ANALYSIS OF FACTORS INFLUENCE THE PERFORMANCE OF INDONESIAN SMALL AND MEDIUM ENTERPRISES (A RECOURSE-BASE THEORY APPROACH) Herri Management

Department, Economics Faculty, University of Andalas Padang, 25163 Indonesia Address: Kampus Unand Limau Manis Padang, 25163- Sumatera Barat Indonesia Telp 0062 751 71088, fax 0062 751 71088, Mobile 081363291438 Email: herri88@yahoo.com: herri88@hotmail.com Suhairi Abstract This research is aimed at explaining the relationship based on resource-base theory and contingency theory used in developing research framework. Specifically, the relationship is between personality values, business strategy, environmental uncertainty, and firms performance. The three hundreds (300) respondents who are entrepreneurs from various manufactures of small and medium companies in Indonesia have beed used to test research hypothesis. Based on hirarchical regression, it can be concluded that business strategy is mediating variable on the relationship between entrepreneurs personality values and and firms performance, and environmental uncertainty is moderating variable towards the relationship between business strategy and firms performance. Introduction Small and medium enterprises (SME) play an important role (Yu, 2001), therefore they dominant the most number of firms in he world, both in develop and developing countries (Day, 2000; Wijewardena & Tibbits, 1999; Sanjaya, 1997). The role of SME is more important in developing country, especially for Indonesia (Swasono, 1986). The development of SME has brought some positive impacts although they havent been able to change Indonesian economic structure as a whole (Marzuki, 1997; Tambunan, 1999). However, there are still some findings about SME bankruptcy while some SMEs are very success running their business instead. The influences of factors on firms success are different from one country to another country. The differences are due to economics condition, location, and culture (Wijewardena & Tibbits, 1999). Some researches have found that factors determining bankruptcy also influence the firms success (Gaskill, Auken, & Manning, 1993). Previous researches have not explained comprehensively the reasons of bankruptcy of many firms (Gaskill et al., 1993). Researchers often used rational theory (Jennings & Beaver, 1993), and there have not unified theoretical model thatexplain factors influence SMEs performance (Kangasharju, 1997).

Research on the success of IKS may use four approaches, they are (1) personality approach, (2) business management approach, (3) sectoral approach, dan (4) organization development approach (Gibb & Devis, 1990). This research will focus on personality characteristics of an entrepreneur because personality characteristics of an entrepreneur are often used as the base on many previous studies (Bab & Bab, 1992). Some researches have found personality characteristics of an entrepreneur are an important factor that influences firms performance (Luk, 1996; Theng & Boon, 1992; Ibrahim & Goodwin, 1986; Montagno, Kuratko, & Scarcella, 1986). However, many previous researches relate directly between personal characteristics and firms performance. Based on resource-based theory, the influence of personality factor towards firms performance is not only directly but also indirectly, that is, through the application of business strategy. Therefore, this research has purpose to examine the influence factors on SMEs performance by applying resourcebased theory as a base in developing research framework. Besides, this study also uses contigency theory to explain the influence of environmental uncertainty towards firms performance. LITERATURE REVIEW Theory Resource-based theory explains that firms sources are the main factor that determines competitive advantage and profitabilities (Michalisin, Smith, & Kline, 1997; Bates & Flynn, 1995; Mahoney & Pandian, 1992). One of the unique sources that possibly possessed by firm are personality values of an entepreneur. Personality values will influence business strategy that result competitive advantage. Therefore, SMEs performance will also be influenced by environmental uncertainty, therefore this research will use contigency theory to explain the relationship between business strategy and firms performance.. Personality, Strategy, and Performance Some previous research found that personality characteristics and managerial skills of an entrepreneur is critical factor on SMEs performance (Al-Shaikh, 1998; Box, White, & Barr, 1993; Cragg & King, 1988). However, until at present there has not a universal agreement on the scope of managerial field (Cragg & King, 1988). Management and planning functions have overall characterictics and included in all aspects in business (Gaskill et al., 1993). As a result, the difference between one researcher to other researchers is sometimes using different focus of personality and managerial. Research conducted in Indonesia found that need for achievement and locus of control are the main personality characteristics comparing to other entrepreneurs personality characteristics (Riyanti, 2003; Sukardi, 1991). Pandey and Tewary (1979) stated that both personality characteristics are important and main entrepreneurship values. Therefore, this suty will focus only on two personality characteristics, they are, need for achievement and locus of control.

Research conducted by Miller and Toulouse (1986) found that there is correlation between need for achievement and locus of control with business strategy as well as on firms performance. Reseach conducted by Kotey and Meredith (1997) indicated that one who has high entrepreneurship characteristics will use more proactive strategy and apply that strategy in the firm and therefore firm will gain higher performance. Research focuses on locus of control conclude that locus of control has positive relation with business strategy and as a result it will influence firms performance (Boone, Brabader, & Witteloostuijn 1996; Nwachukwu, 1995). Research Framework Based on resource-based theory and contingency theory, and findings on previous studies, this research framework can be diagramed as follows: Figure 1. Research Framework Environmental Uncertainty Personality of Entrepreneur Business Strategy Firms Performance

Hypotheses Based on the literature review and research model therefore the hypotheses of this research are: Hypothesis1: Business strategy is mediating variable that relates between personalities of entrepreneur and firms performance Hypothesis 2: Environmental u ncertainty is moderating variable that relates between business strategy and firms performance. RESEARCH METHOD Population and Sample The size of SME used in this research is firms that have the numbers of employees from 1 to 99 (BPS, 2002). Data selection of firms found in Directory of Manufacturing Firms in 2001 found 15.593 firms categorized as SME. Four provinces as the center of medium manufacturing firms in Indonesia, they are, DKI Jakarta, West Java, Middle Java, and East Java with the numbers of firms 12.326. These four provinces are approximately representative of small and medium size of manufacturing firms in Indonesia.

Due to the limitation of time and cost therefore sample was selected by purposive random sampling to 300 firms. Since the list of sample frame address was not available, technique snow ball is used in selecting sample, that fulfill the criteria outlined by the definition of SME according to Centrol Bureau for Statistics in Indonesia. Variable Measurement Need for achievement Need for achievement construct was adopted from Steers and Braunstein (1976), this is a common practice for similar studies that conducted earlier such as Entrialgo, Fernandez, and Vazquez (2000), Box, et. Al (1993), and Miller and Toulouse (1986). The measurment used to measure this variable consisted of five items, and the seven-point likert-type scale (from 1 to 7) were used for the purpose of this study. Locus of control The measurement of locus of control that developed by Rotter (1996) and modified by Lumpkin (1985) has been used for this study. However, the Lumpkin (1985) modified measurement was recognized and used by many researchers such as Entrialgo et al. (2000) and Box, et.al (1993), and thus, in a line with the previous research, this study will use the modified measurement of locus of control. This measuremnt as modified by Lumpkin (1985) consists of two categories, namely, high internal locus of control, and low internal locus of control, each of which have three items. Senven points Likert-type scale ranging from 1 to 7 will be used for the purpose of this study. Business Strategy The Strategy Hierarchy comprises with corporate level, strategic business unit level, and functional level. The measurement of business strategy is based on functional strategy has been used by Kotey and Meredith (1997) and Gadenna (1998). Th equestionnaire on functional strategy consists of 36 items, including production strategy, marketing strategy, financial strategy, research and development strategy, and human resource strategy. Measurement is conducted by using Liker scale, that is, 1 to 7. Environmental Uncertainty Environmental uncertainly will be measureb by using questionnaire developed by Miles & Snow (1978). The measurement used some questions related to environment dimension such as: marketing condition, government policy finance, labor and competition. The measurement uses Likert scale from 1 7 (from very predictable to very unpredictable). From the questionnaire acquired some values which describe perception of manager owner of SME toward environmental uncertainly, the higher the value, the higher the environment uncertainty.

Firms performance An extensive literature review of 52 empirical research on entrepreneurship were conducted by Murphy et al. (1996), they concluded that five measurements of firms performance were used frequently in this area of research, these are: sales growth, profit margin, return on investment, return on equity, and return on asset. Therefore, this research intends to utilize three out of these five measurments, namely, sales growth, profit margin, and return of asset. The respondents of this study will be requested to indicate their firms average of these performance measurments for the last three years. Furthermore, in order to obtain total firms performance measurement, the average of these three performances measurements was calculated and named as financial performance, this procedure is similar to that used by Boone, et al. (1996). Method of Analysis This research used some statistical analysis methods to assist data analysis and hypothesis testing. Before applying regression analysis, analysis factors analysis and reliabilities were conducted firstly. Based on the concept of analysis on mediating variable proposed by Baron and Kenny (1986), and Ndubisi, Jantan, and Richardson (2001), hirarchical regression model used to test first hypothesis is: Z = a + b1 X1 + b2 X2 Y = c + d1 X1 + d2 X2 Z= e+fY Z = g + h1 X1 + h2 X2 + j Y Full Mediating b 0 d 0 f 0 also j 0 h =0 Partial Mediating *b 0 *d 0 * f 0 also j 0 * h 0 but h < b

To test the second hypothesis, the following model is used: Z= e+fY Z = e + k1 Y + k2M + k3 YM where: X1 X2 Y Z = Need for achievement = Locus of control = Business strategy = Firms performance

M YM

= Unvironmental uncertainty = Interaction business strategy and unvironmental uncertainty

FINDING Samples Characteristics The result of descriptive statistic of the characteristics of firms samples can be seen in Table 1, and the characteristics of entrepreneurs samples can be seen in Table 2. Table 1 Firms Profile
Location West Java Middle Java East JAva DKI Jakarta Limited corporation Commanditor Proprietorship 10 tahun >10 20 tahun > 20 tahun 19 > 19 - 99 Total 80 70 80 70 62 48 110 151 107 42 229 71 Percent 26.67 23.33 26.67 23.33 20.7 16.0 12.7 63.3 35.7 14.0 76.3 23.7

Legal form

Age

Employee

Following are the entrepreneurs characterisictics of this study Table 2 Entrepreneur profile
Total Age (years) 40 > 40 Male Famele < Junior high school Senior high school Diploma Bachelor 180 120 236 64 69 160 30 41 Percent 17.0 46.6 78.7 2.3 23.0 53.3 10.0 13.7 Mean 39.2 Standard Deviation 9.9

Sex

Education

Length of tenure (years)

5 > 5 10 > 10

61 52 49

29.6 25.2 23.8

15.7

7.3

Validity and Reliability To test the validity to the measurement, factor analysis was conducted, and the reliability of the measurement can be seen from its Cronbach Alpha. The measurement is reliable if its Cronbach Alpha is at least .60. Moreover, loading factor is equal or more than to .3 is accepted, and cross loading equal or more than to 0,3 is rejected (Hair, Anderson, Tatham, & Black, 1998). Factor analysis towards instrument of entrepreneurs personality characteristics results 3 factors, named as locus of control, need for achievement, and risk taking. Factor analysis to instrument of environmental uncertainty results four factors, which can explain 72,19 varians factor formed. The second order of factor analysis towards mean factor formed results one factor only, consists of 17 items and expains environmental uncertainty. Factor analysis on business strategy instrument results five factors, consist of 30 items. The second order of factor analysis towards mean factor formed results one factor, called business strategy. Test of Hypotesis Testing on the first hypothesis is conducted through 3 stages of regression. The first stage is to test relationship between entrepreneurs personality values and business strategy. Second is business strategy and firms performance. Third stage is conducted through hirarchical regression, that is the relationship between personality values and firms performance, and so forth between personality values and business strategy and firms performance. The summary of regression analysis can be seen in Table 3.

Table 3 indicates that model 1 can explain the positive influence of personality values towards business strategy (R = 12.8, F = 14.336, p value = .01). This means thet 12.8 percentage of varians of business strategy can be explained by personality values of an entrepreneur. Partial analysis also indicates that all dimensions of personality values of an entrepreneur have positive influence towards business strategy. Therefore, either simultaneously or partially, personality values of an entrepreneur can contribute towards the formation of business strategy. In Table 3, the influence of business strategy towards firms performance can be seen. The ability of business strategy to explain firms performance is moderately high, that is, 19.2 percent. Three dimensions of personality values of an entrepreneur, locus of control, risk taking, and need for achievement are able to explain 25.8 of varians of firms performance. The ability to explain the varians of firms performance is higher if in regression analysis of personality values, business strategy is added. Personality values and business strategy are able to explain 34.6 percent of the varians of firms performance.

Partially, locus of control, risk taking, and need for achievement have positive influence towards firms performance. Similarly, business strategy also has positive influence towards firms performance. If standardized coefficients ( ) of personality values and business strategy are compared, it can be concluded that locus of control and business strategy have ability to explain the higher varians of firms performance comparing with need for achievement and risk taking. All of analysis requirements on mediating variable explained by Baron and Kenny (1986) can be fulfilled in testing conducted. Standardized coefficients ( ) oflocus of control, risk taking, and need for achievement indicate the decreasing between before and after business strategy is added in the equation of regression. Therefore, business strategy is partially mediating variable towards the relationship betweeen locus of control, risk taking, and need for achievement and firms performance. Table 3. Business Strategy is Mediating Variable
Independent Variable Business Strategy .116 .208 for .185 T Value 2.050** 3.665*** 3.223*** .439 8.428*** Firms Performance T Value Firms Performance .382 .156 .159 T Value 7.356*** 3.056*** 2.976*** Firms Performance .327 .101 .125 .313 T Value 6.573*** 2.004** 2.534** 6.271***

Locus of Control Risk Taking Need Achievement Business Strategy

R R Adjusted R Change F Value / F Change

.128 .119

.192 .190

.258 .251 .258

.346 .337 .087 39.322***

14.336***

71.036***

34.359***

*** = Significance .01

** = Significance .05

* = Significance .1

The second of hypothesis testing is conducted by using hirarchical regression. This is conducted after forming interaction variable between business strategy and environmental uncertainty. The result of testing on the influence of environmental uncertainty as moderating variable towards the relationship between business strategy and firms performance can be seen in Table 4. Table 4 indicates the ability of business strategy in explaining higher varians of firms performance after inserting the variable of environmental uncertainty to the equation of regression, that is, 19.2 percent to 22.2 percent. Partially, the influence of business strategy is positive towards firms performance, but the influence of environmental uncertainty is negative. This means that busines strategy implemented by firm

will motivate firms performance, however environmental uncertainty will weaken the achievement of good firms performance. If variable interaction between business strategy and environmental uncertanty is added into regression equation, the result of regression shows that interaction variable is able to explain the change in firms performance significantly (F Change =2.974 at p= .1). Therefore, it can be concluded that environmental uncertainty is moderating variable towards the relationship between business strategy and firms performance.

Table 4. Environmental Uncertainty is Moderating Variable

Pembolehubah Bersandar Non Change? Business Strategy Environmental Uncertainty Interaction Bs x Eu Tidak Standard Firms Performance .439 T Value 8.428*** .417 -.197 T Value 8.043*** -3.796*** .851 .147 -.545 T Value 3.311*** .713 -1.725*

R R Adjusted R Change F Value / F Change

.192 .190

.222 .216 .222

.230 .222 .008 2.974*

71.036***

41.470***

*** = Significance .01 ** = Significance .05

* = Significance .1

DISCUSSION This research result indicates that business strategy is partially mediating variable between personality values and firms' performance. This means that firms' performance is not only influenced directly by personality values but also influenced by business strategy. This research finding support previous research conducted by, like Boone et al. (1996), Nwachukwu (1995), Entrialgo et.al (2000), and Kotey and Meredith (1997). In accordance with personality values of an entreprenuer, that is, dissatisfaction with what he has gained, always enhance his performance, highly confindence on his job, risk-taking, therefore these values will influence him in the implementation of business strategy related to environmental condition faced with. Therefore, personality values will also give positive influence towards the implementation of business strategy, and, so forth, competitive advantage and profitabilities can be achieved. The competitive advantage formed through personality values will face negative influence from

environmental uncertainty. This research finding indicates that the relationship between business strategy and firms performance will be moderated by environmental uncertainty, in which, the environmental uncertainty weaken the relationship between business strategy and firms performance. Some previous research support this research, some of them are conducted by Kumar and Strandholm (2002), and Herri (2002).

CONCLUSION AND SUGGESTION Internal factors such as personality of entrepreneur and business strategy have contribution to SMESs performance. High performing SMEs tend to have proactive strategy, internal locus of control, high need for achievement, and risk taking. Higher environmetal uncertainty influenced by long lasting economic crisis in Indonesia results negative influence towards SMESs performance. Implication This research gives contribution to evaluate the practice of SMEs management, and is made as basis for compilation of policy. This also adds research related to aspects determining SMEs performance. Among its implication is the importance of developing of nature of entrepreneurships giving contribution to SMEs performance like nature of locus of control, need for achivement, and risk taking. Besides, the development in the implementation of appropriate business strategy to environment condition is necessarily performed so that high firms performance can be achieved. Future Research To support this research finding, future research may be conducted by modifying into some other characteristics. The possibility to include cultural factor or ethnic may be also performed since this factor probably also influences SMEs performance. Most of samples are coming from manufacture sectors, for future research, it is possible to have research in different sectors such as trading or service hence it will broad the knowledge about the factors contribute to the performance of SMEs in Indonesia. Moreover, data of this research merely come from the perception of the respondents; research by using an objective data is one of the possibilities in the future. Reference Al-Shaikh, F. (1998). Factors for Small Business Failure in Developing Countries. ACR, 6(1), 7586. Bab, E. M., & Bab, S. V. (1992). Psychological Traits of Rural Entrepreneurs. Journal of SocioEconomics, 21(4), 353-363.

Baron, R. M., & Kenny, D. A. (1986). Moderator-Mediator Variable Distinction in Social Psychological Research: Conceptual, strategic, and statistical considerations. Personality and Social Psychology. 51(6), 1173-1182. Bates, K. A., & Flynn, J. E. (1995). Innovation History and Competitive Advantage: A Resourcesbased View Analysis Of Manufacturing Technology Innovations. Academic of Management Best Papers Proceeding. 235-239. Biro Pusat Statistik (BPS). (2002). Directory Manufacturing Company Tahun 2001, Jakarta, Indonesia: BPS. Boone, C., Brabader, B. D., & Witteloostuijn, A. V. (1996). CEO Locus of Control and Small Firm Performance an Integrative Framework and Empirical Test . Journal of management Studies. 33(5), 667-699. Box, T. M., White, M. A., & Barr, S. H. (1993). A Contingency Model of New Manufacturing Firm Performance. Entrepreneurship Theory and Practice. Winter, 31-45. Cragg, P. B., & King, M. (1988), Organizational Characteristics and Small Firms' Performance Revisited. Entrepreneurship Theory and Practice, Winter, 49-63. Day, J. (2000). Commentary: The Value and Importance of The Small Firm to The World Economy European. Journal of Marketing. 34 (9/10), 1033-1037 Entrialgo, M., Fernandez, E., & Vazquez, C.J. (2000). Characteristics of Managers as Determinants of Entrepreneurial Orientation: Some Spanish evidence. Enterprise & Innovation Management Studies. 1(2), 187-205. Gardenne, D. (1998). Critical Success Factors for Small Business: an Inter-Industry Comparison. International Small Business. 17(1), 36-56. Gaskill, L. R., Auken, H. E. V., & Manning, R. A. (1993). A Factor Analytic Study of The Perceived Causes of Small Business Failure. Journal of Small Business Management. 31(4), 18-31. Gibb, A. & Davies, L. (1990). In Pursuit of Framework for The Development of Growth Models of The Small Business. International Small Business Journal. 9(1), 15-31. Hair, J. F., Anderson, R. E., Tatham. R. L., & Black, W. C. (1998). Multivariate Data Analysis. New Jersey, Prentice-Hall. Herri. (2002). Ciri-Ciri Pengurus Atasan, Strategi, dan Prestasi Syarikat . School of Management, USM, Malaysia, Tesis Phd. Ibrahim, A. B., & Goodwin, J. R. (1986). Perceived Causes of Success in Small Business. American Journal of Small Business. Fall, 41-50. Jennings, P., & Beaver, G. (1993). The Performance and Competitive Advantage of Small Firms: A management perspective. International Small Business Journal. 15 (2), 63-75. Kangasharju, A. (1997). Growth of The Smallest: Determinants of Small Firm Growth During Strong Macroeconomic Fluctuations. International Small Business Journal, 1928-43 Kotey, B., & Meredith, G. G. (1997). Relationship Among Owner/Manager Personal Values, Business Strategies, and Enterprises Performance. Journal of Small Business Management. April, 37-64.

Kumar, K., & Strandholm, K. (2002). Perceived Uncertainty: How Different Environmental Sectors Moderate Strategy-Performance Relationship, The Journal of American Academy of Business, Cambridge. March, 289-295. Luk, S. T. (1996). Success in Hong Kong: Factors Self-Reported by Successful Small Business Owners. Journal of Small Business Management, July, 68-74. Lumpkin, J. R. (1985). Validity of A Brief Locus of Control Scale for Survey Research. Psychological Reports. 57, 655-659. Mahoney, .T., & Pandian, J. (1992). The Resource-Based View Within the Conversation of Strategic Management . Strategic Management Journal. 13, 251-275. Marzuki, U. (1997). Komitmen mengembangkan usaha kecil, in U. Marzuki, & H. Seldadyo (Eds.) (1997), Kiat Sukses Pengusaha Kecil (pp. 1-10). Jakarta, Indonesia: Jurnal Keuangan dan Moneter. Michalisin, M. D., Smith, R. D., & Kline, M. (1997). In Search of Strategic Assets. International Journal of Organizational Analysis. 5(4), 360-387. Miles, R. E., & Snow, C. C. (1978). Organizational Strategy, Structure and Process. New York: Mc. Graw Hill Book Company. Miller, D., & Toulouse, J. M. (1986). Chief Executive Personality and Corporate Strategy and Structure in Small Firms. Management Science. 32(11), 1389-1409. Montagno, R. V., Kuratko, D. F., & Scarcella, J. H. (1986). Perception of Entrepreneurial Success Characteristics. American Journal of Small Business. Winter, 25-32. Murphy, G. B., Trailer, J. W., & Hill, R. C. (1996). Measuring Performance in Entrepreneurship Research. Journal of Business Research. 36, 15-23. Ndubisi, N. O., Jantan, M., & Richardson, S. (2001). Is the Technology Acceptance Model Valid for Entrepreneurs? Model Testing and Examining Usage Determinants. Asian Academy of Management Journal, 6(2), 31-54. Nwachukwu, O. C. (1995). CEO Locus of Control, Strategic Planning, Differentiation, and Small Business Performance: A test of path analytic model. Journal of applied Business Research, 11(4), 9-14. Pandey, J. & Tewary, N. B. (1979). Locus of Control and Achievement Values of Entrepreneurs. Journal of Occupational Psychology, 52, 107-111. Riyanti, B. P. D. (2003). Kewirausahaan dari Sudut Pandang Psikologi Kepribadian. Jakarta, Grasindo. Sanjaya, A.A.B. (1997). Kemitraan Usaha Dalam Meningkatkan Kemampuan Wirausaha Nasional, in Usaha Kecil Indonesia: Tantangan krisis dan globalisasi. Center for Economic and Social Studies, 97-108 Steers, R. M., & Braunstein, D. N. (1976). A Bahaviorally-Based Measure of Manifest Needs in Work Settings. Journal of Vocational Behaviour. 9, 251-266. Sukardi, I. S. (1991). Intervensi terencana faktor-faktor lingkungan terhadap pembentukan sifat-sifat entrepreneur, Dissertasions. Fakultas Pascasarjana UI. in B. P. D. Riyanti (2003). Kewirausahaan dari Sudut Pandang Psikologi Kepribadian, Jakarta, Grasindo. Swasono, S.E. (1986). Pengertian Industri Kecil. Institut Pendidikan dan Pembinaan Manajemen, Jakarta

Tambunan, T. (1999). Perkembangan Industri Kecil di Indonesia. Jakarta: PT. Mutiara Sumber Widya. Theng, L. G., & Boon, J. L. W. (1992). An Exploratory Study of Factors Affecting the Failure of Local Small and Medium Enterprises. Asia Pacific Journal of Management, 13 (2), 47-61. Wijewardena, H., & Tibbits, G. E. (1999). Factors Contributing to the Growth of Small Manufacturing Firms: Data from Australia, Journal of Small Business Management, 37 (2), 88-96. Yu, T.Fu-Lai. (2001). The Chinese Family Business as a Strategic System: An evolutionary perspective, International Journal of Entrepreneurial Behavior & Research. 7 (1), 22-40.