Assessing the Effects of Product Quality and Environmental Management Accounting on the Competitive Advantage of Firms
Dunk, Alan S., Australasian Accounting Business & Finance Journal
Arguments have been made in the literature that product quality provides a basis for establishing and maintaining a firm's competitive advantage. Proposals suggest that the framework provided by environmental management accounting facilitates product quality having the attributes that are likely to contribute to competitive advantage, and hence it is likely that environmental accounting plays an influential role in that relation. The purpose of this study is to examine empirically whether there is evidence for environmental management accounting impacting on the relation between product quality and competitive advantage. These findings support the view that environmental management accounting has an important role to play in firms. Specifically, the results of the study suggest that product quality contributes to a firm's competitive advantage when the reliance on environmental management accounting is high. However, it fails to do so when the reliance on environmental management accounting is low.
Key words: environmental management accounting; product quality; competitive advantage.
A critical factor reportedly behind product quality initiatives undertaken by many organizations has been the increasingly global nature of competition (Shank and Govindarajan 1994; Callahan and Lasry 2004). Quality is typically regarded as a key driver of competitive advantage and hence the enhancement of product quality has been of prime concern to firms (Daniel et al. 1995; Flynn et al. 1995; Foster and Sjoblom 1996). It has also been a matter of concern to the management accounting literature, in which studies focusing on learning curves, cost of quality and zero defect approaches to quality have frequently been featured (for example Malmi et al. 2004; Foster and Sjoblom 1996). In accounting practice, cost of quality (prevention, appraisal, internal failure and external failure costs) is a widely used method in the control of quality costs, as are zero defect approaches to quality (Shank and Govindarajan 1994; Anderson and Sedatole 1998).
Smith and Wright (2004) reported that product quality refers to the extent to which products meet the expectations of customers, and argued that product quality improvement should lead to customer satisfaction and higher sales. Product quality typically takes into consideration product design and customer requirements as well as the environmental attributes of products (Flynn et al. 1994; Lynch 1999; Porter and van der Linde 1995; Nadia 2001; Wagner 2005). Azzone and Bertele (1994) indicated that the environmental attributes of products are a critical factor in the buying behaviors of consumers. The literature suggests that there are also a number of product quality consequences at the organizational level. For example, Shank and Govindarajan (1994) argued that quality is widely recognized as a key competitive weapon of firms. Similarly, arguments have been made that quality provides a basis for establishing and maintaining a global competitive advantage (for example Porter 1991; Flynn et al. 1995; Terziovski et al. 1999). A firm's competitive advantage is defined as the way in which it creates value for its customers, which allows it to establish and sustain a defensible position in its product market (Flynn, Schroeder and Sakakibara 1995).
However, the literature suggests that environmental management accounting may influence the extent to which product quality contributes to competitive advantage. In one of the first attempts to focus on environmental management accounting, AT&T defined it as the integration of environmental factors into management accounting systems, models and practices throughout an organization (USEPA 1995a). It addresses the importance an organization places on the reduction or elimination of process waste, the tracing of costs to environmental activities, the consideration of environmental matters in investment and design decisions, the needs of customers and other stakeholders, the improvement in compliance with environmental standards, the support of sustained profit growth, and the identification, reduction, and/or elimination of material with environmental downsides. …