Empirical insights into innovation and competitive advantage in the manufacturing landscape: evidence from Indonesia

Purpose This study aims to examine the direct influence of activity-based costing (ABC) methods, innovation, information technology and service quality on competitive advantage in the small and medium-sized enterprises’ (SMEs’) manufacturing firms. Design/methodology/approach The authors use a cross-sectional survey of manufacturing SMEs in Yogyakarta, Indonesian. Purposive sampling was used to identify eligible firms, and non-probability sampling was used to recruit managers and production employees as respondents. After a data screening, 432 valid questionnaires were analyzed. Competitive advantage, ABC, innovation, IT and service quality were measured using established multi-item scales, and the data were analyzed using multiple linear regressions. Findings Contrary to dominant expectations in the literature, the authors do not find statistically significant positive relationships between ABC, innovation or IT and competitive advantage. Their regression coefficients are small and not significantly different from zero. By contrast, service quality displays a positive and statistically significant association with competitive advantage and explains a substantial share of the variance in the dependent variable. Practical implications For manufacturers operating in resource-constrained environments, investments in ABC, innovation and IT do not automatically yield competitive returns. Managers should prioritize strengthening service-quality capabilities such as reliability, responsiveness and assurance to customers before or alongside more complex cost-management and technology initiatives. Careful alignment between ABC/IT projects and the firm’s strategic priorities and implementation capacity is essential. Originality/value This study offers new evidence that, contrary to much of the literature, activity-based costing, innovation, and information technology do not necessarily enhance competitive advantage in manufacturing SMEs. Instead, it identifies service quality as the primary driver, providing a more context-specific understanding of competitive advantage in resource-constrained environments.