Journal of International Business Research (Print ISSN: 1544-0222; Online ISSN: 1544-0230 )

Research Article: 2019 Vol: 18 Issue: 1

The Effectiveness of SMEs: Exploratory Study of SME Owners Competency in Indonesia

Fenika Wulani, Widya Mandala Catholic University

Tuty Lindawati, Widya Mandala Catholic University

Antonius Jan Wellyan Toni Putro, Widya Mandala Catholic University

Ani Suhartatik, Widya Mandala Catholic University

Abstract

This study investigated the competencies of business owners that distinguish the effectiveness of SMEs in Indonesia. We conducted in depth interviews with 10 successful SME owners and 10 static SME owners in Surabaya, the second-largest city in Indonesia. We obtained data of SME owners from The Department of Cooperatives and SME in Surabaya and used structured interviews that include questions about the ability of the business owners in their role as leaders and managers. This study found that there are 48 competency items of successful SME owners. Out of these 48 items, there are 27 items of competency associated with successful SME owners, but not the owners of static SMEs.

Keywords

Competency, SME Owner, SME Effectiveness, Leadership, Indonesia.

Introduction

In Indonesia, SMEs have a large role in creating jobs and improving the community welfare (Japhta, 2016). Therefore, it is important for Indonesia to continue developing SMEs. Although the number of SMEs generally reached 99.9% of business units in Indonesia and absorbed 89% of the workforce, SMEs can only produce 60% of GDP (Asia Pacific Foundation of Canada, 2018). The Governor of Bank Indonesia revealed that there are several problems of SMEs such as limited skills in access to markets including international markets, financial management, and product innovation (Chandra, 2016). Irjayanti & Azis, (2012) found that competition, funding, technology, fuel costs, and production inefficiencies are the biggest obstacles for SMEs in Indonesia. Thus, it can be concluded that generally SMEs in Indonesia face limited capacity to market, innovate, and manage human resources as well as finance.

Boubakary (2015) argued that the growth of SME depends on the leaders including their personality. Furthermore, the role of SME managers are important for the achievement of SME performance related to limited resources (Garavan et al., 2016) SME owners also play an important role in managing SMEs as managers and leaders to support and encourage employees to achieve their goals (Franco & Matos, 2015). Therefore it is important to develop leader competencies, namely in order to achieve team performance, develop expertise and give recognition to subordinates, and create a culture of innovation (Franco & Matos, 2015). In addition, SME owners have strategic and operational roles, so they need to have the competence to carry out these roles (Garavan et al., 2016). This leadership factor can be the biggest obstacle to managing change in SMEs (Shokri et al., 2016). However, although the factor of owners as SME leaders is important for the success of SMEs, not many studies have examined leadership in the context of SMEs (Franco & Matos, 2015).

This present study identifies initial investigation toward what competencies which determine the effectiveness of creative industry SMEs at the micro level in Indonesia. In this study the researchers explore what characteristics distinguish successful and static SMEs. This refers to the finding of Boyatzis (1982) & Yukl (2002), that there are several individual characteristics that distinguish effective and ineffective managers. In our study, the characteristics of successful SME owners will then show the competencies that SME owners must possess to be effective. SME' entrepreneurs, not only need to have the competence of a manager but also the competence of a leader, which can influence their followers and bring them to high performance. In this study also consider local cultural factors, because the effectiveness of a business is also determined by the understanding of business people about local culture (Meyer, 2014). The current study explores the determinants of the effectiveness of creative industry SMEs, focusing on the sectors of batik, culinary, and fashion (including accessories) at the micro business level (SMEs) in Surabaya, the second biggest city in Indonesia. Micro-level businesses are considered not to have enough entrepreneurial ability. Therefore it is important to investigate what competencies possessed by SME owners in Indonesia.

Literature Review

Resource-based view theory (RBV) explains that corporate resources that are valuable, rare, difficult to imitate, and irreplaceable can be a competitive advantage of a company (Barney et al., 2001). Referring to the RBV, entrepreneurial competence is the key to valuable resources for the company (Tehseen & Ramayah, 2015). This competence will be a competitive advantage for entrepreneurs and provide business success (Tehseen & Ramayah, 2015). Ritter & Gemunden (2002) define competencies as knowledge, skill and qualifications owned and used by individuals. Furthermore Boyatzis (2008) defines competence as capability or ability. This concept of competency is based on theories about performance that individuals will perform high if their competence is in accordance with the work and organizational context (Boyatzis, 2008). In addition, he explains that competence is a underlying characteristic that includes emotional (self-control), cognitive (thinking patterns) and social (managing relationships). According to (Taipale-Erävala et al., 2015), competence is a skill, ability, experience, attitude, and other traits that can influence the management of SMEs. SME has the characteristics of limited resources and money, as well as multi skills of employees. Therefore, SME owners need to have the competence to be able to overcome various limitations.

Boyatzis study (1982) & Yukl (2002) found that competencies such as the trait personality, cognitive, and interpersonal skills are related to managerial effectiveness. According to Boyatzis, effective manager competence can include being able to influence others, seeking information from various sources, analysing situations, developing creative solutions, developing networks, getting support from other parties, and giving recognition to members contributions. HBR in Manager’s handbook (2017) offers a set of skills that managers need to successfully lead their role as leaders. For example, the ability to get and share information about business and trustworthy people and build trust. In particular, in order to successfully develop a new business, entrepreneurs need to have, among others, vision, creativity, networking, perseverance (Entrepreneur’s handbook, 2018). However, the effectiveness of a business is also determined by the understanding of business people regarding local culture (Meyer, 2014; Schweitzer & Alexander, 2015), including in SME (Sajilan, 2015). In Indonesia, building relationships is important. This is reflected in the use of work time. In Indonesia, employees use 50% of their working time by completing work-related tasks, and 50% for socializing (Schweitzer & Alexander, 2015). Followed by Meyer (2014), in terms of performance appraisal, in the Indonesian context, negative assessments were given indirectly (indirect negative feedback). Negative judgments are given subtly and subtle and in personal situations.

Methodology

The research participants were 20 SMEs entrepreneurs in the creative industry in the field of batik, fashion accessories, clothes and bags, and food in Surabaya. These products are the prime product of SME in Surabaya. The 20 SMEs included 10 SMEs who showed high performance in the past year, and 10 SMEs who had experienced static progress in the past year. High performance or static refers to the criteria of sales results in the 2016 period. Information about SMEs and their performance was obtained from the Department of Cooperatives and SME in Surabaya. Participants were asked to share what skills, knowledge, managerial behaviour, and leading behaviours had been carried out in their business. The list of interview questions is based on the activities of leading and managing SMEs in 4 areas of management functions, namely marketing, finance, production and human resources. The researchers also ask about their perceptions about local culture, especially in managing employees, and what behaviours are important to do with that culture. Data collected documented through recording and writing.

The researchers conducted interviews with 10 successful SME owners and 10 static SME owners. The twenty SMEs have a business in the creative industry which includes fashion - accessories, clothes, bags; batik, and food. The interview is carried out in about 60 minutes.

Table 1 shows the participant data based on the product, the owner's gender, and Year of establishment.

Table 1 Participant Profile
SME’s product Successful SME   Static SME  
Number of SME Gender Year of establishment Number of SME Gender Year of establishment
Fashion and accessories 4 4 female 2010: 2 SMEs 6 6 female 2009: 1 SME
2013: 1 SME 2010: 2 SMEs
2015: 1 SME 2012: 1 SME
2015: 2 SMEs
Batik 2 2 female 2005: 1 SME 2014: 1 SME 2 2 female 2009: 1 SME 2014: 1 SME
Food and beverage 4 2 female 2013: 1 SME 2 2 male 2012: 1 SME
2 male 2015: 2 SMEs 2015: 1 SME
2016: 1 SME

Results

Interviews with successful SME owners resulted in 106 business profile profiles, while interviews with static SME owners resulted in 72 business profile profiles. The next stage, the researchers identified whether there were items that had the same meaning, in each successful and static SMEs profile. The results of the identification show a list of 45 entrepreneur profiles for the owners of static SMEs and 48 successful SME owners. In addition, the study shows that there are 21 items of the same entrepreneurs profile mentioned by successful SME owners and static SME owners in managing their business. Some of the same items are following various types of business training, following certain communities, giving unique characteristics to products and maintaining good relations with employees. However, there are 27 items from successful SME owners that are not mentioned by static SME owners, such as developing employee skills, understanding consumer desires, having performance targets, and having caution in running a business. On the contrary, there are 24 business profile profiles mentioned by static SME owners but not mentioned by successful SME owners, such as taking risks, imitating competitor’s designs, and not assuming competition. The list of items from the interviews is shown in Table 2.

Table 2 The Result of in-Dept Interview
No Successful SME Static SME
1 Following the various types of business training Following the various types of business training
2 Giving recognition for employee work Giving recognition for employee work
3 Looking for product development ideas Looking for product development ideas
4 Adding product variations Adding product variations
5 Taking credit offered by financial institutions Taking credit offered by financial institutions
6 Following certain communities Following certain communities
7 Conducting regular visits to outlets for inventory checking and product conditions Conducting regular visits to outlets for inventory checking and product conditions
8 Giving a unique characteristic to the product Giving a unique characteristic to the product
9 Managing product inventory Managing product inventory
10 Managing consumer payment transactions Managing consumer payment transactions
11 Managing product delivery to consumers Managing product delivery to consumers
12 Maintaining good relations with employees Maintaining good relations with employees
13 Having persistence in running a business Having persistence in running a business
14 Managing sales revenue Managing sales revenue
15 Willingness to learn business independently from various media Willingness to learn business independently from various media
16 Sharing information with successful SMEs Sharing information with successful SMEs
17 Providing quality products to consumers Providing quality products to consumers
18 Repairing the work of employees that are not appropriate Repairing the work of employees that are not appropriate
19 Promoting products by using products Promoting products by using products
20 Establishing good relationships with consumers Establishing good relationships with consumers
21 Doing Innovation Doing Innovation
22 Regularly promoting products via social media Unusing online media to market products
23 Taking part in the exhibition Providing adequate packaging
24 Providing work rules to employees Using machine tools
25 Collaborating with other SMEs Advising employees
26 Developing employee skills Self-financing
27 Understanding consumer desires Do not want to borrow credit offered
28 Having caution in running a business Dare to take risks
29 Having basic knowledge about the production process Less checking
30 Taking part in the SME's contest Innovate if only the old design has been sold out
31 Enthusiastic in running a business Utilizing the rest of the other party's production as raw material
32 Focus on running a business Choosing good quality raw materials
33 Performing performance evaluation Satisfying consumers
34 Carrying out the production process every day Setting competitive prices
35 Promoting products by distributing a tester Using raw materials that are easy to obtain and cheaper
36 Bringing lots of products during the exhibition Producing many different types of products
37 Meeting employee needs Imitating competitor design
38 Having employees with special expertise Establishing good relationships with friends
39 Having performance targets Showing to consumers the example of a finished product before mass production
40 Having a vision Utilize of unused raw materials into diversified products
41 Implementing an open financial system for employees Doing most of the production process by her/himself
42 Inviting employees to participate in decision making There is no special recognition such as incentives for employee
43 Setting product prices Do not want to develop product variations
44 Developing networks Not assume there is competition
45 Developing product distribution channels Not using preservatives
46 Recognizing the right moment to promote the product  
47 Become a trainer  
48 Selecting products based on market potential  

Discussion

The results of the study show that there are 48 entrepreneur profiles as a competency items for successful SME owners. Referring to the forty-eight profiles, there were 21 items that were also carried out by the owners of static SMEs. For example, following the various types of business training, following certain communities, maintaining good relations with employees, and sharing information with successful SMEs. These results support the finding by (Cancino & Bonilla, 2015) that SMEs participating in training activities provided by the government experience high performance. Therefore, it is important for SME owners to have strong motivation to develop their competencies by participating in various trainings organized by government. The results of interviews show that almost all participants mentioned that they attended training activities provided by government that manage SMEs in Indonesia. However, the static SMEs tend not to routinely participate in these activities. Some participants from static SME owners gave a number of reasons why they rarely attended the training, such as they had already received the topics before.

Muzzi & Albertini (2015) suggested the importance of building networks to get the idea of innovation, with the concept of Innovation Community (IC). Surin et al. (2017) in their quantitative study on SME owners in Malaysia found that strategic business networks influence business performance. Referring to Surin et al. (2017), the success of the network depends on human capital, namely the managerial ability of SME owners. In the context of successful and static SMEs, participants tended to try to build networks to obtain information on product development and exhibition activities held by the government as well as promote their product each other. With regard to culture, Indonesian people, especially Javanese, will respect good leaders (Irawanto & Ramsey, 2011). Therefore, it is important for SME owners to establish good relations with their subordinates. Especially, there is a tendency in Indonesia; SME employees are relatives and neighbours of the owners themselves. Therefore they do not want to give too high demands and strong reprimands if the performance of their employees has not reached their expectations. Even some owners chose to repair by themselves the work of employees which do not meet expectations.

In addition, this study found that there were 27 items of successful SME behaviour/ attitudes/skills that were not mentioned by static SME owners. For example, SME owners routinely using technology for promoting their products and focus on running their business. This is consistent with Morgan (2014), managers need to utilize technological developments to run their businesses and strengthen networks. According to Ritter & Gemunden (2002), individuals can achieve innovation success if they have networking and technology competencies. Participants from successful SME owners tend to use technology in the form of social media to promote their products. Some of them actively use Instagram and Facebook, even some participants have sold their products through online stores in Indonesia. They, compared to participants from static SME owners, are more focused on running their business. These successful SME owners tend to be more passionate and diligent in running their businesses and have a high willingness to learn. While some static SME owners appear to be out of focus, for example because they have other activities besides running their businesses, for example active in service activities to the community. Other static SME owners tend to show their complaints regarding their non-selling products and try to sell other types of products, or have difficulty obtaining people who want to be their employees.

The interesting thing that differentiates the two profiles of SMEs is that SME owners are successful in being careful in running a business, while static SME owners are more willing to take risks. Referring to HBR (Entrepreneur’s handbook, 2018) regarding how small businesses develop their businesses, caution is needed in taking an opportunity, to reduce the risk of failure. In addition, the owner of a static SME said that there was no need to consider a competitor. While successful SME owners mention the need to understand market potential and manage product prices. This shows that competitors need to be taken into account in order to determine differences against competitors. Entrepreneur’s handbook (2018) explains the importance of determining competitive advantage, which is something that differentiates our products from competitors, in order to survive in the industry.

Conclusion

Due to the growing number of SMEs in Indonesia and the opening of global markets, SMEs in Indonesia must be more competitive. Therefore SMEs in Indonesia need SME owners who can play effective roles as leaders and managers. The competence of SME owners is very important to consider. The results of the analysis show that there are 48 competencies of SME owners who are successful in running their businesses. Furthermore, among them there were 27 successful SME owner competencies but were not carried out by participants of static SME owners. The twenty-seven items of this differentiating competency can be used as material that needs to be given to training activities followed by SME owners. It is important to be considered by government agencies to provide training materials that fit to the conditions of business and leadership problems faced by SME owners. However, the results of this study are preliminary findings that are still necessary to pass further validation testing. Future studies need to analyse the relevance of the items of the differentiating competencies, especially in the context of SMEs in Indonesia.

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