Production Planning & Control

The Management of Operations

ISSN: 0953-7287 (Print) 1366-5871 (Online) Journal homepage: https://www.tandfonline.com/loi/tppc20

Lean service, business strategy and ABC and their

impact on firm performance

Wael Hadid

To cite this article: Wael Hadid (2019): Lean service, business strategy and ABC and their impact
on firm performance, Production Planning & Control, DOI: 10.1080/09537287.2019.1599146

To link to this article: https://doi.org/10.1080/09537287.2019.1599146

Published online: 14 May 2019.

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PRODUCTION PLANNING & CONTROL
https://doi.org/10.1080/09537287.2019.1599146

Lean service, business strategy and ABC and their impact on firm performance
Wael Hadid
Sheffield University Management School, University of Sheffield, Sheffield, UK

ABSTRACT ARTICLE HISTORY

This paper aims to address an underdeveloped area in the lean system literature by developing Received 29 May 2018
and testing a model which clarifies the current confusion on the role of different costing systems and Accepted 20 March 2019
business strategies in the implementation of lean service practices and their impact on financial
KEYWORDS
performance. Using data from UK service firms, the proposed positive effect of lean service on finan-
Lean Service; activity-based
cial performance is supported. Further, activity-based costing (ABC) has a positive impact on lean costing; business strategy;
service, and therefore to indirectly on financial performance. Interestingly and in contrast to previous financial performance
studies, both the differentiation and cost leadership strategies are directly and positively related to
lean service. However, whilst ABC positively intervenes in the lean-differentiation relationship, it
suppresses the lean-cost leadership relationship resulting in a situation of inconsistent mediation.

1. Introduction of keeping TCSs in the lean environment and the noticeable

lack of evidence, based on large-scale quantitative studies,
The literature on lean system is still expanding and after
on this impact contributes to this deficiency in the lean sys-
establishing the significance of the system in relation to the
tem-cost accounting literature. This necessitates more studies
performance of the adopting firms (e.g. Galeazzo and Furlan
in order to document sufficient evidence on the impact of
2018; Shamsuzzaman et al. 2018; Hadid and Mansouri 2014),
different costing systems in the lean environment (Fullerton,
more attention has been devoted to the factors which facili- Kennedy, and Widener 2014, 2013).
tate/hinder the implementation of its practices (e.g. Bellisario Secondly, there has been very limited attention to the
and Pavlov 2018; Melin and Barth 2018; Tezel, Koskela, and role of business strategy in the lean environment and the
Aziz 2018). This is not surprising, especially, due to the major four studies which attempted to contribute in this area
changes brought about by lean practices and the investment reported completely different results. Whilst Baines and
needed to implement and maintain them (Swink and Jacobs Langfield-Smith (2003) and Chenhall and Langfield-Smith
2012; Scherrer-Rathje, Boyle, and Deflorin 2009). Therefore, (1998) found differentiators to engage with lean practices,
understanding how lean practices operate in relation to Hallgren and Olhager (2009) and Qi, Zhao, and Sheu (2011)
other organizational factors is of paramount importance reported evidence to the contrary. In consequence, based
(Melin and Barth 2018; Negr~ao, Filho, and Marodin 2017). on the available knowledge and limited empirical evidence,
However, an underdeveloped area concerns the role of cost- it is very difficult to make any conclusion about whether
ing systems and business strategy in the lean environment. lean practices could be more favoured by firms focusing on
Firstly, some scholars in the management accounting lit- cost efficiency or by those focusing on quality improvements
erature argued, through theoretical or case studies, against or perhaps by both. In addition, the aforementioned studies
the use of traditional costing systems (TCSs) in the lean did not attempt to offer explanations to their results and did
environment as doing so would hinder the implementation not consider the potential role of costing systems in the
of lean practices believed to be better supported by activity- strategy-lean association which also limits our understanding
based costing (ABC) or value stream costing (e.g. Li et al. of why, for instance, cost leaders were found to implement
2012; Cooper and Maskell 2008; Datar et al. 1991). Whilst the lean practices in some studies but not in others.
results of such studies require further external validation as In response to the above, this current paper aims to con-
recommended by some of these scholars themselves, tribute by developing and testing a more complex theoret-
Fullerton and McWatters (2004) raised more concerns about ical model than in prior studies to offer more insights into
their validity when they found that firms adopting advanced the role of different costing systems and business strategy in
manufacturing systems including lean practices were still the lean service environment (i.e. the use of lean practices
relying on TCSs. However, this latter study did not discuss by service firms) and their impact on firm performance. By
whether firms keeping their TCSs were facing problems in doing so, the current study differs from prior studies in a
the implementation of lean practices. Such confusing results number of ways and is expected to make the following
leave researchers and practitioners unclear about the impact contributions.

CONTACT Wael Hadid [email protected] Sheffield University Management School, University of Sheffield, Conduit Road, Sheffield S10 1FL, UK
ß 2019 Informa UK Limited, trading as Taylor & Francis Group
2 W. HADID

Rather than focusing on the role of each individual vari- its goals, some principles and practices have been developed.
able in isolation as in prior studies, their roles will be exam- Womack and Jones (1996) provided five general principles
ined simultaneously in one model by integrating three which can be used as a road map by practitioners: (i) value:
different streams of literature; the lean-cost accounting litera- focuses on identifying what is perceived by customers as valu-
ture, the lean-business strategy literature and the business able, (ii) value stream: requires the identification of all activities
strategy-cost accounting literature. By doing so, the current for producing/delivering products/services, (iii) flow: focuses
study, firstly, uncovers more complex relations than in prior on removing bottlenecks so that value-adding activities flow
studies by testing both the direct and indirect impact of without interruptions, (iv) pull: work can only start when a
business strategy on a lean system through the costing sys- customer places an order, (v) perfection: to continuously ques-
tems used. Such complex relations will help offer some tion the current processes and seek ways to improve them. To
explanations to the mystifying results reported in the lean- operationalize the five lean principles, several practices are
business strategy literature. Secondly, the impact of different used (e.g. 5S, value stream mapping, group technology,
costing systems on lean practices will be documented in workload balancing, etc.), all of which concentrate on identify-
order to supplement the existing body of theoretical and ing and eliminating wasteful activities (Shamsuzzaman et al.
case-studies (e.g. Li et al. 2012; Datar et al. 1991) with more 2018; Tezel, Koskela, and Aziz 2018; Shah and Ward 2003).
evidence based on a large-scale quantitative study to test From a lean perspective and based on customer value, a
the external validity of their argument. Thirdly, whilst the company’s activities can be classified into three classes
cost accounting literature has failed to conclusively prove a (Hines and Rich 1997); (1) necessary value-added activities,
positive relationship between the use of costing systems and (2) necessary NVAs (e.g. unpacking deliveries) and (3)
firm performance (e.g. Maiga, Nilsson, and Jacobs 2014; unnecessary NVAs (e.g. work duplication). Lean service practi-
Ittner, Lanen, and Larcker 2002; Mishra and Vaysman 2001), ces target the third category which is perceived as pure
the current study proposes and tests the potential mediating waste and point to the need to modify the current oper-
ational system in order to minimize and later eliminate
role of lean practices in this relationship which has rarely
the second group of activities. In the service environment,
been examined in either the costing or operations manage-
this may lead to considerable improvements. For instance,
ment literature (Banker, Bardhan, and Chen 2008).
Atkinson (2004) studied eight functions in a financial com-
The remainder of this paper is organized as follows.
pany and found that about 200 activities could be classified
Some background information and literature on the three
as wasteful activities in the form of rework and duplication,
main concepts examined in this study and important for the
yet they comprised 40% of labour costs.
hypotheses development are presented in Section 2. The
methodology, analysis and results are reported in Sections
3 and 4, respectively. Section 5 presents a discussion of the 2.1.2. Business strategy
main findings and in the last section, the conclusion, limita- Business strategy can be defined as the way through which
tions and avenues for future research are provided. a company decides to compete in a selected market for
competitive advantages (Porter 1980). Different typologies
have been developed for classifying companies based on the
2. Literature and hypotheses development
approach they adopt (e.g. Gupta and Govindarajan 1984;
2.1. Brief background information Porter 1980; Miles and Snow 1978).
Porter (1980) classified companies according to how
2.1.1. Lean service they manage the five market forces into three strategic
The lean system is commonly defined as a multi-dimensional types. These include (1) cost leadership, (2) differentiation
approach with principles and practices aiming to remove and (3) focus. The cost leadership strategy can be defined
non-value-adding activities (NVAs) and improve customer as ‘an integrated set of actions taken to produce goods or
value accordingly (Shah and Ward 2003; Bowen and services with features that are acceptable to customers
Youngdahl 1998). The term ‘lean manufacturing’ came into at the lowest cost, relative to that of competitors’ (Hitt,
existence through a pioneering article by Krafcik (1988). Ireland, and Hoskisson 2016, p. 118). On the other hand,
Womack and Jones (1996) formally extended the concept of the differentiation strategy is understood as ‘an integrated
lean manufacturing to other functional areas by introducing set of actions taken to produce goods and services (at an
the term ‘lean thinking’ which was later extended to all ser- acceptable cost) that customers perceive as being different
vice industries by formally coining the term ‘lean service’ by in ways that are important to them’ (Hitt, Ireland, and
Bowen and Youngdahl (1998). Hoskisson 2016, 121). The third category, the focus cat-
Whilst the scope of the term ‘lean’ has extended over time, egory, includes companies serving a segment of the market
the essence of the concept has remained the same. Like lean and competing through either the differentiation or cost
manufacturing, lean service seeks to eliminate waste from leadership strategy. Therefore, this category is not an expli-
processes to improve customer value (Shamsuzzaman et al. cit strategy in itself (Langfield-Smith 1997).
2018; Hadid, Mansouri, and Gallear 2016). It assumes that all Unlike differentiators, cost leaders operate in
organizations are comprised of a set of processes and activities relatively stable markets, compete on a price basis, and pro-
which can be controlled and continuously improved (Allway duce a narrower range of standardized products/
and Corbett 2002). To implement a lean service and achieve services (Ward, McCreery, and Anand 2007; Porter 1980).
 PRODUCTION PLANNING & CONTROL 3

Furthermore, according to the value chain literature, cost ABC systems assume that products/services consume activ-
leaders and differentiators organize their value chains differ- ities which, in turn, consume resources (Cooper and Kaplan
ently (Porter 1991). Cost leaders seek to organize activities 1992). Hence, ABC systems break down processes into their
and processes in their value chain so that they are carried major activities, trace overhead costs to these activities and
out at the lowest possible cost (Porter 1985). In contrast, dif- then use the most relevant cost drivers (volume-based and
ferentiators focus on how to organize and perform activities non-volume based) to allocate the accumulated overheads
and processes in a way to look unique to customers to the final cost objects (Al-Omiri and Drury 2007). For
(Porter 1985). proponents, the mechanism of ABC guarantees a more pre-
Porter’s typology will be used in this study for a number cise measurement of the resources consumed by each prod-
of reasons. First, researchers carrying out survey studies need uct/service, which results in more detailed and accurate
a simple typology for measuring business strategy that can cost information (Cooper and Kaplan 1992). In addition, by
be both easily communicated to managers and able to cap- decomposing processes into their major activities and
ture the complex gestalt of strategic attributes (Auzair and recording their respective costs, ABC systems can support
Langfield-Smith 2005). Porter’s typology has extensively been improvement initiatives by revealing NVAs which become
tested and its simplicity and capability to capture complex the target for elimination (Maiga and Jacobs 2008).1
relations have been proved (Miller and Dess 1993). Second,
researchers have recognized the similarities between the
Porter’s typology and the other commonly used typology 2.2. Hypotheses development
(defenders vs. prospectors) developed by Miles and Snow 2.2.1. ABC and business strategy
(1978). For instance, in her literature review article, Langfield- Unlike cost leaders, the success of differentiators depends
Smith (1997) found that cost leaders/defenders have similar largely on their continuing development of customized prod-
control systems which are detailed, seek to reduce uncer- ucts/services which meet the demands of a wide range of
tainty, emphasize problem-solving but not useful for new customers (Ward, McCreery, and Anand 2007; Porter 1980).
product development and/or capturing new market opportu-
This usually leads to more complex operations and substan-
nities. In contrast, the control systems of prospectors/differ-
tial increases in overheads. Thus, differentiators may rely on
entiators emphasize problem identification and flexibility to
ABC which can capture the complexity of their operations
respond to their rapidly changing environment. Defenders/
and provide a fair view of how resources are consumed
cost leaders are also found to link their reward systems to
(Gosselin 1997). Schoute (2011) found that companies with
budget targets and to rely on formula-based rewarding
higher products/services diversity relied on ABC in order to
systems. In contrast, differentiators/prospectors are more
capture the complexity resulting from placing different
likely to use subjective evaluation for determining rewards
demands on companies’ activities and resources. Ben-Arieh
(Langfield-Smith 1997). These similarities and others resulted
and Qian (2003) provided a good example of how ABC gen-
in placing differentiators/prospectors at one extreme point of
erates useful information about the activities carried out at
a continuum whilst cost leaders/defenders were positioned
the design and development stage of a product, which can
at the other extreme one, with different possible combina-
be critical for differentiators. Moreover, whilst ABC can be an
tions of strategies lying in between (Chenhall 2003; Gosselin
expensive system, differentiators are usually poised to invest
1997). Therefore, even those who used the Miles and Snow’s
in innovative systems (e.g. ABC) in their constant attempts to
(1978) typology justified their decision based on these
improve their flexibility and responsiveness to customer
similarities (e.g. Gosselin 1997; Chong and Chong 1997) and
needs (Chenhall 2003; Chenhall and Langfield-Smith 1998).
used the findings based on Porter’s typology to build their
In the case of cost leaders, the motivation for ABC is less
hypotheses (e.g. Naranjo-Gil, Maas, and Hartmann 2009).
clear than expected. On one hand, because cost leaders
focus on cost efficiency, some may believe they should use
2.1.3. Activity-based costing system (ABC) ABC to help them understand how and where resources are
ABC systems were introduced in the 1980s to address the consumed (Malmi 1999). On the other hand, cost leaders
problems associated with the then used TCSs. The changes may prefer TCSs as they are comparatively cheaper to imple-
in the business environment, including higher levels of com- ment. In addition, TCSs may not generate largely distorted
petition, more complex operations, increasing levels of auto- cost information for companies which operate in relatively
mation and the production of more customized products/ less volatile markets and produce a range of relatively similar
services, led to a substantial increase in the overhead costs products/services as in cost leaders (Gosselin 1997).
(Johnson and Kaplan 1987). This new environment has chal- Gosselin (1997) studied 161 manufacturing firms and found
lenged the validity of TCSs which capture the consumption ABC to be more used by prospectors than defenders. Similarly,
of overheads at a departmental level and then allocate Baines and Langfield-Smith (2003) empirically demonstrated
them using mainly volume-based drivers (e.g. labour costs) that firms with a differentiation strategy would require more
(Cooper and Kaplan 1992). advanced accounting systems such as ABC, and Chenhall and
A typical ABC system is usually defined as ‘a method Langfield-Smith (1998) further demonstrated that ABC would
for accumulating product costs by determining all costs asso- generate more benefits to firms with a differentiation strategy
ciated with the activities required to produce the output’ than to firms with a cost leadership strategy. In contrast to
(Qian and Ben-Arieh 2008, 807). In contrast to TCSs, typical cost leaders, ABC is used by differentiators not only to control
4 W. HADID

and manage costs but also to obtain more insights into the prices, they still consider operating costs through their
value-added activities essential to enhance product differenti- higher use of ABC for more relevant cost information
ation. More direct evidence on the strategy-ABC relation was (Naranjo-Gil, Maas, and Hartmann 2009). This provides an
reported by Malmi (1999), Bhimani, Gosselin, and Ncube extra motive for firms with a differentiation strategy to adopt
(2005) and Naranjo-Gil, Maas, and Hartmann (2009). Malmi lean practices which help in controlling operating costs.
(1999) initially expected a positive ABC-cost leadership strat- Cost leaders seek to protect themselves in the market by
egy association but his empirical analysis failed to confirm it. producing a narrower range of relatively similar products at
Bhimani, Gosselin, and Ncube (2005) examined the direct strat- low costs (Porter 1980). Operational efficiency becomes then
egy-ABC relation using data from 416 firms in seven countries essential and may encourage cost leaders to adopt lean ser-
and logistic regression. The findings indicated that the pro- vice practices (Qi, Zhao, and Sheu 2011). An essential attri-
spector strategy was positively associated with the implemen- bute of lean service is its focus on wasteful activities which,
tation of ABC. However, Bhimani, Gosselin, and Ncube (2005) in service firms, may amount up to 40% of labour costs
measured strategy as a dummy variable where ‘1’ indicated a (Atkinson 2004). By eradicating NVAs, lean practices encour-
prospector strategy and ‘0’ otherwise (including defenders). age service firms to do more with less (i.e. less capital, space
Therefore, the findings could also indicate that defenders, in and labour) (Swank 2003). For instance, lean practices
general, did not favour ABC. Similarly, Naranjo-Gil, Maas, and emphasize the importance of performing tasks right the first
Hartmann (2009) measured strategy on a semantic differential time. This improves employee productivity by reducing the
scale in which a low score indicated a defender strategy and a time spent on rework activities along with all associated
high score represented a prospector strategy. Using data from costs (Piercy and Rich 2009). Moreover, lean practices focus
98 firms, their findings revealed a positive effect of business on improving the work environment by grouping activities
strategy on the use of innovative management accounting and people needed for delivering similar products/services in
techniques including ABC. Taking into account the measure- the same area (Hadid, Mansouri, and Gallear 2016). This can
ment method of the strategy variable, the finding could also help cost leaders reduce unnecessary movements of employ-
imply that prospectors used ABC whilst defenders did not. ees, which contributes to higher productivity and efficiency.
Therefore, the following hypotheses are formulated: Surprisingly, whilst from a theoretical perspective both
differentiators and cost leaders may have incentives to imple-
H1: There is a direct positive relationship between the ment lean practices, the results of large-scale surveys have
use of ABC and the differentiation strategy. been confusing. Using data from 78 manufacturing firms,
H2: There is a direct negative relationship between the Chenhall and Langfield-Smith (1998) suggested that better per-
use of ABC and the cost leadership strategy. forming firms adopted both the differentiation strategy and
lean practices. Including a larger number of manufacturing
firms (140 firms), Baines and Langfield-Smith (2003) concurred
2.2.2. Business strategy and lean service with Chenhall and Langfield-Smith (1998) by demonstrating
Joshi, Kathuria, and Porth (2003) have argued that operations that differentiators had a higher usage of innovative practices
strategy should be designed to support the overall business including Total Quality Management (TQM) and Just-in Time
strategy, implying a potential influence of business strategy (JIT)2. In contrast, Qi, Zhao, and Sheu (2011) collected data
on the adoption of lean practices (Ward, McCreery, and from 604 manufacturing companies and found that adopting
Anand 2007). the cost leadership strategy was positively associated with
Lean service revolves around improving customer value the implementation of lean practices and similar evidence
and responding quickly to their changing needs (Shah and was also earlier reported by Hallgren and Olhager (2009).
Ward 2003). Differentiators are likely to appreciate such a Apparently, there has been some confusion regarding the
system. Due to their volatile market environment and the relationship between the different types of business strategy
negative impact on productivity resulting from their focus on and lean practices. This problem was exacerbated by the
customization (Kumar and Telang 2011; Gosselin 1997), dif- lack of plausible explanations to the mixed results reported
ferentiators can rely on lean practices to develop high-quality in prior studies, which necessitates further research in this
products/services quicker in response to changes in customer respect. However, based on the theoretical argument pre-
needs (Kennedy and Widener 2008). In addition, all employ- sented above the following hypotheses will be tested:
ees, in the lean environment, are responsible for quality
control and quality issues which are encouraged to be H3: There is a direct positive relationship between differ-
addressed at the source (Piercy and Rich 2009). This helps entiation strategy and the implementation of lean ser-
differentiators to improve productivity through avoiding or vice practices.
minimizing rework time due to quality issues. In addition, by H4: There is a direct positive relationship between cost
removing wasteful activities from processes, lean practices leadership strategy and the implementation of lean ser-
enable differentiators to shorten lead time which results in vice practices.
better responsiveness to customers (Shamsuzzaman et al.
2018); a necessary attribute for companies operating in vola-
tile markets (Hadid, Mansouri, and Gallear 2016; Lei, Hitt, 2.2.3. ABC and lean service
and Goldhar 1996). Furthermore, despite the ability of differ- Lean service practices revolve around the elimination of
entiators to compensate for additional costs by increasing NVAs to improve processes (Shamsuzzaman et al. 2018;
 PRODUCTION PLANNING & CONTROL 5

Womack and Jones 1996). However, TCSs do not facilitate Banker, Bardhan, and Chen 2008). In addition, mixed results
the achievement of this goal by producing aggregate infor- were reported in this body of literature. Fullerton and
mation and encouraging the absorption of all overhead costs McWatters (2004) surveyed manufacturing firms and found
into cost objects (Banker, Bardhan, and Chen 2008). Such a that firms adopting advanced manufacturing systems includ-
practice hides waste in overhead allocation rates and con- ing lean practices were still relying on TCSs. However, the
ceals areas for improvement (Chenhall and Langfield-Smith authors did not discuss whether firms keeping their TCSs
1998). Datar et al. (1991) and; Gurd, Smith, and Swaffer were facing problems in the implementation of lean practi-
(2002) have highlighted through case studies how TCSs hold ces. In contrast, Innes and Mitchell (1995) found the UK’s
back improvement initiatives by generating misleading cost largest companies engaging in improvement programmes
information on the effectiveness of process innovations including continuous improvement, TQM and JIT to be also
which may lead managers to erroneously cease such innova- using ABC. Negr~ao, Filho, and Marodin (2017), in their litera-
tions. In contrast, ABC records cost information at the activity ture review study, concluded that TCSs could have a detri-
level and uses more relevant cost drivers for allocation pur- mental effect on the implementation of lean practices and
poses (Cooper and Kaplan 1992). In consequence, ABC may hence they should be avoided. Banker, Bardhan, and Chen
equip managers with more detailed and relevant cost infor- (2008) studied 1250 manufacturing plants and found that
mation which enhances their understanding of where and those using ABC had a higher implementation level of
how resources are consumed (Cooper and Kaplan 1992). lean practices which, in turn, improved firm performance.
With this in mind, there are different ways through which Evaluating the mixed results presented above, the following
ABC can support lean service. hypothesis will be tested.
First, by using activities as cost centres, ABC can be useful
in differentiating between value-added activities and NVAs, H5: The use of ABC is positively related to the implemen-
which is essential for lean service (Hadid and Mansouri 2014; tation of lean service practices.
Maiga and Jacobs 2008). Moreover, reporting quantitative
measures of the costs consumed by each activity can be 2.2.4. Lean service and firm performance
instrumental in (1) highlighting the need for management to Lean service is designed to improve processes by focusing
implement lean practices to eradicate unproductive activities on NVAs from the customer perspective (Hadid, Mansouri,
and (2) prioritizing areas for improvement (Ittner, Lanen, and and Gallear 2016; Shah and Ward 2003). The basic premise
Larcker 2002). This is particularly important since Tezel, of the system is that by eliminating NVAs, several benefits
Koskela, and Aziz (2018) found that one of the main reasons can be achieved including a reduction in operating costs,
behind the lack of implementation of lean practices was the higher productivity and efficiency, improved flexibility,
inability of managers to develop a robust business case dem- enhanced customer satisfaction and profitability (Nielsen,
onstrating clearly the potential benefits of these practices. Kristensen, and Grasso 2018; Shamsuzzaman et al. 2018;
Second, budgets and the associated variance analyses pro- Agarwal et al. 2013). Several practices can usually be used to
duced under ABC are thought to be more meaningful in target NVAs such as standardization, automation, 5S, process
highlighting the negative variances for lean practices to redesign, etc.3 (Hadid and Mansouri 2014). The effectiveness
improve (Abu Mansor, Tayles, and Pike 2012). This ensures of these practices, and others, in delivering the aforemen-
that lean practices are not implemented to improve already tioned benefits has been the subject of ongoing debate
efficient processes. If lean practices are mistakenly used to among researchers (Galeazzo and Furlan 2018; Nielsen,
improve efficient processes, this may subsequently lead to Kristensen, and Grasso 2018; Shamsuzzaman et al. 2018;
little or no improvement which, in turn, would damage the Hadid, Mansouri, and Gallear 2016). For example, Cua,
reputation of the lean system and would ultimately result in McKone, and Schroeder (2001) classified lean practices
the abandonment of this system (Banker, Bardhan, and Chen into three bundles (i.e. TQM, JIT, and Total Preventive
2008; Datar et al. 1991). In its attempt to implement lean Maintenance (TPM)) and investigated their joint impact on
practices, Irving Oil moved to an activity-based budgeting manufacturing performance. Their results highlighted the
system which highlighted to managers the number of NVAs importance of implementing lean practices as a system and
along with their associated costs (Carr, Lawler, and Reny their capability to improve manufacturing performance. Shah
2012). Using the ABC concept was an eye-opener for Irving and Ward (2003) extended the work of Cua, McKone, and
Oil managers and triggered attempts to modify the existing Schroeder (2001) by using a larger sample (1757 manufactur-
processes in order to eliminate NVAs. For instance, after ing plants) and adding a fourth bundle (Human Resource
moving to ABC-based budgeting, the company realized that Management) into the analysis. Their findings confirmed ear-
about $1 million a year was spent on reconciliation activities lier results and highlighted the positive role of each of the
which did not add value. Removing these NVAs resulted in lean bundles in enhancing operational performance. Alsmadi,
savings of $17 million in 2011 which increased to $30 million Almani, and Jerisat (2012) empirically demonstrated that
in 2012 (Carr, Lawler, and Reny 2012). although some differences existed in the implementation of
To date, there has been very little effort to provide empir- lean practices between manufacturing and service firms, lean
ical evidence through large-scale survey studies on the role practices improved the financial and operational perform-
of different costing systems (e.g. TCSs vs. ABC) in the lean ance of adopters in both sectors. Agarwal et al. (2013)
environment (Fullerton, Kennedy, and Widener 2014, 2013; reported slightly different results indicating that lean
6 W. HADID

Cost
leadership
H2 (-) H4 (+)

H5 (+) H6 (+) Financial

ABC Lean performance
service

H1 (+)
H3 (+)
Differentiation
Control variables
Firm size
Industry
Past performance

Figure 1. The research framework.

practices could influence only some performance measures amendments were applied to improve the questionnaire
(i.e. sales, profit and profit margin). Based on the above: accordingly. The questionnaire, a prepaid envelop, and
personalized letter were distributed to the sample firms tar-
H6: There is a direct positive relationship between the
geting positions such as chairman, CEO, operations director
implementation of lean practices and firm performance.
or finance director. To avoid different interpretations of
Figure 1 depicts the research framework which highlights lean practices, an A4 sheet which included a definition
the associations between the main constructs and two of lean practices as recently published by Hadid and
important points. More specifically, integrating the argu- Mansouri (2014) was also in the package. A second letter
ments for H1, H2 and H5 brings to light the ABC intervening was posted to all non-respondents after 3 weeks from the
impact in the strategy-lean relationship. Based on that, a full first contact and followed by a telephone call to all non-
understanding of how business strategy influences lean ser- respondents to encourage them to participate. To improve
vice can be gained by considering its both direct as well as the response rate, a summary of the results was promised
indirect effect through ABC and this will help to explain the to all participants.
mystifying results in this stream of literature as shown later. Of the 1000 questionnaires distributed, 70 were returned
In addition, combining the arguments for H5 and H6 high- because of wrong addresses5. Of the 930 delivered question-
lights the role of lean practices in mediating the ABC-per- naires, 186 were received and later reduced to 105 as 81
formance relationship which the cost accounting literature questionnaires were returned empty for different reasons6
could not adequately prove. In contrast to what the direct resulting in a response rate of 11.3%. Six questionnaires were
effect suggested by previous studies (e.g. Maiga, Nilsson, and further eliminated due to high missing data leaving 99 ques-
Jacobs 2014; Mishra and Vaysman 2001), the theoretical tionnaires in the sample. The response rate is comparable to
model depicted in Figure 1 points to a potential mediating that of recent surveys such as the 7.9%, 10.6% and 14.9%
effect of lean practices in the ABC-firm performance relation- obtained by Inman et al. (2011), Kim, Kumar, and Kumar
ship which has not been sufficiently examined in the litera- (2012) and Auzair and Langfield-Smith (2005), respectively.
ture (Banker, Bardhan, and Chen 2008). The sample distribution per industry included 20 firms
from the financial industry, 9 from education, 16 hotels and
restaurants, 8 from the post and telecommunication, and 6,
3. Methodology 16 and 24 firms from the transport, wholesale and retail, and
3.1. Sample selection and data collection other services, respectively. Respondents had on average 17
years of experience in their management position and 9
For testing the research model, data were collected from UK years at their current firm, which could be a positive indica-
for-profit private service firms4. Using the Financial Analysis tion about the credibility of the collected data.
Made Easy (FAME) database, a sample of one thousand firms To test for non-response bias, ANOVA analysis was per-
was randomly drawn which had to meet the following crite- formed on two variables; firm age and turnover (e.g. De
ria: (1) had to have unconsolidated information in the last Leeuw and van den Berg 2011; Craighead, Hult, and Ketchen
three available years prior to 2012 in which the study was 2009). For more accurate analysis, 99 firms were randomly
carried out and (2) had to employ greater than fifty employ- selected from the non-respondents group and used in the
ees to ensure the sample firms were large enough to expect ANOVA analysis (Hair et al. 2010). Statistically speaking,
advanced systems such as ABC and lean system to be in use no significant differences between the two groups were
(Mia and Winata 2008). detected suggesting that non-response bias would not be a
A questionnaire was prepared and pilot tested with two significant threat in this study. A further test was conducted
academics and thirteen practitioners to check the face and using the wave method as in Maiga, Nilsson, and Jacobs
content validity of the variables/constructs and some (2014). Under this method, responses from early and late
 PRODUCTION PLANNING & CONTROL 7

respondents are usually compared as the latter are believed However, financial performance indicators (collected from
to have similar characteristics to non-respondents7. Using the the FAME database) were used in this study for the following
Chi-Squared test in relation to industry (p ¼ .81) and costing reasons. Firstly, measuring the three non-financial, operational
systems (p ¼ .35) provided further evidence of the lack of perspectives in Kaplan and Norton’s BSC can be difficult
differences between the two groups. Likewise, ANOVA ana- through objective data due to the lack of publicly available
lysis tested for potential differences between the two groups data on private firms similar to the ones used in this study.
on lean service and business strategy items and no signifi- Using secondary, externally-audited data on the dependent
cant differences were found. variable (i.e. firm performance) was deemed to be important
To test for potential common method bias, Harman’s sin- to mitigate the effect of the potential bias arising from relying
gle-factor test was used (Podsakoff et al. 2003). In this tech- solely on one source of information (e.g. questionnaire) and
nique, all variables are loaded into an exploratory factor from one respondent per firm (Swink and Jacobs 2012).
analysis with a focus on the unrotated solution. The common Secondly, one of the objectives of this study was to examine
method bias is not a serious issue if no single factor explains the mediating role of lean service in the confusing ABC-
a large proportion of variance (Podsakoff et al. 2003). performance relationship, in which firm performance was
Following this logic, the factor analysis extracted ten factors measured in prior studies from a financial perspective (e.g.
with only 23% variance explained by the first factor. This Maiga, Nilsson, and Jacobs 2014; Ittner, Lanen, and Larcker
could be a reasonable assurance about the lack of common 2002; Mishra and Vaysman 2001). Hence, focusing on financial
method bias in this study. performance in this study helps to isolate the potential impact
of using different performance dimensions and makes our
results more comparable to those of prior studies on the ABC-
3.2. Variables measurement performance relationship (e.g. Maiga, Nilsson, and Jacobs 2014;
To measure lean service, taking into account its multidimen- Ittner, Lanen, and Larcker 2002; Mishra and Vaysman 2001).
sional nature as explained in Subsection 2.1.1, the 37 practices Financial performance was operationalized through data
presented along with their associated references in Hadid and on profit per employee and return on capital employed
Mansouri (2014) were used. However, to ensure that practice (Agarwal et al. 2013; Bhasin 2012) and consideration was
was an important component of lean service, only practices given to the implementation year of lean service. The data
mentioned by at least five articles were included in this study. collected indicated that lean service in the responding firms
Accordingly, 23 lean service practices were considered and was implemented, on average, in 2009. Accordingly, data on
their implementation level was measured using the six-point the financial indicators were obtained on all available years
scale by Fullerton, McWatters, and Fawson (2003). The imple- since the implementation year8 (i.e. up to 2011). To control
mentation year of lean service was also solicited. for potential industry bias, we followed Swink and Jacobs
Business strategy was measured through the scales used (2012) and Patterson, West, and Wall (2004) by computing
by Auzair and Langfield-Smith (2005). A low score on both and using an industry-adjusted median value for the firm
scales refers to lower levels of emphasis on the correspond- performance variables9.
ing strategy. The costing system was measured following the Furthermore, for more robust analyses and results, three-
literature (e.g. Maiga, Nilsson, and Jacobs 2014; Banker, year past data (preceding the year of lean service implemen-
Bardhan, and Chen 2008; Gosselin 1997), by asking partici- tation) on the two financial indicators were collected, based
pants to report the costing system employed by their firm. on which an industry-adjusted median value was constructed
Respondents who declared the use of ABC were coded 1 to account for past performance effects10 (Swink and Jacobs
and all other respondents were coded 0 in the dummy vari- 2012; Patterson, West, and Wall 2004). Finally, firm size was
able used in the main analysis as in Maiga, Nilsson, and considered as an important control variable (Mia and Winata
Jacobs (2014) and Banker, Bardhan, and Chen (2008). 2008; Shah and Ward 2003) and was operationalized by calcu-
Firm performance has been conceptualized and operation- lating the 3-year average total number of employees in the
alized in different ways and some researchers have pointed to period preceding the implementation year of lean service.
the multidimensionality nature of firm performance. For
instance, Venkatraman and Ramanujam (1986) developed a
4. Data analysis
scheme which classified firm performance into three catego-
ries (1) financial performance, (2) operational performance and An exploratory factor analysis was applied to lean service
(3) firm effectiveness which concerns meeting the demands of practices to reduce the data and establish the main dimen-
a wider range of stakeholders. In the accounting literature, sions (Shah and Ward 2003). Varimax rotation, eigenvalue >1,
Kaplan and Norton (1992, 1996) promoted measuring perform- Kaiser–Meyer–Olkin test for sampling adequacy (>50%), com-
ance through their balanced scorecard (BSC) which has four munality value of 50% for each item in a scale and loadings
different perspectives; learning and growth perspective, >55% were all applied as suggested by Hair et al. (2010).
internal process perspective, customer perspective, and finally Items with cross-loadings and/or not meeting the above
the financial perspective. Their main argument was that finan- thresholds were dropped from further analyses. The reliability
cial measures/indicators are backward looking and lag oper- of multi-item constructs was assessed through Cronbach’s
ational measures and hence, they may not draw a true and fair alpha (Nunnally 1978). An examination of the assumptions of
picture of firm performance. parametric tests revealed six lean practices (bold in
8 W. HADID

Appendix A) which were highly skewed (p < .001) and conse- Table 1. The measurement model.
quently, they were dropped leaving 17 lean practices. Composite
The 17 lean practices were reduced into four factors, Construct Loading reliability AVE
namely, process factor (PF), physical structure factor (PSF), Process factor (PF) 0.88 0.54
Automation 0.70
customer value factor (CVF) and error prevention factor, JIT 0.69
respectively, explaining 62% of the variance. Practices load- Pull system 0.79
Quick setup 0.73
ing ranged from 60% to 83% with communality values of
Small lots 0.71
over 50% and Cronbach’s alpha values between 68% and Workload balancing 0.78
83%. However, ‘mistake proofing’ was removed for having Physical structure factor (PSF) 0.88 0.64
5Ss 0.77
insignificant loading on any of the four factors. More detail Group technology 0.86
on the results of this factor analysis could be found in Improving facility layout 0.86
Table 1 in Hadid, Mansouri, and Gallear (2016). Visualization 0.69
Customer value factor (CVF) 0.82 0.54
By adhering to the criteria of Hair et al. (2010), the con- Kaizen blitz 0.77
vergent and discriminant validity of factors were ensured. Policy deployment 0.78
All items in a factor loaded significantly on that factor and Quality function deployment 0.73
Value stream mapping 0.64
did not have significant cross-loadings on other factors. Differentiation strategy 0.94 0.69
The main analysis was carried out by employing partial Differ1 0.72
least squares structural equation modeling (PLS-SEM) which Differ2 0.88
Differ3 0.86
was deemed appropriate for two reasons (Hair, Ringle, and Differ4 0.88
Sarstedt 2011). First, PLS-SEM can tackle non-normally distrib- Differ5 0.83
uted data and produce unbiased estimates (Hair, Ringle, and Differ6 0.81
Differ7 0.82
Sarstedt 2011). This is important in this research given the Cost leadership strategy 0.86 0.61
use of objective financial data11. Second, because it is a vari- Leader1 0.59
ance-based technique, PLS-SEM has a softer demand in terms Leader2 0.77
Leader3 0.88
of the sample size compared to other techniques such as the Leader4 0.86
covariance-based SEM (Hair, Ringle, and Sarstedt 2011, Hair
et al. 2012). The minimum sample size for PLS-SEM is usually
determined by multiplying the largest number of structural
variance extracted of each construct exceeds its correlations
paths associated with an endogenous latent construct by ten
with other constructs, which is evidence of discriminant val-
(Hair, Ringle, and Sarstedt 2011). In this study, the most com-
idity (Hair et al. 2012).
plex construct is the return on capital employed as five struc-
tural paths are pointing to it12 (three lean factors, firm size
and past performance). Hence, a sample size of 99 is almost 4.2. Results of hypotheses testing
double the minimum sample size suggested by the above-
mentioned rule (10  5 ¼ 50 observations). To assess the structural model and the proposed relation-
ships, R2, coefficients (b) along with their significance and
the model’s predictive capability (Q2: cross-validated redun-
4.1. Validity and reliability dancy) were examined13 (Hair et al. 2012). Since PLS-SEM
does not assume multivariate normality in the data, it relies
The validity of each construct was assessed by examining its
indicators loading and average variance extracted, whilst on the bootstrapping method and produces t-value for
composite reliability (>70%) was evaluated to ensure the evaluation purposes (Hair, Ringle, and Sarstedt 2011). To
reliability of each multi-item construct (Hair, Ringle, and improve the robustness of the results, the structural model
Sarstedt 2011). As evidenced in Table 1, the reliability of all was estimated with the bootstrapping function set to 5000
constructs surpassed the recommended value of 70%. In samples (Hair, Ringle, and Sarstedt 2011).
addition, most items measuring the lean factors had load- Table 3 (Panel tests of the indirect effects) reports the
ings on their associated factor of >70% and all items had results of the structural analysis and Figure 2 depicts visually
loadings of >55% (see Table 1). This provided initial assur- the structural model. The results suggest an acceptable
ance regarding convergent validity. However, the item ‘root model with all R2 values being greater than the minimum
cause analysis’ in the two-item error prevention factor did 10% recommended for practical and statistical significance
not have a significant loading and therefore was dropped (Lee et al. 2011; Falk and Miller 1992). In addition, the pre-
from further analysis along with its factor. dictive capability of the model is supported with all cross-
Based on that, only three factors have represented lean validated redundancy values being larger than zero (Hair,
service in the final analysis as shown in Table 1. The average Ringle, and Sarstedt 2011, Hair et al. 2012).
variance extracted reported in Table 1 offered further evi- The findings (Table 3) demonstrate a positive relationship
dence on the convergent validity of each construct. In all between ABC and the differentiation strategy (b ¼ 0.31,
cases, the average variance extracted was >50% and in line p < .001) and a negative ABC-cost leadership association
with Hair, Ringle, and Sarstedt’s (2011) recommendations. In (b ¼ 20.30, p < .01) which support H1 and H2. Further, the
addition, as shown in Table 2, the square root of the average differentiation strategy is positively related with two lean
 PRODUCTION PLANNING & CONTROL 9

Table 2. Correlations matrixa.

Construct 1 2 3 4 5 6 7 8 9 10 11
1 ABC 1
2 Differentiation strategy .27 0.83
3 Past Profit per employee 0.19 0.10 1
4 Past Return on capital employed 0.21  0.02 0.02 1
5 Cost leadership strategy 0.26 0.12 0.02 0.15 0.78
6 PF 0.19 0.30 0.09 0.04 0.26 0.74
7 PSF 0.22 0.15 0.12 0.03 0.21 0.46 0.80
8 CVF 0.21 0.31 0.13 0.05 0.17 0.46 0.49 0.73
9 Profit per employee 0.06 0.12 0.55 0.11 0.04 0.12 0.25 0.18 1
10 Return on capital employed 0.15 0.04 0.03 0.63 0.09 0.14 0.05 0.11 0.27 1
11 Size 0.17 0.13 0.12 0.01 0.06 0.08 0.11 0.08 0.26 0.09 1
Correlation is significant at the 0.01 level (2-tailed).
Correlation is significant at the 0.05 level (2-tailed).
a
Squared root of average variance extracted on the diagonal.

Table 3. Results of hypotheses testing.

Tests of the direct effects
Endogenous variables
Profit per Return on capital
Exogenous variables ABC PF PSF CVF employee employed
Standardized coefficient (b)
Differentiation 0.31 0.21 0.03 0.23
Cost leadership (0.3) 0.29 0.29 0.20
ABC 0.20 0.29 0.20
PF 0.01 0.20
PSF 0.18 0.07
CVF 0.05 0.02
Size 0.11
Past profit per employee 0.54
Past return on capital employed 0.64
R2 0.16 0.18 0.13 0.15 0.34 0.44
Cross  validated redundancy 0.162 0.080 0.065 0.062 0.343 0.460
Tests of the indirect effects
Average product term
Indirect paths Indirect effect coefficienta (bootstrapping method)
Cost leadership  ABC  PF 0.06 0.06
Cost leadership  ABC  PSF 0.09 0.08
Cost leadership  ABC  CVF 0.06 0.06
Differentiation  ABC  PF 0.06 0.07
Differentiation  ABC  PSF 0.09 0.09
Differentiation  ABC  CVF 0.06 0.06
ABC  PF – return on capital employed 0.04 0.04
ABC  PSF – profit per employee 0.05 0.04
 
Tests of the direct effects: p  .05; p  .01; p  .001. Tests of the indirect effects: p  .10; p  .05; p  .01. aproduct term of the direct paths.

service factors14, namely the PF (b ¼ 0.21, p < .05) and the bootstrapping method was used with 5000 samples with
CVF (b ¼ 0.23, p < .05) which supports H3. The cost leader- replacement in order to construct an empirical distribution of
ship strategy is also positively and directly related with two the product term for each indirect relation (e.g. differentiation
lean service factors, namely the PF (b ¼ 0.29, p < .01) and PSF – ABC – PF) using only the significant direct paths. Each of the
(b ¼ 0.29, p < .01) which support H4. H5 is also supported empirical distributions was then order-ranked and the percent-
since ABC is positively and directly related to the PF age above/(below) zero for negative effects/(positive effects)
(b ¼ 0.20, p < .05), CVF (b ¼ 0.20, p < .05) and PSF (b ¼ 0.29, was calculated to determine the statistical significance of the
p < .01). Finally, lean service seems to be promising given its relations (Preacher and Hayes 2008). The results of this process
positive impact on the return on capital employed through are presented in Table 3 (Panel tests of the indirect effects).
its PF (b ¼ 0.20, p < .01) and on profit per employee through The results suggested a negative indirect association between
its PSF15 (b ¼ 0.18, p < .05), which is in line with H6. the cost leadership strategy and all lean service factors. In con-
The indirect effects of business strategy on lean factors trast, a positive indirect association between the differenti-
through ABC and that of ABC on firm performance through ation strategy and the three lean service factors was found.
the lean factors were formally tested using the bootstrapping Evidence was also found confirming the mediating role of lean
method. The method was found more relevant for small sam- service factors in the ABC-performance relation. The PF medi-
ple sizes and/or for data which did not meet the multivariate ated the impact of ABC on the return on capital employed and
normality assumption (Malhotra et al. 2014; Preacher and the PSF mediated the ABC-profit per employee relation as
Hayes 2008); both aspects apply to the current study. The shown in Table 3 (Panel tests of the indirect effects).16
10 W. HADID

0.29**
Cost Lean-
leadership process -0.01
0.29**
0.20**
-0.3** 0.2 PE

0.20* 0.18*
Lean-
ABC 0.29** physical
structure -0.07
0.20*

0.31*** ROCE
0.21*
0.05

0.03
Lean- 0.02
Differentiation customer
0.23* value

Figure 2. The structural model.

5. Discussion and implications Such findings contribute to our theoretical understanding

of the mediating role of lean practices and the ways by
This research has attempted to shed light on the role of cost- which ABC generates benefits to the adopting firms through
ing systems and business strategy in the lean environment these practices (e.g. Maiga, Nilsson, and Jacobs 2014; Mishra
and their impact on firm financial performance. The findings and Vaysman 2001). The findings suggest that ABC (alone)
verify the promising effect of lean service on financial perform- may not be able to significantly enhance financial perform-
ance (H6). Two of the lean service factors (PF and PSF) are ance. However, by using ABC two goals can be achieved
found to positively influence profit per employee and return simultaneously. First, more relevant and detailed cost infor-
on capital employed even after controlling for the potential mation for decision making will be attained. Second, the
effect of past performance, industry and firm size. This evi- information generated by ABC will indirectly impact financial
dence supplements earlier studies (e.g. Alsmadi, Almani, and performance by supporting the implementation of lean ser-
Jerisat 2012) and should encourage service firms to experi- vice practices which are effective in improving firm financial
ment with and benefit from lean service practices. performance. In addition to their theoretical contribution,
these findings have also an important practical implication
5.1. Lean service, ABC and firm performance for managers. Service managers should avoid relying on TCSs
if they are implementing or contemplating the implementa-
The findings indicate that there is a positive relation tion of lean service practices in their operations and should
between ABC and lean service (H5) and by extension a nega- use ABC which is more conducive to the lean environment.
tive relation between TCSs and lean service. This is in line Achieving that may require some interaction between the
with the argument that ABC enhances the visibility and accounting and operations management functions in order
awareness of how resources are expended at the activity for each to explain their plans and needs which may help to
level, which helps to highlight NVAs for lean practices to minimize unpleasant surprises during the implementation
eliminate (e.g. Maiga and Jacobs 2008). Therefore, the sup- process of lean practices.
port for H5 contradicts the findings by Fullerton and
McWatters (2004) and suggests that using TCSs may hinder
5.2. Business strategy and lean service
the implementation of lean practices (Datar et al. 1991).
Moreover, tests of the indirect effects panel in Table 3 indi- Both differentiation (H3) and cost leadership (H4) are found to
cates that ABC has a significant indirect relationship with have a direct positive relation with lean service factors.
financial performance through lean service practices. This However, the set of lean practices associated with each type
corroborates earlier evidence reported by Banker, Bardhan, of strategy is not necessarily the same which may reflect the
and Chen (2008) and extends it in two ways. Banker, distinctive perspective of each strategy. Cost leaders normally
Bardhan, and Chen (2008) found lean practices to mediate focus on reducing operating costs and improving the effi-
the effect of ABC on the operational performance of manu- ciency of their processes. Therefore, they have implemented
facturing plants. However, the current findings indicate that the PF and PSF to help in achieving this aim. On the other
lean practices will perform the same role in service firms and hand, differentiators pay more attention to understanding cus-
with financial performance. tomer requirements which enables them to provide unique
 PRODUCTION PLANNING & CONTROL 11

products/services. As a result, differentiators have focused on service) but with different signs (Taylor, MacKinnon, and Tein
the CVF which goes in line with their objective. However, 2008). In such cases, the total impact of the independent
differentiators have also implemented the PF in their attempt variable on the dependent variable is determined by the
to eliminate waste from processes, which implies that differen- magnitude of its direct and indirect effects. Where the two
tiators do not entirely ignore operating costs (Qi, Zhao, and effects are equal in size and with different signs, the total
Sheu 2011; Chenhall and Langfield-Smith 1998). effect of the independent variable (cost leadership) on the
The focus on different lean practices by the two different dependent variable (lean service) will be zero and this may
business strategies possibly explains the mixed results explain why some scholars found no relationship between
reported in prior research (e.g. Qi, Zhao, and Sheu 2011; cost leadership and lean practices (e.g. Ward, McCreery, and
Baines and Langfield-Smith 2003; Chenhall and Langfield- Anand 2007; Baines and Langfield-Smith 2003; Chenhall and
Smith 1998). More specifically, the different and narrow rep- Langfield-Smith 1998). Thus, our analysis indicates that lean
resentations of lean system in prior empirical studies have service and cost leadership are compatible and the direct
probably contributed to the inconclusive results. For positive relation detected in this study supports that.
instance, if researchers focus on lean practices incorporated However, the adoption of an incompatible costing system
into the CVF, they would more likely confirm a positive (i.e. TCS) by some cost leaders may hinder the implementa-
differentiation strategy-lean system fit (e.g. Baines and tion of lean practices as also suggested in this study and this
Langfield-Smith 2003; Chenhall and Langfield-Smith 1998). underlines the importance of considering the role of costing
On the other hand, if they focus on lean practices incorpo- systems in order to better understand the business strategy-
rated into the PSF, they would more likely find a positive lean service association. The very limited research in this
lean system- cost leadership strategy fit (e.g. Qi, Zhao, and area has made it very difficult to find a cost leadership com-
Sheu 2011). In short, lean service is a multi-dimensional pany which has experienced problems with lean practices
system and should be represented accordingly in order to due to its incompatible costing system. However, the cases
understand its relationship with other variables. reported by Datar et al. (1991) and Cooper and Maskell
(2008) explained how TCSs can turn a successful lean pro-
gram into a failure, leading to questioning its effectiveness
5.3. Lean service, business strategy and ABC and finally abandoning it. These case studies provide some
The results indicate that whilst the differentiation strategy support to the conclusion made in this study although they
directly and positively affects lean service (H3), it also has an did not refer to the type of business strategy adopted by
indirect influence on all lean service factors through ABC as the companies under investigation.
indicated by (H1 and H5) and statistically confirmed in For service managers adopting a cost leadership strategy,
Table 3. This implies that ABC partially mediates the lean- the above discussion carries a significant implication.
differentiation strategy relationship which empirically Although cost leaders may obtain relatively accurate cost
validates the argument that differentiators operating in information from TCSs and at a lower cost (as discussed
uncertain environments and producing more customized before), they may have to forgo the proven benefits of lean
products are more likely to rely on ABC (Chenhall and service if they continue to use such costing systems (Li et al.
Langfield-Smith 1998; Gosselin 1997). This, in turn, enables 2012, Cooper and Maskell 2008; Datar et al. 1991). For service
the implementation of lean service practices to further managers adopting a differentiation strategy, the results
enhance their performance (Banker, Bardhan, and Chen 2008). confirm the validity of their choice of using ABC in the lean
The results also confirm an indirect, though negative, environment as ABC supports lean practices and helps com-
effect of the cost leadership strategy on lean service as panies to realize their benefits (Banker, Bardhan, and Chen
shown in Table 3. As noted by some scholars (e.g. Naranjo- 2008; Baines and Langfield-Smith 2003).
Gil, Maas, and Hartmann 2009; Bhimani, Gosselin, and Ncube
2005; Malmi 1999) and further confirmed in this study (H2),
6. Conclusion, limitations and future research
cost leaders are less likely to rely on ABC since it is expensive
to implement and it does not substantially improve the This article seeks to investigate the mechanism through
quality of information under stable environments and when which business strategy and ABC affect lean service, its
a narrower range of standardized products is produced. implementation level and relationship with performance. Six
Consequently, the cost leadership strategy is proved to have hypotheses were developed and tested using PLS-SEM and
a direct positive impact on lean service (H4) and an indirect data from 99 UK service firms. The results confirmed the
negative impact (H2 and H5) due to the adoption of TCSs. effect of lean service on firm financial performance. Further,
This has a detrimental effect on lean service. Put it differ- ABC was found to have a critical and supporting role in the
ently, the ABC variable in this study is found to suppress the lean service environment and lean practices mediated its
impact of the cost leadership strategy on lean service result- impact on firm performance. Regarding the strategy-lean
ing in a case of inconsistent mediation (MacKinnon, Krull, association, both cost leadership and differentiation strat-
and Lockwood 2000). egies were directly and positively related to lean practices.
Inconsistent mediation represents cases where an inde- However, in contrast to the indirect positive impact of differ-
pendent variable (e.g. cost leadership strategy) has both a entiation strategy on lean practice via ABC, an indirect nega-
direct and indirect impact on a dependent variable (e.g. lean tive effect was confirmed in the case of cost leadership
12 W. HADID

strategy because of its reliance on TCSs which had a detri- 3. A glossary sheet which contains a definition for each lean practice
included in this study can be found in Hadid and Mansouri (2014).
mental effect on lean practices. Therefore, whilst the ABC
4. The same dataset used in this study was also used in Hadid, Mansouri,
variable in the model partially mediated the differentiation and Gallear (2016). However, all five hypotheses relating business
strategy-lean practices relationship, it led to a situation of strategy, ABC and lean system have not been tested in the
inconsistent mediation in the case of the cost leadership- previous paper.
5. A similar problem faced Kroes and Ghosh (2010) and Al-Omiri and Drury
lean relationship. (2007) where 469 and 102 questionnaires were returned for a
This study has similar limitations to other cross-sectional similar reason.
studies. Adopting a longitudinal methodology could signifi- 6. No time (21), the targeted person left the firm (20), the scope of the
cantly improve our confidence in the results. This would study does not apply to the targeted firm (18), company policy not to
participate (9), small company (8), information required is sensitive (3),
enable researchers to examine the impact of changes in and the company participated in many studies recently (2).
costing systems on the effectiveness of lean practices. 7. Therefore, the wave method does not measure the actual non-response
The relatively small sample could also be an issue in this bias but only provides a proxy for it.
study and therefore a generalisation of the findings should 8. Doing so is an attempt to partially address the potentiality of reverse
causality (Guest et al. 2003).
be understood in light of this sample size. Future research
9. To compute an industry-adjusted median value for a firm, the industry
on a larger sample size would supplement the findings of median value of a performance indicator (e.g. profit per employee) was
the current study and provide more generalizable results. obtained from the FAME database and was subtracted from each firm’s
median value on that performance indicator.
Moreover, the reliance on single-item measures from a single
10. This is also useful to account for cases where past performance explains
respondent may be another limitation. However, this is a the implementation of an innovation system such as lean service (Guest
common method of measurement that has been used by et al. 2003; Gurd, Smith, and Swaffer 2002).
several researchers in the existing literature (e.g. Nielsen, 11. Both the Kolmogorov-Smirnov and Shapiro-Wilk tests (p < .001, df ¼
99) indicated that the financial indicators violate the normality
Kristensen, and Grasso 2018; Banker, Bardhan, and Chen
assumption. A visual inspection of histogram graphs also confirmed the
2008), and the subjective measures were supplemented with violation of the normality assumption.
objective measures on firm performance. Endogeneity is 12. For profit per employee only four structural paths are directed at it.
another problem which faces most empirical survey studies These include all structural paths directed at the return on capital
employed except firm size.
including this one. However, to partially address this prob-
13. R2 and b in PLS-SEM are interpreted in a comparable way to those
lem, the effect of past performance was accounted for. reported in OLS regression analysis (Hair, Ringle, and Sarstedt 2011; Hair
Despite the above limitations, this study has improved et al. 2012).
our theoretical understanding of the relationships between 14. In the hypotheses development section all hypotheses were formulated
in relation to the lean service as a whole concept and not to its
lean practices, business strategy and ABC rarely examined constituent factors. This was necessary as the constituent factors of lean
simultaneously in one model. In addition, through the simul- service were not known before conducting the exploratory factor analysis.
taneous examination of these variables, we are now aware of Future research may rely on the factors developed in this study to ideally
formulate hypotheses in relation to each individual factor of lean service.
the mediating role of ABC in the lean-strategy association 15. Although the direct impact of ABC on performance was not
and the mediating role of lean practice in the ABC-perform- hypothesised in this study, another model which incorporated this
ance association. Such awareness was critical in explaining impact was also tested. However, similar to the findings of Banker,
Bardhan, and Chen (2008), no support for the direct impact was found.
the mixed results reported in different streams of literature.
16. Control variables (past performance and firm size) were not included
Future research may examine through longitudinal case for simplicity.
studies the interesting case of inconsistent mediation
detected in this study. Specifically, insightful research may Acknowledgements
provide more information on the experience of cost leaders
with lean practices over time with a focus on the effective- I would like to thank Professors Afshin Mansouri, David Gallear, John
Cullen, Josephine Maltby and the two anonymous reviewers for their
ness of these practices. Finally, this study offered insights useful comments on this paper.
into the possible contribution ABC can make in the lean
environment. Interesting future research may focus on the
newly developed concept of lean accounting as very limited Disclosure statement
evidence is currently available in this respect. Our sample No potential conflict of interest was reported by the author.
firms indicated that lean accounting was not in use at the
time of our survey. Hence, it would be interesting to shed
more light on this system and understand why companies Notes on contributors
are still reluctant to use it.
Wael Hadid, is a lecturer in Management Accounting
at Sheffield University Management School. He has
Notes an MSc in finance an accounting and PhD in manage-
ment studies both from Brunel University. His current
1. Although some scholars have started to discuss the relevance of value
research includes costing and control systems and
stream costing or lean accounting to lean firms (e.g. Fullerton, Kennedy,
their role in the modern operational environment,
and Widener 2014; 2013), the sample firms in this study did not indicate
the use of such systems and hence these concepts were not the role of supply chain accounting practices in dif-
discussed here. ferent forms of inter-organisational relationships and
2. They are considered parts of the lean system (Shah and Ward 2003) sustainability accounting.
 PRODUCTION PLANNING & CONTROL 13

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Appendix A
1. “Indicate the extent to which your firm has implemented the following practices: (tick one option) (Check the glossary sheet for a definition
of each expression if needed)

Scale (1) No implementation (2) Considering (3) Beginning

(4) Partially (5) Substantially (6) Fully
1 5Ss
2 Automation
3 Group technology
4 Improving facility layout
5 Just in Time
6 Kaizen blitz
7 Policy deployment/Hoshin Kanri
8 Pull system
9 Quality function deployment
10 Root cause analysis
11 Total preventive maintenance
12 Value stream mapping
13 Visualization
14 Work load balancing
15 Mistakes proofing/Poka-Yoke
16 Quick set up time
17 Small lots
18 Continuous improvement
19 Process redesign
20 Standardization
21 Kanban
22 Single piece flow
23 Takt time

2. Has your firm implemented lean system? Yes _____ No ____

If your answer is YES, indicate year initiated ________
3. Indicate by circling the costing system that is in use at your firm:
(1) Variable costing
(2) full absorption costing
(3) Activity-based costing
(4) Others
4. Please indicate the level of your firm’s emphasis on the following activities: (tick one option)

Scale (1) No emphasis (6) Highest level of emphasis

achieving lower cost of services than competitors
making service/procedures more cost efficient
improving the cost required for coordination of various services
improving the utilization of available equipment, services and facilities
Introducing new services/procedures quickly
Providing services that are distinct from that of competitors
Offering a broader range of services than the competitors
Improving the time it takes to provide services to customers
Providing high-quality services
Customizing services to customers need
Providing after-sale services and support”