Antecedent Factors of Competitive Advantage and its Impact on Performance: Analytical Essay

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Abstract:

Small- and Medium-sized Enterprises (SMEs) have performed an important role in national development upon their support on both the traditional even modern sector. They have experienced an increase of competitiveness, particularly since the Indonesian government deals with the ASEAN Economic Community (AEC). The agreement encouraged SMEs to escalate their innovation and creativity to be able to survive amid intense competition. This research aimed to find an explanation about factors influencing the business competitiveness of SMEs and the effect on performance. The respondent’s SMEs in Kudus City are represented by the embroidery business owners that since three years before they have experienced a decrease in profit. They expressed their response to research variables such as competitiveness, orientation, adaptability, internal resources, and performance. The use of Structural Equation Modeling (SEM) was intended for examining the variables relationship and direct/indirect influence from the exogenous variables to endogenous variables by AMOS software. The results demonstrated that the entrepreneurial orientation did not affect competitive advantage, meanwhile the adaptability to business environment and internal resources affected SMEs business position positively. Finally, the entrepreneurial orientation of business owner, SME’s competitive advantage, and internal resources (financial, physics, human, and nature) effect on business performance direclty.

Introduction

Small and Medium-sized Enterprises (SMEs) drives a prominent contribution to economic growth of many countries through their traditional and modern sectors. This small industry supports growth through poverty alleviation (job creation, serves various needs, and the ability to survive with products/services innovation, income distribution, and its contribution to national income. SMEs grow in large number, but were not bankable yet or they have no sufficient guarantees in funding despite of their good character and business performance. Moreover, in accordance with capital problems, they also face obstacles of human resources, business networks, unpredictable business environment, infrastructures, and access to the market, whereas low competitiveness takes effect on business sustainability.

Entrepreneurs ought to take advantage of these opportunities aggressively while managing any risks (Covin and Slevin, 1989). They should be able to adapt to business uncertainty that forces them to generate a long-term plan and strategic decision-making. Their success is a consequence of the ability to adapt to the environmental changes, whereas the ability then affect the basic company’s strategy. To implement a strategy that improves business efficiency and effectiveness, a company’s internal resources should be well-managed which contributes to its competitive advantage through production cost reduction (Seddon et al., 2017).

The competition raised since the government assigned the AEC (ASEAN Economic Community) and ACFTA (ASEAN-China Free Trade Agreement). Moreover, SMEs in Central Java, especially in the embroidery business in Kudus City, have a problem regarding innovation. The models didn’t experience significant changes for the last 3 years or the models are not able to meet the market trend. Accordingly, it impacts on the requests decline, which directly affects the profit. This phenomenon needs special attention to have the industry still grows with high competitiveness.

Theoretical framework

2.1 Entrepreneurial Orientation

Entrepreneurship is a pioneer in achieving sustainable economic growth and highly competitive advantage. Regarding literature of entrepreneurship, orientation as considered as the most common construct that include proactiveness, innovativeness, and risk-taking. Innovativeness is the ability to apply creativity in order to solve problems and opportunities to enhance and improve living standards. Risk-taking is an action that is oriented to the opportunities in uncertain decision-making. Subsequently, proactiveness is a condition where the leader is capable of identifying opportunities, problems, needs, and changes in the future (Uhl-Bien et al., 2007).

Entrepreneurial orientation (EO) drives an important role for a company to improve and be an acceptable meaning of business performance. It is recognized as a corporate benefits strategy to be able to compete more effectively in the same marketplace This construct is measured by four dimensions: internal locus of control, need for achievement, extroversion, and self-reliance (Affendy et al., 2015). The combination of these four dimensions is believed to improve business competitiveness and performance.

2.1.1 The Effect of Entrepreneurial Orientation on Competitive Advantage

Discussion about strategy content (the generic strategies) in strategy-making processes, entrepreneurial orientation seems to be a critical construct to explore. It is considered as the first of designing and implementing competitive strategies. Hence, studying competitive strategy and entrepreneurial orientation is challenging research (Lechner and Gudmundsson, 2014). Notice that entrepreneurial orientation has emerged as a possible solution to the problems that businesses faced in order to achieve the sustainability of competitive advantage (CA). Thus, understanding of entrepreneurial orientation, especially in SMEs context has a great impact on strengthening business competitiveness. The three dimensions of entrepreneurial orientation (innovativeness, risk-taking, and proactiveness) also have a significant influences on the competitive advantage (Jantunen et al., 2005).

2.1.2 The Effect of Entrepreneurial Orientation on Performance

Since entrepreneurial orientation has been recognized as a strong predictor of company performance in the past research, some research has also argued that entrepreneurial orientation does not affect performance at all. It is often considered as a predictor of competitive advantage and business growth. Due to competition in the present era, SMEs face increasing pressure derived from competition from across the world. They face increasing difficulty to maintain and improve business performance in time unless they can actively manage these pressures properly (Affendy et al., 2015).

2.2 Adaptability

Adaptability is the competence to adjust companies’ approach or actions in response to changes in their external environment. It is a precious skill for individuals and businesses to compete with others (Ismaeel and Blaim, 2012). The challenge with strategic adaptability is that they essentially have to plan for the unexpected. Naturally, they can’t anticipate changes or problems that their research and intuition don’t reveal. However, they can establish a standard system or method to respond to change within the business.

To increase competitiveness, entrepreneurs should increase innovation, invest in technology, and use market-based management. The business environment has a large influence on economic development. Stable political and economic conditions will improve a very significant business climate, indicated by the increasing number of small businesses and more innovative products that will be offered. The conclusion is that the better the company adapt to its environment, it will impact on the increase of competitive advantage (Covin and Slevin, 1989).

It is difficult to evaluate the key factors in business success or failure, where some researchers report increased usage of non-financial measures to evaluate performance in the last years (Hoque, 2004). However, business performance can be measured and judged from various perspectives, Ruekert and Walker Jr (1987) proposed a three-dimensional of performance consisting of effectiveness, efficiency, and adaptability. Effectiveness is recognized as the products and services’ success in comparison with those competitors (Ruekert and Walker, 1987).

Efficiency is recognized as a degree (a result of comparing product/service outputs to a set of inputs resources). Meanwhile, adaptability refers to success in responding to dynamic change (Mouzas, 2006). Explicitly, effectiveness is correlated with nonfinancial goals, efficiency is highly correlated with achieving profitability, and adaptability is correlated with adaptation to change (Miller et al., 2012).

2.3 Internal Resources

The term of resource is derived from three main constructs; capabilities, competencies, and resources, that have been widely analyzed in the strategic management literature, resulting in difficulties to generalize conclusions across studies. Internal resources refers to the internal company environment (a set of company internal factors which in turn affect the success of business operations). The company has full control over these factors as the opposite of the external environment. However, it is also important for a company to recognize threats outside (Barney, 1991). A better understanding of threats outside the company leads to create a strategy that maximizes its resources and minimizes weaknesses.

The good governance of internal resources and operations management is one of business key success factors. Therefore, leadership has an important role to a company as a significant internal factor (Momoh et al., 2010). The leadership style and other management styles also impact on organizational culture (Kuratko et al., 2014). Some areas which are typically recognized as in internal factors are (Abdullah and Hamdan, 2012): The financial resource like funding, investment, and income sources; Physical resources such as location, facilities, and equipment,; Human resources such as employees, target audiences, and volunteers; Access to natural resources, patents, copyrights, and trademarks; Current processes like employee programs, software systems, and department hierarchies.

2.3.1 The Effect of Internal Resources on Competitive Advantages

The underlying competitive emphasis on most industries appears to have shifted from being product-market based to being more resource-based (Etemad, 2009). In line with the resource-based theory, bundles of resources, rather than industry-wide structural characteristics or the product-market combinations chosen for their deployment (eg strategic conduct), lie at the core of a firm’s competitive advantage (Kuratko et al., 2014).

The primary idea is that a firm possesses and exploits its resources and capabilities in order to make it unique from others. Unique ways of combining and applying innovation resources (product development capabilities), human resources, brand label capital or functional experience (production, marketing, sales, etc.) are examples of such capabilities. This ability is in turn usually seen as a collection of routine production that is socially complex and therefore tends to oppose imitation. In particular, the non-tradable resources and capabilities (perfect immobile) which develop and accumulate within the firm are the central concern of the resource-based theory (Kozlenkova et al., 2014).

2.3.2 The Effect of Internal Resources on Performance

Certain types of resources owned and managed by companies potentially produce competitive advantages, which makes the company’s performance superior (Gupta and Kumar, 2013). The company’s internal resources such as knowledge, skilled employees, machines, and capital are the basis for achieving superior performance. The relationship between company resources and competitive advantage is strongly influenced by elements such as assets owned by the company. Companies that want to implement strategies that can improve efficiency and effectiveness must be able to manage their internal resources that cover all assets, capabilities, organizational processes, information, and knowledge.

The RBV literature (resource-based value) shows that internal resources possess a long-lasting competitive advantage. Entrepreneurs as a corporate resource catalyst have been researched over the past decade (Jackson et al., 2014). Their success is a reflection of business quality, a form of collaboration between personality attributes such as entrepreneurial enthusiasm and attitude, general human capital, industry, and specific company experience, as well as learning from previous business experience. Thus, the founder’s attributes are the most central resources in business in order to achieve its competitive advantages (Chandler and Hanks, 1994; Clancy Dollinger, 1995; Heru Priyanto, 2012).

2.4 Competitive Advantage

Competitive advantage is perhaps the most widely used term in strategic management, nevertheless, it remains poorly described and operationalized. Competitive advantage does not equal to superior performance because it is a relational term that is context‐specific. It has several meanings, including the emphasis on the superiority of resources and company expertise. Another definition emphasizes excellence in performance achievement. Companies that pay attention to performance and strive to improve their performance have the opportunity to achieve a good competitive position. The position becomes the company’s capital to continue competing with competitors (Johnson et al., 2008).

The evidence of competitive advantage is the company’s superior position both in the industry and the marketplace (Irfan et al., 2014), where superiority depends on how customers look at it. For example, a company able to make superior products, but if customers do not see it as a superior product, the company will not grow into a competitive advantage and make its products better than competitors.

2.5 Performance

The freedom of the owner or manager in making decisions, taking the initiative, and setting policy strategies that affect business performance. Prahalad (1990) state that business can be superior if company management capable to consolidate its technological and production capabilities into competence, which gives strength to every individual in the organization to always adapt to the ever-changing market opportunities (Prahalad et al., 1990). Businesses will be able to maintain long-term advantages if they have the ability to create products with low cost (low cost) and faster manufacturing time compared to competitors (Morrison et al., 2003).

Competitive advantage is seen as something that can be used in corporate strategy in order to improve company performance. Competitiveness sees the company as a whole consisting of many activities carried out by the company in designing, producing, marketing, handing over, and supporting sales (Porter and Kramer, 2006). Companies that have a higher level of competitive advantage will also have better business performance (Etemad, 2009).

Discussions

The respondents were the managers of the embroidery industry in Kudus Regency which consists of 122 companies. They were asked to express their perception through a questionnaire and subsequently analyzed by structural equation modeling (SEM) supported AMOS software. The research model investigated the effects of entrepreneurial orientation, adaptability, and internal resource on competitive advantage and the influence on business performance.

Table 1: Hypothesis Testing Results.

Hypothesis

CR and P-value

Entrepreneurial orientation (EO) has a positive influence on competitive advantage (H1)

1,499 : (0,134)

H1 rejected

The adaptability of the business environment has a positive effect on competitive advantage (H2)

2,020 : (0,043)

H2 accepted

The company’s internal resources positively influence on competitive advantage (H3)

6,379 : (0,000)

H3 accepted

Entrepreneurial orientation has a positive effect on company performance (H4)

2,302 : (0,021)

H4 accepted

The company’s internal resources positively influence the company’s performance (H5)

6,045 : (0,000)

H5 accepted

Competitive advantage positively influences company performance (H6)

2,343 : (0,019)

H6 accepted

The following discussion explained the results of hypothesis testing from table 1.

3.1 Hypothesis 1

The results did not support the hypothesis which stated that entrepreneurial orientation has a significant effect on competitive advantage. Nevertheless, the results showed an influence direction in accordance with the hypothesis. The explanation is that in an industrial cluster there is uniformity or at least similarity in terms of the resources owned by each company. They owned almost the same information, employee skills, technology, raw materials, and even capital.

The existence of the similarity factor is possibly the cause entrepreneurial orientation had no significant influence on competitive advantage. The phenomenon that occurs in this study is that there is almost no innovation process that occurs so the existing competitiveness is being low.

3.2 Hypothesis 2

The results corroborated the findings of (Andriyanto and Nurjanah, 2015). Competitive advantage could be achieved if the business actors and their teamwork (employees) had an ability to understand the customer’s wishes well, able to recognize the development of competition carefully and have a good working relationship with their suppliers. So that companies can get information, and recognize trends and relationships within an organization’s external environment, where this adaptability process could help the management in planning future actions.

3.3 Hypothesis 3

This research is in line with research conducted by (Jiang et al., 2012), which proves that the company’s internal resources significantly influence competitive advantage. Companies that were able to manage their internal resources well enable companies to implement the right strategies forming competitive advantage. Internal resources were able to provide superior company performance.

3.4 Hypothesis 4

The results of this study are in line with research conducted by Avlontis and Salavou (2009) which shows that entrepreneurial orientation has proven to have a positive and significant influence on company performance (Avlonitis and Salavou, 2007). Likewise with research conducted by Witjaksono (2009) which also shows the same results regarding the influence of entrepreneurial orientation on company performance (Witjaksono, 2009). The ability of company leaders to implement innovation, proactive and have the courage to risk-taking create more innovative products and achieve a wider marketplace. The condition helps the company to improve performance.

3.5 Hypothesis 5

The results of this study succeeded in supporting the hypothesis that the company’s internal resources directly affect the company’s performance. The results of this study indicate that the performance of embroidered SMEs in Kudus Regency has the ability to increase their potential to improve company performance. The resources consist of many factors that the manager have to recognize and use it as effectively as possible.

3.6 Hypothesis 6

The results of this study are supported by the results of research conducted by Gupta and Kumar (2013) which suggests that competitive advantage has a significant influence on business performance (Gupta and Kumar, 2013). Kumar et al. (2011) and Boulianne (2007) also states that competitive advantage has a positive effect on performance (Boulianne, 2007; Kumar et al., 2011). Similar results are obtained from research conducted by Othman et al., 2015, competitive advantage has a positive influence on performance (Othman et al., 2015).

The results of this study are also supported by the results of previous studies by Kumar and Pansari (2006) where competitive advantage has a positive and significant effect on the company’s marketing performance (Kumar and Pansari, 2016). If a business does not have a unique or different value, then the level of sales, profits and the level of visiting consumers in a business may not be able to increase superiorly (Mariadoss et al., 2011).

Some managerial implementations of the results of this study are expected to contribute to the development of embroidery businesses in Kudus Regency in terms of internal resources as follows: Technology; Employee skills; The ability of the company; Capital; Information; and Human resource knowledge.

Company performance becomes a variable that is influenced by all variables. The most influential variables are internal resources of 0.882, competitive advantage of 0.184, entrepreneurial orientation of 0.109, and business environment adaptability of 0.027. The following are indicators that affect company performance: Sales growth; Customer growth; Profit growth; and Market growth.

Competitive advantage was affected by all other variables. The following were indicators that affect competitive advantage: Uniqueness; Not easily replaced; Competitive prices; and Not easily imitated.

Entrepreneurial orientation becomes important in this study. The following indicators influence the orientation: Proactive; Innovation; and Risk-Taking.

The following indicators were in the context of Adaptability, such as the Ability to understand customers; the Ability to work with suppliers, and the Ability to understand competitors.

Conclusions

The results of this study can provide answers to the research problem. Based on the results of the study, there are six processes that can be used to improve company performance, namely:

First, company performance can be enhanced by entrepreneurial orientation, including by innovating products, having the courage to take risks, and having a proactive attitude. Entrepreneurial orientation carried out will have a direct influence on the company’s performance.

Second, company performance can be improved by adapting to the business environment, namely by understanding customers, understanding competitors, and working with suppliers. Adaptation of the business environment will have a direct influence on the company’s performance.

Third, company performance can be improved by utilizing internal company resources, including capabilities, information, knowledge of human resources, capital, technology, and employee skills. Companies that are able to utilize their internal resources well will be better at improving their company performance. The company’s internal resources will have a direct influence on the company’s performance.

Fourth, company performance can be improved by entrepreneurial-oriented ways, where the entrepreneurial orientation that is carried out will increase the company’s competitive advantage. Competitive advantages possessed will improve company performance

Fifth, the company’s performance can be improved by adapting to the business environment, where the adaptation of business environment will improve the company’s competitive advantage. Competitive advantages possessed will improve company performance.

Sixth, the company’s performance can be improved by utilizing the company’s internal resources, where the maximum utilization of the company’s internal resources will improve the company’s performance. Competitive advantages possessed will improve company performance.

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