveness. On the other hand, Lindsey (2002) proposes a conceptual KM effectiveness
model in terms of two main constructs: knowledge infrastructure capability and knowledge process
capability. In addition, Hsu and Sabherwal (2011) explain KM effectiveness as of two functions:
knowledge enhancement capability and knowledge utilization capability that increase corporate value.
Drawing from KBV, knowledge capabilities is a core resource of the firm that can gain sustained
competitive advantage because of its value, uniqueness and complexity (Eisenhardt and Martin, 2000;
Grant, 1996). In addition, a high degree of tacit knowledge resources is generally difficult to understand
and absorb for outside spectators (Lam, 2000). In a similar vein, various studies focus on the role of KM in
the innovation process by suggesting that KM is positively related to firm innovativeness (Chen et al.,
2010; Huang and Hsiao, 2010). Likewise, Jashapara (2005) states that KM is the important factor in
assessment and measurement firm success. Many studies confirm that KM effectiveness improves
business performance (i.e. Mohrman et al., 2003; Zack et al., 2009; Daud and Yusoff, 2011). Hence, the
following hypothesis is formulated:

Hypothesis 4: Knowledge management effectiveness is positively associated with (a)
organizational innovation and, (b) sustainable business performance.

2.3 Organizational Innovation (OI)
Organizational innovation refers to the creation or adoption of an idea or behavior new to the organization
(Damanpour and Evan 1984; Damanpour 1996). Innovative organization is characterized as intelligent
and creative, capable of learning effectiveness and creating new knowledge (Nonaka 1994). The
resource-based view of the firm argues that organizational innovation as one of organizational capabilities
provides the stimulus necessary to achieve a competitive advantage in the marketplace (Barney 1991).
Innovation has a considerable impact on corporate performance by producing an improving market
position that conveys competitive advantage and superior performance. Mol and Birkinshaw's (2009)
propose organizational innovation as a source of sustainable competitive advantage. A large number of
studies focus on the relationships between innovation and higher business performance (i.e.Calantone et
al., 2002; Guan and Ma, 2003). Organizational innovation has the potential to significantly increase firm
performance by helping to gain access to knowledge assets and building of value adding capabilities that
is specific characteristics, hard to imitate and, therefore, sustainable (Hamel, 2006). As described above,
the hypothesis is proposed as follows:

Hypothesis 5: Organizational innovation is positively associated with sustainable business
performance.

2.4 Transformational Leadership (TL)
Transformational Leadership refers to the leader moving the subordinate beyond immediate self-interests
(Bass et al., 2003). Bass and Avolio (1994) have characterized transformational leadership as
encompassing four unique but interrelated behavioral components: inspirational motivation (articulating
an appealing and/or evocative vision), intellectual stimulation (promoting creativity and innovation),
idealized influence (charismatic role modeling), and individualized consideration (coaching and
mentoring). Prior studies have found that leaders who display transformational behaviors are able to
realign their followers values and norms, promote both personal and organizational changes, and help
followers to exceed their initial performance expectations (e.g., Jung 2001; Shin and Zhou, 2003). In
addition, employee learning orientation and transformational leadership were positively related to
employee creativity in insurance industry (Gong et al., 2009). Likewise, Jung et al., (2008) and Khan et
al., (2009) assert that transformational leadership has a positive impact on organizational innovation.
Moreover, the study of Abdulai et al., (2012) shows that transformational Leadership moderates the
relationships between the elements of intellectual capital and firm competitive capability. Hence, the
following hypotheses are formulated:
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 29


Hypothesis 6: The relationships between human capital and (a) knowledge management
effectiveness, (b) organizational innovation, and (c) sustainable business performance will be
positively moderated by transformational leadership.

Hypothesis 7: The relationships between structural capital and (a) knowledge management
effectiveness, (b) organizational innovation, and (c) sustainable business performance will be
positively moderated by transformational leadership.

Hypothesis 8: The relationships between relational capital and (a) knowledge management
effectiveness, (b) organizational innovation, and (c) sustainable business performance will be
positively moderated by transformational leadership.

3. RESEARCH METHODS

3.1 Sample and Data Collection Procedure
The population and sample of this research are 380 private hospitals in Thailand chosen from data file of
the Department of Business Development. Ministry of Commerce, Thailand.
(http://knowledgebase.dbd.go.th/DBD/Main/login.aspx, 5 March, 2012). Private hospitals are interesting to
be focused on because the knowledge of employees working and organizational knowledge of private
hospital are considered important elements effectively running medical service business in competitive
environment (Peng et al., 2007). The key participants in this study are executive director, general director
or general manager of each firm.

A mail survey was used for data collection. The questionnaires were sent to 380 private hospitals. With
regard to the questionnaire mailing, 4 surveys were undeliverable because some firms were no longer in
business, address errors or had moved to unknown locations. Removing the undeliverable from the
original 380 mailed, the valid mailing was 276 surveys, from which 104 responses were received. Due to
2 incomplete questionnaires, they were deducted from further analysis. Of the surveys completed and
received, only 102 are usable. The effective response rate is approximately 27.13%. According to Aaker
et al., (2001), the response rate for a mail survey, without an appropriate follow-up procedure if greater
than 20%, is considered acceptable.

Finally, the non-response was tested for independent two samples. A comparison of early responses and
late responses data is recommended by Armstrong and Overton (1977). T-tests comparing the first 51
survey responses received with the last 51 survey responses across firms four characteristics (i.e.
number of employees, number of years in business, amount of capital invested, and sale revenue per
year) did not find any significant differences between the two groups. Thus, it appears that non-response
bias does not pose a significant problem for this research.

3.2 Questionnaire Development and Variable Measurement

3.2.1 Questionnaire Development
To examine the relationships mentioned earlier, the questionnaire of this study was developed to assess
the dimensions of intellectual capital orientation, and moderators. There are five parts in a questionnaire.
Part one asks for personal information. Part two asks about private hospital information. Part three and
four, all questions deal with the measurement of intellectual capital orientation and the outcomes. Lastly,
an open-ended question for suggestions and opinion is included.

3.2.2 Variable measurement
In the conceptual model, all of variables were measured on five point Likert scale, ranging from
1 = strong disagree to 5 = strong agree, except control variable. The variable measurements of
dependent, independent, moderator, and control variables are described as below:

Sustainable business performance is the dependent variable of this research. It is measured by long term
in sales growth, profitability, market share, outstanding service over competitor and customer acceptance.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 30

This construct is adapted from Jirawuttinaunt and Ussahawanitchakit (2011) including four-item scale.
Human Capital is measured by qualities of employees such as competencies, experience and creativity
abilities. This construct is adapted from Bontis (1998) and Sharabati et al., (2010) including four-item
scale. Structural Capital is measured by a link of firms potential to apply administrative system,
organization structure, organizational culture, motivating strategies, and information access for serving
increasing productivity. This construct is adapted from Bontis (1998) and Sharabati et al., (2010) including
four-item scale. Relational Capital is measured by the firm being able to cooperate and cultivate a good
friendship with stakeholders. This construct is adapted from Bontis (1998) and Sharabati et al., (2010)
including four-item scale. Knowledge Management Effectiveness is measured by the level of knowledge
acquisition, knowledge sharing and knowledge application. This construct is adapted from Zheng (2005)
including four-item scale. Organizational Innovation is measured by the firm being able to create new
product or service, new process, and applying new technology to improving service and R&D in
developing new product or service and new process. This construct is adapted from Peng et al., (2007)
including four-item scale. Transformational Leadership is measured by the extent to which leadership
actions and behaviors result in the corporate mission and vision, and stimulate idea generation and
innovation This construct is adapted from Abdulai et al., (2012) including three-item scale.

The control variables are also likely to affect the relationships. In this research, there are two of them
including firm age and firm capital; because different age may present different organizational attributes
and resource deployment (Chen and Huang, 2009). This study defines firm age as the number of years
the firm has been established. Also, firm capital may impact the capacity of a firm to implement business
strategies in order to achieve superior performance (Ussahawanitchakit, 2007). It is measured by amount
of capital invested.

3.3 Validity and Reliability
With respect to the confirmatory factor analysis, this analysis has a high potential to inflate the component
loadings. Factor analysis was utilized for construct validity. This analysis has a high potential to expand
the component loadings. Hence, a cut-off at 0.40 was adopted (Nunnally and Berstein, 1994). All factor
loadings in this research are greater than the 0.40 cut-off and are statistically significant. The reliability of
the measurements in this research was evaluated by Cronbach alpha coefficients. In the scale reliability,
Cronbach alpha coefficients are greater than 0.70 (Nunnally and Berstein, 1994). The scale of all
measurement appears to produce internally consistent results; thus, these measures are deemed
appropriate for future analysis as they express an accepted validity and reliability. Table 1 shows the
results for both factor loadings score between 0.7-0.9 indicating that there is construct validity, and
Cronbach alpha for all variables are shown between 0.8-0.9.

TABLE 1
RESULTS OF MEASURE VALIDATION

Items Factor
Loadings
Cronbach
Alpha
Number
of Items
Sustainable Business Performance (PER) .815-.889 .906 4
Human Capital (HC)
Structural Capital (SC)
Relational Capital (RC)
Knowledge Management Effectiveness (KM)
Organizational Innovation (OI)
Transformational Leadership (TL)
.912-.956
.769-.901
.761-.829
.779-.947
.752-.891
.883-.908
.941
.874
.800
.868
.848
.891
4
4
4
4
4
3

3.4 Statistic Test
The Ordinary Least Square (OLS) is utilized to assess all hypotheses in this study. Because both
dependent and independent variables in this study were neither nominal data nor categorical data, OLS is
an appropriate method for examining the hypothesized (Hair et al., 2006). After all is said and done, the
model of the relationships mentioned above is shown below.

INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 31

Equation 1: KM =
01
+
1
FA +
2
FC +
3
HC +
4
SC +
5
RC +

Equation 2: KM =
02
+
6
FA +
7
FC +
8
HC +
9
SC +
10
RC +
11
TL +

12
(HC*TL) +
13
(SC*TL) +
14
(RC*TL) +

Equation 3: OI =
03
+
15
FA +
16
FC +
17
HC +
18
SC +
19
RC +

Equation 4: OI =
04
+
20
FA +
21
FC +
22
HC +
23
SC +
24
RC +
25
TL +

26
(HC*TL) +
27
(SC*TL) +
28
(RC*TL) +

Equation 5: OI =
05
+
29
FA +
30
FC +
31
KM +

Equation 6: PER =
06
+
32
FA +
33
FC +
34
HC +
35
SC +
36
RC +

Equation 7: PER =
07
+
37
FA +
38
FC +
39
HC +
40
SC +
41
RC+
42
TL+

43
(HC*TL) +
44
(SC*TL) +
45
(RC*TL) +

Equation 8: PER =
08
+
46
FA +
47
FC +
48
KM +
49
OI +


4. RESULTS AND DISCUSSION

The descriptive statistics and correlation matrix for all variables are shown in Table 2. With respect to
possible problems relating to multicolinearity, all the correlation coefficients of independent variables are
smaller than 0.8. The problem of multicolinearity of independent variables in this model is therefore not
significant (Hair et al., 2006). Variance Inflation Factors (VIFs) was used to check multicolinearity
problem among independent variables. The VIFs ranged from 1.182 7.668 are below the cut-off value
of 10 recommended by Hair et al., (2006) meaning that the independent variables are not correlated with
each other. Therefore, there are no substantial multicolinearity problems encountered in this study. In
addition, Table 2 shows the correlation matrix for all variables used in the regression analysis.




TABLE 2
DESCRIPTIVE STATISTICS AND CORRELATION METRIX FOR ALL CONSTRUCTS
Variables
HC SC RC TL KM OI PER
MEAN
4.039 4.181 4.024 4.167 3.992 3.566 3.774
S.D .725 .587 .571 .649 .582 .754 .657
HC

SC
.629
**

RC
.693
**
.763
**

TL
.570
**
.713
*
.684
**

KM
.585
**
.683
**
.678
**
.546
**

OI
.586
**
.485
**
.578
**
.522
**
.686
**

PER
.481
**
.624
**
.515
**
.453
**
.654
**
.614
**

**. p <0.01, * p < 0.05

4.1 Influence of Intellectual orientation and consequences Table 3 presents the OLS regression
analysis of intellectual capital orientation (human capital, structural capital and relational capital) on KM
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 32

effectiveness, organizational innovation and sustainable business performance. The results reveal that
human capital has a significant positive impact on KM effectiveness (b
3
= 0.214, p<.05), organizational
innovation (b
17
= 0.396, p<.01) and sustainable business performance (b
34
= 0.198, p<.10). Therefore,
Hypotheses 1a, 1b and 1c are supported. All in all, Hypothesis 1 is fully supported consistent with prior
literatures. The later, structural capital shows a significant influence on KM effectiveness (b
4
= 0.278,
p<.05), and sustainable business performance (b
35
= 0.422, p<.01). On the contrary, structural capital has
no significant relationships with organizational innovation (b
18
= -0.016, p>.10). Therefore, Hypotheses
2a and 2c are supported but Hypothesis 2b is not. These results imply that structural capital has a
direct effect on business performance and indirect effect via KM effectiveness consistent with Daud and
Yusoff (2011). However, the finding shows that structural capital has no significant impact on
organizational innovation similar to Carmona-Lavado et al., (2010) who reveals that organizational capital
has no direct effect on product innovation. This result may due to the fact that most structures of private
hospital in Thailand are based on family-owned organizations which Kuo and Wu (2007) suggest that
family ownership structure has a negative effect on organizational innovation. Besides, the non-significant
effect of structural capital may due to firms spending too much on information system or R&D
expenditures, in turn, leading to reduced new product development performance (Hsu and Fang, 2009).
Next, relational capital has a positive effect on KM effectiveness (b
5
= 0.260, p<.05) and organizational
innovation (b
19
= 0.266, p<.05) but with no direct impact on sustainable business performance (b
36
=
0.008, p>.10). Following the previous literature of Zhao et al., (2011), relational capital does not
demonstrate any significant impact on the probability in short term performance. This result provides that
relational capital has an indirect effect on business performance through KM effectiveness and
organizational innovation. Thus, Hypotheses 3a and 3b are supported but hypothesis 3c is not.

Subsequently, the results in Table 3 show that KM effectiveness has a significant positive influences on
organizational innovation (b
31
= 0.693, p<.01), and sustainable business performance (b
48
= 0.356, p<.01).
Similar to Chang and Lee (2008), this result implies that it is vital for organizations to create KM
effectiveness and organizational innovation to gain the most economic rents. Therefore, Hypotheses 4a
and 4b are strongly supported. In addition, following the results of numerous literature (i.e. Guan and
ma, 2003; Hamel, 2006), the finding reveals that organizational innovation is positively associated with
business performance (b
49
= 0.363, p<.01). Thus, Hypothesis 5 is supported.

For the moderating effect of transformational leadership on three IC elements (HC, SC, RC), the results
show that transformational leadership moderates the relationships between human capital and KM
effectiveness (b
12
= 0.561, p<.05), and the relationship between relational capital and organizational
innovation (b
13
= 0.239, p<.10) but has no effect on other relationships. Hence, Hypotheses 6a and 8b
are supported whereas 6b, 6c, 7a, 7b, 7c, 8a, and 8c are not. This finding can explain that
transformation leadership has influence on human capital to increase KM effectiveness as well as on
relational capital to create organizational innovation which confirm by the study of Birasnav et al., (2011)
and Abdulai et al., (2012) who indicates that transformational leadership moderate the element of
intellectual capital and firm internal competitive capability relationships. Surprisingly, on the contrary to
the proposal, transformational readership is significantly and negatively affected structural capital and KM
effectiveness relationship (b
12
= -0.535, p<.05) which support the study of Singh (2008) who explains
that supportive styles of leadership, one of transformational leadership elements, is significantly and
negatively associated with the art of knowledge management practices for competitive advantage in
software firms in India. However, the absence of other relationships of transformational leadership might
be affected by almost previous studies that treat transformation leadership as an independent variable.
Therefore, when this research treats transformational leadership as moderator, it may have some effects
on others variables, and in turn, make it not significant.






INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 33

TABLE 3
RESULTS OF OLS REGRESSION ANALYSIS
a


Independent Variables
Dependent Variables
1 2 3 4 5 6 7 8
KM KM OI OI PER PER OI PER
Human Capital (HC) .214**
(.098)
.260***
(.091)
.396***
(.113)
.379***
(.112)
.198*
(.112)
.190*
(.112)




Structural Capital (SC) .278**
(.112)
.181
(.113)
-.016
(.128)
-.089
(.141)
.422***
(.127)
.519***
(.141)


Relational Capital (RC) .260)**
(.116)
.194*
(.113)
.266**
(.133)
.184
(.140)
.008
(.132)
-.007
(.140)

Knowledge Management
Effectiveness (KM)
.693***
(.078)
.356***
(.102)
Organizational Innovation (OI) .363***
(.098)
Transformation Leadership (TL) .043
(.097)
.208
(.120)
-.002
(.120)

HC x TL .561***
(.114)
.182
(.142)
-.096
(.142)


SC x TL -.535***
(.133)
-.261
(.165)
.095
(.165)

RC x TL .088
(.115)
.239*
(.142)
.126
(.142)

FA .374**
(.158)
.238
(.147)
.153
(.182)
.172
(.182)
.445**
(.180)
.551***
(.182)
-.187
(.166)
.416**
(.162)
FC -.204
(.143)
-.027
(.135)
-.369
(.164)
-.310*
(.167)
-.014
(.163)
-.092
(.167)
-.228
(.153)
.159
(.151)
Adjusted R
2
.544 .630 .402 .432 .411 .432 .476 .502
a
Beta coefficients with standard errors in parenthesis, *** p < 0.01, **. p <0.05, * p < 0.10

5. CONTRIBUTIONS AND DIRECTIONS FOR FUTURE RESEARCH

5.1 Theoretical Contribution and Directions for Future Research
This research is intended to provide a clearer understanding of the relationships among IC orientation,
KM effectiveness, organizational innovation, and sustainable business performance. IC orientation
consists of three dimensions, namely, human capital, structural capital and relational capital. It provides
unique theoretical contribution expanding on previous knowledge and literature of IC, KM effectiveness,
organizational innovation, and sustainable business performance. With respect to the results, element of
intellectual capital (HC, SC, and RC) has a direct effect on sustainable business performance and indirect
effect via KM effectiveness and organizational innovation. However, transformational leadership is almost
not the moderator of the relationships. Then, future research needed to conceptualize the measurement
to find out why transformational leadership is almost does not fully moderate the aforementioned
relationships.

5.2 Managerial Contribution
This research provides some relevant managerial implications. The results can help medical service
business executives identify and justify key components that may be more critical in a rigorously
competitive market. For medical service businesses, they should understand, manage, and give priority to
capital to provide IC, KM effectiveness, organizational innovation to increase sustainable business
performance. The findings imply that human capital and structural capital appear to impact directly on the
organizational performance of medical service business of Thailand whereas relational capital appears to
impact indirectly via KM effectiveness and organizational innovation. This makes the organization gain
more advantage over competitors. Also, medical service executives should understand more about IC
and its critical role in exposing value creation. In other words, medical service executives should pay
more attention to what IC resources are considered important for competitive advantage of the firm, and
whether the relative performance indicators are being used to measure how those IC resources create
firm value.


INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 34

5.3 Limitations and Future Research Directions
This research has some limitations that should be mentioned. Firstly, the data obtained only from private
hospital businesses in Thailand. Future research is needed to collect data from different groups of sample
and/or a comparative population such as public hospital in order to verify the generalizability of the study
and increase the level of reliability. Secondly, this research is conducted on a small sample size. If with
larger sample size, it is expected to make the results more distinct. Lastly and surprisingly,
transformational leadership is almost not the moderator of intellectual capital orientation that needs future
research to apparently reconfirm.

6. CONCLUSION

Intellectual capital is increasingly recognized as an important strategic asset for sustainable corporate
competitive advantages. Our results underline the importance of IC in enhancing business performance in
medical service business in Thailand. The purpose in this study is to examine the relationship between
intellectual capital and sustainable business performance via KM effectiveness and organizational
innovation as mediators. The model is tested using data collected from mail survey of 102 private
hospitals in Thailand. On the whole, the results of the OLS analysis largely confirm our conceptual
framework and hypotheses. All in all, the empirical results indicate that intellectual capital (HC, SC, RC)
has a positive impact on KM effectiveness, organizational innovation and sustainable business
performance. This implies that knowledge and competency of employee, internal organizational systems,
organizational information and knowledge appear to directly impact the organizational performance of
medical service business of Thailand. On the other hand, relational capital has an indirect effect on
business performance via KM effectiveness and organizational innovation. Furthermore, we find that
human capital is the most important IC to explain the effects of KM effectiveness, organizational
innovation on business performance. Based on these results, it follows that the optimal procedure for
medical service companies is to focus on all the three components of IC in order to increase firm
performance. The results of the study support the notion that firms which actively nurture and increase
their IC are likely to obtain superior performance. Our findings have important implications for developing
countries to describe IC which being increasingly recognized as the major driver of corporate growth.
Additionally, further study may consider finding practical reasons why some constructs were found with
no relationships supporting hypotheses by reviewing extensive literature, or collecting data from a larger
sample. In summary, this research contributes significantly toward understanding how medical service
business in Thailand generate intellectual capital orientation to increase KM effectiveness, organizational
innovation and ultimate, achieve sustainable business performance.

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AUTHOR PROFILES:

Dr. Sumittra Jirawuttinunt earned his Ph.D. from Mahasarakham University, Thailand in 2011.
Currently, she is a lecturer of Management at Mahasarakham Business School, Mahasarakham
University, Thailand.

Kannika Janepuengporn earned her M. Ed. from Chulalongkorn University in 1996, Thailand. Currently,
she is a lecturer of Management at Mahasarakham Business School, Mahasarakham University,
Thailand.


INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 40


HUMAN RESOURCE MANAGEMENT POLICIES AND PRACTICES (HRMPP):
SCALE VALIDATION IN THE UNITED STATES

Gisela Demo, UCLA Anderson School of Management, Los Angeles, California, USA
Ksia Rozzett, University of Braslia, Braslia, Brazil


ABSTRACT

Given the strategic relevance of Human Resource Management (HRM) in organizations and the lack of
comprehensive instruments to assess policies and practices of HRM, the main objective of this study is to
develop and validate a reliable and valid scale to measure employees perceptions regarding policies and
practices of Human Resource Management (HRM) implemented by organizations. Three studies with
different national samples were conducted for the development and validation of the Human Resource
Management Policies Scale (HRMPPS) in the United States (US) using exploratory factor analysis (EFA)
and confirmatory factor analysis (CFA). Scale reliability was assessed by Cronbachs alpha and
Jreskogs rho. A six-factor model was generated showing high-reliability and good fit. Construct validity
was provided through convergent, discriminant and nomological validity, being the latter assessed
through the correlation between HRM practices and well-being at work. Finally, the scale generalizability
was tested in a different sample by conducting a replicative analysis on the measurement model and
structural model obtained. This research is a starting point to provide a comprehensive, psychometrically
and operationally valid measure of employees perceptions regarding the most widely studied HRM
policies and practices. As practical implications, the six-factor HRMPPS model could be used as a
diagnostic tool to identify HRM areas where specific improvements are needed, as well as an instrument
of evaluation for managers who wish to improve employees well-being. Limitations and directions for
future researches are discussed.

Keywords: human resource management policies and practices; exploratory factor analysis; confirmatory
factor analysis; scale validation; well-being at work

Acknowledgement
We would like to thank the Brazilian National Counsel of Technological and Scientific Development
(CNPq - Conselho Nacional de Desenvolvimento Cientfico e Tecnolgico) for the grant that funded this
research.
1. INTRODUCTION
Given the strategic relevance of Human Resource Management (HRM) in organizations, the lack of
comprehensive instruments to measure employees perceptions about policies and practices of HRM and
the importance to validate a scale in different countries to improve its generalizability, the main objective
of this study is to validate in the US the Human Resource Management Policies and Practices Scale
(HRMPPS), developed and validated first in Brazil by Demo, Neiva, Nunes and Rozzett (2012).
In order to test the nomological validity of the HRMPPS, that means, its ability to behave as expected with
respect to some other constructs to which it is related, this study also aims to confirm results from other
studies showing that HRM policies and practices have a great influence on employees well-being at work
(Rubino, Demo and Traldi, 2011; Baptiste, 2008; Nishii, Lepak and Schneider, 2008; Turner, Huemann
and Keegan, 2008; Gelade and Iviry, 2003).
According to Huselid (1995), work on the measurement of HRM policies and practices is extremely limited
and this is still true. The only scale found in the literature, called High-Performance Work Practices was
developed and validated by Huselid (1995), with 13 items and a .67 Cronbachs alpha. It was based on a
prior work from Delaney, Lewin and Ichniowski (1989), which resulted in a 10-item HRM practices
questionnaire. These measures and also some indexes of HRM practices identified by advocates of the
high commitment approach (Guest, 1998; Pfeffer, 2005; Marchington and Wilkinson, 2005) have been
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 41


used in researches. However comprehensive instruments with higher reliability for measuring HRM
policies and practices are demanded.
Furthermore, if the HRMPPS shows theoretical consistency and also good psychometric indexes when
validated in a different country (US), it will be a comprehensive, psychometrically and operationally valid
measure to be used in relational studies from both Human Resource, and Management and
Organizations fields. Additionally, it could be used as a diagnostic tool to identity HRM areas where
specific improvements are needed, as well as an instrument of evaluation for managers who wish to
improve employees well-being.
First of all, a literature review about human resource management, its strategic role in organizations, and
human resource management policies, including their constitutive definitions, is presented. After, the
study conducted by Demo et al (2012) concerning the procedures for the development and validation of
the HRMPP scale in Brazil are detailed, since it is the basis for the present study. The method used is
then described, detailing the review of the items to make the scale suitable for application in the US, as
well as the procedures applied in the 3 studies conducted to validate the scale in America. In sum, study
1 aimed to select items based on Exploratory Factor Analysis (EFA); study 2 intended to examine the
factor structure by running a Confirmatory Factor Analysis (CFA), as well as to provide scale reliability
and construct validity through convergent, discriminant and nomological validity; and study 3 aimed to test
the scale generalizability by checking if the factor structure obtained in the CFA would remain stable in a
different sample. Finally, the results are presented and discussed and final remarks are made, pointing
the research limitations and its practical implications as well as highlighting directions for future research.

2. LITERATURE REVIEW

This section first presents the theoretical background of HRM and HRM policies and after details the
study conducted by Demo et al (2012) to develop and validate a HRMPP scale, used as basis for this
research.

2.1 Theoretical Background
Many authors understand HRMs current role in the organizations as being strategic. One of the
distinctive features of HRM is that better performance is achieved through the people in the organization
(ALDamoe, Yazam and Ahmid, 2012). Ulrich, Halbrook, Meder, Stuchlik and Thorpe (1991) stated that
the competitive panorama is constantly being changed and has been demanding new models of
competitiveness which in turn require organizational capacities that will enable the companies to better
serve their customers and distinguish them from their competitors. These organizational capacities come
from the redefinition and redistribution of HRM practices, functions and professionals.
By summarizing what authors such as Guest (1987), Storey (1995), Legge (2006) and Bohlander and
Snell (2009) say, it is possible to observe that people have been taking over a strategic and relevant role
in organizations, and therefore cohesive and coherent theories - aligned to both planning and
organizational strategy - must properly sustain HRM. In this meaning, HRM policies and practices may
vary among organizations and should be aligned with business strategy (Chnevert and Tremblay, 2009).
Boxall and Purcell (2000) add that the effects of individual HRM practices depend on both the nature of
the effects of other HRM practices and the business strategy. Also, Lim (2012) argues that external
business environment has strong influence on the HRM activities.
From the perspective of Strategic HRM, policies and practices can be mutually reinforced and create a
strong impact on organizational goals (Morris and Snell, 2010). Moreover, HRM policies are guided by the
logic of skills developed in accordance to the requirements of business processes (Serpell and Ferrada,
2007). Thus, they provide tools to capture and communicate the strategic vision and objectives of the
organization in clear terms that can be more easily understood and requested (Vakola, Soderquist and
Pratascos 2007). On such context, the development of scales that allow an estimation of the perception
of HRM policies aims to identify to what extent they are applicable to various organizations and aligned to
the organization's strategy. In addition, a scale can translate how HRM policies are associated with
business strategy, because only so they will be effective (Legge, 2006).
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HRM must also not have the traditional role of support anymore, but instead it must constitute essential
competence in reaching the organizational and individual objectives and results, once human resource
are valuable and constitute a source of competitive advantage. Uysal (2012) indeed found strong, positive
and significant correlations among the main HRM policies cited on the literature such as staffing, training,
performance evaluation and compensation. These results are important for understanding the inter-
relationships between HRM practices, in order to enhance the effect of HR systems on employees
organizational outcomes.
Therefore, organizations have turned to the perspective of creating competitive advantage. Consequently
themes related to the areas of organizational strategy and theory converge, originating comprehensive
implications for HRM and putting its primordial function under discussion. According to the Resourced
Based View by Barney (1991), the creation of competitive advantage depends on prerequisites that may
be closely related to the HRM area, since resource must be valuable and rare to the organization, may
never be imitated or replaced, and the organization must be able to explore them. Also, Beauvallet and
Houy (2010) support that the key mechanism and decisive variable that would justify the competitive
advantages of companies alleged as being lean enterprises, or the ones practicing a lean
management, are directly related to HRM.
Organizational policy can be defined as principles established for leading a company, a general course of
action in which some practices are developed collectively, in a constructive way, aiming to reach certain
objectives (Singar and Ramsden, 1972). HRM policies define the attitude, expectations and values of the
organization concerning the way of treatment of the individuals, and serve as point of reference for the
development of organizational practices and for decisions made by people, besides causing an equal
treatment among individuals (Armstrong, 2009).
In this study the term HRM policy means an organizational articulated proposal, with theoretical and
practical constructions within human relations aiming to reach the desired results. Thereby, HRM policies,
operationalized by HRM practices, define theoretical and practical referential built to make possible the
reaching of the objectives and purposes of the organization, operating as thinking and acting guides for
the HRM area.
Some research results have pointed out positives relations between HRM policies and variables like
commitment, productivity, profitability and quality, among others (Guest, 1987; Schneider and Bowen,
1985; Ulrich et al., 1991). In their meta-analysis, Combs, Liu, Hall and Ketchen (2006) found that relations
between HRM practices and organizational outcomes are stronger in industries than in service
companies. Studies have also been conducting in cultures other than the American and European ones.
Majumder (2012) verified strong relationship between HRM practices and employees satisfaction in
Bangladesh private banks. Kim and Lee (2012) found evidence that HRM policies and practices improve
strategic capabilities and firm performance in management consult firms at South Korea. The study of
Demo (2010) showed positive and strong relationship between HRM policies and organizational justice in
both private and public Brazilian organizations.
Similarly, other researchers have shown that HRM policies and practices affect performance of
organizations favorably (Boselie, Dietz and Boon, 2005; Subramony, 2009; Menezes, Wood and Geladi,
2010). Guest and Conway (2011) confirmed the association between more HRM practices, higher HR
effectiveness and a range of performance outcomes. Besides, ALDamoe et al. (2011) concluded that
employee retention is likely to mediate in the relationship between HRM practices and organizational
performance. Employee perceptions of HRM policies and practices also influence discretionary work
effort and co-worker assistance (Frenkel, Restubog and Bednall, in-press). On the other hand, the
effectiveness and acceptance of HRM policies are related to values and organizational culture
(Stone, Stone-Romero and Lukaszewski, 2007).
There is a consensus indeed that HRM practices generate higher organizational performance when
integrated to business strategy (Guest and Hoque 1994; Ezzamel, Lilley and Willmott, 1996). And this is
also true for small firms. The study conducted by Katou (2012) showed that HRM policies have a positive
effect on organizational performance through employee attitudes (satisfaction, commitment, motivation)
and employee behaviors (absences, turnover, disputes). In summary, HRM policies and practices
assume special connotation in development, appreciation and retention of talents. They also promote
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 43


employees commitment and, as a result, goodwill on their part to act in a flexible and adaptive manner
towards excellence in the organizations (Legge, 2006). An entrepreneurial strategy aiming production and
supply of added-value products and services must concern the development and the implementation of
HRM policies resulting in well-qualified employees (Legge, 2006).HRM policies and practices considered
in the current study were based on the literature review used for HRMPPS development and validation in
Brazil (Demo et al., 2012). According to Kerlinger and Lee (2008), constitutive definition is the one that
typically appears as a term definition in dictionaries and theories. Authors should elaborate such concepts
based on a literature review of other concepts and studies that work as a theoretical support. And the
items of the scale are HRM practices. Policies are indeed implemented by practices (Legge, 2006).
Chart 1 summarizes the selected policies as well as its constitutive definitions elaborated from the
literature review. The main authors who were reviewed in the development of the theoretical background
for each HRM policy are pointed out.

CHART 1.CONSTITUTIVE DEFINITIONS OF HRM POLICIES AND ITS THEORETICAL
BACKGROUND
HRM Policy Constitutive Definition and Authors Reviewed
Recruitment
and Selection
(RS)
Organizational articulated proposal, with theoretical and practical constructions,
to look for employees, encourage them to apply, and select them, aiming to
harmonize peoples values, interests, expectations and competences with the
characteristics and demands of the position and the organization.
Authors reviewed: Armstrong, 2009; Bohlander and Snell, 2009; Dessler, 2002;
Lievens and Chapman, 2010; Mathis and Jackson, 2003.
Involvement
(I)
Organizational articulated proposal, with theoretical and practical constructions,
to create an affective bond with its employees, contributing to their well-being at
work, in terms of acknowledgement, relationship, participation and
communication.
Authors reviewed: Bohlander and Snell, 2009; Dessler, 2002; Dietz, Wilkinson
and Redman, 2010; Mathis and Jackson, 2003; Muckinsky, 2004; Sisson, 1994;
Ulrich et al., 1991; Siqueira, 2008.
Training,
Development
and Education
(TD&E)
Organizational articulated proposal, with theoretical and practical constructions,
to provide for the employee systematic competence acquisition and to stimulate
continuous learning and knowledge production.
Authors reviewed: Bohlander and Snell, 2009; Dessler, 2002; Dutra, 2001;
Goldstein, 1996; Sisson, 1994; Winterton, 2007.
Work
Conditions
(WC)
Organizational articulated proposal, with theoretical and practical constructions,
to provide the employees good work conditions in terms of benefits, health,
safety and technology.
Authors reviewed: Bohlander and Snell, 2009; Dessler, 2002; Loudoun and
Johnstone, 2010; Mathis and Jackson, 2003; Osborn, Hunt and Schermerhorn,
1998; Sisson, 1994; Ulrich, 2001.
Competency-
Based
Performance
Appraisal
(CBPA)
Organizational articulated proposal, with theoretical and practical constructions,
to evaluate the performance and competences of the employees, subsidizing the
decisions about promotions, career planning and development.
Authors reviewed: Bohlander and Snell, 2009; Dessler, 2002; Devanna,
Fombrun and Tichy, 1984; Dutra, 2001; Latham, Sulsky and Macdonald, 2007;
Mathis and Jackson, 2003.
Compensation
and Rewards
(CR)
Organizational articulated proposal, with theoretical and practical constructions,
to reward the employees performance and competences in terms of
remuneration and incentives.
Authors reviewed: Bohlander and Snell, 2009; Dessler, 2002; Devanna,
Fombrun and Tichy, 1984; Dutra, 2001; Gerhart, 2010; Hiplito, 2001; Sisson,
1994

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2.2 Development and validation of the HRMPPS in Brazil
The study of the development and validation of the HRMPPS in Brazil (Demo et al., 2012) was the basis
for the validation in the US. Item generation of the HRMPPS validated in Brazil was based on a broad
literature review as well as on interviews with employees of various companies. Regarding the interviews,
the analysis of categorical thematic content recommended by Bardin (2011) was used for the
identification of categories and its indicators. The categories that emerged from content analysis were
consistent with the six main policies cited in the most recently literature review about HRM policies
namely recruitment and selection, involvement, training, development and education, working conditions,
competency-based performance appraisal and rewards (Gerhart, 2010; Dietz, Wilkinson and Redman,
2010; Lievens and Chapman, 2010; Armstrong, 2009; Bohlander and Snell, 2009; Dessler, 2002;
Winterton, 2007; Latham, Sulsky and Macdonald, 2007; Mathis and Jackson, 2003; Goldstein, 1996;
Sisson, 1994; Ulrich et al., 1991; Devanna, Fombrun and Tichy, 1984). Then, 88 items were developed.
As to theoretical analysis of the items, we followed the steps proposed by Kerlinger and Lee (2008). At
first, they were submitted to semantic analysis so that their understandability to the population members
could be verified and doubts could be solved. At the end of the semantic analysis, 20 items were
considered unclear, doubting and repeated by the analysts. These items were crossed off and HRMPPS
remained with 68 items. Finally, twelve experts in HRM field (professors, HRM researchers and HRM
managers) were exposed to the definition of each factor/HRM policy plus a related explanation and asked
to allocate each of the 68 statements to an appropriate factor or to a not applicable category. After the
judges analysis, 18 items did not reach an application concordance to the factors for 80% of the judges
or did not fit into only one factor and were deleted from the instrument. After all, HRMPPS counted 50
items in its application version, with a 5-point Likert scale, varying from I totally disagree to I totally
agree.
Thereafter, HRMPPS was validated through EFA and CFA. The results presented a multifactorial
instrument with 40 items distributed in 6 factors consistent with the literature review and explained about
58% of the constructs total variance. It also has high reliability by displaying Cronbachs alphas higher
than .80 in the 6 obtained factors, according to the threshold recommended by authors such as Nunnally
and Bernstein (1994), besides Jreskogs rho higher than .76, as proposed by Chin (1998). Specifically:
recruitment and selection policy (=.84; =.81), involvement policy (=.93; =.92), training, development
and education policy (=.88; =.88), work conditions policy (=.84; =.76), competency-based
performance appraisal policy (=.86; =.92) and rewards policy (=.81; =.77). At last, HRMPPS has
validity by displaying high-quality factor loadings, with 70% of the items classified as good, very good and
excellent, according to Comrey and Lees (1992) criterion.
After, the six-correlated-factor structure obtained in the exploratory analysis was tested in other sample,
remaining stable. Finally, the CFA conducted using the maximum likelihood method in other different
sample confirmed the validity of HRMPPS by showing conceptual adequacy to the structure obtained in
the exploratory analysis and satisfactory fit. The final model showed 112 parameters, with 2
(708)
=
2178.4, p<0.001; p<0.001 or NC=3.07; CFI = .90; RMSEA=.057 (confidence interval from .55 to .60).

3. METHODS

First of all, the review of the scale for application in the US, regarding its translation for English and the
content validity of the items, are presented. Then, the three studies conducted for the development and
validation of the Human Resource Management Policies and Practices Scale (HRMPPS) in the United
States (US) are detailed. Three different national samples were collected online using MTurk in order to
ensure the presence of a broad variety of industries located in the United States. This diversification
indicates sampling variability and representativeness.
Data from study 1 (n=409) were used to select items based on EFA. Then, CFA was used on data
obtained in study 2 (n=400) to examine factor structure, as well as to provide construct validity through
convergent and discriminant validity and a structural model including the construct Well-Being at Work
(WBW) was used to test for nomological validity. Scale reliability was assessed by Cronbachs alpha and
Jreskogs rho. Finally, data from study 3 (n= 285) were used to test the scale generalizability by
conducting a replicative analysis on both the measurement model and structural model used to test
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 45


nomological validity in study 2, and by checking if the structure obtained through the CFA remained stable
in a different sample.

3.1 HRMPPS Review for Application in the US
In order to make the HRMPPS suitable for application in the US, the 40 items were translated to English
by a specialist in translation and retranslated to Portuguese by the authors of the scale. Then, an English
Professor from a university in California checked out the translation to English. Following the item
generation steps proposed by Kerlinger and Lee (2008), two faculty members and one PhD student from
the Management and Organization area of a Business School of a university in California served as
judges to evaluate the content/validity of the items. As a result, the 40 statements remained for the
application in the US, with a 5-point Likert scale, varying from I totally disagree to I totally agree. The
40 items can be found in Appendix 1.

3.2 Study 1: Exploratory Factor Analysis
The sample for this study was collected online using MTurk. Data were collected from 449 employees of
various organizations. Of the employees, 67% were male, 46% were Asian, Asian-American or Pacific
Islander, 80% were under the age of 36, 53% had a Bachelor degree, and 55% had been at the company
for fewer than 5 years. The respondents came from a multitude of industries, such as computer
hardware/software (19.1%), education (12.1%), healthcare/medical (7.7%), internet ASP (7.4%),
engineering/architecture (7.2%), finance/banking/insurance (6.7%), accounting (4.2%), retail (3.5%),
telecommunications (2.7 %), consulting (2.5%), and others (26.9%).
The data were examined (searched for incorrect values, missing data and outliers) and the assumptions
for multivariate analysis were checked, following the procedures recommended by Tabachnick and Fidell
(2007) and Hair, Black, Babin, Anderson and Tatham (2009). The final sample counted then with 409
subjects. Hair et al. (2009) say that for an adequate sample size, it is necessary to have between 5 and
10 individuals for each item of the instrument. However, the authors state that any factor analysis with
less than 200 individuals can hardly be considered suitable. To Tabachnick and Fidell (2007), a factor
analysis is compromised with less than 300 individuals. Similarly, Comrey and Lee (1992) class 300 as a
good sample size. The sample size with 409 subjects attended, therefore, all the criteria cited.
To perform the EFA, the correlation matrix, the matrix determinant and the results of the Kaiser-Meyer-
Olkin (KMO) sampling adequacy test were analyzed regarding factorability. For factor extraction, Principal
Components Analysis (PCA) was used. Once the matrix was considered factorable, the eigenvalues,
percentage of explained variance of each factor, scree plot graphic and parallel analysis were then
examined in order to determine the quantity of factors to be extracted. After defining the quantity of
factors, a Principal Axis Factoring (PAF) analysis was run using Promax rotation - since correlation
among factors was expected, which is common in behavioral phenomena. Cronbachs alpha was used to
check reliability or internal consistency of each factor.

3.3 Study 2: Confirmatory Factor Analysis and Construct Validity
The sample for this study was also collected online using MTurk. Data were collected from 450
employees of several companies. Of the employees, 58% were male, 45% were Asian, Asian-American
or Pacific Islander, 85% were under the age of 40, 55% had a Bachelor degree, and 48% had been at the
company for fewer than 5 years. The respondents came from a multitude of industries, such as education
(13.4%), computer hardware/software (13.2%), engineering/architecture (9.4%), healthcare/medical
(5.8%), finance/banking/insurance (5.8%), admin/support/waste management/remediation services
(4.8%), telecommunications (4.8%), internet ASP (4.3%), accounting (4.3%), food service (3.5%), retail
(3.5%), manufacturing (3.3%), consulting (2.8%), and others (21.1%).
The data were examined and the assumptions for multivariate analysis were checked, following the
procedures recommended by Myers (1990), Menard (2002), Tabachnick and Fidell (2007) and Hair et al.
(2009). The final sample counted then with 400 subjects. Byrne (2009) and Kline (2011) state that for a
CFA, an adequate sample size would be 10 subjects for variable. On the other hand, the authors state
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 46


that a minimum of 200 individuals is always required. The sample size with 400 subjects attended,
therefore, the criteria.
In this study, two measurement models were tested and compared: the one-factor model and the six-
factor model. To determine which structure adjusts better to HRMPPS, its fit was evaluated by using
AMOS through the following indexes: NC (normatized chi-square or chi-square value divided by the
models degrees of freedom = CMIN/DF), CFI (Comparative Fit Index) and RMSEA (Root Mean Square
Error of Approximation), as recommended by Kline (2011). The internal consistency was measured
through composite reliability, also known as Dillon-Goldsteins rho or Jreskogs rho, as proposed by Chin
(1998). Dillon-Goldsteins rho is a better reliability measure than Cronbachs alpha in Structural Equation
Modeling, since it is based on the loadings rather than the correlations observed between the observed
variables.
Finally, construct validity, the degree to which a measure assesses the construct it is purported to
assess (Peter, 1981, p. 134), was examined in this study through convergent, discriminant, and
nomological validity.

3.4 Study 3: Scale Generalizability
The sample for this study was collected online using MTurk as well. Data were collected from 305
employees of multiple organizations. Of the employees, 70% were male, 60% were Asian, Asian-
American or Pacific Islander, 90% were under the age of 40, 54% had a Bachelor degree, and 56% had
been at the company for fewer than 5 years. The respondents came from a multitude of industries, such
as computer hardware/software (16.3%), education (14.5%), engineering/architecture (9.9%),
healthcare/medical (6.7%), finance/banking/insurance (5.7%), internet ASP (5.3%), accounting (5.3%),
and others (36.3%).
The data from this study were used to test the scale generalizability by conducting a replicative analysis
on both the measurement model and structural model used in study 2, assessing the correlation between
HRM policies and well-being at work. For this purpose, we used as measure for the perceptions of HRM
policies the six-factor HRMPPS validated in the EFA (study 1) and confirmed trough the CFA (study 2).
Also, the measure used to assess employees well-being at work was the three-factor Well-Being at Work
(WBW) scale developed and validated by Paschoal and Tamayo (2008). This scale was translated to
English by one of its authors, retranslated to Portuguese by the authors of this paper and it was finally
checked out by an English Professor from a university in California.
The WBW scale has good psychometric parameters and addresses both the affective dimension of well-
being at work as well as the eudaimonica dimension of achievement and expression. This instrument
comprises 30 items divided into three factors: (1) positive affect, with nine items and the reliability index
Cronbach's alpha () equal to .95, (2) negative affect, with 12 items and =.94, (3) fulfillment, composed
of nine items and = .92. Items related to positive and negative affect are supposed to be answered
according to a five-point scale, ranging from 1 (not at all) to 5 (extremely) and the items related to
fulfillment in accordance with a scale of five points of agreement, ranging from 1 (strongly disagree) to 5
(agree completely).
The data were examined and the assumptions for multivariate analysis were checked, following the
procedures recommended by Myers (1990), Menard (2002), Tabachnick and Fidell (2007) and Hair et al.
(2009). The final sample counted then with 285 subjects. In order to run a structural model, it is important
to select a sample that has a minimal statistical power of .80 (Cohen, 1992). Through the program
GPower 3.1, we obtained the minimum sample size of 146 with a .95 statistical power. Additionally,
according to Kline (2011), for simple models, which is the case of this study, 200 subjects is the minimum
recommended. Thus, the sample size with 285 subjects attended both criteria.

4. RESULTS

This section presents the results of exploratory factor analysis, confirmatory factor analysis, construct
validity and scale generalizability.

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4.1 Exploratory Factor Analysis
The analyses results confirmed the matrix high factorability to perform the exploratory factor analysis.
KMO was 0.959, classified by Kaiser (1974) as marvelous. The determinant of the matrix was extremely
close to zero indicating that the number of factors is lower than the number of items. Through Principal
Components Analysis, it was possible to decide how many factors would be extracted. All the criteria
adopted (eigenvalues higher than 1.0, explained variance percentage of each factor above 3%, scree plot
graphic visual analysis and parallel analysis) pointed to the existence of 6 factors.
Thus HRMPPS, after 11 iterations, resulted in a multifactorial instrument with 32 items, distributed in 6
factors (subscales), representing HRM policies. The policies are compatible with the theoretical review
done, explaining 58% of the constructs total variance and meeting Hair et al.s (2009) criterion that says
a scale needs to have enough factors in order to explain about 60% of the construct variance.
The validity or quality of the items that composed each factor was also analyzed, based on Pasqualis
(2008) statement that a valid item is the one that well represents the factor, that is, an item with a good
factor loading. The minimum acceptable load was .40 (Tabachnick and Fidell, 2007). Comrey and Lee
(1992) classified items with loadings higher or equal .71 as excellent; higher or equal .63 as very good;
higher or equal .55 as good; higher or equal .45 as reasonable; and higher or equal .32 as poor. Thus, as
to the items quality, 70% of them were classified as excellent, very good and good.
Concerning the reliability, internal consistency or precision of the factors, Pasquali (2008) states that
values above .70 indicate that the scale is reliable, while values above.80 indicate good reliability (Field,
2009). Nunnally and Bernstein (1994, pp. 264-265) say that in the early stages of predictive or construct
validation research, it may be satisfactory to have only modest reliability, e.g., .70. For other scenarios,
Nunnally and Bernstein (1994) go on to state that .80 or even .90 may be required. Petersons (1994)
meta-analytical study on Cronbachs alpha showed that reliable alphas have a .77 mean and .79 median.
All 6 factors showed high reliability, with alpha coefficients higher than .80, following the threshold
recommended by authors such as Nunnally and Bernstein (1994), and Peterson (1994). Tables 1, 2, 3, 4,
5 and 6 summarize the main information of each factor.
TABLE 1. DESCRIPTION OF THE ITEMS IN FACTOR 1 (RECRUITMENT AND SELECTION)
Variable Description Quality Loading
HR4 The organization I work for uses various selection instruments
(e.g., interviews, tests, etc.).
Very Good .70
HR3 Selection tests of the organization where I work are conducted
by trained and impartial people.
Very Good .64
HR2 The organization I work for has competitive selection processes
that attract competent people.
Good

.58
HR1
The organization I work for widely disseminates information
about both external and internal recruitment processes.
Good .58
HR5 The organization I work for discloses information to applicants
regarding the steps and criteria of the selection process.
Reasonable .49
HR6 The organization I work for communicates performance results
to candidates at the end of the selection process.
Poor .40
Note: This factor had a total of six items and reliability of .81 (Cronbachs in EFA).








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TABLE 2. DESCRIPTION OF THE ITEMS IN FACTOR 2 (INVOLVEMENT)
Variable Description Quality Loading
HR8 The organization I work for is concerned with my well-being. Excellent .82
HR9 The organization I work for treats me with respect and
attention.
Excellent .73
HR10 The organization I work for seeks to meet my needs and
professional expectations.
Excellent .72
HR16 In the organization where I work, there is an environment of
trust and cooperation among colleagues.
Excellent .71
HR15 In the organization where I work, there is an environment of
understanding and confidence between managers and
employees.
Very Good .70
HR13 The organization I work for recognizes the work I do and the
results I achieve (e.g., in oral compliments, in articles in
corporate bulletins, etc.).
Good .60
HR11 The organization I work for encourages my participation in
decision-making and problem-solving.
Reasonable .49
HR14
In the organization where I work, employees and their
managers enjoy constant exchange of information in order to
perform their duties properly.
Reasonable .45
HR18
In the organization where I work, there is a consistency
between discourse and management practice.
Poor .43
Note: This factor had a total of ten items and reliability of .91 (Cronbachs in EFA).

TABLE 3. DESCRIPTION OF THE ITEMS IN FACTOR 3 (TRAINING, DEVELOPMENT & EDUCATION)
Note: This factor had a total of three items and reliability of .82 (Cronbachs in EFA).

TABLE 4. DESCRIPTION OF THE ITEMS IN FACTOR 4 (WORK CONDITIONS)
Variable Description Quality Loading
HR26
The organization I work for provides basic benefits (e.g., health
care, transportation assistance, food aid, etc.).
Very Good .65
HR29 The organization I work for is concerned with the safety of their
employees by having access control of people who enter the
company building/facilities.
Good .60
HR28 The organization I work for has programs or processes that help
employees cope with incidents and prevent workplace accidents.
Good .56
HR25 The organization I work for is concerned with my health and
quality of life.
Reasonable .48
HR30 The facilities and physical condition (lighting, ventilation, noise and
temperature) of the organization I work for are ergonomic,
comfortable, and appropriate.
Poor .40
Note: This factor had a total of five items and reliability of .81 (Cronbachs in EFA).
Variable Description Quality Loading
HR21 I can use knowledge and behaviors learned in training at work. Very Good .69
HR22 The organization I work for stimulates learning and application
of knowledge.
Reasonable .52
HR19 The organization I work for helps me develop the skills I need
for the successful accomplishment of my duties (e.g., training,
conferences, etc.).
Reasonable .48
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 49



TABLE 5. DESCRIPTION OF THE ITEMS IN FACTOR 5 (COMPETENCY-BASED PERFORMANCE
APPRAISAL)
Variable Description Quality Loading
HR35 The organization I work for disseminates competency-based
performance appraisal criteria and results to its employees.
Excellent .84
HR34 The organization I work for discusses competency-based
performance appraisal criteria and results with its employees.
Excellent .74
HR33 In the organization where I work, competency-based performance
appraisal provides the basis for an employee development plan.
Good .61
HR32 In the organization where I work, competency-based performance
appraisal is the basis for decisions about promotions and salary
increases.
Reasonable .53
HR31 The organization I work for periodically conducts competency-
based performance appraisals.
Reasonable .49
Note: This factor had a total of five items and reliability of .86 (Cronbachs in EFA).

TABLE 6. DESCRIPTION OF THE ITEMS IN FACTOR 6 (COMPENSATION AND REWARDS)
Item Description Quality Loading
HR38 In the organization where I work, I get incentives such as
promotions, commissioned functions, awards, bonuses, etc.
Very good .66
HR40 In the organization where I work, my salary is influenced by my
results.
Good .56
HR37 The organization I work for offers me a salary that is compatible
with my skills, training, and education.
Reasonable .48
HR39 The organization I work for considers the expectations and
suggestions of its employees when designing a system of
employees rewards.
Reasonable .45
Note: This factor had a total of four items and reliability of .84.

By comparing the HRMPPS validated in Brazil and the HRMPPS validated in US, regarding reliability,
number of items and validity, its possible to see similar parameters, as shown on Table 7, driving us to
the conclusion that the six-factor structure validated in Brazil remained stable, with fewer items, on the
validation in a different country, being suitable for application in US organizations.

TABLE 7. RELIABILITY OF THE SCALES
Factor HRMPPS Brazil HRMPPS US
Recruitment and Selection =.84 =.81
Involvement =.93 =.91
Training Development and education =.88 =.82
Work Conditions =.84 =.81
Competency-Based Performance Appraisal =.86 =.86
Compensation and Rewards =.81 =.84
Number of items 40 32
Quality of items 70% classified as excellent,
very good and good
60% classified as excellent,
very good and good
Total variance explained 58% 58%
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 50




4.2 Confirmatory Factor Analysis and Construct Validity
As to dimensionality assessment, Byrne (2009) states that in a confirmatory factor analysis, a one-factor
model should be tested before a multiple-factor model. So, in this study, two measurement models were
tested and compared: Model 1, one-factor model (see Figure 1) and Model 2, six-factor model structure
obtained in the EFA (see Figure 2). Two CFAs were run and the maximum likelihood method was used to
estimate both models.
According to Kline (2011), values which indicate satisfactory adjust for a model are: for NC (CMIN/DF),
values 2.0 or 3.0 or, at most, up to 5.0; for CFI, values higher than .90 and for RMSEA, values lower than
.05 or up to .08. Model 1 showed 97 parameters, with 2
(464)
= 1554.14, p<0.001 or NC=3.35; CFI =.81;
RMSEA=.08 (confidence interval from .07 to .08). Therefore, the one-factor model has provided only
moderate levels of fit (Figure 1).
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 51






FIGURE 1. MODEL 1 FOR HRM POLICIES AND PRACTICES
LATENT VARIABLE: HRM POLICIES AND PRACTICES

2
(464)
= 1554.14.4 p<0.001

NC =3.35 CFI =.81 RMSEA=.08
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 52


On the other hand, the hypothesized six-factor model (Model 2) was tested and confirmed, providing a
good fit in all indexes (Figure 2). The model showed 117 parameters, with 2
(449)
= 979.54, p<0.001 or NC
= 2.18; CFI = .91; RMSEA = .05 (confidence interval from .05 to .06). The factor loadings of the items in
this confirmatory validation were between .47 and .84, showing a good quality of items, according to
Comrey and Lee (1992).



FIGURE 2. MODEL 2 FOR HRM POLICIES AND PRACTICES
LATENT VARIABLES: RECRUITMENT AND SELECTION (RS); INVOLVEMENT (I), TRAINING,
DEVELOPMENT and EDUCATION (TD&E); WORK CONDITIONS (WC); COMPETENCY-BASED
PERFORMANCE APPRAISAL (CBPA); COMPENSATION AND REWARDS (CR)

Taken together, model 2 was found to outperform model 1 on all measures. Summary statistics for these
two models are shown in Table 8.
2
(449)
= 979.54 p<0.001 NC =2.18
CFI=.91 RMSEA=.05
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 53



TABLE 8. COMPARISON OF THE INDEXES OBTAINED FOR THE HRM POLICIES AND PRACTICES
CONSTRUCT

Indexes
Model 1: one general
factor
Model 2: six correlated
factors
CMIN or 2
(df)
1554.14
(464)
, p<0.001 979.54
(449)
, p<0.001
NC (2/df) 3.35 2.18
RMSEA .08 .05
CFI .81 .91

The result of this analysis suggested that HRM policies in United States organizations are a multi-
dimensional construct that consists of six dimensions. It is important to emphasize that, in the
confirmatory analysis, the same multifactorial structure of 32 items distributed in 6 factors were kept, in
agreement with the reviewed literature and with the exploratory validation, such that the interpretation of
the factors is the same displayed in the tables 1 to 6. At last, the originated results confirmed the
HRMPPS validation by showing the conceptual suitability of the structure obtained in the exploratory
analysis and satisfactory fit.
By comparing the fit provided in the six-factor final model (Model 2) obtained in the CFA in the American
sample with the fit obtained in the six-factor final model in the Brazilian sample, we observe better fit and
indexes in the American model with 32 items. In addition, chi-square difference was significant, indicating
that the American model is better than the Brazilian one. Table 9 shows this comparison.

TABLE 9. COMPARISON OF THE RESULTS OBTAINED IN BRAZILIAN AND AMERICAN MODELS
FOR HRM POLICIES AND PRACTICES

Six-factor model in
Brazil (40 items)
Six-factor model in US
(32 items)
CMIN or 2 (p) 2178.4 (p<0.001) 979.5 (p<0.001)
Df 708 449
NC (2/df) 3.07 2.18
RMSEA .06 .05
CFI .90 .91

2
(259)
= 1198.9, p<0.001


4.1.1 Reliability Assessment
To assess the reliabilities of the six subscales of HRM Policies and Practices, Jreskogs rho was
computed for each factor. Chin (1998) recommends that acceptable scores for the Jreskogs rho should
be higher than 0.7. The results were satisfactory, ranging from .73 through .90 for all the six factors.
Specifically: recruitment and selection (=.77), involvement (=.87), training, development and education
(=.73), work conditions (=.80), competency-based performance appraisal (=.90) and rewards (=.83).

4.2.2 Construct validity
Construct validity is the degree to which a set of measured items actually reflects the theoretical latent
construct that those items are supposed to measure (Hair et al, 2009). In this study, the construct validity
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 54


of the HRMPPS was examined by assessing convergent, discriminant, and nomological validity.
Convergent validity refers to the degree of agreement in two or more measures of the same construct.
According to Hair et al. (2009), there are several indicators of convergent validity, for example, examining
factor loadings and the reliability of the factors. As we have seen, the reliability of all six factors were
above =.70, indicating appropriate convergence (Hair et al., 2009). In addition, all items of the HRM
Policies and Practices measure loaded significantly positive on their specified factor (see Figure 2). 31 of
the 32 items had loadings over .5 (Hair et al., 2009) on the factors to which they were assigned which is
indeed a test of convergent validity of the scale. We may thus state that the scales for these six
dimensions of HRMPP possessed convergent validity.
Discriminant validity indicates the degree to which measures of conceptually distinct construct differ. It
was assessed in this study as follows: AFC was performed for a selected pair of constructs/factors,
allowing correlation between the two constructs. The chi-square value of this model has been noted.
Then, the AFC was performed again for the same pair of constructs, setting the correlation between the
two constructs equal to 1. The chi-square value of the second model has been noted.
Thereafter, we calculated the difference between the values of the chi-squares and also the difference of
degrees of freedom for both models. Then, we analyzed the difference of the chi-square values and the
difference of degrees of freedom in a chi-square table: statistically significant values indicate the
existence of discriminant validity. The test was conducted on each pair of constructs, resulting in 15 tests.
The results on Table 10 showed that all chi-square differences are significant. There is evidence, then,
that the constructs are different and have discriminant validity.

TABLE 10. DISCRIMINANT VALIDITY
Constructs
Recruitment
and Selection
Involvement
TD&E
Work
Conditions
CBPA
Involvement
2
(1)
=113.7
p<0.001

Training,
Development
and Education

2
(1)
=138.1
p<0.001

2
(1)
=82.2
p<0.001

Work
Conditions

2
(1)
=122.1
p<0.001

2
(1)
=63.4
p<0.001

2
(1)
=98.2
p<0.001

Competency-
Based
Performance
Appraisal

2
(1)
=138.7
p<0.001

2
(1)
=95.1
p<0.001

2
(1)
=120.4
p<0.001

2
(1)
=84.1
p<0.001

Compensation
and Rewards

2
(1)
=115.1
p<0.001

2
(1)
=56.5
p<0.001

2
(1)
=91.4
p<0.001

2
(1)
=50.5
p<0.001

2
(1)
=71.3
p<0.001

Nomological validity shows the ability of a scale to behave as expected with respect to some other
constructs to which it is related. It can be tested by examining if correlations between constructs make
sense in a theory of measurement (Hair et al., 2009). There are well-grounded theoretical reasons to
expect a strong and positive association between HRM policies and practices and well-being at work
(Rubino et al., 2011; Baptiste, 2008; Nishii et al., 2008; Turner et al., 2008; Gelade and Iviry, 2003). Thus,
in the current context, nomological validity would be demonstrated if the scores of the measures of HRM
policies were positively and significantly correlated with well-being at work.
An assessment of the nomological validity of the HRMPPS was conducted through the structural equation
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 55


modeling analyses depicted on Figure 3. The findings supported the hypothesis that there is a positive
correlation (r=0.814, p<0.001) between HRM policies and practices (HRMPP) and well-being at work
(WBW). To remember, the 3 observed variables for well-being at work latent variable: positive affect,
negative affect and fulfillment. Consequently, there is evidence of nomological validity for the proposed
HRMPPS.



FIGURE 3. NOMOLOGICAL VALIDITY

In sum, we found evidence of convergent validity, discriminant validity, and nomological validity, and thus
our findings lend support to the construct validity of the six-factor model of HRM policies and practices.

4.3 Scale Generalizability
Even though our proposed factorial structure has a good fit with the data (Figure 2) and we have used a
broad sample from various organizations located in US, we recognize that the results could be specific to
this particular sample. Although it can be said that the sample represents a cross-section of a large
number of firms, the generalizability of the HRMPPS could be still questionable. To provide evidence on
generalizability of HRMPPS, a replicative study on a wide and different sample is essential, as shown in
Figure 4.
As far as the measurement model is concerned, the data in this study exhibit a satisfactory level of fit: 31
parameters, with 2
(26)
=87.36, p<0.001 or NC=3.36; CFI =.96; RMSEA =.09 (confidence interval from .07
to .11). Moreover, all 9 items were significant and loaded as predicted on their respective factors. These
results provide further evidence to suggest that the proposed scale validated in this study is a reliable
operational measure for HRM policies in a variety of American industries. After, analyzing our structural
model (figure 4), we verified that our data support the assertion that there is a positive correlation
between HRM policies and well-being at work (r = 0.839, p<0.001).
To sum up, the results are encouraging in terms of scale generalizability. The 32-item 6-factor HRM
policies scale proposed in this study was found to have a high degree of reliability and validity and so it
can be applied to a wide array of industries in the United States.
2
(26)
= 109.25 CFI=.94
p<0.001 RMSEA=.09
NC =4.20
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 56




FIGURE 4. SCALE GENERALIZABILITY

5. DISCUSSION
This section discusses the theoretical consistency of the scale validated in this study, academic and
managerial implications of the results obtained and also points out limitations and directions for further
researches.

5.1 Theoretical Consistency of the HRMPPS
This paper reports a series of studies on the development and validation of a measure of HRM policies
and practices in US organizations. The HRMPPS was found to demonstrate a high degree of reliability
and construct validity. Nevertheless the numbers resulted from the previous analysis performed being
very satisfactory, it is also necessary to analyze HRMPPSs theoretical consistency or validity of
expression from the revised literature, verifying if the scales items are coherent with the theoretical
concepts used to support it. Kerlinger and Lee (2008) have said that it is not appropriate to hold a factor
that has only a mathematic meaning, for the factor must be relevant in the scientific theoretical context.
Furthermore, validity of expression must be established before any theory test when using CFA, because
without an understanding of the content or meaning of each item, it is impossible to express and correctly
specify a theory of measurement (Hair et al, 2009).
Concerning the recruitment and selection policy and its practices, Dessler (2002), and Mathis and
Jackson (2003) have suggested as important points the vast disclosure of external and internal
recruitment processes, as well as of information concerning the selective process stages, criteria,
performance and results. The importance of using several selection instruments, defended by authors like
Bohlander and Snell (2009), Dessler (2002), and Mathis and Jackson (2003), is also an aspect of
HRMPPS and is the one with highest loading. And, finally, there are items, with a strong factor loading
indicating its representativeness in the construct, illustrating the ideas of Lievens and Chapman (2010).
They say that professionals responsible for recruitment and selection process have to be capable and
impartial once they perform a fundamental and determinant role in the process. According to these
authors, companies with a good organizational image become more attractive and have the possibility of
selecting best-prepared professionals. They are also present in the scale.
2
(26)
= 87.36 CFI=.96
p<0.001 RMSEA=.09
NC =3.36
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Dietz, Wilkinson and Redman (2010) discussed the involvement policy and its practices by legitimating
the employees participation in decision-making and greater integration among them. Bohlander and Snell
(2009) highlighted the importance of the existence of an environment of understanding, cooperation and
confidence as a way of creating involvement, and the coherence between managerial speech and
practice, points which are present in HRMPPS. Muckinsky (2004) and Siqueira (2008) emphasized the
respectful and attentive treatment given to the employees, as well as caring for their well-being as
fundamental aspects to involve them. It is important to note that the illustrative items of this point are the
ones with the highest factor loadings of the involvement policy, showing thus the convergent validity of
the items with the concept they represent. The other involvements items also have theoretical support.
Bohlander and Snell (2009), Dessler (2002), Mathis and Jackson (2003) and Sisson (1994) alerted to the
importance of continuous acknowledgement and feedback, exchanging information, as important
practices of involvement, and Ulrich et al. (1991) emphasized the necessity of establishing partner
relationships with the employees from the identification of their needs, values and worries.
The scales items referring to the TD&E practices also have theoretical support. Goldstein (1996) and
Winterton (2007) explained the differences between the concepts of training, development and education,
emphasizing the importance of evaluating training impact at work. Such item presented the highest factor
loading in the HRMPPS validation. Sisson (1994) and Dessler (2002), in turn, discussed the need that
the organizations have to invest especially in actions of development and education given their strategic
character (long term). Thus, modern methods of training, managerial development and career
management assume special connotation. In this context, Dutra (2001) affirmed that TD&E policy plays
an important role in the development of necessary competences to perform functions, illustrating distance
education and the corporate universities model as innovative in this process. Finally, Bohlander and Snell
(2009) indicated that the stimulus for learning and sharing knowledge must be in the heart of a TD&E
policy.
Regarding the items referring to the work conditions policy and its practices, Loudoun and Johnstone
(2010) dealt with occupational health, quality of life at work and work safety, referring to a suitable
environment and auspicious conditions to maintain the physical, psychic and mental welfare of the
individuals, synthesizing items with high factor loading in the HRMPPS validation. Sisson (1994), Osborn,
Hunt and Schermerhorn (1998), Dessler (2002) and Mathis and Jackson (2003) confirmed the relevance
of offering basic benefits to the employees and this was the most representative item of the work
conditions policy in the HRMPPS validation. Mathis and Jackson (2003) also pointed the importance of
an ergonomic approaching on the project of functions, environment and positions. At last, Ulrich (2001)
stressed that managers constantly neglect the access to suitable and necessary technology, in its
broadest sense (hardwares, softwares, office supplies), for a good functions performance, although it is
fundamental, deserving special attention. In the same way, the existence of workplace amenities and
conveniences, as banks, snack bars, among others, is a point recommended by the author, aiming to
make work conditions more attractive to the employees.
Items representing practices of the competency-based performance appraisal policy also have found
support in the reviewed literature. According to Latham, Sulsky and Macdonald (2007), performances
management feedback to the employees is a crucial point, referring to the goals and results reached.
From that, its important to remember that the criterias definition for the performance evaluation can be
elaborated together with the employees as well as it should be disseminate throughout the organization,
stimulating their involvement and participation in the process. These were the items with the highest
factor loading in this policy. Aligned to these ideas, Dessler (2002), Mathis and Jackson (2003) and
Bohlander and Snell (2009) defended the performance evaluation as the principal subsidy for elaborating
an employees development plan and for decision-making regarding promotion and salary raise. Dutra
(2001) emphasized the need of evaluating, besides performance, the employees competences since
they might be indicatives of the potential for future contribution to the organization. Finally, Devanna,
Fombrun and Tichy (1984) certified the need of periodical evaluations and, in this sense, Bohlander and
Snell (2009) recommended a maximum period of 1 year between an evaluation and the next, having 6
months as the ideal period.
Finally, respecting the items representing practices validated in the compensation and rewards policy,
Gerhart (2010) argued that it must be object of careful choices of the managers, being able to act as one
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 58


of the most impacting strategic policies of an organization. According to the author, the main questions for
decision making are how to pay (offered rewards), considered the most strategic one in the decision-
making process, and how much to pay. Referring to how much to pay, the remuneration must be
compatible with the employees education and skills as Sisson (1994) and Bohlander and Snell (2009)
defend. Also, Devanna, Fombrun and Tichy (1984) understood that a compensation policy must
comprehend, besides remuneration, rewards and incentives like awards, bonus and promotions. The
incentives were translated in the item with the highest factor loading in the rewards policy validation. On
the same line, Hiplito (2001), Dutra (2001) and Dessler (2002) highlighted variable remuneration
methods, such as prizes, gratification, profit participation and action options, a competency-based
promotion and the broadbanding (fewer, but broader pay ranges indicating an easier way to professional
promotion) as remuneration tendencies in the new millennium.
Thereafter, we might affirm that HRMPPSs 32 items indeed have theoretical support, greatly
corresponding to the literature reviewed throughout this paper.
The items of the Human Resource Management Policies and Practices Scale developed and validated in
Brazil by Demo et al. (2012) were the basis for the validation conducted in the US. The comparison
between the two scales, regarding the exploratory and the confirmatory factor analyses, drove us to the
conclusion that the six-factor structure validated in Brazil remained stable in the American sample with
respect to its validity and reliability, but the model validated in the US presented a leaner structure, with
fewer items: 32 instead of 40 in its Brazilian version. Smaller instruments may have a higher response
rate because it is likely that respondents questionnaire fatigue could be a contributory factor to the
response rate (Saunders, Lewis and Thornhill, 2000). Besides, the 32-item-measurement model used to
run the CFA, trough the structure equation modeling, also showed better fit in all indexes than the 40-
item-model, indicating that the American version of HRMPPS could be more suitable for test in other
countries and cultures.
In sum, the three studies performed in this paper produce a six-factor measure for HRM policies and
practices with reliability, construct validity and theoretical consistency to be used in US companies.

5.2 Academic and managerial implications
The present study makes both academic and practical contributions, and suggests several applications
for the research.
First, we explore the strategic nature of HRM, provide a clear conceptualization of the construct, and then
develop a conceptual model with the six most cited in the literature policies, namely, recruitment and
selection; involvement; training, development and education; work conditions; competency-based
performance appraisal; compensation and rewards. Though some of the ideas expressed in this
conceptual model are familiar to HRM specialists, its value is in integrating these various notions to
provide a more comprehensive and holistic picture of HRM policies and practices. Second, we provide
empirical evidence on the testable scales that are both reliable and valid. This gives a new theoretical
insight into how HRM policies and practices can be managed to provide superior organizational
outcomes. Third, the model was empirically tested and found to have substantial association with well-
being at work, indicated by positive affect, negative affect, and fulfillment.
As to the managerial implications, our findings confirm the long-held belief that HRM policies and
practices are a critical success factor for well-being at work. There is a consensus in the literature that
HRM policies and practices positively impact well-being at work. Nishii et al. (2008) assert that HRM
practices should be designed to enhance well-being at work. Similarly, Turner et al. (2008) point out that
HRM has traditionally two roles, a management support, providing the organization with competent
people to perform the work processes, and also a support staff, looking after their well-being. Also,
Gelade and Ivery (2003) found significant correlations between HRM practices, work climate and
organizational performance, emphasizing the contribution of HRM policies and practices for employees
well-being. In the same vein, the study performed by Baptiste (2008) showed that HRM practices
significantly impact both well-being at work and organizational performance. Additionally, the results
obtained by Rubino et al. (2011) highlight the strong influence of the involvement and compensation
policies to promote greater well-being at work.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 59


In this meaning, our scale might be an important evaluation instrument for managers to improve
employees well-being at work. Beyond, there is theoretical and empirical evidence that HRM policies
and practices indeed affect performance of organizations favorably (e.g., Guest and
Hoque 1994; Ezzamel, Lilley and Willmott, 1996; Boselie, Dietz and Boon, 2005; Subramony, 2009;
Menezes, Wood and Geladi, 2010; Guest and Conaway, 2011; Katou, 2012). Consequently, since the
Human Resource Management Policies and Practices Scale comprehends the most widely studied HRM
policies and practices, it might support managers decision-making and problem-solving regarding
identification of HRM areas where specific improvements are needed.

5.3 Limitations and directions for future research
Our proposal represents a first attempt to build and test a conceptual framework of HRM policies and
practices. Then, a first limitation is that the present findings are therefore indicative rather than
conclusive. In spite of the scales validation in Brazil, it would be useful to further assess the
generalizability of the HRMPPS to other business environments such as European and Asian countries.
Moreover, with more replicative and creative research, a more comprehensive conceptual framework
related to HRM policies and practices can be developed in the future.
Second, although the results of this study do provide support that HRM practices have a positive
influence on well-being, it is important to note that well-being is a multi-dimensional construct that may be
characterized in a number of ways. Thereby, it would be useful to explore the complexities of the
relationship between HRM practices and alternative dimensions and measures of well-being in future
studies. For instance, it would be used the Satisfaction with Life Scale validated by Diener, Emmons,
Larsen and Griffin (1985) to measure ones global, cognitive assessment of ones life as a whole, and the
Positive Affect and Negative Affect Schedules validated by Watson, Clark and Tellegen (1988) which
measure the experience of positive and negative emotions at work.
Another limitation is that because of the cross-sectional nature of the data, questions regarding causality
remain unanswered. Thereby, the relationships between HRM practices and well-being at work may not
be interpreted as proof of a causal relationship, but rather as lending support for a prior causal scheme.
The development of a time-series database and testing of the HRM practices association with well-being
at work in a longitudinal framework would provide more insights into probable causation.
In this meaning, there could be a need of alteration or even deletion of original items. Additionally, items
representing HRM practices very disclosed and mentioned as important in literature could be included in
further validations, such as: additional benefits and convenience at work place (e.g., partnerships with
gyms, recreation centers and other establishments, rest area, banks, post-offices, beauty saloons),
flexible benefits plan, labor gymnastics program and other leisure and health benefits the organization
can offer, in the work conditions policy; internal recruitment prioritization over external, in the recruitment
and selection policy; social gatherings, events and sports to promote employees interaction and the
existence of internal communication channels, in the involvement policy; and periodically survey for
training needs as well as investments on education (e.g., full or partial sponsorship of undergraduate
degrees, postgraduate programs, language courses) in the TD&E policy. Specifically, the TD&E policy
was composed by three items only, the minimum required for a scale (Hair et al, 2009; Field, 2009).
Despite it has shown good reliability, future validations may considerate adding items to this factor.
Finally, continued refinement of the HRMPPS is recommended based on further research on new HRM
trends and perspectives and changes in business environments, so that a valid measure of HRM policies
and practices can be ensured on an ongoing basis.
We may conclude, in spite of the limitations pointed, that the main objective of this study was reached
and a multifactor instrument to measure employees perception regarding HRM policies and practices was
produced showing theoretical consistency, reliability, construct validity and the possibility to be applied to
a wide array of industries in the United States.
Considering the increasing research attention paid to the new strategic role of HRM policies in
organizations, this study provides a comprehensive operational measure of HRM policies. The findings
found here are not intended to be conclusive or limiting but offer a useful starting point from which further
theoretical and empirical research of HRM policies and practices can be built.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 60


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Appendix 1. HRMPPS application version items

1 The organization I work for widely disseminates information about both external and internal
recruitment processes.
2 The organization I work for has competitive selection processes that attract competent people.
3 Selection tests of the organization where I work are conducted by trained and impartial people.
4 The organization I work for uses various selection instruments (e.g., interviews, tests, etc.).
5 The organization I work for discloses information to applicants regarding the steps and criteria of the
selection process.
6 The organization I work for communicates performance results to candidates at the end of the
selection process.
7 The organization I work for follows up on the adaptation of employees to their functions.
8 The organization I work for is concerned with my well-being.
9 The organization I work for treats me with respect and attention.
10 The organization I work for seeks to meet my needs and professional expectations.
11 The organization I work for encourages my participation in decision- making and problem- solving.
12 The organization I work for encourages interaction among its employees (e.g., social gatherings, social
events, sports events, etc.).
13 The organization I work for recognizes the work I do and the results I achieve (e.g., in oral
compliments, in articles in corporate bulletins, etc.).
14 In the organization where I work, employees and their managers enjoy constant exchange of
information in order to perform their duties properly.
15 In the organization where I work, there is an environment of understanding and confidence between
managers and employees.
16 In the organization where I work, there is an environment of trust and cooperation among colleagues.
17 The organization I work for favors autonomy in doing tasks and making decisions.
18 In the organization where I work, there is a consistency between discourse and management practice.
19 The organization I work for helps me develop the skills I need for the successful accomplishment of my
duties (e.g., training, conferences, etc.).
20 The organization I work for invests in my development and education promoting my personal and
professional growth in a broad manner (e.g., full or partial sponsorship of undergraduate degrees,
postgraduate programs, language courses, etc.).
21 I can use knowledge and behaviors learned in training at work.
22 The organization I work for stimulates learning and application of knowledge.
23 In the organization where I work, training needs are identified periodically.
24 In the organization where I work, training is evaluated by participants.
25 The organization I work for is concerned with my health and quality of life.
26 The organization I work for provides basic benefits (e.g., health care, transportation assistance, food
aid, etc.).
27 The organization I work for provides additional benefits (e.g., membership in gyms, country clubs, and
other establishments, etc.).
28 The organization I work for has programs or processes that help employees cope with incidents and
prevent workplace accidents.
29 The organization I work for is concerned with the safety of their employees by having access control of
people who enter the company building/facilities.
30 The facilities and physical condition (lighting, ventilation, noise and temperature) of the organization I
work for are ergonomic, comfortable, and appropriate.
31 The organization I work for periodically conducts competency-based performance appraisals.
32 In the organization where I work, competency-based performance appraisal is the basis for decisions
about promotions and salary increases.
33 In the organization where I work, competency-based performance appraisal provides the basis for an
employee development plan.
34 The organization I work for discusses competency-based performance appraisal criteria and results
with its employees.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 65


35 The organization I work for disseminates competency-based performance appraisal criteria and results
to its employees.
36 The organization I work for remunerates me according to the remuneration offered at either the public
or private marketplace levels.
37 The organization I work for offers me a salary that is compatible with my skills, training, and education.
38 In the organization where I work, I get incentives such as promotions, commissioned functions,
awards, bonuses, etc.
39 The organization I work for considers the expectations and suggestions of its employees when
designing a system of employee rewards.
40 In the organization where I work, my salary is influenced by my results.





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ACTIVITY-BASED COST MANAGEMENT STRATEGY AND CONTINUOUS PERFORMANCE
IMPROVEMENT: EVIDENCE OF THAI ELECTRONIC FIRMS

Pitachaya Kaneko, Mahasarakham Business School, Mahasarakham University, Thailand
Phapruke Ussahawanitchakit, Mahasarakham Business School, Mahasarakham University, Thailand


ABSTRACT

The study attempts to integrate the key components of activity-based cost management strategy in the
new model. The objectives of this study are to examine the effects of activity-based cost management
strategy on continuous performance improvement through two mediators: resource integration quality and
intellectual capital advantage. This study also examines the effects of organizational communication and
organizational coordination as moderators on the relationships among activity-based cost management
strategy, resource integration quality, intellectual capital advantage, and continuous performance
improvement of electronic firms in the Federation of Thai Industries (F.T.I). Questionnaire was utilized for
data collection and 225 financial managers of electronic firms are the sample of this study. With the
results of the study, activity-based cost management strategy is strongly positive which has a significant
continuous performance improvement through resource integration quality and intellectual capital
advantage which become mediators. However, the results indicate a partially significant positive effect of
the moderators, organizational communication and organizational coordination on the relationship among
activity-based cost management strategy, resource integration quality, intellectual capital advantage and
continuous performance improvement. Additionally, the results also suggest that organizational
coordination is suitable as an antecedent than a moderator, because it has a direct effect both on
resource integration quality and intellectual capital advantage, but it has no indirect effect on continuous
performance improvement. To explicitly verify the linking of the aforementioned antecedents to
continuous performance improvement, future study needs to resort to antecedent and mediating variables
and include them in the conceptual model in order to increase the contributions and benefits of the study.

Keywords: Activity-Based Cost Management Strategy, Cost Management Orientation, Product Planning
Focus, Resource Integration Quality, Intellectual Capital Advantage, Continuous Performance
Improvement, Organizational Communication, Organizational Coordination

1. INTRODUCTION

The fierce global competition both of local and international markets forces manufacturers to compete in
quality, cost, and time to the market aspects of their products. These changes have an impact on the
environment around companies change continuously and are demanding lower prices, extend higher
quality of products/services, suitable product planning and aggressive pricing. The availability and
relevance of accounting information underlies many business decisions. The popularity of activity-based
cost management which has presented since 1980s has subsequent evolution and revolution debate both
of management accounting literature and practices. However, it still concentrates on assessing the
integrity of the ABC process (Cokins, 1996; Gupta, 2008; Gupta and Galloway, 2003; Kennedy and
Affleck-Graves, 2001; Krumwiede, 1998), factors impacting the success of implementation, the goal of
ABC and ABCM is to increase profits by estimating the various manufacturing costs more accurately to
become a strategic objective and create share holder value through increasing long-term profits,
continuous performance improvement.

The term activity-based cost and activity-based cost management are sometimes used interchangeably
(Cokins, 1996) and have increasingly influenced managers who utilize this information for decision
making and seek new strategies, techniques and resources with concerning more complex cost
management systems in order to create continuous performance improvement. ABC is a cost accounting
methodology that aims to allocate overhead costs effectively and traces cost by using resource and
activity cost drivers that reveal activities and objects consumption patterns on the basis of a cause-effect
relationship. Cost drivers in ABC model are utilized to establish a transitional mapping between
resources, activities and cost objects (Kostakis, Boskou, and Palisidis, 2011). While activity-based cost
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management refers to fundamental management philosophy that focuses on the planning, controlling,
executing, and measuring activities as a strategy for the key to competitive advantage (Rasmussen et al.,
1999; Roberts et al.,1996). Additionally, increasing the value for activities process can increase the
competitive advantage to ensure the survival of firm in the world of high uncertainty and competitiveness
(Beheshti, 2004; Drury and Taules, 2005; Rattanaphaptham and Ussahawanitchakit, 2010).

Prior research focuses on the interest and motivation about the effects of ABC adoption; implementation;
and techniques on firm performance or firm success (Kennedy and Affleck-Graves, 2001) which includes
ABC effectiveness as firms resource and capability to create competitive advantage leading to enhance
financial performance. There are several potential questions about ABC and ABCM implementation as If
ABC has demonstrated benefits, why firms are not actually employing it and Is ABCM implementation
actually suitable for every firm? However, implementation of ABC or ABCM itself may be not succeed
and could not increase value added of stakeholders. It needs to be correlated with the others variables
which are true value drivers on firm performance (Shields, Dang and Kato, 2000). Anderson (1995);
Foster and Swenson (1997); Krumwiede (1998); Malmi (1997); argue that successful implementation
depends on organizational and technical factors including specific characteristics in their business
strategy and organizational structure that leads certain firms to adopt and implement ABCM. Both ABC
and ABCM may have an indirect rather than a direct effect on performance through an intervening
variable that mediates the relationships. Managers of firm will be concerned about the level of suitable
implementation ABCM and the influence factors as a strategy to set their targets. Additionally, only a few
researches examine the relationships between implementation of activity-based cost management and
firm performance (Gunasekaran and Sarhadi, 1998). This study, thus, focuses on the contribution from
implementation of activity-based cost management strategy in electronic firms as well as in manufacturing
and services firms (Lammert and Ehrsam, 1987; Cooper and Kaplan, 1991; West and West, 1997) to
achieve the important goals such as product development and pricing; target cost reduction; key
performance evaluation; and industry cost comparison, two dimensions of activity-based cost
management strategy (cost management orientation and product planning focus) are utilized in this study.

The remainder of this study is organized in seven sections as follows. The second section reviews
theoretical framework, literature reviews and hypotheses development is presented in the third section.
The fourth explains about research methods, sample selection and data collection procedure and variable
measurement of each construct. The fifth shows the results and discussion. The sixth describes the
contributions of this study and the suggestions for future research. The conclusion is presented in the
last section.

2. THEORETICAL FRAMEWORK

This study applies the following concepts of the resource-based view, contingency theory, and planning
theory to explain the situation and understand about the relationship among these variables that have
shown in Figure 1. The resource-based view (Barney, 1991) is defined firm resources as all assets,
capabilities, organizational processes, firm attributes, information, knowledge, innovations and intellectual
capital controlled by a firm. Firms will have increased competitive advantages when they could create
value and succeed their strategy based on firm resources. This theory explains how firm resources and
their capabilities have a strongly positive impact on firm performance (Rattanaphaphtham and
Ussahawanitchakit, 2010). Thus, this research proposes that the effectiveness of activity-based cost
management is a firm resource to create more competitive advantages leading to continuous
performance improvement.

According to contingency theory, organizational structure is a function of context which simultaneously
determined by a variety of endogenous and exogenous contextual factors such as business strategy,
organizational commitment, environmental uncertainty, organizational communication and coordination,
and competitors (Anderson and Young, 1997; Liu and Pan, 2007). Hence, this study treats two
contextual factors: organizational communication and coordination as moderating effects which
encourage firms to obtain continuous performance improvement.

INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 68




Planning theory is a theoretical framework with the synthesis of concepts from multiple fields and based
on concept How organizational leaders might best consider practicing and set their targets in the future.
This theory does not only concern the changes too rapid for prediction to be accurate, but also gain
creditability as effective tools to prepare for an uncertain future and to improve performance in a dynamic
environment (Chermack et al., 2001; Thaweechan and Ussahawanitchakit, 2011). In this study, we apply
activity-based cost management strategy, managerial accounting strategy as a functional management
strategy, for a proxy of management strategy. We also apply this theory to study the relationships
between product planning focus on continuous performance improvement through mediators resource
integrated quality and intellectual capital advantage following RBV theory and organizational
communication and coordination based on contingency theory as moderators among these variables on
continuous performance improvement.

3. LITERATURE REVIEWS AND HYPOTHESES DEVELOPMENT
According to the theoretical framework, the probable relationship concerns among several constructs are
visible. This research proposes a conceptual model for empirical research in the topic Activity-Based
Cost Management Strategy and the Influence Factors on Continuous Performance Improvement as
shown in Figure 1.

FIGURE 1
MODEL OF THE RELATIONSHIPS BETWEEN ACTIVITY-BASED COST MANAGEMENT STRATEGY
AND CONTINUOUS PERFORMANCE IMPROVEMENT

3.1 Activity-Based Cost Management Strategy
Activity-based cost management (ABCM) has been accepted as more accurate in the costing and pricing
of products or services with the focus on decision making of planning, controlling, executing and
measuring all activities as a strategy for the key to competitive advantage (Rasmussen et al., 1999;
Roberts et al.,1996). Activity-based cost management strategy (ABCMS) is defined as strategy with
advanced management accounting system ABCM to create more sophisticated decision-making
approach utilizing sophisticated management accounting systems with more complex, more challenging
and more competitive business environment (Kallunki and Silvola, 2008). To increase competitive
advantage and decrease non-value added activities and cost, managers should utilize activity-based cost
management as a strategy for formal controls and planning (Zaman, 2009). Thus, we employ cost
management orientation and product planning focus which included concept of production and marketing
function as dimensions of activity-based cost management strategy in this study.

3.1.1 Cost Management Orientation
Cost management orientation (CMO) is based on firm strategic cost management systems that
emphasize on better business process, implementation and profit by focusing on 1) the achievement of
allocation of direct and indirect costs, provision of cost information creditability, and cost reporting
usefulness to support management decision making, 2) the achievement focuses on increasing efficiency
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and managerial practices that concern about market oriented cost management such as lower the
customer cost, higher customer satisfaction, cost of maintenance and cost to improve the implementation
in order to achieve organization goals (Ratanaphaptham and Ussahawanitchakit, 2010; Zaman, 2009).
Additionally, environment changes are required in the functional structures of the organizations and the
interaction between cost management oriented and other structures of the organization including the
belief to be the most valued members of the organization.

3.1.2 Product Planning Focus
Product planning focus (PPF) is a strategic planning concept: 1) to assign production planning in all
aspects from workforce activities to product delivery, concerning with the efficient use of resources,
distinguished characteristics that the production planning is focused on the actual production, whereas
operations planning looks at the operation as a whole (OConner, 2004; OFarrell, 2011), 2) to utilize
capable forecasting and planning output of product/ service, 3) to lead to increase customer
responsiveness, quality, and satisfaction by new product development and products to the market quickly
than major competitors (Chenhall, 2004; Choe, 2004; Ratanaphaptham and Ussahawanitchakit, 2010).
Camal, Acar and Tanriverdi (2006) argued that product planning could increase sustained competitive
advantage to encourage firms to achieve high performance.

3.2 Resource Integration Quality
Resource integration quality (RIQ) refers to the process by which managers manage corporate resources,
internal innovation, knowledge and capabilities to gain and use effectively and efficiently in the
achievement of the organizational targets (Pavlov and Bourne, 2007) and to achieve competitive
advantage (Pungboonpanich and Ussahawanitchakit, 2010). Prior researchers (e.g. Labodova, 2004;
Myhr and Spekman, 2002) reveal that efficiently planning, forecasting, and controlling have a strongly
positive impact on resource integration quality. In this study, we apply two dimensions of activity-based
cost management strategy as a strategy focuses on efficiently planning, forecasting and controlling cost
and production, and employ resource integration quality as a mediating variable of activity-based cost
management strategy on continuous performance improvement.

3.3 Intellectual Capital Advantage
Intellectual capital advantage (ICA) refers to the value of best practice of a real business asset, or
organizations employee knowledge, business training and any useful information that helps company
gain competitive advantage. Intellectual capital advantage is focused on value added of asset,
knowledge, and all information systems and resources of company to gain new customers, create new
products, or improve business over competitors such as human capital, information capital, alliances,
brand awareness and instructional capital (Agbejule and Saarikoski, 2006; Gupta et al., 2008). Prior
researches on cost accounting found that implementation of activity-based cost management can
enhance cost and profit information and also assist managers in understanding and evaluating how
resources are suitably used to create firms value-chains in delivering strategic outcomes and firm
performance such as customer satisfaction, return on investment and profitability (Cadez and Guilding,
2008; Krumweide, 1998). We apply this variable as a mediating variable of activity-based cost
management strategy on continuous performance improvement. Thus, the hypotheses are proposed as
follows:

Hypothesis 1a: The greater the cost management orientation is, the more likely that firms will
achieve more resource integration quality.

Hypothesis 1b: The greater the cost management orientation is, the more likely that firms will
achieve more intellectual capital advantage.

Hypothesis 2a: The greater the product planning focus is, the more likely that firms will achieve
more resource integration quality.

Hypothesis 2b: The greater the product planning focus is, the more likely that firms will achieve
more intellectual capital advantage.

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3.4 Continuous Performance Improvement
Continuous performance improvement (CPI) in this study is defined as firms effort to seek out continually
and apply new ways to enhance sustained performance in long-term. Continuous performance
improvement actually forces everyone in business either employees or managers to continue improving
themselves, in turn, resulted in economic benefits increase in four categories: improving stakeholder
confidence; management and firm performance; organization learning; and innovation assets (Holton et
al., 2010; Prempanichnukul and Ussahawanitchakit, 2010). Following the theoretical framework and prior
literature reviews, the hypotheses are proposed as follows:

Hypothesis 3: The greater the resource integration quality is, the more likely that firms will
achieve more continuous performance improvement.

Hypothesis 4: The greater the intellectual capital advantage is, the more likely that firms will
achieve more continuous performance improvement.

3.5 Organizational Communication
Organizational communication (OCM) in this study is defined as the process by which information
exchanged and understood by two or more people, usually with an intention to motivate or influence
behavior. It focuses on three dimensions: diverse communication implementation; openness and flexible
communication channel; and media utilization efficiency. The importance of organizational
communication relationships continues to be of an interesting topic (Jahanson et al., 2008) because it
helps managers achieve the goal, especially in increasing or reducing critical problems, giving information
or commitment. According to contingency theory, this research determines organization coordination as
the moderator of relationships among activity-based cost management strategy, resource integration
quality, and intellectual capital advantage include relationships among resource integration quality,
intellectual capital advantage, and continuous performance improvement. Hence, the hypotheses are
proposed as follows:

Hypothesis 5a: The greater the cost management orientation is, the more likely that firms with
higher organizational communication will achieve more resource integration quality.

Hypothesis 5b: The greater the cost management orientation is, the more likely that firms with
higher organizational communication will achieve more intellectual capital advantage.

Hypothesis 6a: The greater the product planning focus is, the more likely that firms with higher
organizational communication will achieve more resource integration quality.

Hypothesis 6b: The greater the product planning focus is, the more likely that firms with higher
organizational communication will achieve more intellectual capital advantage.

Hypothesis 7: The greater the resource integration quality is, the more likely that firms with higher
organizational communication will achieve more continuous performance improvement.

Hypothesis 8: The greater the intellectual capital advantage is, the more likely that firms with
higher organizational communication will achieve more continuous performance improvement.
3.6 Organizational Coordination
Organizational coordination (OCO) in this study focuses on goal sharing behavior of firms and it is
defined as the extent to which activities, people, routines, and assignments work together to accomplish
overall objects or activities and link together to different parts of an organization to accomplish a collective
set of task that leads toward common goals (Avadikyan et al., 2001; Lai, Wong, and Cheng, 2008).
According to the contingency theory, this research determines organization coordination as the moderator
of the relationships among activity-based cost management strategy, resource integration quality, and
intellectual capital advantage include relationship among resource integration quality, intellectual capital
advantage, and continuous performance improvement as same as organizational communication. Hence,
the hypotheses are proposed as follows:

INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 71




Hypothesis 9a: The greater the cost management orientation is, the more likely that firms with
higher organizational coordination will achieve more resource integration quality.

Hypothesis 9b: The greater the cost management orientation is, the more likely that firms with
higher organizational coordination will achieve more intellectual capital advantage.

Hypothesis 10a: The greater the product planning focus is, the more likely that firms with higher
organizational coordination will achieve more resource integration quality.

Hypothesis 10b: The greater the product planning focus is, the more likely that firms with higher
organizational coordination will achieve more intellectual capital advantage.

Hypothesis 11: The greater the resource integration quality is, the more likely that firms with
higher organizational coordination will achieve more continuous performance improvement.

Hypothesis 12: The greater the intellectual capital advantage is, the more likely that firms with
higher organizational coordination will achieve more continuous performance improvement.

4. RESEARCH METHODS

4.1 Sample Selection and Data Collection Procedure
In this study, the sample selection included 850 members of electronic firms in the Federation of Thai
Industries (F.T.I). A mail survey procedure via the questionnaire was used for data collection to examine
the relationships. The key informants were financial managers of these firms. With regard to the
questionnaire mailing, 51 surveys were undeliverable because of firms had moved to unknown locations
and some dismissed due to the flooding in 17 provinces of Thailand. Deducting the undeliverables from
the original 850 mailed, the valid mailing was 799 surveys, from which 238 responses were received. Of
the surveys completed and returned, 225 were usable. The effective response rate was approximately
28.16%. According to Aaker, Kumar and Day (2001), the response rate for a mail survey of this paper
with an appropriate follow-up procedure if greater than 20%, is considered acceptable.

The non-response bias was calculated by comparing the results of early and late respondents as
recommended by Armstrong and Overton (1977). Additionally, respondents were compared with non-
respondents in terms of sample characteristics, such as authorized capital of the company, firm tenure,
and number of employees. Non-response bias was investigated by t-test, and results were not
significantly different, indicating that non-response bias did not appear to be a problem in this paper.

4.2 Variables
To measure each construct in the conceptual model, all variables in table 1 are anchored by five-point
Likert scale, ranging from 1 (strongly disagree) to 5 (strongly agree) excluding control variables and show
numbers of items in order to tap each variable. Additionally, all constructs are developed for measuring
from definition of each constructs and examine the relationship from theoretical framework and prior
literature reviews. Thus, the variables measurement of dependent variable, independent variables, and
control variables of this study are described as follows:

4.2.1 Dependent Variable
The dependent variable in this paper is continuous performance improvement referred to in the prior
literature which consists of five items to assess four dimensions, namely the increasing outcomes from
financial and non-financial performance; creativity intellectual; market share; sales and after service; and
overall performance (Choe, 2004; Holton et al., 2010).

4.2.2 Independent Variables
This study considers six independent variables. Firstly, the core constructs two dimensions of activity-
based cost management strategy are cost management oriented and product planning focus. Following
literature reviews, cost management orientation is measured by ten items dealing with three categories:
cost driver fitness; cost calculation accuracy and cost information (Chenhall, 2004; Pungboonpanich and
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 72




Ussahawanichakit, 2010; Zaman, 2009). While, product planning focus is measured by eight items
dealing with three dimensions: pricing decision; production process decision; and product development
(Chenhall, 2004; Zaman, 2009).

Secondly, resource integration quality is measured by four items concerning the efficiency of financial and
non-financial resource utilization, material requirement planning, information network system and
alliances. Thirdly, product planning focus is measured by four items concerning with value added of
asset, knowledge, and all information systems and resources of company to gain new customers, create
new products, or improve business over competitors such as human capital, information capital, alliances,
brand awareness and instructional capital (Abhijeet and Gupta, 2010). Finally, the next two moderator
variables are organizational communication and organizational coordination. Both of them are measured
by three items.

4.2.3 Control variables
In this study, three control variables are considered. The first is firm size measured by operational capital
and represent as a dummy variable which 1 is firms with more operational capital than 25 million baht,
while 0 is otherwise. The second is firm tenure measured by years of firms operation and representing as
a dummy variable which 1 is firms with operation experiences more than 10 years, while 0 is otherwise.
The third is firm revenue measured by operation income per year and also representing as a dummy
variable which 1 is firms with operation income more than 25 million baht, while 0 is otherwise.

4.3 Methods
In this paper, factor analysis was implemented to assess the underlying relationships of a large number of
items, and conducted separately on each set of the items representing a particular scale due to limited
observations. This analysis are adopted by Nunnally and Bernstein (1994), all factor loadings were
greater than cut-off value was at 0.40 and were statistically significant. Reliability of the measurements
was evaluated by Cronbach Alpha Coefficients. In the scale reliability, Cronbach Alpha Coefficients are
0.76 - 0.88 as being greater than 0.70 (Nunnally and Bernstein, 1994). The scales of all measures appear
to produce internally consistent results. Hence, these measures are conceived appropriate for further
analysis because they revealed an accepted validity and reliability in this study. Table 1 presents the
results for both factor loadings and Cronbach Alpha for multiple-item scales used in this paper.

The ordinary least squares (OLS) regression analysis is used to test and examine the hypothesized
relationships among activity-based cost management strategies, which consist of cost management
orientation and product planning focus, resource integration quality, intellectual capital advantage, and
two moderators: organizational communication and organizational coordination, on continuous
performance improvement of electronic firms in The Federation of Thai Industries. The OLS regression
analysis is an appropriate method for examining the hypothesized relationships (e.g. Aulakh, Kotabe and
Teegen, 2000). With the interest of understanding the relationships in this study, the research models of
the aforementioned relationships are depicted as follows.

TABLE 1
RESULTS OF MEASURE VALIDATION

Items Factor Loadings Cronbach Alpha
Cost Management Orientation (CMO) 0.66-0.84 0.85
Product Planning Focus (PPF) 0.75-0.85 0.85
Resource Integration Quality (RIQ) 0.80-0.89 0.86
Intellectual Capital Advantage (ICA) 0.84-0.91 0.88
Organizational Communication (OCM) 0.86-0.91 0.79
Organizational Coordination (OCO) 0.90-0.94 0.84
Continuous Performance Improvement (CPI) 0.86-0.89 0.76

Equation 1: RIQ =
01
+
1
CMO +
2
PPF +
3
CAP +
4
FTE +
5
REV +
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 73





Equation 2: RIQ =
02
+
6
CMO +
7
PPF +
8
OCM +
9
CMO * OCM +
10
PPF * OCM
+
11
CAP +
12
FTE +
13
REV +

Equation 3: RIQ =
03
+
14
CMO +
15
PPF +
16
OCO +
17
CMO * OCO +
18
PPF * OCO
+
19
CAP +
20
FTE +
21
REV +

Equation 4: ICA =
04
+
22
CMO +
23
PPF +
24
CAP +
25
FTE +
26
REV +

Equation 5: ICA =
05
+
27
CMO +
28
PPF +
29
OCM +
30
CMO * OCM +
31
PPF * OCM
+
32
CAP+
33
FTE +
34
REV +

Equation 6: ICA =
06
+
35
CMO +
36
PPF +
37
OCO +
38
CMO * OCO +
39
PPF * OCO
+
40
CAP +
41
FTE +
42
REV +

Equation 7: CPI =
07
+
43
RIQ +
44
ICA +
45
CAP +
46
FTE +
47
REV +

Equation 8: CPI =
08
+
48
RIQ +
49
ICA +
50
OCM +
51
RIQ * OCM +
52
ICA * OCM
+
53
CAP +
54
FTE +
55
REV +

Equation 9: CPI =
09
+
56
RIQ +
57
ICA +
58
OCO +
59
RIQ * OCO +
60
ICA * OCO
+
61
CAP +
62
FTE +
63
REV +

5. RESULTS AND DISCUSSION

Table 2 presents the descriptive statistics and correlation matrix for all variables. The potential problems
relating to multicollinearity, variance inflation factors (VIFs) were used to provide information about their
correlation on the extent to which non-orthogonality among independent variables inflates standard
errors. The VIFs are ranged from 1.17 to 3.80, well below the cut-off value of 10 recommended by Neter,
Wasserman and Kutner (1985), meaning that the independent variables are found that there are some
correlations with each other over 0.80 score (Hair, 2010) which may have an effect on this problem.
However, there is no significant problems from the multicollinearity encountered after the VIFs testing in
this study.

TABLE 2
DESCRIPTIVE STATISTICS AND CORRELATION MATRIX

Variables CPI CMO PPF RIQ ICA OCM OCO CAP FTE REV
Mean 3.55 3.95 3.95 3.63 3.77 3.57 3.68 2.52 3.22 2.93
S.D. 0.66 0.60 0.66 0.64 0.69 0.70 0.72 1.09 0.93 1.02
CPI
CMO 0.59***
PPF 0.61*** 0.84***
RIQ 0.66*** 0.74*** 0.77***
ICA 0.69*** 0.73*** 0.74*** 0.82***
OCM 0.59*** 0.63*** 0.64*** 0.69*** 0.71***
OCO 0.60*** 0.69*** 0.69*** 0.70*** 0.76*** 0.81***
CAP 0.10 0.19*** 0.20*** 0.13 0.11 0.05 0.07
FTE 0.11 0.19*** 0.21*** 0.16** 0.10 0.07 0.06 0.35***
REV 0.19*** 0.23*** 0.22*** 0.18*** 0.13 0.15** 0.18*** 0.66*** 0.32***
***p<.01, **P<.05

INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 74




Table 3 shows the results of OLS regression analysis of the relationships among cost management
orientation, product planning focus, organizational communication, and organizational coordination on
resource integrated quality and intellectual capital advantage.

TABLE 3
RESULTS OF REGRESSION ANALYSIS
a

Independent
Variables
Dependent Variables
RIQ ICA
Model1 Model 2 Model 3 Model 4 Model 5 Model 6
CMO 0.32*** 0.23*** 0.21*** 0.42*** 0.36*** 0.29***
(0.13) (0.12) (0.13) (0.13) (0.12) (0.12)
PPF 0.50*** 0.39*** 0.38*** 0.40*** 0.29*** 0.25***
(0.08) (0.08) (0.08) (0.08) (0.08) (0.07)
OCM 0.30*** 0.28***
(0.05) (0.05)
OCO 0.31*** 0.39***
(0.06) (0.06)
CMO * OCM 0.09* 0.11**
(0.05) (0.05)
PPF * OCM -0.02 0.08*
(0.05) (0.05)
CMO * OCO 0.01 0.10*
(0.05) (0.05)
PPF * OCO -0.01 0.03
(0.06) (0.05)
CAP -0.06 -0.02 -0.02 -0.02 0.01 0.02
(0.11) (0.11) (0.11) (0.12) (0.11) (0.10)
FTE -0.01 0.01 0.02 -0.04 -0.01 0.00
(0.11) (0.10) (0.10) (0.11) (0.10) (0.10)
REV 0.04 0.02 0.00 -0.03 -0.05 -0.08
(0.11) (0.11) (0.11) (0.12) (0.11) (0.11)
Adjusted R
2
0.61 0.66 0.65 0.59 0.66 0.68
*p<.10, **p<.05, ***p<.01,
a
Beta coefficients with standard errors in parenthesis.

The first two hypotheses focus on the relationships among cost management orientation (CMO), product
planning focus (PPF) on resource integration quality (RIQ) and intellectual capital advantage (ICA). The
results of Hypotheses 1-2 have presented in Table 3. It indicates that cost management orientation in
Models 1-3 (H1a:
1
= 0.32, p<.01;
6
= 0.23, p<.01;
14
= 0.21, p<.01) and Models 4-6 (H1b:
22
=0.42,
p<.01
27
= 0.36, p<.01
35
= 0.29, p<.01), Product Planning Focus in Models 1-3 (H2a:
2
= 0.50, p<.01;
7
=
0.39, p<.01;
15
= 0.38, p<.01) and Models 4-6 (H2b:
23
=0.40, p<.01;
28
= 0.29, p<.01;
36
= 0.25, p<.01)
has a strong positively significant effect on RIQ and ICA. CMO has more strong impact than PPF in ICA,
but less impact in RIQ. It means that the greater the higher two elements (CMO and PPF) of activity-
based cost management strategy are, the more likely that firms will achieve more resource integrated
quality and intellectual capital advantage. Thus, Hypotheses 1a,b and 2a,b are supported.

Hypotheses 5-6 in Table 3, we test the interaction between independent variables (CMO and PPF) and a
moderator, organizational communication (OCM) on RIQ and ICA. The result of H5a shows the
interaction between CMO and OCM on RIQ (Model 2, H5a:
9
= 0.09, p<.10) and the result of H5b
indicates the interaction between CMO and OCM on ICA (Model 5, H5b:
30
= 0.11, p<.05). It indicates
that the greater the cost management orientation is, the more likely that firms with higher organizational
communication will achieve more resource integration quality and intellectual capital advantage. Thus,
Hypothesis 5 is supported. However, the result of the interaction between PPF and OCM on RIQ
(Model 2, H6a:
10
= -0.02, p>.10) is not supported, while the interaction between PPF and OCM on ICA
(Model 5, H6b:
31
= 0.08, p<.10) is supported. It means that the greater the intellectual capital advantage
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 75




is, the more likely that firms with higher organizational communication will achieve more only intellectual
capital advantage. Thus, Hypothesis 6 is partially supported.

In Models 3 and 6, we substitute organizational communication to organizational coordination and test the
interaction between independent variables (CMO and PPF) and organizational coordination, which are
also presented in Table 3. The result of H9a shows the interaction between CMO and OCO on RIQ
(Model 3, H9a:
17
= 0.01, p>.10), while H9b shows the interaction between CMO and OCO on ICA (Model
6, H9b:
38
= 0.10, p<.10). The result of H10a indicates the interaction between PPF and OCO on RIQ
(Model 3, H10a:
18
= -0.01, p>.10), while H10b indicates that the interaction between PPE and OCO on
ICA (Model 6, H10b:
39
= 0.03, p<.10). These findings reveal that there is a significant effect of the
interaction between CMO and OCO on ICA in H9b. Thus, Hypothesis 9 is a partially supported.
However, Hypothesis 10 is not supported. Additionally, we find the direct effect of organizational
coordination on resource integration quality (Model 3,
16
= 0.31, p<.01) and the direct effect on
intellectual capital advantage (Model 6,
37
= 0.39, p<.01). Additionally, we also find the direct effect of
organizational communication on RIQ (Model2,
8
= 0.30, p<.01) and the direct effect on ICA (Model 5,

29
= 0.28, p<.01).

TABLE 4
RESULTS OF REGRESSION ANALYSIS
a

Independent Dependent Variable (CPI)
Variables Model 7 Model 8 Model 9

RIQ 0.31*** 0.23*** 0.28***
(0.08) (0.09) (0.09)
ICA 0.42*** 0.34*** 0.32***
(0.08) (0.09) (0.09)
OCM 0.19***
(0.07)
OCO 0.15*
(0.08)
RIQ * OCM -0.08
(0.08)
ICA * OCM 0.08
(0.08)
RIQ * OCO -0.01
(0.07)
ICA * OCO 0.08
(0.07)
CAP -0.07 -0.06 -0.06
(0.13) (0.13) (0.13)
FTE -0.03 -0.02 -0.02
(0.12) (0.12) (0.12)
REV 0.13 0.11 0.10
(0.13) (0.13) (0.13)
Adjusted R
2
0.49 0.50 0.50
*p<.10, **p<.05, ***p<.01,
a
Beta coefficients with standard errors in parenthesis.

Table 4 shows the results of OLS regression analysis of the relationships among resource integrated
quality (RIQ), intellectual capital advantage (ICA), organizational communication (OCM), and
organizational coordination (OCO) on continuous performance improvement (CPI). Firstly, in Hypotheses
3 and 4, we test the relationships of RIQ and ICA on CPI respectively. The result indicates that RIQ in
Models 7-9 (H3:
43
= 0.31, p<.01;
48
= 0.23, p<.01;
56
= 0.28, p<.01) and ICA in Models 7-9 (H4:
44
=
0.42, p<.01;
49
= 0.34, p<.01;
57
= 0.32, p<.01) have strong positively significant effect on CPI. It
concludes that the greater the resource integration quality and intellectual capital advantage is, the more
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 76




likely that firms will achieve more continuous performance improvement. Thus, Hypotheses 3 and 4 are
strongly supported. It refers that activity-based cost management strategy has an impact on continuous
performance improvement through resource integration quality and intellectual capital advantage which
play a role as mediating variables.

Secondly, we test the interaction effect of RIQ and OCM and interaction effect of ICA and OCM, in
Hypotheses 7 and 8. The results indicate that the interaction effect of RIQ and OCM (H7:
51
= -0.08,
p>.10) and the interaction effect of ICA and OCM (H8:
52
= 0.08, p>.10) have no impact on CPI. Thus,
Hypotheses 7 and 8 are not supported.

Finally, we test the interaction effect of RIQ and OCO and the interaction effect of ICA and OCO on CPI in
Hypotheses 11 and 12. The results indicate that the interaction effect of RIQ and OCO (H11:
59
=-0.01,
p>.10), and the interaction effect of ICA and OCO (H12:
60
= 0.08, p>.10) have no impact on continuous
performance improvement. Thus, Hypotheses 11 and 12 are not supported. Both OCM and OCO have
no impact on the relationships among RIQ and ICA on CPI. However, we find that both OCM (in Model 8:

50
= 0.19, p<.01) and OCO (in Model 9:
58
= 0.15, p<.10) have a direct effect on CPI. Additionally, we
also utilize control variables, namely firm size (CAP), firm tenure (FTE), and operation income (REV) in
Models 1-9 for controlling the influence effect. However, the results indicate that there is no significant
effect of control variables in this study.

6. CONTRIBUTIONS AND DIRECTIONS FOR FUTURE RESEARCH

6.1 Theoretical Contribution and Directions for Future Research
This study is intended to provide a clearer understanding of the activity-based cost management
usefulness as business strategy to achieve performance improvement. This research also enriches the
previous literature on usefulness of activity-based cost management as a strategy for goal achievement.
This study measures activity-based cost management strategy based on prior literature as an indirect
effect on continuous performance improvement through mediating variables in uncertainty environment.
Prior research (e.g. Foster and Senson, 1997; Krumweide, 1998) reveals that activity-based cost
management as a useful strategy which is appropriate for manufacturing and service firms to enhance
their performance improvement. However, the success of implementation on activity-based cost
management strategy will impact on suitable of firms characteristic and structures (Foster and Swenson,
1997; Krumwiede, 1998, 2001; Malmi, 1997).

6.2 Managerial Contribution
This study also provides more contribution to firm owners and managers to settle decision making their
planning and control. Managers can apply the suitable level of relationships among activity-based cost
management strategy, cost management orientation and product planning focus, resource integration
quality, intellectual capital advantage, organizational communication, and organizational coordination to
the actual business situations and utilizing their resources and capabilities in order to achieve continuous
performance improvement.

7. CONCLUSION

The objectives of this study are to examine 1) the effects of activity-based cost management strategy on
continuous performance improvement through two mediators: resource integration quality and intellectual
capital advantage, and 2) to examine the effects of organizational communication and organizational
coordination as moderators on the relationships among activity-based cost management strategy,
resource integration quality, intellectual capital advantage, and continuous performance improvement of
electronic firms in the Federation of Thai Industries (F.T.I). Drawing on the work of Chenhall (2004);
Krumwiede, 1998; and Shield (1995), it explains about the relationships between activity-based cost
management and behavioral implementation factors, including business strategies and their usefulness
for implementation practices (cost management orientation and product planning focus). The results from
the sample of 225 financial managers of electronic firms are strong positively supported with the
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 77




hypotheses of relationships among activity-based cost management strategy, resource integration quality
and intellectual capital advantage on continuous improvement.

The interaction effects of organizational communication and organizational coordination on these
variables are partially positively supported. However, there are still mixed results on the role of
organizational communication and coordination. Reviewing of the literatures on organizational
communication emphasize the lack of empirical research into the communication of the change process
itself and the extent to which employees feel the change in communication effectively to them (Elving,
2005; Jones et al., 2004; Nelissen and Selm, 2008). Thus, organizational communication and
organizational coordination could play a role as an antecedent and a consequence when firms with long
period of operation could forecast the circumstance environment closely actual will utilize more
organizational communication and coordination to motivate employees to improve their tasks and
performances to achieve the goals (Lana and Fei, 2007). Additionally, organizational communication
focuses on openness and flexible communication channel; media utilization efficiency which
communicated firm information to related parties (e.g. suppliers, customers, alliances, regulators) for
understanding and decision making. Thus, organizational communication may play a role as an
antecedent, a consequence and a moderator of activity-based cost management strategy. While the
results of this study suggest that organizational coordination is more appropriate when play a role as an
antecedent of resource integration quality, intellectual capital advantage and continuous performance
improvement than a moderator. Because firms need to have well integrated system to ensure
sustainable controls by using their coordination to help planning and decision making and support their
goal targets (Malik et al., 2011), thus, it plays a role as a strategy tool to help the process directly in order
to achieve the target.

This study reveals both future research and limitations which future research should consider seeking to
explicitly verify the linkage between the aforementioned antecedents and continuous performance
improvement. It needs to resort to more antecedents and mediating variables to exhibit in the conceptual
model in order to increase the contributions and benefits of the study. Likewise, it requires for collecting
data from other samples to increase the level of reliable results and for the generalizability of theoretical
framework in the future.

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AUTHOR PROFILES:

Pitachaya Kaneko earned her M.B.A. from Kasetsart University, Thailand in 1998. Currently, she is a
Ph.D. (Candidate) in Accounting at Mahasarakham Business School, Mahasarakham University,
Thailand.

Dr. Phapruke Ussahawanitchakit earned his Ph.D. at Washington State University, USA in 2002.
Currently, he is an associate professor of accounting and Dean of Mahasarakham Business School,
Mahasarakham University, Thailand.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 82


STRATEGIES IMPLEMENTATION AND EVALUATION OF THAILAND PUBLIC SECTOR TO
IMPROVE PRIVATE SECTOR PERFORMANCE

Viput Ongsakul, National Institute of Development Administration (NIDA), Bangkok, Thailand


ABSTRACT

This survey research revealed the status of strategies implementation of public sector in Thailand aiming
to improve private sector performance. The research data is based on 905 samples which consist of two
parts. The first part is data from citizen evaluation, 755 samples, and the second part is from civil servant
evaluation, 150 samples. The model that we construct to evaluate strategies implementation of public
sector is based on 4 dimensions which are efficiency, competency, participation and governance. The
study reveals that efficiency and governance are most advance dimensions in strategies implementation
while competency and participation are less advance dimensions.

Keywords: Strategy, Strategy Management, Strategy Implementation, Strategy Evaluation,
Public Management, Private Sector Performance, Public Reform, New Public Management

1. INTRODUCTION

World Bank has done a study on the ease of doing business in each country and released report each
year from 2003 to present. The report has shown the rank of countries in 10 indicators: Starting a
Business, Dealing with Construction Permits, Getting Electricity, Registering Properties, Getting Credit,
Protecting Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, and Resolving
insolvency. Thailand was rank in top 20 for many years (World Bank, 2003-2011). Thai government set
target to move Thailand into Top 10 rank and has initiated strategies to reform government agencies to
serve better, faster, and cheaper. The reform strategies have been carried out by the Office of Public
Development Commissions (OPDC). The strategies aimed to improve efficiency of service process,
competency of civil servants, participation of citizens, and governance in administration. OPDC has set
four strategy implementations and created many projects and initiatives for each strategy.

The first strategy implementation was to improve overall efficiency of service process. The strategy
involved initiating two large-scale service improvements, the Service Links and Government Counter
Services. The Service Links acts as government gateway for handling requests requiring government
approvals or services such as home construction permit, work permit, firm permit, tax submission service,
social security service etc. Service Links are located in city center and sky train terminal providing a single
location to make inquiries or submit requests to various public agencies. The Government Counter
Services further increase convenience by locating service counters of public agencies that provide basic
service such as identification cards, household certificates, name change certificates, birth and death
certificates, passport, police reports for stolen wallet and losses of documents etc.

The second strategy implementation involved improve competency of civil servants. The competency
base management and Knowledge Management (KM) programs were started. The aims were to improve
the public servant ability and to provide more pay to qualified servants. Later, the organizational
restructure came in place, where the new structure is leaner by outsourcing some public works to efficient
providers. The new format of government agency such as Public Organization, Office of Commissioners
has been used for new type of government works. The young blood and talented people were recruited
and trained for 22 months in the PSED (Public Service Executive Development) program. After their
graduation, they were sent to work in strategic departments and provinces and qualified under the Fast
Track career path.

The third strategy implementation was to promote citizen participation in public policies and public works.
The Public and Private Partnership or PPP was formed. Its main objective was to champion
collaborations between government, businesses, NGOs in policy making and policy implementation. The
19 clusters initiative within provincial network collaboration was created, aiming to promote business
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 83


activities within and across provincial levels. The integrated provincial administration and the integrated
ministry administration were formed by area based and function based accordingly. They were managed
by joint key performance indicators (joint KPIs) as well as their own KPIs. The Peoples Audit for Thailand
(PATH) program was kicked off. The key emphasis was based on focusing on peoples need and
participation in public service in order to increase the understanding, satisfaction, and trust.

The forth strategy implementation was the adopting governance administration. The Royal Decree on
Good Governance was proclaimed, where as it has prescribed the criteria and procedures for good
governance. The government agencies are bound to follow the criteria and procedures for good
governance. The provincial good governance committees were created, where their roles were to monitor
provincial agency and make recommendations on improving public services to the governors.

After years of implementation, OPDC would like to know the results and progress. This research was set
by OPDC and founded by NIDAs Business School to evaluate and monitor progress as well as the result.
The research was based on survey of 905 samples consisted of two parts. The first part is citizen
evaluation, 755 samples and the second part is civil servant evaluation, 150 samples.

2. THE MODEL

The strategies implementation evaluation model is constructed base on four dimensions which are
efficiency, competency, participation, and governance (See Figure 1). In each dimension, the evaluation
has set to see the results of each initiative and activity by using Satisfaction Index. The Index is based on
Likert scale, which runs from one to five. One is least agree and five is most agree. There are five
question in efficiency dimensions, six questions in competency dimension, four questions in participation
dimension, and three questions in governance dimension. The method of the survey is based on quota
random sampling on two set of groups: The first group is civil servants (the service provider) and the
second group is citizen (the service receiver). The data collection has been set for 200 service provider
samplings and 800 service receiver samplings. The descriptive statistical analysis of each dimension is
used to see the average and compare the result with other dimension


FIGURE 1: STRATEGIES IMPLEMENTATION EVALUATION MODEL
























Efficiency
Governance
Competency
Participation
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 84


3. RESULTS

The response from the first group is 150 out of 200 (75% response rate) and the second group is 755 out
of 800 (94.37% response rate). The overall satisfaction index of the first group is 3.33 and the second
group is 3.07. The satisfaction index of each dimension for the first group and second group are shown in
Table 1 and Table 2 respectively.

TABLE 1: SATISFACTION INDEX FOR THE FIRST GROUP (CIVILSERVANTS)
SATISFACTION INDEX ON STRATEGIES IMPROVING IN AVERAGE
1. Efficiency 3.51
2. Competency 3.09
3. Participation 3.18
4. Governance 3.38
Overall 3.33

TABLE 2: SATISFACTION INDEX FOR THE SECOND GROUP (CITIZENS)
SATISFACTION INDEX ON STRATEGUES IMPROVING IN AVERAGE
1. Efficiency 3.14
2. Competency N/A
3. Participation 2.92
4. Governance 2.86
Overall 3.07

The t-test two samples with 95% confident interval shows that there is no significant difference in
Satisfaction Index among two groups. It means that these two groups of responds answered are
homogenous response and can be combined. The next tests are based on comparing between each pair
of parameters to see the differences between Satisfaction Index using t-test with 95% confident interval
and the results are shown in TABLE 3.

TABLE 3: HYPOTHESIS TESTING BETWEEN PAIR OF PARAMETERS

Pair of
Parameters
Confident Level p-value Results
Efficiency and
Competency
95% 0.972 Cannot reject the hypothesis of no
differences between two parameters
Efficiency and
Participation
95% 0.001 Reject the hypothesis of no differences
between two parameters
Efficiency and
Governance
95% 0.001 Reject the hypothesis of no differences
between two parameters
Competency and
Participation
95% 0.001 Reject the hypothesis of no differences
between two parameters
Competency and
Governance
95% 0.001 Reject the hypothesis of no differences
between two parameters
Participation and
Governance
95% 0.795 Cannot reject the hypothesis of no
differences between two parameters


From the t-test results, we can see that there are no statistical differences between efficiency and
competency, participation and governance. But there are statistical differences between efficiency and
participation, efficiency and governance, competency and participation, competency and governance.
Therefore, the efficiency and competency can be classified as one group and participation and
governance are in one group. It means that people (citizens and civil servants) see the same results from
strategies implementations in efficiency and competency, participation and governance, but see the
different result between group of efficiency and competency and group of participation and governance.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 85


4. DISCUSSION

The response from the survey confirmed that there are more satisfaction in strategies results in efficiency
and competency than participation and governance. Thai Government needs to continuously improve
efficiency of public service to maintain satisfaction level because citizens now expect a similar quality of
service from both the public and private sectors (Jackson, 2001). With the shift in expectations, public
agencies are generally faced with constant demand for improvement, especially in the areas of efficiency
and quality (Wilson et al., 2001; and Finn and Thomas, 2008). To increase the level of service quality,
empowerment of staff, and participation of citizens, all of which are essential for sustaining future
improvements in service delivery (Foley, 2008). Therefore competency development and participation are
the keys to improve government service, but Thai Government doing a good job in competency
development and need improvement in participation. Finally, given the trends in urbanization and life-
styles or living culture of city dwellers (who simply have no time to skip work to contact public agencies
during the weekdays), any initiative for service improvement must address these issues (Vos and
Westerhoudt, 2008).

Thai Government needs to recognize the difference between lifestyle of urban citizen and rural citizen and
response in providing public service differently. In order to have the difference service standard for urban
and rural citizen, the different in service standard should still be good difference. Therefore the need to
improve governance within the public agency is important.

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INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 86


World Bank, Doing Business 2009, A copublication of the World Bank and the International Financial
Corporation, Washington DC, 2008.

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and the International Financial Corporation, Washington DC, 2009.

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World Bank and the International Financial Corporation, Washington DC, 2010.

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World Bank and the International Financial Corporation, Washington DC, 2011.


AUTHOR PROFILE:

Dr. Viput Ongsakul is an assistant professor at the Graduate School of Business Administration, National
Institute of Development Administration (NIDA) in Bangkok, Thailand. He is currently Director of Ph.D.in
Business Program and Area Coordinator for the Operations Management Department. He obtained a
Bachelor of Engineering from Chulalongkorn University, Bangkok, Thailand. He also has a Ph.D. and an
M.SC. in Industrial Engineering/Operations Research from Texas Tech University, U.S.A.




INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 87
COMPETITIVE ADVANTAGE IN THAI SERVICE BUSINESSES:
INVESTIGATING THE EFFECTS OF ORGANIZATIONAL DESIGN EFFECTIVENESS

Anirut Pongklee, Mahasarakham University, Thailand
Sakcharoen Pawapootanont, Mahasarakham University, Thailand

ABSTRACT

This paper to examines the role of organizational design effectiveness that affects service marketing
image, specialize human capital, and firm performance. In addition, the researchers explore the key
antecedents of organizational design effectiveness that include three factors of competence development
in business relationship, customer induced uncertainty and technological opportunity. The model is tested
using data collected from mail survey of 149 companies from hotel businesses in Thailand. The results
indicate partial support for the hypotheses derived from the conceptual model. Thus, contribution and
suggestions are also provided for future research.

Keywords: Organizational Design Effectiveness, Service Marketing Image, Specialize Human Capital,
Firm Performance, Competence Development in Business Relationship, Customer Induced Uncertainty,
and Technological Opportunity

1. INTRODUCTION

This research takes a strategic perspective and proposes a model based on the resource-based view
(RBV) of the firm linking organizational design effectiveness to their consequences. RBV is employed for
better understanding how and why firms gain and sustain competitive advantage. This perspective
emphasizes performance differences based on firm heterogeneity. Firms vary in their unique bundles of
resource and in the capabilities derived from such resources. Resources that are valuable, unique and
difficult to imitate can provide the competitive advantage (Barny, 1991). The RBV suggests that an
industry may be heterogeneous in terms of the resources they control and these resources are
imperfectly mobile across firms (Barney, 2001). This intrinsically suggests that resources are valuable in
and of themselves, impulse the selection of strategy and that competitive advantage is derived through a
combination of unique organizational resources to enhance business competition in the competitive
intensity markets (Hamel and Prahalad, 1994). Truly, RBV is applied for two reasons: firstly,
organizational design effectiveness is a valuable resource of firm because of it is the firm culture to create
and commit to integrate marketing activity to every function of firm that generates good coordination and
enhances customer value. Lastly, organizational design effectiveness becomes a unique resource of firm
that it cannot be easily imitated by rivals because these activities are more complex and take time of
accumulating this capability. Thus, RBV is more appropriate to derive the conceptual model of this
research.

Research field of strategic management focus on configuration paradigm that provides and modified
organisational structure will enhance firm competitiveness. Prior research on organizational design is
different in the aims of the study and lacks serious investigation in the construct. Gebauer et al., (2010)
explore the patterns of service strategy changes in manufacturing firms and indicate how each pattern is
interrelated with modifications in organizational design elements. Homburg et al., (2000) described a
range of dimensions such as structure, coordination, culture, and power that allow comparisons of
organizations. Chowdhurya, and Miles, (2006) examined the unique design characteristics of service
organizations that focus on the factors predicted organizational design choices. Moreover, prior
investigations remain less information and lack empirical study of organizational design effectiveness in
terms of organizational resource that can provide firm performance.

The organizational design effectiveness literature signals that lack of the few academics exist with a
systematic empirical research for the effects of organizational design effectiveness on service marketing
image, specialize human capital, and firm performance. This research directly addresses this important
knowledge gap by advancing and testing the notion of organizational design effectiveness. This research
has theoretical contribution that encompasses the resource-based view of the firm and adds up the
literature of organizational design effectiveness in terms of practitioners intent.
Therefore, the primary objective of this research is to investigate the relationships among organizational
design effectiveness, service marketing image, specialize human capital, and firm performance. The final
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 88
is to empirically investigate the role of competence development in business relationship, customer
induced uncertainty and technological opportunity on organizational design effectiveness. The remaining
part of this study is structured as follows. First, the relevant literature on all construct is reviewed. Second,
the research method of the study is detailed. Third, the results of the empirical study are discussed.
Finally, the study ends with theoretical and managerial contributions, suggestions for future research and
conclusion.

2. RELATION MODEL AND HYPOTHESES

The conceptual framework is drawn from a review of existing organizational design effectiveness. This
conceptual framework attempts to investigate the relationships among organizational design
effectiveness, service marketing image, specialize human capital, and firm performance. Then, this study
attempts to investigate the antecedence organizational design effectiveness that includes competence
development in business relationship, customer induced uncertainty and technological opportunity. This
model is based on the resource-based view, as shown in Figure 1 below.

2.1 Organizational Design Effectiveness
Organizational design effectiveness refers the capacity to produce a strong a formal, guided process for
integrating the people, information, and technology of organization that used matches the form of
organization as closely as possible to the purpose the organization seek to achieve. The organizational
design concept is based on managerial decisions about the service orientation of human resources,
organizational structure, and service process development (Gebauer, et al. 2009). Thus, this is
organizational culture that are provides major decisions about align their organizational design with
service strategy changes. Organizational design effectiveness s focuses on the concept of strategic
change in service orientation towards the realigning and establishing business structure, process, and
human capital that are integrated and committed to the continuous creation of unique value for
customers.

Organizational design effectiveness is culture and a key variable in the enhancement of organizational
performance (Gebauer, et al. 2009) that becoming a source of sustained competitive advantage (Barney,
1991). To survive in turbulence of external environment organizations must be able to cope with
increasing complexity and high-speed change (Brown and Eisenhard, 1995). In these contexts,
companies with the capacity to innovate the organizational design will be able to respond to challenges
faster and to exploit new products and market opportunities (Miles and Snow, 1997). Murphy and Wang,
(2006) suggest that when firm are integrated organizational functions, the service marketing in many firm
functions is orientated to the long term growth. The goal is to deliver long-term value to customers, and
the measure of success is long-term customer satisfaction. Then, the development of services firm
corresponds with the alterations in resources, structure, measurement and performance, and processes
that are provide and enhance human capital in the organization (Neu and Brown, 2005). Capabilities of
integrated organizational function allow firms to develop flexible strategies by effectively coordinating and
consuming their process, technology and human resources in order to enhance firm performance
(Rodoula et al., 2010) Therefore, the hypotheses are posited as follows:

Hypothesis 1a: Organizational design effectiveness has a positive effect on service marketing image.

Hypothesis 1b: Organizational design effectiveness has a positive effect on specialize human capital.

Hypothesis 1c: Organizational design effectiveness has a positive effect on firm performance.

2.2 Service Marketing Image
Service marketing image refers to positive attributes of the service marketing including expertise,
trustworthiness, attractiveness and power that are convince customer interest. Image is generally
conceived of as the outcome of a transaction whereby signals discharged by a service marketing
department are acquired by a receptor and organized into a mental perception of the sending unit (Stern,
B. et al., 2001). Corporate image is more involved in the service industry, which is conditioned by service
features: intangibility, inseparability, heterogeneity, and perishability (Davies , 1996).
Lehtinen and Lehtinen (1991) argue that the corporate images are positive relationship with service
quality. According to Gronroos (1990) Firm image makes an important dimension of service quality.
Image is considered to be an outcome of a service functional and technical quality. Marketing image is
the most significant factor in the customers quality perception (Lehtinen and Lehtinen 1991). Barich and
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 89
Kotler (1991) identify groups of elements stipulating marketing image: selling power, channels of
distribution, communication, service, promotion, price, product or service. This marketing value can
increase firms protability through higher customer life time value (Rust et al., 2004) and affecting sales
growth and market share through customer attitudes toward brands and services and customer
satisfaction to cultivate lifetime customer loyalty. Therefore, the hypothesis is posited as follows:

Hypothesis 2: Service marketing image has a positive effect on firm performance.


FIGURE 1
COMPETITIVE ADVANTAGE IN THAI SERVICE BUSINESS: INVESTIGATING
THE EFFECTS OF ORGANIZATIONAL DESIGN EFFECTIVENESS







2.3 Specialize Human Capital
Specialize human capital refers the unique capabilities, experiences, knowledge and skills of the workers
that match core competency of organization. Employee abilities and experiences are largest capital of the
modern firms (AL-Ma'ani and Jaradat, 2010). Accordingly, service organizations began to take the issue
of building the specialize human capital, the importance it earns, by focusing on organizational process,
which build and support creativity, and through employee development, to secure its vitality and
effectiveness that are encouraging creativity and service innovation. The literature does suggest a
positive effect of human resource management on firm performance. Human capital allows the company
to develop capabilities that enhance innovation and that innovation is what positively affects performance
(Hurley and Hult, 1998). Specialize human capital is similar to firms intangible assets that provide
organizational competency such as new service process and more effective communication and retention
program with customer. Thus, this capability can serve as a source of firm performance and provide
competitive advantage (Hunt and Morgan 1995). Therefore, the hypothesis is posited as follows:

Hypothesis 3: Specialize human capital has a positive effect on firm performance.

2.4 Competence Development in Business Relationship
Competence development in business relationship refers to the extent to which a firm develops it
competencies through adapting with customer and competitors action in the organizational environment.
Nowadays, service firm confront change in the buying behavior of customer that is the substantial
increase in the buying power of the customers. In addition, Besides, Firm face to excellently competitors
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 90
that shown new and powerful strategy and action to business competition (Kotler and Keller, 2009). Thus,
business in modern economic cant ignore the customer and competitor action that are affecting firm
operation, performance and competitive advantage. The ability to respond to change of customer and
competitor has been found to positively impact organization strategy and firm performance. Competence
development in business relationship means that a firm can instantaneously prepare for operational
change and volatile customer demands (Stank and Lackey, 1997) that provide and improve the new
process, technology and human capital development. Therefore, the hypothesis is posited as follows:

Hypothesis 4: Competence development in business relationship has a positive effect on organizational
design effectiveness.


2.5 Customer Induced Uncertainty
Customer induced uncertainty refers to the vagueness that arises from customer diversity, opportunism,
and interactions to an organization (Chowdhurya and Miles, 2006). Nowadays, many firms confront more
complex external environment. In the emerging era of continuous innovative production and service, all of
business firm will increasingly need to involve customers in organizational activities (Miles et al., 1997).
As the interaction diversity of the customer profile of such an organization increases that are increasing
the mutability of demand (Tansik, 1990). Thus, customer diversity potentially presents a high level of
mutability into the organizational process (Skaggs and Youndt, 2004). A highly diverse and complex
customer base requires organizational agents and staff to continually adjust their approach to completing
transactions. Organizations with highly diverse customers demand will therefore have trouble in
forecasting activities to prosperously complete business activities and transactions (Bowen and Jones,
1986). Customer-induced uncertainty provides a more inclusive means of understanding and improves
organizational design (Chowdhurya and Miles, 2006). Correspondingly, increased customer induced
uncertainty will force businesses to adopt strategic management paradigm or firms capability that
enables streamlined creation of new structure, process, and capability of organization staff for customers.
It enhances information to gain access, provides new process of business services, and improves
delivery superior services. Therefore, the hypothesis is posited as follows:

Hypothesis 5: Customer induced uncertainty has a positive effect on organizational design effectiveness.

2.6 Technological opportunity
Technological opportunity refers to the extent to which the opportunities related to technology for
business operation. Technological opportunities provide success of radical innovations, in introducing
new technological and resource opportunities (Fai, 2007) that are prepare resource or input for
organizational design process. New technology improves firm architecture that provides more efficiently
organizational facilities. Then, these opportunities promote human competency development that effect
firm competitive advantage. Mitchell and Singh, (1996) has shown that discoverers of technological
opportunities can access resources for exploitation most effectively through collaboration that provide
process of knowledge management between partner. The importance of synergies of knowledge is
apparent in evident to strategic integration (Geringer, 1988). Besides, technological opportunity influences
the productivity of research and development (Klevorick et al. 1995). Correspondingly, increased
technological opportunities will provide and force businesses to adopt businesss structure and process
that enables streamlined creation of new organizational design. It improves delivery superior services.
Therefore, the hypothesis is posited as follows:

Hypothesis 6: Technological opportunity has a positive effect on organizational design effectiveness.




3. RESEARCH METHODS
3.1 Sample
The suggested research model was tested with data obtained from a random sample of 630 companies
from hotel businesses in Thailand. This study focuses on CEOs and top executive as target respondents.
A questionnaire was sent to each respondent along with a cover letter and a postage-paid return
envelope. The final sample consisted of 149 usable responses resulting in a response rate of 23.65%
which is considered acceptable.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 91

No non-response bias was found since there were no differences between the mean responses of the
first and the last quartiles (Armstrong and Overton (1977). In this study, respondents were compared with
non-respondents in terms of sample characteristics, such as total assets and authorized capital of the
company. To test for non-response bias, the data for the early respondents as the first-wave
questionnaire and late respondents were compared (Churchill, 2006). The rationale was that late
respondents are more akin to non-respondents than those early ones. Non-response bias was
investigated by t-test, and results found no significant differences, indicating that non response bias did
not appear to be a problem in this investigation.


3.2 Variable Measurements
To measure of independent variables, mediating variables, dependent variables, moderating variable and
control variables are detailed as follows. The measurements used in this research were on a 5- point
Likert-type scale (where: 1 = strongly disagree; 2 = disagree; 3= undecided; 4 = agree; 5 = strongly
agree).The variables in this research were measured with multiple-item scale and based on previous
research and literature review.

The independent variable, as organizational design effectiveness, was measured by six items, which
relate to the capacity to produce a strong a formal, guided process for integrating the people, information,
and technology of organization. As for, the mediator variables; Service marketing image was measured
by five items, which were positive attributes of the service marketing including expertise, trustworthiness,
attractiveness and power that are convince customer interest. Specialize human capital was measured
by four items, which related the unique capabilities, experiences, knowledge and skills of the workers that
match core competency of organization; competence development in business relationship was
measured by five items, which indicates the extent to which a firm develops it competencies through
adapting with customer and competitors action in the organizational environment. Customer induced
uncertainty was measured by four items which indicates the vagueness that arises from customer
diversity, opportunism, and interactions to an organization. Technological opportunity was measured by
five items which indicates the opportunities related to technology for business operation. Technological
opportunities provide success of radical innovations, in introducing new technological and resource
opportunities. For the dependent variable as firm performance was measured by six items adapted from
Troilo et al., (2009). Also, the control variables were also likely to affect the relationships as firm age
because different age may present different organizational attributes and resource deployment (Chen and
Huang, 2009) which may behave differently in firm performance. Therefore, this study consists of this
variable as control variables to measure possible effects. This study defines firm age as the number of
years the firm has been established.

3.3 Reliability and Validity

TABLE 1
RESULTS OF MEASURE VALIDATION

Variables Factor Loadings Cronbach's Alpha
Organizational Design Effectiveness (ODF) 0.852-0.883 0.889
Service Marketing Image (SMI) 0.737-0.898 0.707
Specialize Human Capital (SHC) 0.542-0.961 0.809
Firm performance (FPM) 0.725-0.947 0.824
Competence Development in Business Relationship (CDR) 0.803-0.864 0.857
Customer Induced Uncertainty (CIU) 0.920-0.925 0.919
Technological Opportunity (TNO) 0.634-0.876 0.807

Reliability of each construct was evaluated using the coefficient or Cronbachs Alpha. The reliability of
each construct was higher than the cut-off value of 0.70 as recommended by Nunnally and Bernstien,
(1994). In the scale reliability, Cronbachs alpha coefficients are 0.707-0.919 as being greater than 0.70.
The scale of all measures is internally consistent with the results. Factor analysis is employed to test the
validity of data in the questionnaire. Items are used to measure each construct extracted to be one only
principal component. Factor loading for each construct presents a loading value higher than 0.4. All factor
loadings are 0.542-0.961 as being greater than the 0.4 cut-off and are statistically significant. That is,
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 92
factor loading of each construct should not be less than 0.4 (Nunnally and Bernstien, 1994). The scales of
all measure are internally consistent with the results. Hence, these measures are deemed appropriate for
further analysis because they revealed an accepted validity and reliability in this study. Table 1 on
previous page shows the results of both factor loadings and Cronbachs Alpha for multiple-item scales
used.

3.4 Statistical Technique
The multiple regression analysis is used to test the hypotheses relationships among organizational design
effectiveness, service marketing image, specialize human capital, and firm performance. Then, this study
attempts to investigate the antecedence organizational design effectiveness that includes competence
development in business relationship, customer induced uncertainty and technological opportunity. In this
research, the models of the aforementioned relationships are depicted as follows.

Equation 1: SMI =
01
+
1
ODF +
2
FA +
Equation 2: SHC =
02
+
3
ODF +
4
FA +
Equation 3: FPM =
03
+
5
ODF +
6
SMI +
7
SHC +
8
FA +
Equation 4: ODF =
04
+
9
CDR +
10
CIU +
11
TNO +
12
FA +

4. RESULTS AND DISSCUSSION

Table 2 shows the correlation matrix for all variables. Variance inflation factors (VIF) were used to check
potential problems relating to multicollinearity, which non-orthogonally among independent variables
inflates standard errors. The VIFs range from 1.07 to 2.79 well below the cut-of value of 10 recommended
by Neter et al., (1985).Thus, they did not correlate with each other between independent variables.
Hence, there are no substantial multicollinearity problems encountered in this study.

TABLE 2
RESULTS OF CORRELATION MATRIX

Variables ODF SMI SHC FPM CDR

CIU
ODF 1.00
SMI -0.457 1.00
SHC 0.632* -0.405* 1.00
FPM 0.747* -0.308* 0.773* 1.00
CDR -0.244* -0.082 -0.098 -0.035 1.00
CIU
-0.221* 0.057 -0.394* -0.363* 0.012 1.00
TNO
0.626* -0.193* 0.865* 0.859* -0.239* -0.285*
** p < .05, *** p < .01, Correlation is significant at the 0.01 level (2-tailed)

Table 3, in Model 1, shows the results of the relationships between organizational design effectiveness
and service marketing image in H1a. The results indicate that between organizational design
effectiveness has a negative effect on service marketing image (b
1
= -.279, p < .01). Therefore,
Hypothesis H3 is not supported. The finding is inconsistent with Rodoula et al., (2010) suggesting that
capabilities of integrated organizational function allow firms to develop flexible strategies. The marketing
image is positive perception of customer that is more long time to build this competitive advantage. Thus,
service firm are concentrate the organizational change effectiveness that use effort to realigning process,
technology and staff capability. Then, marketing image of service firm can be dropped. Therefore,
Hypotheses H1a is not supported. Beside, Table 3, in the Model 2, shows the results of the relationships
between organizational design effectiveness and specialize human capital in H1b. The results indicate
that organizational design effectiveness has a positive effect on specialize human capital (b
3
= .780, p <
.01). Neu and Brown (2005) argue that the development of services firm corresponds with the alterations
in resources, structure, measurement and performance, and processes that are provide and enhance
human capital in the organization. Therefore, Hypothesis H1b is supported. Moreover, Table 3, in Model
3, shows the results of the relationships between organizational design effectiveness and firm
performance in H1c. The results indicate that organizational design effectiveness has a positive effect on
firm performance (b
5
= .320, p < 0.01). The finding is consistent with Rodoula et al., (2010) suggesting
that firms with higher organizational design effectiveness tend to integrate the technology, processes, and
activities that promote the continuous creation of superior value for customers that enhance firm
performance. Therefore, hypothesis H1c is supported. Table 3, in model 3, shows the results of the
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 93
relationships among service marketing image, specialize human capital and firm performance are in H2,
and H3. The results indicate that service marketing image has a positive effect on firm performance (b
6
=
.152, p < .01). This result implies thats firms that are more marketing image value can increase firms
profitability through higher customer life time value (Rust et al., 2004) and affecting sales growth and
market share through customer attitudes toward brands and services and customer satisfaction to
cultivate lifetime customer loyalty. Therefore, Hypothesis H2 is supported. Then, the results indicate that
specialize human capital has a positive effect on firm performance (b
7
= .493, p < .01). This result implies
that firms are to develop existing and potential human capital with regard to the unique services. Hurley
and Hult, (1998) argue that human capital allows the company to develop capabilities that enhance
innovation and that innovation is what positively affects performance. Therefore, Hypothesis H4 is
supported.

TABLE 3
RESULTS OF REGRESSION ANALYSIS


Independent Variables

Dependent Variables
SM SHC FPM OD
Model Mode Mode Mode
Organizational Design Effectiveness (ODF) -.279 .780* .320*
(.076 (.067 (.056
Service Marketing Image (SMI) .152*
(.04
Specialize Human Capital (SHC) .493*
(.053
Competence Development in Business Relationship (CD .210*
(.06
Customer Induced Uncertainty (CIU) .043
(.050
Technological Opportunity (TNO) .743*
(.053
Firm Age (FA) -.77 -.64 .234* .245*
(.153 (.134 (.099 (.093
Adjusted R
2
.318 .475 .722 .673
* p < .10, ** p < .05, *** p < .01, Bata coefficients with standard error in parenthesis

Table 3, in model 4, shows the results of the relationships among competence development in business
relationship, customer induced uncertainty and technological opportunity and organizational design
effectiveness in H5, H6, and H7. The results indicate that competence development in business
relationship and technological opportunity have a positive effect on organizational design effectiveness
(b
9
= .210, p < .01; b
11
= .743, p < 0.01). The relationships may be explained as when firms confront the
situation of more new customer capability and information technology growth. The ability to respond to
change of customer and competitor has been found to positively impact organization strategy and firm
performance. Competence development in business relationship means that a firm can instantaneously
prepare for operational change and volatile customer demands (Stank and Lackey, 1997) that provide
and improve the new process, technology and human capital development. Correspondingly, increased
customer induced uncertainty will force businesses to adopt strategic management paradigm or firms
capability that enables streamlined creation of new structure, process, and capability of organization staff
for customers. It enhances information to gain access, provides new process of business services, and
improves delivery superior services. Therefore, Hypothesis H5 and H6 are supported. Then, the results
indicate that customer induced uncertainty have a positive effect on organizational design effectiveness
(b
10
= .043, p > .05). Therefore, Hypotheses H5 are not supported.

5. CONTRIBUTIONS AND DIRECTIONS FOR FUTURE RESEARCH

5.1 Theoretical contribution and directions for future research
This study contributes to marketing literature in several aspects. First, this investigation empirically
verifies the theoretical tenets of RBV theory that resources and capabilities produce different performance
results depending on the complex process in which a rm integrates organizational design effectiveness.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 94
Second, this research fulfils the gap of a systematic empirical research on the effects of organizational
design effectiveness. The research results provide information for strategic management research field
that initiates to test the concept of organizational design effectiveness. Previous research on the role of
configuration concept in the capability of organizational design effectiveness has not taken into explicit
consideration the complementary contribution of the business firms. However, this investigation has
several limitations that should be mentioned. The first, this study used questionnaire to collect data by
mail survey. Thus, the empirical validity may be biased. Future research should attempt to overcome the
limitations of this research. One key point is based on small sample size because the sample this
research are Thai listed firms. In a sense, the result can be considered as a starting point for
investigations in other industry for future research. Therefore, future research needed to collect data from
larger sample in order to increase reliability and valid generalization. On the other hand, in order to
examine the effect of organizational design effectiveness on company performance, future research
should also use longitudinal studies. As organizational learning and innovation processes require some
time to affect performance.

5.2 Managerial contribution
Besides theoretical implications, the study has several managerial implications. The general implication is
that managers should be aware that emphasizing on organizational design effectiveness requires
changes in the company's process, managerial technology as well as employee's viewpoints and
behaviours. Therefore, an organization hoping to enhance corporate performance through organizational
design effectiveness should improve its human development processes. Some recommendations in this
line are the following. First, firms should promote the acquisition of new capability, for example by making
managerial polity attend consolidating the development of new technology within the firm. Second, they
should enhance the new unique process of service work that is interpreted within the firm. Thirdly, firms
should try to continuously develop human resource.

6. CONCLUSION

The purpose of this study is to investigate the influences of organizational design effectiveness, service
marketing image, specialize human capital, and firm performance. In addition, this study attempts to
investigate the antecedence organizational design effectiveness that includes competence development
in business relationship, customer induced uncertainty and technological opportunity on organizational
design effectiveness in Thai service businesses. The results reveal that organizational design
effectiveness is significantly and positively related to specialize human capital, and firm performance.
Moreover, marketing value driven, and customer insight are significantly and positively related to firm
performance. Furthermore technological opportunity is significantly and positively related to
organizational design effectiveness.

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AUTHOR PROFILES:

Dr. Anirut Pongklee earned his Ph.D. from Mahasarakham University, Thailand in 2010. Currently, he is
a lecturer of marketing at the Faculty of Accountancy and Management, Mahasarakham University,
Thailand.

Sakcharoen Pawapootanont earned his Master of Business Administration from the University of
Ottawa, Canada in 1988. Currently, he is a lecturer of management at Faculty of Accountancy and
Management, Mahasarakham University, Thailand.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 97




ROLES OF RISK MANAGEMENT STRATEGY IN GOAL ACHIEVEMENT:
EVIDENCE FROM THAI LISTED FIRMS

Sutika Rukprasoot, Mahasarakham Business School, Mahasarakham University, Thailand
Phapruke Ussahawanitchakit, Mahasarakham Business School, Mahasarakham University, Thailand


ABSTRACT

This study aims at investigating the impacts of risk management strategy on goal achievement through
mediating influences of internal control efficiency, operational value increase and organizational resource
exploitation and moderating effects of environmental complexity. Risk management strategy consists of
(1) identifying events and circumstances relevant to an organization's achievement of its goals and
objectives (IE); (2) assessing these events and circumstances in terms of likelihood and magnitude of
impact (AE); (3) determining a strategy for responding to the identified threat or opportunity (DS); and (4)
monitoring the subsequent evolution and impact of the events (ME). 128 information Thai Listed firms
were chosen as the sample of the study. The results present that AE and DS have a significant positive
influence on internal control efficiency, operational value increase and organizational resource
exploitation. Inversely, ME has a negative influence on operational value increase, organizational
resource exploitation, especially it has a significant negative influence on internal control efficiency.
However, IE has no influence on internal control efficiency operational value increase, organizational
resource exploitation. Likewise, operational value increase and organizational resource exploitation have
a potential positive influence on goal achievement while internal control efficiency has no relationship with
goal achievement. Thus, further study may consider finding practical reasons why it is so by reviewing
extensive literature. Potential discussion with the research results is effectively implemented in the study.
Theoretical and managerial contributions are explicitly provided. Conclusion and suggestions and
directions for the future research are highlighted.

Keywords: Risk Management Strategy, Internal Control Efficiency, Operational Value Increase,
Organizational Resource Exploitation, Environmental Complexity, Goal Achievement

1. INTRODUCTION

Nowadays, environmental uncertainty has been increasing rapidly making firms adapt their competitive
advantage. The possibility of the outcome needs to identify uncertainties, estimate their impact, analyze
their interactions, and control them by risk management strategy so as to deal with it for goal
achievement. Risk management has become a main part of the firms activity and it main aim is to help all
other management activities reach its aim directly and efficiently (Tchankom, 2002). Similarly, risk
management is a strategy to increase the value management function (Gupta, 2011). Recently, risk
management strategy has been likely to become a main driver that influences improved business
outcomes, such as efficiency, effectiveness, performance, and goal achievement.

However, fewer organizations had real all-encompassing risk management strategy (Tchankom, 2002).
Adequate basic system and service is not available in companies for implementing enterprise wide risk
management (Gupta, 2011). Effective risk management can improve organizational performance. Risk
management strategy helps firms achieve their goals. It is a framework that entails the following: (1)
identifying events and circumstances relevant to an organization's achievement of its goals and
objectives, (2) assessing these events and circumstances in terms of likelihood and magnitude of impact,
(3) determining a strategy for responding to the identified threat or opportunity, and (4) monitoring the
subsequent evolution and impact of the events (Arnold et al., 2011).

To expand and increase the benefits and advantages of the risk management strategy on the goal
achievement relationships, internal control efficiency, operational value increase, and organizational
resource exploitation are hypothesized to become mediators and environmental complexity as a
moderator of the relationships. The importance of risk management strategy has managed the firms by
integrating strategic planning, operations management, performance management and internal control.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 98




To identify and proactively address risks and opportunities, organizations create value for shareholders
(Arnold et al., 2011). Meanwhile, environmental complexity or external competition pressure can increase
the importance of exploration activities (Garcia et al., 2003).

Accordingly, the relationships among risk management strategy, internal control efficiency, operational
value increase, organizational resource exploitation, goal achievement relationships, and environmental
complexity are examined. To clearly verify the aforementioned relationships, information Thai Listed
firms are chosen as the sample of the study. Risk management strategy is of four stages:(1) identifying
events and circumstances relevant (IE) to an organization's achievement of its goals and objectives (2)
assessing the events and circumstances (AE) in terms of likelihood and magnitude of impact (3)
determining a strategy for responding to the identified threat or opportunity (DS), and (4) monitoring the
subsequent evolution and impact of the events (ME). Therefore, risk management strategy is
hypothesized to become a key determinant of driving and explaining goal achievement via mediating
effects of internal control efficiency, operational value increase, and organizational resource exploitation.
In this study, environmental complexity is a moderator of the relationships. Hence, the objective of this
study is to investigate the influences a risk management strategy on goal achievement through internal
control efficiency, operational value increase and organizational resource exploitation as mediators and
environmental complexity as a moderator relationship of Thailisted firms.

Correspondingly, the key research questions are: (1) how risk management strategy has a significant
effect on internal control efficiency, operational value increase, organizational resource exploitation, (2)
how internal control efficiency, operational value increase, organizational resource exploitation has an
important influence on goal achievement, (3) whether the moderator has an effect of environmental
complexity is the relationship between four stage of risk management strategy and its consequence,
internal control efficiency, operational value increase, organizational resource exploitation (4) whether
moderating an effect on environmental complexity has the relationship among internal control efficiency,
operational value increase, organizational resource exploitation has and goal achievement , (5) whether
the aforementioned relationships are positive, and (6) whether internal control efficiency, operational
value increase, organizational resource exploitation are mediators of these relationships.

This study is outlined as follows. The first section reviews existing significant literature in the areas of
management strategy, internal control efficiency, operational value increase, organizational resource
exploitation, goal achievement relationships, and environmental complexity, links between the concepts
of the aforementioned variables, and develops the key research hypotheses of those relationships. The
second explicitly details research methods, including data collection, measurements, and statistics. The
third gives the results of the analysis and the corresponding discussion. The final summarizes the findings
of the study, points out both theoretical and managerial contributions, and presents suggestions for
further research and the limitations of the study.

2. RISK MANAGEMENT STRATEGY AND GOAL ACHIEVEMENT

Accordingly, risk management strategy is the main determinant of driving goal achievement through
mediating functions of internal control efficiency, operational value increase, and organizational resource
exploitation. The relationships between risk management strategy and goal achievement are
systematically investigated. Thus, the conceptual, linkage, and research model presents the associations
between risk management strategy and goal achievement as shown in Figure 1 on next page.










INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 99




FIGURE 1
CONCEPTUAL MODEL OF THE ROLE OF RISK MANAGEMENT STRATEGY
ON GOAL ACHIEVEMENT





















H8a-d (+) H9a-c (+)



For the most important thing, identifying and proactively dealing with risks and opportunities,
organizations create value for shareholders. The benefits of risk management are enhancing resource
allocation (Arnold et al., 2011). For this reason, identification is the first stage in risk management process
that presents and leads role for effective risk management, which has to start with the question as 1) How
can organizational resource be threatened?, 2) What adverse effect can prevent the organizational from
achieving its goals? , and 3) What favorable possibility can be revealed? Thus, IE is greater internal
control efficiency, operational value increase and organizational resource exploitation. Therefore, the
aforementioned relationships are hypothesized as shown below.

Hypothesis 1a: The greater the identifying of the events and circumstances is, the more likely that
firms will achieve internal control efficiency.

Hypothesis 1b: The greater the identifying of the events and circumstances is, the more likely that
firms will achieve operational value increase.

Hypothesis 1c: The greater the identifying of the events and circumstances is, the more likely that
firms will achieve organizational resource exploitation.

2.2 Assessing the Events and Circumstances
Assessing events and circumstances (AE) refers to an ability of risks analysis in terms of likelihood and
magnitude of impact (COSO, 2004). The aim of the risks assessing is to determine the entitys exposure
to the identified risks, taking into account their probability and incidence, risk classification in terms of
tolerance to risk on the basis of the existing criteria (Turlea and Stefnescu,2009). Hence, AE is important
needed to consider its impact of the entity.

Accordingly, firms classified as the risks into dimensions are likelihood of occurrence and magnitude of
impact on achievement of objectives. After focusing on the high risks and defining control strategies for
containing them, then, if performing all of this appropriately, after that what is the residual risk is and
Risk Management Strategy
1. Identifying the Events
and Circumstances
2. Assessing the Events and
Circumstances
3. Determining a Strategy
Responding to the Threat
or Opportunity
4. Monitoring the
Subsequent Evolution and
Impact of the Events

Goal
Achievement

Operational Value
Increase
Organizational
Resource Exploitation
Internal Control
Efficiency
Environmental
Complexity
H1a-c (+)
H2a-c (+)
H3a-c (+)
H4a-c (+)
H5 (+)
H6 (+)
H7 (+)
Control
variables
Firm Age
Firm Size
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 100




where it is acceptable, during of this risk assessment, which is continuing process, firms have found that
they are able to improve the quality of their processes and the management of their operations. Thus,
well assessing the events and circumstances are greater internal control efficiency, operational value
increase and organizational resource exploitation. Therefore, the abovementioned relationships are
hypothesized as shown below.

Hypothesis 2a: The greater the assessing of the events and circumstances is, the more likely that
firms will achieve internal control efficiency.

Hypothesis 2b: The greater the assessing of the events and circumstances is, the more likely that
firms will achieve operational value increase.

Hypothesis 2c: The greater the assessing of the events and circumstances is, the more likely that
firms will achieve organizational resource exploitation.

2.3 Determining a Strategy for Responding to the Threat or Opportunity
Determining a strategy for responding to the identified threat or opportunity (DS) refers to the reaction
approach selecting to resolve the risk of firm (COSO, 2004). Consequently, they are identified and
analyzed as the options and chosen as the strategy based on the decisional criteria focused on results or
opportunities; it is implemented the chosen strategy (Turlea and Stefnescu, 2009). Also, firms enhance
the relationships between risk management and organizational performance. Higher levels of risk
management activity are actually associated with increased strategic flexibility and improved performance
(Arnold et al, 2011). Thus, determination on how to respond to assessed relevant risks management has
effective processes to respond to improved performance.

Highlights of assimilate strategic planning, operations management, performance management, and
internal control are important to risk management strategy which the enterprise identifies and proactively
addresses risks and opportunities, and organizations create value for shareholders. Additionally, the
benefits of risk management enhance resource allocation and assuring well management (Arnold et al.,
2011). Thus, DS is the greater internal control efficiency, operational value increase and organizational
resource exploitation. Therefore, the abovementioned relationships are hypothesized as shown below.

Hypothesis 3a: the greater the determining of a strategy for responding to the threat or
opportunity is, the more likely that firms will achieve internal control efficiency.

Hypothesis 3b: the greater the determining of a strategy for responding to the threat or
opportunity is, the more likely that firms will achieve operational value increase.

Hypothesis 3c: the greater the determining of a strategy for responding to the threat or
opportunity is, the more likely that firms will achieve organizational resource exploitation.

2.4 Monitoring the Subsequent Evolution and Impacts of the Events
Monitoring the subsequent evolution and impact of the events (ME) refers to observe, adjust and improve
activity for organization accomplishment (COSO, 2004). Risk management procedures provide necessary
information to top management needed to monitor for changing the impacts for an organization's well-
being (Arnold et al., 2011). The nature of follow-up monitoring suggests that these aspects of Internal
Audit Function (IAF) quality help prevent material weaknesses from occurring. These activities increase
the internal control effectiveness (Lin et al., 2011). Hence, monitoring of the effectiveness of risk
management strategy has a major role for the existence of the relationship feedback for improvement and
enhances internal control efficiency.

According to the problems found and treatment of accidents in follow-up audit, internal auditors can
assess whether the new control measure is useful. The results of the analysis and suggestions will
provide for the management in order to improve control measures. In the entity-level control, Monitoring
is the most important objective, the internal control through continuous and point-in-time assessment
processes (Huang et al., 2011). As a result, internal audit should be included in its annual plan the
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 101




complete review of the framework for managing operational risk and the review of the policies, process
and procedures for identification, assessing, monitoring and control/mitigate operational risk (Ana, 2007).
Therefore, monitoring is a feedback-learning-improvement by internal audit activities to remediation of
control problems. Thus, well monitoring the subsequent evolution and impact of the events are greater
internal control efficiency, operational value increase and organizational resource exploitation. Therefore,
the abovementioned relationships are hypothesized as shown below.

Hypothesis 4a: The greater the monitoring of the subsequent evolution and impact of the events
is, the more likely that firms will achieve internal control efficiency.

Hypothesis 4b: The greater the monitoring of the subsequent evolution and impact of the events
is, the more likely that firms will achieve operational value increase.

Hypothesis 4c: The greater the monitoring of the subsequent evolution and impact of the events
is, the more likely that firms will achieve organizational resource exploitation.

2.5 Internal Control Efficiency
Internal control efficiency refers to the process established to provide reasonable assurance regarding the
achievement of successful, reliable and competent operations (Petrovits et al., 2011). At the beginning of
the twenty-first century, following a number of large corporate scandals and failures, corporate
governance became extremely an important topic. A key part of corporate governance is a strong internal
control culture, and this includes the internal audit function because it is a valuable source of internal and
external risk information.

Given the importance of the internal control necessities as a means to improve the governance of firms,
the reporting effects of strong versus weak internal controls by examining how the quality of internal
controls is related to conservatism in financial reporting (Goh and Li, 2011). In the same way, risk
management must ensure that control processes identify both risks and opportunities that may affect the
achievement of objectives. The identified risks and opportunities are complimented with appropriate
responses. An efficient operational risk management framework will improve and reinforce the internal
controls of the organization (Fernandez-Laviada, 2007). Accordingly, internal control has an effect on
goal achievement. The strength of internal control system enhances an organization's ability to identity
events may affect the achievement (Arnold et al 2011). Thus, internal control efficiency leads to which
goal achievement. Therefore, the abovementioned relationships are hypothesized as shown below.

Hypothesis 5: The greater the internal control efficiency is, the more likely that firms will achieve
goal achievement.

2.6 Operational Value Increase
Operational value increase refers to the performance efficient as expected from guidelines for add quality
development (Molina-Castillo et al., 2011). The first stage in risk management is risk identification. Once
risk identification is complete, risk analysis is used to identify the likelihood of which the risks that have
been identified will happen. While there are several formal methods that can be used for risk analysis, the
most performance success maintains open lines of communication throughout their organizations helping
to understand the issues related risk and how to avoid them. Thereby insuring greater probability their
performance will come to a successful and satisfying conclusion (Cervone, 2006). Thus, several
processes of operational value increase enhance the greater success. Especially, operational value
increase leads to goal achievement. Therefore, the abovementioned relationships are hypothesized as
shown below.

Hypothesis 6: The greater the operational value increase is, the more likely that firms will achieve
goal achievement.

2.7 Organizational Resource Exploitation
Organizational resource exploitation refers to obtaining advantage from resources invested to improve
and expand innovation knowledge, skills and processes (Arnold et al., 2011). Accordingly, the benefits of
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 102




risk management enhance resource allocation. Thus, firms minimize the risks and failures in the process
enhancing preference for the existing organizational competences that increase its reliance on process
improvements.

For decision making for exploitive activities to maintain performance expectation, firms should research
and develop strategy over environmental factor keeping in mind on exploitation allocation decision and
may be more profitable to focus on exploitation activities. Also, in highly competitive or unsuccessful
environments, a prudent myopic strategy is to focus on exploitation activity (Garcia et al., 2003). Thus,
well organizational resource exploitation leads to better increased goal achievement. Therefore, the
abovementioned relationships are hypothesized as shown below.

Hypothesis 7: The greater the organizational resource exploitation is, the more likely that firms
will achieve goal achievement.

2.8 Environmental Complexity
Environmental complexity refers to the heterogeneity or variety activities from the market turbulence or
competitive intensity is dispersing organizational activities (Molina-Castillo et al., 2011). Similarly, to
explain for operations, environmental complexity would be best understood as the variety and diversity of
additional factors that operations have to consider because of the presence in environments with an
extended scope, such a global environment (Kinra and Kotzab, 2008). Also, external competition
pressure can increase the importance of exploration activities as competitors pursue the same market
opportunities.

Correspondingly, information acquired from environmental scanning is subsequently utilized in the
strategic management process strategic and decision-makers collect, interpret, and utilize information
from the external environment in formulating their firms future strategies (Ebrahimi, 2000). The increasing
complexity of enterprise environment, risk management techniques will develop continuously, and
simultaneous technique will move forward, and need more practitioners to be involved not only to enrich,
but also to improve practicality of findings. (Wang and Li, 2011). Therefore, more environmental
complexity leads to better risk management strategy increase internal control efficiency, operational value
increase and organizational resource exploitation. Therefore, the abovementioned relationships are
hypothesized as shown below.

Hypothesis 8a: Environmental complexity relationships positively moderate the relationships
between identifying the events and circumstances and (a) internal control efficiency (b)
operational value increase, and (c) organizational resource exploitation.

Hypothesis 8b: Environmental complexity relationships positively moderate the relationships
between assessing the events and circumstances and (a) internal control efficiency (b)
operational value increase, and (c) organizational resource exploitation.

Hypothesis 8c: Environmental complexity relationships positively moderate the relationships
between determining a strategy for responding to the threat or opportunity and (a) internal control
efficiency (b) operational value increase, and (c) organizational resource exploitation.

Hypothesis 8d: environmental complexity relationships positively moderate the relationships
between monitoring the subsequent evolution and impact of the events and (a) internal control
efficiency (b) operational value increase, and (c) organizational resource exploitation.

As a result, external competition pressure can increase the importance on exploration activities as
competitors pursue the same market opportunities. Competitive forces often do not allow the stressed
firm to focus primarily on exploitation activities. They much continually launch technologically superior
products in order to maintain market share (Garcia et al., 2003).

However, increased perceived environmental complexity did not decrease but increased executives
scanning efforts of environmental sectors did. Thus, environmental complexity brings firms more activities
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 103




to seize opportunity. With the increasing complexity of enterprise environment, risk management
techniques will develop continuously. As well as in other emerging economies, complexities are not only
the obstacles and difficulties but also they can be the source of greater opportunities (Wang and Li,
2011). Thus, more environmental complexity leads to better increased goal achievement. Therefore, the
abovementioned relationships are hypothesized as shown below.

Hypothesis 9a: Environmental complexity relationships positively moderate the relationships
between internal control efficiency and goal achievement.

Hypothesis 9b: Environmental complexity relationships positively moderate the relationships
between operational value increase and goal achievement.

Hypothesis 9c: Environmental complexity relationships positively moderate the relationships
between organizational resource exploitation and goal achievement.

3. RESEARCH METHODS

3.1 Sample Selection and Data Collection Procedure
For data collection of this study, the sample firms will be randomly selected from Thai-Listed firms in all
industries (excluding possible delisting companies). There are 473 Thai-listed firms (www.set.or.th on
December 12, 2011). The key informants are Internal Audit Executive (IAE). With regard to the
questionnaire mailing, 2 surveys were undeliverable because some firms were with unclear locations and
had moved to unknown locations. Deducting the undeliverable from the original 473 mailed, the valid
mailing was 471 surveys, from which 128 responses were received as the surveys completed and
returned; the effective response rate was approximately 27.18%. According to Aaker, Kumar and Day
(2001), the response rate for a mail survey, without an appropriate follow-up procedure, if greater than
20% is considered acceptable.

To test potential and non-response bias and to detect possible problems with non-response errors, non-
response bias is conducted by the comparison of early and late responses by demographic data. The
assessment and investigation of non-response-bias was centered on comparison of first wave and
second wave data as recommended by Armstrong and Overton (1977). The result showed no significant
differences.

3.2 Variables
All variables obtained from the survey. Goal achievement is the dependent of the study and it is defined
as an ability of firm to generate value for financial and non-financial performances (James, 2004). Five-
item scale was developed to evaluate the level of goal achievement both financial and non-financial
performance, namely, business goal achievement corporate innovative, corporate market share,
customer satisfaction, and achieve both financial and non-financial performances and goal excellence
more than competitors.

Risk management strategy refers to the process of the organization and the whole staffs are involved and
intended to provide reasonable insurance in terms of the achievement of objective (COSO 2004). This
process is intended to identify the potential events which could have effects on the entity and to manage
the risks within the limits of its aversion to risk. It is taken into account when drawing up the entity strategy
and its activities risk management strategy have 4 stages concluding identifying the events and
circumstances, assessing the events and circumstances, determining a strategy for responding to the
threat or opportunity, and monitoring the subsequent evolution and the impact of the events are
independent variables of the study. Each of which is defined as below.

First, identifying events and circumstances refers to an ability to discover something or situation important
that affecting an entitys objectives (COSO, 2004). Events both internal and external affecting
achievement of an entitys objectives must be identified, and distinguished between risks and
opportunities. Opportunities are guided back to managements strategy or objective-setting processes.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 104




Four-item scale was implemented to evaluate firms which provide their activities for identifying events and
circumstances.

Second, assessing the events and circumstances refers to an ability of risks analysis in terms of likelihood
and magnitude of impact (COSO, 2004). This assesses both inherent and residual risk for the
determining to manage. Four-item scale was exploited to evaluate the degree to which firms assess these
events and circumstances.

Third, determining a strategy for responding to the threat or opportunity refers to the reaction approach
that selecting to resolve or risk management of firm (COSO, 2004), such as, avoiding, accepting,
reducing, or sharing risk by developing a set of actions. Four- item scale was investigated to measure the
degree of determination in response to assess relevant risks of firms. Lastly, monitoring the subsequent
evolution and impact of the events refers to the observation and improvement of activity for organization
accomplishment (COSO, 2004). Four-item scale was used to investigate the degree of firms monitoring.

Internal Control Efficiency refers to the process established to provide reasonable assurance regarding
the achievement of successful, reliable and competent operations (Petrovits et al., 2011). Policies and
procedures are established and implemented to help ensure the risk responses that are effectively carried
out by management (COSO, 2004). Five-item scale was investigating which to evaluate internal control
efficiency of firms. Operational value increase refers to the performance efficiency expected from
guidelines development for added quality (Molina-Castillo et al., 2011). Five-item scale was employed to
investigate the operational value increase of firms. Organizational resource exploitation refers to the
obtained advantage from resources investing for improving and expanding innovation knowledge, skills
and processes (Arnold et al., 2011). Also, the benefits of ERM are enhancing resource allocation. Five-
item scale was employed to investigate the organizational resource exploitation of firms.

Environmental complexity refers to the heterogeneity or variety activities from the market turbulence or
competitive intensity that disperses organizational activities (Molina-Castillo et al., 2011). Complexity
relates to an ability to predict the effects of environmental trends on the firm. Five-item scale was used to
investigate the degree environmental complexity of firms.

The control variables were likely to affect the relationships, including firm age and firm size. Firm age
(FA) becomes a control variable because uncertainty environment and complexity increase managerial
opportunism and reduce risk value (Leech and Leahy, 1991).The dummy variable which 0 means firm
has the period of time in proceeding business lower than 15 years, and 1 means firm has the period of
time in proceeding business equal or more than 15 years. In this study, firm size (FS) is treated as a
control variable which is defined as total assets of the firm invested. It is a dummy variable which 0 is firm
with total assets lower than 10,000,000,000 Baht, and 1 is firm has total assets equal or more than
10,000,000,000 Baht.

3.3 Methods
Factor analysis was firstly utilized to examine the confirmatory factor analysis. This analysis has a high
potential to inflate the component loadings. Thus, a higher rule-of-thumb, a cut-off value of 0.40, was
adopted (Nunnally and Bernstein, 1994). All factor loadings are greater than the 0.40 cut-off and are
statistically significant. The reliability of the measurements was secondly evaluated by Cronbach alpha
coefficients. In the scale reliability, Cronbach alpha coefficients are greater than 0.70 (Nunnally and
Bernstein, 1994). The scales of all measures appear to produce internally consistent results; thus, these
measures are deemed appropriate for further analysis because they express an accepted validity and
reliability in this study. Table 1 below presents the results for both factor loadings and Cronbach alpha for
multiple-item scales used in this study.

INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 105




TABLE 1
RESULTS OF MEASURE VALIDATION

Items
Factor
Loadings
Cronbach
Alpha
Goal achievement (GA) .80-.89 .90
Identifying the Events and Circumstances (IE) .82-.88 .88
Assessing the Events and Circumstances (AE) .85-.89 .90
Determining a Strategy For Responding to the Threat or Opportunity (DS) .80-.88 .88
Monitoring the Subsequent Evolution and Impact of the Events (ME) .89-.92 .92
Internal Control Efficiency (IC) .72-.88 .89
Operational value increase (OV) .67-.87 .86
Organizational resource exploitation (OR) .82-.91 .92
Environmental complexities(EC) .80-.90 ..88
The ordinary least squares (OLS) regression analysis is used to test and examine the hypothesized
effects of risk management strategy on goal achievement via internal control efficiency, operational value
increase and organizational resource exploitation as mediators, which environmental complexities as a
moderating variable. Because all dependent variable, independent variables, and control variables in this
study were neither nominal data nor categorical data, OLS is an appropriate method for examining the
hypothesized relationships (Aulakh, Kotabe and Teegen, 2000) with the need to understand the
relationships in this study, the research models of the aforementioned relationships are shown as follows.

Equation 1: IC =
01
+
1
IE +
2
AE +
3
DS +
4
ME +
5
FA+
6
FS +

Equation 2: IC =
02
+
7
IE +
8
AE +
9
DS +
10
ME +
11
EC +
12
(IE * EC)
+
13
(AE * EC) +
14
(DS * EC) +
15
(ME * EC) +
16
FA+
17
FS +

Equation 3: OV =
03
+
18
IE +
19
AE +
20
DS +
21
ME+
22
FA+
23
FS +
Equation 4: OV =
04
+
24
IE +
25
AE +
26
DS +
27
ME +
28
EC +
29
(IE * EC)
+
30
(AE * EC) +
31
(DS * EC) +
32
(ME * EC) +1
33
FA+
34
FS +

Equation 5: OR =
05
+
35
IE +
36
AE +
37
DS +
38
ME +
39
FA+
40
FS +

Equation 6: OR =
06
+
41
IE +
42
AE +
43
DS +
44
ME +
45
EC +
46
(IE * EC) +
47
(AE * EC)
+
48
(DS * EC) +
49
(ME * EC) +
50
FA+
51
FS +

Equation 7: GA =
07
+
52
IC +
53
OV +
54
OR +
55
FA+
56
FS +

Equation 8: GA =
08
+
57
IC +
58
OV +
59
OR +
60
EC+
61
(IC* EC +
62
(OV *EC)
+
63
(OR *EC) +
64
FA+
65
FS +
Where:
GA = Goal Achievement
IE = Identifying the Events and Circumstances
AE = Assessing the Events and Circumstances
DS = Determining a Strategy for Responding to the Threat or Opportunity
ME = Monitoring the Subsequent Evolution and Impact of the Events
IC = Internal Control Efficiency
OV = Operational value increase
OR = Organizational resource exploitation
EC = Environmental complexities
FA = Firm Age
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 106




FS = Firm Size
= error term

4. RESULTS AND DISCUSSION

In Table 2, the descriptive statistics and correlation matrix for all variables are presented. With respect to
potential problems relating to multicollinearity, Variance Inflation Factors (VIFs) were used to provide
information on the extent to which non-orthogonality among independent variables inflates standard
errors. The VIFs range from 1.08 to 4.9, well below the cut-off value of 10 as recommended by Neter,
Wasserman and Kutner (1985), meaning the independent variables are not correlated with each other.
Therefore, there are no substantial multicollinearity problems encountered in this study.

Table 3 presents the results of OLS regression of the relationships among risk management strategy,
internal control efficiency, operational value increase, organizational resource exploitation, goal
achievement, and moderating effect of environmental complexity on risk management strategy and goal
achievement relationships. Risk management strategy includes Identifying the events and circumstances
(IE), assessing the events and circumstances (AE), determining a strategy for responding to the threat or
opportunity (DS), and monitoring the subsequent evolution and impact of the events (ME). Interestingly,
AE has a significant positive influence on internal control efficiency (b
2
= 0.35, b
8
=.37, p < 0.01),
operational value increase (b
19
= .46, p < 0.01 and b
25
=.32, p < 0.05), and organizational resource
exploitation, (b
36
=.45, b
42
=.47, p < 0.01). In the existing literature, AE is an activity gaining the
importance due to current business environment with a global focus and competition.

TABLE 2
DESCRIPTIVE STATISTICS AND CORRELATION MATRIX































Variables GA IE AE DS ME IC OV OR EC FA FS
Mean 3.86 4.10 4.01 4.08 4.07 4.15 3.90 3.93 3.65 .8425 .3657
s.d. .62 .57 .60 .62 .63 .55 .57 .58 .70 .3701 ..484
GA
IE .547
**

AE .718
**
.784
*
*


DS .604
**
.750
*
*

.800
**

ME .562
**
.748
*
*

.789
**
.837
**

IC .610
**
.623
*
*

.694
**
.720
**
.587
**

OV .819
**
.621
*
*

.729
**
.686
**
.606
**
.758
**

OR .723
**
.601
*
*

.690
**
.644
**
.578
**
.714
**
.801
**

EC .168 .104 .146 .145 .151 .125 .204
*
.252
**

FA .008 .169 .078 .103 .050 .105 .001 .002 .118
FS .199* .179* .272** .185* .161 .179* .198* .158 .135 .066
**. P< 0.01, * P< 0.05.


INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 107





This technique results in an increased effectiveness of performance (Ahmed, Kayis and
Amornsawadwatana, 2007).Thus, manager awareness to assessing the events and circumstances of
impact are analyzed, considering likelihood and impact. It is the alertness of managers to evaluate and
calculate the magnitude of impact of threat continuously. Accordingly, assessing the events and
circumstances is positively related to goal achievement via mediating effect of internal control efficiency,
operational value increase, and organizational resource exploitation. Hence, it becomes a key
determinant of driving and explaining internal control efficiency, operational value increase, and
organizational resource exploitation. Therefore, Hypotheses 2a, 2b, and 2c are supported.

In addition, DS has a significant positive influence on internal control efficiency (b
3
= 0.54, b
9
= 0.55 p <
0.01), operational value increase, (b
20
= 0.31, p < 0.05), (b
26
= 0.33, p < 0.01), organizational resource
exploitation (b
37
= 0.30, b
43
= 0.29 p < 0.05). The existing literature highlights the importance of risk
management to manage the enterprise by integrating strategic planning, operations management,
performance management, and internal control. Additionally, the benefits of risk management are
enhancing resource allocation (Arnold et al., 2011). In order for risk management to generate some
strategic opportunities, it must be perceived and implemented in a strategic way rather than as a routine
business function (Gupta, 2011). Thus, the perception of corporate managers in determining a strategy
for responding to the threat or opportunity must take responsibility or deal with greater internal control
efficiency, operational value increase and organizational resource exploitation. Accordingly, a strategy for
responding to the threat or opportunity has a significant positive influence on internal control efficiency,
operational value increase and organizational resource exploitation. Hence, it becomes a key determinant
of driving and explaining internal control efficiency, operational value increase, organizational resource
exploitation Therefore, Hypotheses 3a, 3b, and 3c are supported.

In contrary, the results show that ME has a significant negative influence on internal control efficiency (b
4

and b
10
= -0.22, p < 0.10). Besides, the result also shows that the ME has no relationship with operational
value increase and organizational resource exploitation. In the existing literature, cost savings force the
implementation to closely follow the existing and approved traditional internal audit program. The facts
are necessary for trade-offs between effectiveness, efficiency and timeliness of audit procedures and
determining how to make continuous monitoring of business process control implementations valuable
(Alles et al., 2006). Besides, mixed evidence on the relation between internal control and earnings quality
could be due to the existence of additional monitoring mechanisms (Feng et al., 2009). With the
increased complexity, uncertainty and risks in business operations, workflow monitoring is gaining
growing attention in business process controlling and supervision. Also, using customized monitoring plan
and proactive monitoring process, the workflow monitoring activities can be executed flexibly and
efficiently. The application of intelligent agents for such flexible, adaptive and collaborative workflow
monitoring is investigated through an intelligent monitoring system in securities trading (Wang et al.,
2005). Hence, the approach, monitoring the subsequent evolution and impact of the events needs a
severe change in companies (Gupta, 2011). Therefore, Hypotheses 4a, 4b, and 4c are not supported.

Surprisingly, IE has no relationship with internal control efficiency, operational value increase, and
organizational resource exploitation. In the existing literature, the tools for identifying risks do not vary
much between the persons responsible for identifying risks. Companies do not use the modern tools of
risk analysis, which may be due to convention or lack of awareness or skills (Gupta, 2011). Two of the
most common reasons for not implementing a risk management program are cost and benefit (McGrew
and Bilotta, 2000).Thus, limited resources to identify is the reason for the lack of internal control
efficiency. Therefore, Hypotheses 1a-1c, and 4a-4c are not supported.

For the mediating effects of the risk management strategy on goal achievement relationships, operational
value increase has a positive association with goal achievement (b
53
and

b
58
= 0.64, p < 0.01). In the
existing literature, the importance of risk management is integrating strategic planning, operations
management, performance management, and internal control, that by identifying and proactively
addressing risks and opportunities, organizations create value for shareholders. (Arnold et al., 2011).
Therefore, Hypothesis 6 is supported.

INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 108




Organizational resource exploitation has a potential positive association with goal achievement (b
54
and
b
59
= 0.30 and .28, p < 0.01). In the existing literature, minimizing the risks and failures in the innovation
process commensurately enhances its preference for the existing organizational competences that
increase its reliance on process improvements to provide quality (Molina-Castillo et al., 2011). Then,
corporate proactiveness has a positive direct influence on firm performance. Therefore, Hypothesis 7 is
supported.

While both operational value increase and organizational resource exploitation have a positive effect on
goal achievement; internal control efficiency has no influence on goal achievement. In the existing
literature, the cost/benefit balance of auditor testing of internal controls is highly controversial (Bedard and
Graham, 2011). IT internal control quality negatively moderates the association between accounting
earnings and market valuation (Stoel and Muhanna, 2011) Thus, internal control efficiency is not relative
to goal achievement. Then, internal control efficiency has no influence on goal achievement. Therefore,
Hypothesis 5 is not supported.
Hypothesis 8a to hypothesis 8d concentrated on hypothesized moderating effect of environmental
complexity on the relationships between four stages of risk management strategy and its consequence,
internal control efficiency, operational value increase, organizational resource exploitation. The findings
shown in Table 3 indicated that the moderating variable has no positive effect of environmental
complexity on the relationships between risk management strategy and its consequence, internal control
efficiency, operational value increase, organizational resource exploitation. Correspondingly, Information
acquired from environmental scanning is subsequently utilized in the strategic management process
strategic and decision-makers collect, interpret, and utilize information from the external environment in
formulating their firms future strategies (Ebrahimi, 2000). Therefore, Hypotheses 8a, 8b, 8c and 8d are
not supported.

Hypothesis 9a to hypothesis 9c concentrated on hypothesized moderating effect of environmental
complexity on the relationships between internal control efficiency, operational value increase,
organizational resource exploitation and consequence, goal achievement. The results showed that
environmental complexity relationships negatively moderates the relationships between internal control
and environmental complexity (b
61
= -.23, p < 0.05). The reason is that complexity is a function of the
degree of the actor's ignorance about the reality's working principles. When facing natural complexity both
problems and solutions have to be able to create rather than cover up the data (Vasconcelos and
Ramirez, 2011).Hence, higher level environmental complexity uncertainty may impose internal control
efficiency demands, which conversely engender negative impact on goal achievement. Besides, the
interactions among operational value increase, organizational resource exploitation, and environmental
complexity have no positive effect on goal achievement. Therefore, Hypotheses 9a, 9b and 9a are not
supported.

5. CONTRIBUTIONS AND DIRECTIONS FOR FUTURE RESEARCH

5.1 Theoretical Contribution
This study is a emphasis on a clearer understanding of the risk management strategy which is the main
determinant of driving goal achievement through mediating functions of operational value increase and
organizational resource exploitation. According to the results in this study, further study is needed to
identify the events and circumstances, monitoring the subsequent evolution and impact of the events and
internal control efficiency so as to find some explanations about why identifying the events and
circumstances, monitoring the subsequent evolution and the impact of the events and internal control
efficiency do not affect the relationships. Also, future research should use a mixed method procedure
including in-depth field interviews qualitative fieldwork to help identify the important risk factors suitable in
Thailand context which is important for such an emerging market.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 109




TABLE 3
RESULTS OF OLS REGRESSION ANALYSIS
a

Independent
Variables
Dependent Variables
IC1 IC2 OV1 OV2 OR1 OR2 GA1 GA2
IE .10 .08 .12 .16 .13 .11
(.10) (.11) (.10) (.10) (.11) (.11)
AE .35***
.37**
*
.46**
* .32**
.45**
*
.47**
*

(.12) (.13) (.12) (.13) (.13) (.14)
DS .54***
.55**
* .31**
.33**
*
.30** .29**
(.12) (.13) (.12) (.12) (.13) (.13)
ME -.22* -.22* -.08 -.02 -.12 -.13
(.12) (.13) (.12) (.12) (.13) (.13)
EC
.04 .11* .19**
*

(.07) (.06) (.07)
IE*EC .02 -.16 .09
(.10) (.09) (.10)
AE*EC -.12 .28 -.15
(.13) (.12) (.13)
DS*EC .24 .01 .21
(.15) (.14) (.15)
ME*EC -.19 -.13 -.20
(.14) (.13) (.15)
IC -.92 -.75
(.08) (.08)
OV
.64**
*
.64**
*
(.10) (.10)
OR
.30**
*
.28**
*
(.09) (.09)
EC -.04 -.03
(.05) (.06)
IC*EC -.23**
(.11)
OV*EC .16
(.10)
OR*EC .05
(.09)
FA .05 .10 -.24 -.28 -.21 -.20 .04 .01
(.17) (.18) (.17) (.17) (.18) (.18) (.15) (.14)
FS -.01 .02 .03 .03 -.04 -.05 .11 .04
(.13) (.13) (.13) (.13) (.14) (.14) (.11) (.11)
Adjusted R
2
.55 .54 .55 .57 .49 .51 .66 .67
*p<.10, ** p<.05, ***p<.01,
a
Beta coefficients with standard errors in parenthesis.

5.2 Managerial Contribution
This study helps top management and stakeholder of Thai-listed firms understand the role of risk
management strategy and the key components that may be a more important determinant of its
organizational performance, which companies will attempt to improve the risk management strategy of
their company in their efforts for goal achievement. One of the main implications for managers is that risk
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 110




management strategy should be considered, especially, the major causes of such failure. Todays
projects are increasingly being managed using various risk management tools and techniques. However,
the application of those tools depends on the nature of the project, organizational policy, project
management strategy, and availability of the resources.

6. CONCLUSION

This study investigates the influences risk management strategy on goal achievement via internal control
efficiency, operational value increase, and organizational resource exploitation as mediators and
environmental complexity as a moderator of risk management strategy driver to goal achievement. The
entrepreneurial alertness risk management strategy under environmental complexity is a positive
moderator. The objective of this study is to investigate the influences of risk management strategy on goal
achievement through internal control efficiency, operational value increase, and organizational resource
exploitation as mediators and environmental complexity as a moderator of Thai-listed firms. Here, 128
information businesses in Thailand were chosen as the sample of the study.

The results show that assessing the events and circumstances and determining a strategy for responding
to the threat or opportunity have a significant positive influence on internal control efficiency, operational
value increase and organizational resource exploitation. Inversely, monitoring the subsequent evolution
and impact of the events has no influence on internal control efficiency operational value increase,
organizational resource exploitation. Meanwhile Identifying the events and circumstances has no
relations. Likewise, operational value increase and organizational resource exploitation have a potential
positive influence on goal achievement while internal control efficiency has no relationship with goal
achievement. In summary, operational value increase and organizational resource exploitation are
mediators of the aforementioned relationships, whereas internal control efficiency is not a mediator of
these relationships.

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INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 112






AUTHOR PROFILES:

Sutika Rukprasoot earned M.B.A. from Kasetsart University, Thailand. Currently, she is a Ph.D. student
in Accounting at Mahasarakham Business School, Mahasarakham University, Thailand.

Dr. Phapruke Ussahawanitchakit earned his Ph.D. at Washington State University, USA in 2002.
Currently, he is an associate professor of accounting and Dean of Mahasarakham Business School,
Mahasarakham University, Thailand.
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 113

SOYBEAN BRAZILIAN PRICES PREDICTABILITY VIA BOX-JENKINS METHOD



Everton Anger Cavalheiro University of Cruz Alta
Kelmara Mendes Vieira Federal University of Santa Maria
Paulo Srgio Ceretta Federal University of Santa Maria
Juliano Nunes Alves University of Cruz Alta


ABSTRACT

This paper analyses the efficiency of the Box-Jenkins methodology in the forecast of monthly returns
of the soybean price paid in Brazil. At first, in order to determine the exogenous variable, the
logarithm return of this commodity was calculated. Subsequently, the best period for the series
simulation was verified. Afterwards, the simulations were carried out and the model was validated.
The results suggest relative predictability for the soybean price, denoting some sort of inefficiency in
this market due, especially, to the period following the American crisis, in which the soybean price
was shown to be more predictable in t + 1 modeling.

Keywords: Time series, Box-Jenkins, Soybean


1. INTRODUCTION

Among worldwide and Brazilian greatest bean producers, soybean was the one that showed a greater
percentual growth in last few years. According to the data coming from the USA Department of
Agriculture USDA , global soybean production grew from 44 million tons in 1970, to over 220
million tons in 2008. Besides, in August 2009, there was a 15% increase in global production (32
million tons). 2010/2011 projections considering the favourable weather conditions for the American
harvest point out that the American production for 2010/2011 is anticipated for 260.9 million tons,
which represents a 406% growth. This number depicts a substantial growth, whereas other cultures
have grown much less, such as wheat (75%) that moved up from 300 to 792 million tons, and rice
(40%) that moved up from 310 to 432 million tons, in the same period (Trennepohl & Paiva, 2011).

In 2010, Brazil accounted for 26.2% of all soybean global production, corresponding to 67.5 million
tons, grown in a 59.80 million acre area, equivalent to all the UK territory (CONAB, 2010). Still in
2010, soybean accounted for around 9% of all exports, 5.6% of agricultural GDP and 1.25% of the
total Brazilian GDP.

Regarding soybean price, one can say, according to Jun & Chao (2010), that there are many
determining factors for its variation, including the weather, the family consumption level, the
consumption structure, offer and demand, national and international stock in the futures market and
the soybean circulation system. This circulation system has non-linear features typical of a dynamic
system and of the evolution law, sustained by the application of the chaotic sequence so as to study
fluctuation and price forecast law.

Recent research, such as Righi & Ceretta (2011), was performed using time series analysis. In this
sense, Righi and Ceretta (2011) showed that daily quotations for some Brazilian commodities
(soybean, cotton, coffee and sweet corn) do not follow the anticipation for market efficiency, thus
generating opportunities arbitrage. Considering the statement by authors, we defined the following
research problem: Is Box Jenkins methodology efficient enough to prove non-randomness in the
forecast of monthly returns of the soybean price paid in Brazil?

Box-Jenkins models, also known as Autoregressive Integrated Moving Average (ARIMA), were
suggested by Goerge Box and Gwilym Jenkins in the early 70s (Box, Jenkins, & Reinsel, 1970). Box-
Jenkins, methodology is known for being an interactive and complex procedure that produces an
integrated moving average and autoregressive model, adjusted for seasonal and trend factors,
besides estimating adequate pondering parameters, testing the model and repeating the cycle, if
need be.

INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 114

In economics, there are stationary and non-stationary series. Generally, stocks return and GDP
growth are not, among other examples, stationary. Thus, a non-stationary series is the one that does
not float around the same average and may have a deterministic or stochastic nature. A non-
stationary data series with a stochastic trend moves around floating averages and has the
configuration as shown on Equation (1).
t t t
y y c + =
1
(1)
The stationarity concept is the main idea that one must keep in mind so as to estimate a time series,
especially for ARIMA models. The stochastic process, or the time series, ...} 2 , 1 , 0 { }, , { = Z Z e t y
t
is
weakly stationary if i) < E
2
t
y ; ii)

( ) = E
t
y for all Z e t , and iii) ( )( )
t j t t
y y = E

.

The first condition only states that the second not centred moment must be finite, though it is unequal
for all periods. The second condition states that the average is the same for all periods, even if
distribution for the random variable changes through the course of time. The third condition states that
variance is always the same for all periods where auto-covariance does not depend on this factor, yet
only on time distance between observations.

2. METHODOLOGY

In order to answer this research problem, we performed a time descriptive analysis where we used
the logarithmic return of the prices paid to producers in Brazil as the exogenous variable, between
February 1990 and December 2011. In order to calculate return, we used secondary data based in
(IPEADATA, 2011).

Tsay (2005) mentions that most studies on finances time series use returns, instead of the assets
themselves. In this sense, the author comments that there are two main reasons to use returns in
finance related studies: firstly, for the average investor, assets return is an adequate measure for
comparing investments opportunities and, secondly, return series are easier to deal with than a price
series, since the first ones show more attractive statistical features. Among such features, non-bias is
common in non-stationary data series. Tsay (2005) says that using logarithmic returns in financing
studies is indicated by the hypothesis that assets return is independently and identically distributed
(i.i.d.) with an average and variance
2
o .

After calculating the logarithmic returns, we performed the random walk test, so as to prove whether
or not the data series would show non-random features, which would denote an opportunity to
perform modelling for the time series forecast. Then, we verified the series stationarity using the
augmented Dickey-Fuller methodology.

In order to estimate and identify the parameters for the ARIMA model, we used the ordinary least
squares method, as suggested by Makridakis et al. (2008). The criterion for choosing this model was
the existence of white noise behaviour within the residues of each model. When diagnosing the
residues, we used the Ljung-Box Q test and the autocorrelation Function.

In order to analyse the predictability of soybean price, we used the sample determination coefficient
R
2
. This criterion seeks to measure the proportion or percentage of variation for y anticipated by
models, as shown in Equation (2).
( )
( )
.

1
2
1
2
1
2

=
N
i
N
i
y y
y
R

(2)
Two other indicators were used: MSE and MAE, which are shown in Equations (3) and (4).
( ) .
1
2
1

=
N
i i
y y
N
MSE

(3)
.
1 2 2
1
i i
N
y y
N
MAE =


(4)

Additionally, we analysed the Theil inequality coefficients, also known as U. The denominator for U is
MSE, but the scale for the denominator is such that U exists in the interval from 0 to 1; where U=0
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 115

would be a perfect forecast adjustment to the observed value and where U=1 would show the worst
performance for the models anticipation. The Theil inequality coefficient was shown in Equation (5).
( )
( ) ( )
.

1 1

1
2
1
2
1
2
1


+

=
N
i
N
i
N
i i
y
N
y
N
y y
N
U

(5)

Besides the Theil inequlity coefficient, we anlysed the proportions for U
M
and U
S
(bias proportion and
variance proportion), which allow to break down the error to its characteristical sources.

According to Pindyck and Rubinfield (1991), the bias proportion (U
M
) analyses a possible systematic
error, since it measures how much the average values for the simulated and effective series can
deviate from each other. Whatever the value for the inequality coefficient (U), it is expected that U
M
is
close to 0. An elevated value for U
M
(above 0.1 or 0.2) would be worrying, since it would indicate the
presence of systematic bias, and so the models would need to be checked again. In Equations (6)
and (7), bias and variance proportions are shown, respectively.
( )
( ) ( )
.
/ 1
2
2

=
A
t
S
t
A S
M
y y T
y y
U

(6)
( )
( )
.
/ 1
2
2

|
.
|

\
|

=
A
t
S
t
A S S
y y T
U
o o

(7)
In (6 and 7)
S
y ,
A
y ,
S
o and
A
o we observed the average and the observed and estimated
standard deviation errors, respectively. The variance proportion U
S
, according to Pindyck and
Rubinfield (1991), indicates the capacity to replicate the variability rate for the variable we are
interested in. If U
S
was high, that would mean that the effective series floated a great deal, or vice-
versa. That would also be worrying and could lead to revising the models. In order to evaluate the
forecasts success, as guided by Ivakhnenko, Ivakhnenko and Mller (1993), we used Equation (8).
( )
( )
. min

2
1
2
1 2

N
i
N
i i
i
y y
y y
o
(8)
The results obtained in (8) and that are lower or equal to 0.5 would be considered adequate; the ones
between 0,5 <
2
o < 0,8 would be considered satisfactory; and the ones greater than 1 would be
considered as false information and the modelling would be considered inefficient.

3. RESULTS

Based on the monthly negotiation prices for soybean, we calculated the logarithmic returns. Then we
tested the hypothesis that monthly returns would show features typical of random walks, which would
invalidate the study. Picture 1 shows the test results.


INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 116

Picture 1 random walk test for a random data series and for monthly logarithmic returns for soybean
[ February 1990 December 2011 ].

On the left, Picture 1 shows that there were three data series generated. For a better comparison, all
series were computed using the same sequence of random figures, according to a normal distribution.
Initially, we calculated a pure random walk series (see graphic). The second data series was
computed as a trend (dotted line named rwdrift(ls)). The last series with a deterministic trend was
adjusted by normally distributed errors (det.trend+noise(ls)). On the right, procedure was identical.
The only exception was the use of a logarithmic return series on the soybean average price paid to
producers in Brazil (February 1990 December 2011).

On the series simulated with random figures (graphic on the left), one can tell that the trended series
and the deterministically trended series, which is error adjusted, show similar behaviours. On the
other hand, the random walk does not show an evident relation to the other series. On the right,
where we used the logarithmic returns for soybean price, we can see that the two first series (trended
and deterministically trended adjusted to error) show similar behaviours and the random walk series
appears to follow the first tow series behaviour, denoting that the series presents non-random
behaviours and that could be detected in stochastic deterministic models. We can also note that there
is a behaviour change in the random walk series as of the 50
th
observation. Thus, we performed the
simulation excluding the first 50 observations (February 1990 March 1994). Picture 2 shows the
new test, where the first 50 logarithmic returns were excluded.

Picture 2 random walk test for the monthly logarithmic returns of soybean [ April 1994 December
2011 ]

We can see in Picture 2 that the random walk series show to be even better adjusted to the other two
simulated data series, denoting that the logarithmic returns series shows non random behaviours and
that could be detected in deterministic stochastic models. Excluding the first 50 observations
(February 1990 March 1994) can be explained by a economics perspective: as of a near future
period (October 1994) the Real plan was initiated in Brazil and that significantly modified the inflation
memory within the Brazilian society, enhancing the Brazilian productive processes, especially the
agro-business sector and soybean. Those interested in replicating this test for this or other series can
get better information in Pfaff (2008).

According to Gujarati (2003), stationarity is needed for performing Box-Jenkins models. For this work,
we used the augmented Dickey-Fuller test (ADF)., suggested by Dickey & Fuller (1979) so as to test
the presence of a unitary root in the series. The Dickey-Fuller test is based on the following model in
Equation (9):
t t t t
y y q | o + + + = A
1

(9)
where:

=
=

q
1
1
j
i

(10)
INTERNATIONAL JOURNAL OF STRATEGIC MANAGEMENT, Volume 12, Number 3, 2012 117

where y denotes the dependent variable and denotes the subtratction operator (y
t
= y
t
- y
t-1
). The
parameters to be estimated are , and . The statistics

and

and presented by Dickey & Fuller


(1981) correspond to the t test used to estimate the variable coefficient y
t-1
in Equation [9]. These
statistics are specified for a model that includes a constant, a trend and a lag (

), a model that
includes a lag and a constant (

), as well as a constant-less and trend-less model (). The hypothesis


tested in these models correspond to a null hypothesis stating that it is not stationary (H
0
: y
t
is not I(0)
or = 0); against the alternative hypothesis that it is not an integrated series, i.e., it is a stationary
series (H
1
: y
t
is I(0)).

Table 1. Results of the unitary root from the Augmented Dickey-Fuller test for the null hypothesis
stating that the monthly logarithmic returns of the soybean price paid to producers in Brazil are not
stationary
Total Lags
1 -9.041*** -9.065*** -9.005***
2 -7.119*** -7.129*** -7.060***
3 -6.702*** -6.702 ** -6.612***
4 -6.875*** -6.856*** -6.711***
5 -6.419*** -6.407*** -6.257***
*** indicates the null hypothesis is rejected for a significance level of 1%.


Initially, we applied the unitary root test to the logarithmic return of the soybean price paid to
producers. We can see on Table 1 that the null hypothesis that the indexes are not stationary must
not be rejected for all simulations. Gujarati (2003) says that, in order to use the Box-Jenkins method,
we must have in hands a stationary time series or a series that can become stationary with one or
more lags.

According to Pokorny (1987), the Box-Jenkins methods objective is to spot and estimate a statistical
model that can be interpreted as having been generated by the sample data. If such estimated model
can be used to make predictions, we should assume that such models features are constant through
time, especially in future periods. Thus, the reason to demand stationary data is that any model that is
to be inferred from these data can be itself interpreted as stationary or stable, thus offering a valid
basis for forecast.

The models analysis was carried out using the autocorrelation function (ACF) coefficient,
accompanied by the residues Ljung-Box test. Autocorrelation is verified when at least one of the
autocorrelation coefficients is different from zero and when the p-value, as well as the Ljung-Box Q-
statistic are small enough to reject the null hypothesis that states that the errors in the models have
no correlation. It was considered a 95% interval for the autocorrelation coefficients different from zero
and for the Ljung-Box test. Picture 3 shows the ACF test results for the residues and the p-value for
the Ljung-Box statistic.


Picture 3 results for the ARIMA model (1,1,1) residues test

Picture 3 shows the ARIMA model diagnosis graphics (1,1,1). We can see that the ACF statistic for
residues shows that no correlation can be not null and that the p-values for the residues
independence test, measured by the Ljung-Box statistic, they are always above 70%. It is important to
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note that the Ljung-Box statistic was initially suggested by Ljung & Box (1978), where the tested null
hypothesis states that the data (model residues) are independently distributed; and the alternative
hypothesis states that the data are not independently distributed. Having p-values always above 70%,
it is impossible not to reject the null hypothesis, thus being possible to conclude that the model is
properly adjusted, an the residues seem to be white noise.

After estimating and validating the model, we then move on to the forecast process. We carried out 70
forecasts, only for t+1, i.e., only for one step (month) ahead, between April 2006 and December 2011.
It is important to note that in this period there was the so-called American crisis, basically consisting of
a credit crisis in the banking sector. Symptoms were however perceived in other sectors, especially
the agricultural productive sector.

In this sense, Krugman et al. (1999) says that there is no universally accepted formal definition for the
concept of crisis, but we know them when we see them. According to the author, the basic element is
a type of circular logic, where investors run away from an investment because they fear that it can go
down, and where there are many (although not necessarily all of them) pressures for going down that
come precisely from such capital flee. The author quotes that such crisis has been a recurring feature
in international economy, since gold and silver coins were replaced by coin-paper.

The global systemic global crisis coming from the USA strongly affected the Brazilian economy. De
Freitas (2009) says that happened as far as both external trade and financial flux, including
commercial credit lines and market application of Brazilian equity. In Brazil, the most immediate effect
was the downfall in stock markets, caused by the major selling of stocks to foreign speculators that
literally stepped on each other to repatriate their equity in order to cover their loss in their own
countries. As a consequence, there was an expressive dollar high. This rise of the American currency
directly influenced the Brazilian agro-business sector.

In order to limit periods, we used a theoretical limit based in the article by De Freitas (2009).
According to this author, the period the most crisis turbulence was from September 2008 to May 2009
nine months. This period was called during the crisis. The moment made up of the previous
twenty-six months (June 2008 August 2008) before that period was called before the crisis. Last,
the post-crisis period was from June 2009 and December 2011 (32 months). The forecasts results
are shown in Table 2.

Tabela 2: Forecasts results before, during and after the 2008 American crisis, for the logarithmic
return of the soybean monthly price paid to producers in Brazil
Category R
2
Correlation Signals MSE MAE U U
M
U
S
Ivakhn
enko
All sample 0.1491 0.3861 0.6563 0.0027 0.0387 0.0287 0.1067 0.0000 1.0007
Before the crisis 0.1382 0.3718 0.7143 0.0023 0.0384 0.0251 0.1024 0.0000 1.0163
During the crisis 0.1220 -0.3492 0.1111 0.0087 0.0793 0.0777 0.0002 0.0003 1.7961
Post-crisis 0.3845 0.6201 0.7778 0.0013 0.0302 0.0173 0.0011 0.0001 0.6191

In Table 2, we can see that, according to the Ivakhnenko criterion, shown in Equation [8], the
logarithmic return forecast for soybean price, in all sample and for the period before the crisis, was
ineffective. Positively, we note that the Theil U, the variance proportion (U
M
) and the error bias
proportion (U
S
) have shown to be adequate, thus indicating the absence of a systematic error in the
forecast, which would denote that significant information contained in the original series had not
been modelled.

In the period of time contemporary to the 2008 American crisis, results have completely degenerated
and the Ivakhnenko criterion, Ivakhnenko and Mller (1993), showed the performed forecasts to be
unsatisfactory and the results to be misinformation.

Yet in the period after the crisis (June 2009 December 2011), forecasts have shown to be
satisfactory (Ivakhnenko criterion equals 0.6191). In 77.78% of the cases, the forecasts signs were
right, with a special emphasis for square-R that was 0.3845. Other indicators, such as MSE and MAE
significantly improved, when compared to other analysed periods.
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These results denote a new behaviour for soybean prices paid to producers in Brazil after the
2007/2008 crisis. The series has shown to be more predictable with the Box-Jenkins model, for the
post-crisis period. This research corroborates what was suggested by Righi and Certta (2011), who
have demonstrated that there is mild inefficiency for the Brazilian soybean prices series, thus opening
the possibility for arbitrage procedures and abnormal returns for this type of investments, as well as
opportunities for the farmer to plan how to sell this commodity in more favourable moments.

4. FINAL CONSIDERATIONS

In this research we aimed to assess the predictability of the monthly return of soybean price paid to
producers in Brazil. Initially, the logarithmic return of this series was calculated. Then, we tested the
hypothesis that stated that returns would follow a random walk which would prevent predictability. In
this test, we noted that soybean prices returns show different features depending on the period
before implementing the Real plan (October 1994) and after this moment. Thus, we used 194 months
in order to simulate the modelling parameters and another 64 months to carry out forecasts (April
2006 December 2011).

The forecasts results have shown to be unsatisfactory for all sample; however, the results obtained in
the simulations performed after the American crisis (May 2009 December 2011) showed that the
analysed commodity prices have become more predictable for the ARIMA model (1,1,1). The Box-
Jenkins model has shown to be able to demonstrate the returns non-randomness, denoting
inefficiency for this market, arbitrage opportunities and abnormal return to investors, as well as the
opportunity for producers in that region to plan their sales to more favourable periods.

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