Author:Rizan, Mohamad


Firm performance is one of the biggest concerns in the strategic management literature (Venkatraman & Ramanujam, 1986; Sosiawani et al., 2015). In the context of Small and Medium Enterprises (SMEs), much research has been conducted to identify antecedents of SMEs with good business performance so that such companies can perform better. Freel (2000), Verhees & Meulenberg (2004) and Westerberg & Vincent (2008) claim that SMEs will achieve improved performance if they are more intensive in presenting innovative activities, because the implementation of innovation is able to provide clear direction and become a source of competitive advantage (Kiiyuru, 2015). The ability of SMEs to behave in an innovative way will help them to survive in the competitive business environment (Johnson et al., 1997) and even achieve superior performance (Hurley & Hult, 1998).

Several previous studies have confirmed the importance of strategic orientation as a factor contributing to company performance (Hakala, 2011), even at the level of SMEs (Deshpande et al., 2012; M'zungu et al., 2017). Therefore companies will show different levels of applying such orientation (Eitrem & Oberg, 2018). At the academic level, the concept of strategic orientation is used intensively in the fields of strategy, entrepreneurship and marketing (Grawe et al., 2009). Nzewi et al. (2017) emphasize that companies that implement strategic planning correctly will be able to face the challenges of changes in the external environment. The ability to conduct strategic planning is also considered capable of influencing company performance, including family businesses (Donkor & Karkam-Kwarteng, 2017).

Drawing upon these conditions, the research attempts to analyze the three antecedents as proxies in predicting the performance of SMEs. The selection of SMEs for the study sample is based on their dominance in the absorption of Indonesian workers, employing 97.22% of the workforce and contributing 57.12% to total GDP. Indonesia is also experiencing a digital transformation of the economy, as reflected by the growth of internet users and data from the Ministry of Communications and Informatics in 2015, which show that the valuation of the digital economy reached USD 3.56 billion and grew to USD 4.89 billion in the following years. As the main stakeholders managing the national economy, the government is preparing several sets of policies to accelerate the digital economy, such as the "Thousand Technopreneur" program (Agustine & Oktarinda, 2016). These empirical facts indicate the government's commitment to Indonesia's readiness to connect to the globalized economy. Therefore, the contribution of this study will provide empirical evidence for the influence of strategic orientation on SMEs, a field which is still dominated by the large-scale company context (Gray & Lawless, 2000) in Indonesia as a developing country (Suklev & Debarliev, 2012).


Strategic Orientation and Firm Performance

Strategic orientation is an option that can create capabilities dynamically in a constantly changing business environment and enable companies to respond quickly to these changes (Al-Barghouthi, 2014). Morgan & Strong (2003) state that strategic orientation refers to how a company responds to factors in the business environment. Therefore, such orientation is often portrayed as a predictor of high performing firms which have a competitive advantage (Baker & Sinkula, 2009; Kaya & Seyrek, 2005). Consequently, firms that adopt a strategic orientation will be able to predict the potential for external changes in the business environment and adapt to them.

Gatignon & Xuereb (1997) emphasize that start-up orientation can encourage corporate behavior to be more oriented towards creating competitiveness. This is because such strategic orientation will guide the company's strategy formulation (Noble et al., 2002). On a practical level, strategic orientation will have implications for small and medium-sized enterprises through the process of developing new creative ideas because of the competition that face from larger companies with lower entry barriers (Lee, 2011). The literature on strategic orientation is dominated by the work of Kohli & Jaworski (1990) and Narver & Slater (1990). Kohli & Jaworski (1990) emphasize market orientation as a process of gathering intelligence information that is distributed to the internal organization, and how the organization behaves in translating this information. On the other hand, Narver & Slater (1990) focus on market orientation as an organizational cultural function that improves customer focus. Therefore, the ideas of Kohli & Jaworski (1990) are considered to be more behaviorally oriented, while those of Narver & Slater (1990) are more culturally oriented (Jaakkola, 2012).

Several previous studies have found a link between firms' capability to implement strategic orientation and company performance. Altuntas et al. (2013) conducted research on healthcare providers in Turkey through a combination of email surveys and telephone interviews with 74 companies. They found that there was a relationship between strategic orientation and company performance. Moreover, Ho (2014) also found that strategic orientation influences company performance, especially in industries with a high level of competition, such as technology-based companies. In the context of SMEs, Abiodun & Kida (2016) conducted a study of 238 such companies and found a positive and significant relationship between strategic orientation and their performance. Therefore, it is hypothesized that:

H1: Strategic orientation affects firm performance.

Innovation Capability and Firm Performance

Calantone et al. (2002) define innovation capabilities at a firm level as the identification of something new. Guan & Ma (2003) argue that innovation capabilities on a broader scope are capable of meeting the needs of enterprises to adapt to a variety of competitive business and environmental conditions. A different definition is also proposed by Romijn & Albaladejo (2002), who define organizational capabilities in terms of further emphasizing technological process utilization through the process of absorbing the knowledge and skills that organizations need to develop technology efficiently. Wonglimpiyarat (2010) and Romijn & Albaladejo (2002) all emphasize that the capabilities of innovation need to be directed to create substantial improvements and modifications to current technology and to create new technologies.

Marketing specialists identify two typical innovations. First, innovation as an output of various strategies or actions undertaken to introduce corporate innovations, in relation to new products, brands, line extensions or consumer services (Baker & Sinkula, 2009). Second, innovation represents a company's openness or acceptance of new ideas (Verhees & Meulenberg, 2004). Atalay et al. (2013) conducted a study on the automotive supplier industry in Turkey, with 113 senior managers comprising the sample. They found that there was a relationship between product, process, organizational and marketing innovation and company performance. Hassan et al. (2013) also conducted research based on samples of...

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