The Influence of Leadership on the Competitive Advantage of SMEs: Empirical Evidence from Indonesia

Abstract

This academic study aims to examine, analyze and synthetize the role of entrepreneurial orientation in determining the influence of leadership on competitive advantage. The research was carried out at small- and medium-sized enterprises (SMEs) in the food sector made involved in cassava production. The number of samples in the study were 184 respondents who were entrepreneurs or business owners. The sample method used was judgment sampling with criteria. The data analysis used to determine the effect was Warp Partial Least Square (WarpPLS). Inner and outer models were evaluated for convergence validity and composite reliability. The results of data analysis show that all hypotheses are accepted; there is a positive and significant impact of the leadership on SMEs' competitive advantage by placing entrepreneurial orientation as a moderating variable. An interesting finding is that the placement of entrepreneurial orientation as a moderating factor has a greater influence than the direct effect of leadership on competitive advantage. This research provides new insights to enable SME owners to include entrepreneurial orientation in their business practices, to assess market opportunities, update products, take business risks, make forward-looking decisions, and participate in training both from the Internet and that provided by local governments.

1. Introduction

Entrepreneurship is believed to be the force of economic growth, and entrepreneurship is also considered an innovator in economic development. The high number of entrepreneurs in a country shows that the country’s economy will grow well (Philip, 2010; Crum et al, 2015) in the field of an increasingly open and free market economy, which causes the flow of goods and services as well as labor to cross national borders without obstacles. This situation is both a challenge and an opportunity for entrepreneurs to run a business as small- and medium-seized enterprises (SMEs) (Meyer et al., 2017; Tambunan, 2019)

Most of these SMEs are still hereditary, traditional, and at a household scale. However, even though this business is constrained by the price of raw materials and capital, business actors have persisted in working on it for years, although the business development is not significant. Therefore, leadership becomes the basis behind the research on entrepreneurial at SMEs (Almaz, 2019; Sawaean, 2020; Salim & Rajput, 2021). This study focuses on entrepreneurial leadership in SMEs and entrepreneurial orientation as an important part in determining the competitive advantage.

An entrepreneur must manage his business in a market oriented fashion. This will have various benefits, including being able to produce products or services in accordance with customer perceptions, be able to produce more efficiently than competitors, and be able to explain the differences in performance achieved by the company, and can direct the company to a competitive advantage that can be maintained through internal and external activities.

Small business actors already have a proactive attitude and good initiatives in developing a business. Entrepreneurial knowledge, achievement motives, and personal independence have a significant carrying capacity for business independence (Yıldırıma et al., 2016; Yudaruddin, 2020). Small business actors are still no good in respect to achievement orientation and commitment with other parties, this is shown from the lack of willingness to develop new products and their dependence on interested parties including the government (Hoogendoorn, 2017).

One of the strategies used by the mass media to stay afloat is efficiency and innovation. Efficiency can be done to the production process and distribution of media content, which can be done in a short time, even to the leaner organizational structure. Meanwhile, innovation is carried out as a breakthrough in the era of hyper competition.

The leadership model is needed to increase employee commitment in achieving targets, retaining customers, and serving and maintaining customer satisfaction through after sales service. The role of supervision is to disseminate the company’s strategy to employees. This is in line with Neill (2018) who states that strategy making in organizations takes into account planning, analysis, decision-making, and many aspects of the organization’s culture, value systems, and mission.

2. Literature Review

2.1. Entrepreneurial Orientation

Entrepreneurial orientation is an individual’s attitude toward entrepreneurial activities, whether in existing companies or creating new businesses (Mintzberg, 1973). Hart (1992) argues that entrepreneurial orientation allows companies to develop ideas and make them happen in the form of new products and services, participate in risky projects, predict future needs, and find new market opportunities. According to Lumpkin and Dess (2001), entrepreneurial orientation represents entrepreneurial activities that refer to processes, practices, decision-making styles, and behaviors that lead to entering new or established markets with new or existing goods or services. Entrepreneurial orientation has five dimensions, namely, innovativeness, risk-taking, economics, proactiveness, and competitive aggressiveness.

According to Kraus et al (2011) and Zehira et al. (2015) entrepreneurial orientation and organizational culture are closely related to the strategy formulation process that will provide the basis for decision-making and business implementation of the organization. Entrepreneurial orientation plays an important role in improving business performance (Putnins & Sauka, 2020). Meanwhile, Rezaei and Ortt (2018) stated that entrepreneurial orientation becomes an acceptable concept to explain business performance.

Entrepreneurial orientation refers to processes, practices, and decision-making that lead to new inputs and has three aspects of entrepreneurship, namely, taking risks, acting proactively, and always being innovative (Wales, 2016). Daring to take risks is an entrepreneurial attitude that involves a willingness to tie up resources and the courage to face challenges by exploiting or engaging in business strategies where the possible results are full of uncertainty (Vamvaka et al., 2020). Proactiveness reflects the willingness of entrepreneurs to dominate competitors through a combination of aggressive and proactive movements, such as introducing new products or services on top of competition and activities to anticipate future demands to create change and shape the environment. Innovativeness refers to an entrepreneurial attitude to be involved creatively in the process of experimenting with new ideas that make it possible to produce new production methods so as to produce new products or services, both for the current market and for new markets. A high entrepreneurial orientation is closely related to the main driver of profit so that an entrepreneur has the opportunity to take advantage of opportunities, which in turn has a positive effect on business performance (Sininen, 2015).

2.2. Leadership

There are many definitions of leadership. According to Stoner (1982), leadership is an activity to influence people so that people achieve group goals. According to Hemhill and Coons (1957), leadership is an interpersonal influence that is exercised in a certain situation, and is directed through a communication process, toward the achievement of one or several specific goals. Meanwhile, according to Gibson et al. (1991), leadership is an effort to influence by applying a leadership style to motivate individuals to achieve goals.

Based on these definitions, it can be concluded that leadership is the process of directing the behavior of a subordinate to achieve a certain goal. Direction in this case means causing a subordinate to act in a certain way or follow a certain direction. Successful entrepreneurs are leaders who have managed to lead their employees well.

The main characteristics, according to Yilmaz and Gormus (2012) and Altuntas (2010) are: 1) Support of entrepreneurial skills; 2) Interpretation of the opportunities; 3) Protection of the innovations threatening the current business model; 4) Questioning of the current business logic; 5) Review of the simple questions; and 6) Associate entrepreneurship with strategic management.

2.3. Competitive Advantage

Grant (1991) states the definition of competitive advantage is when two companies compete (in the same market and customers), one company has a competitive advantage over the other company; it occurs when the company gets a level of profit and has the potential to earn higher profits. Wheelen and Hunger (2012) stated that competitive advantage is a collection of strategies to determine the superiority of a company from the competition from other companies. Competitive strategies include low cost and differentiation. Furthermore, the two strategies combined are called focus.

The definition of competitive advantage according to Porter (1985) is the ability of a company to achieve economic benefits above profits that are able to be achieved by market competitors in the same industry. Companies that have competitive advantages always have the ability to understand changes in market structure and are able to choose effective marketing strategies. The idea of a competitive advantage that is full of strength is to recognize competitive advantage as a means to achieve goals (Sigalas, 2015).

Owners and company stakeholders (managers, employees, customers, suppliers, partners, and government) hope the company can provide maximum benefits in the long term. Their goals are for the company to survive, be able to face competition and grow by taking advantage of various business opportunities. In other words, companies are expected to gain and maintain a sustainable competitive advantage (Abdulwase et al., 2020).

Several studies have shown that the resources and capabilities of a company or a person are a source of sustainable competitive advantage. Only resources and capabilities that have criteria such as being valuable, rare, inimitable, and non-substitutable, which can be exploited by company as a source of sustainable competitive advantage (Kozlenkova et al., 2014). Valuable means that the resources and capabilities allow the company to implement strategies that can increase the effectiveness and efficiency of the organization.

3. Research Hypotheses

3.1. The Relationship of Leadership to Entrepreneurial Orientation

In this study, empirical evidence is obtained which states that there is a significant positive relationship between entrepreneurial orientation and competitive advantage. This means that as market orientation and entrepreneurial behavior increases, the competitive advantage will increase and vice versa. Gerald and Samadzadeh’s (2017) findings indicate that the causal relationship between leadership style and entrepreneurial activity as well as the role of organization culture as a mediator in entrepreneurial orientation are significant and positive (Obeidat et al., 2018). Based on the explanation above, the hypothesis is formulated as:

H1: Leadership affects entrepreneurial orientation.

3.2. The Relationship Between Entrepreneurial Orientation and Competitive Advantage

Studying entrepreneurship and the role of a leadership requires an entrepreneurial orientation as the basis for making business strategies. Entrepreneurial orientation is considered capable of strengthening the determination of competitive strategies (Lechner & Gudmundsson, 2014; Wales et al., 2011a). Based on the research by Van Geenhuizen et al. (2008), it can be concluded that entrepreneurial orientation is possible to increase sustainable competitive advantage. Based on the explanation above, the following hypothesis is formulated:

H2: Entrepreneurial orientation affects competitive advantage.

3.3. The Relationship Between Leadership and Competitive Advantage

Mahdi and Almsafir (2014) pointed out that their research hypothesis proved that all of the leadership dimensions do influence sustainable competitive advantage. Lianto (2015) and Khan (2013) also found that leadership was the resource of a strategic decision that generates a sustainable competitive advantage. Leadership is also useful for increasing new product innovation and company performance so that it can achieve competitive advantage. Based on the explanation above, the following hypothesis is formulated:

H3: Leadership affects competitive advantage.

4. Methodology

This research was conducted to answer problems regarding the influence of entrepreneurial behavior and innovation on competitive advantage through leadership as an intervening variable. The sampling method used judgment sampling obtained 184 respondents as entrepreneurs of Umkm (SMEs) and the resulting product was processed cassava. Data analysis used warp partial least square (WarpPLS). Hypothesis testing used t-test.

5. Results and Discussion

5.1. Evaluation of Outer Model

a. Convergent Validity

Convergent validity is the first evaluation of the outer model (indicator-variable). To measure convergent validity is to look at the value of each outer loading. The indicator is said to meet convergent validity if it has a value > 0.5. The following is the outer loading value of each variable indicator:

On Table 1, it can be seen that the outer loading value of each indicator in this research variable is more than 0.5. This proves that the indicators used to measure the variables in this study have met the convergent validity.

Table 1: Outer Loading

b. Composite Reliability

Evaluation on the outer model is composite reliability, which is to test the reliability value of indicators for a variable. A variable is said to meet composite reliability if it has a value of more than 0.7. The composite reliability of this research variable is shown in Table 2: Table 2 shows that the value of the composite reliability of each research variable has met the composite reliability because all values are greater than 0.7.

Table 2: Composite Reliability

c. Inner Model Evaluation

Table 3 shows model fit and quality indices.

Table 3: Model Fit and Quality Indices

d. Hypothesis testing

A research hypothesis is acceptable if the t-statistics value > 1.96 at the level 5% error. Tables 4 and 5 show the t-statistics value at this research:

Table 4: Path Coefficient and t-statistics

Table 5: Path Coefficient and t-statistics

5.2. Discussion

The path coefficient of leadership influence on entrepreneurial orientation is 0.655413 with a t-statistics of 13.144624, greater than 1.96. This proves that there is a positive and significant influence between the two variables. So, transformational leadership has a positive and significant effect on organizational learning; the first hypothesis of this study is accepted. This result is supported by research conducted by Samadzadeh (2017), which found that leadership has a positive effect on entrepreneurial orientation. Obeidat et al. (2018); Ahmad (2013) also found that leadership has a positive effect on entrepreneurial orientation.

The path coefficient of the effect of entrepreneurial orientation on competitive advantage is 0.345435 with a t-statistics of 5.767921, greater than 1.96. It can be concluded that there is a significant positive effect between the two variables. So, entrepreneurial orientation is positive and significant for competitive advantage, in other words, the second hypothesis of this study is accepted. These results are the same as the research conducted by Lechner and Gudmundsson (2014); Yamin (2020); Zeebaree and Siron (2017). They found how companies can increase their competitive advantage by adopting an entrepreneurial orientation. Wales et al. (2011a); Rauch et al. (2009) stated that entrepreneurial orientation can affect the success of a company’s competitive advantage.

The path coefficient of the leadership effect on competitive advantage is 0.212253 with a t-statistics of 2.437843, greater than 1.96. This proves that there is a significant positive effect between the two variables. So, leadership has a positive and significant effect on competitive advantage, so the third hypothesis of this study is accepted. The result of this study are supported by research conducted by Mahdi and Almsafir (2014); Chen et al. (2018), which proved that all the leadership dimensions affect the sustainable competitive advantage. Lianto (2015) and Khan (2013) also found that leadership was the resource to generate a competitive Advantage.

The indirect effect of leadership on competitive advantage through entrepreneurship orientation is 0.226402, which is greater than the direct effect of leadership on competitive advantage, which is only 0.212253. This means that there is an indirect relationship between leadership, entrepreneurial orientation, and competitive advantage. It can be concluded that increasing the competitive advantage is better accomplished through entrepreneurial orientation. This is due to leadership or in this case the owner will be able to follow the needs of consumers and business competition, thereby increasing competitive advantage.

6. Conclusion

This study produces interesting findings in the SME sector where there is a positive and significant influence between leadership and competitive advantage by placing entrepreneurial orientation as a moderating variable. The placement of entrepreneurial orientation as a moderating variable has a greater influence than the direct effect of leadership on competitive advantage. There have been many studies on the influence of leadership on competitive advantage, but placing entrepreneurial orientation as a moderating variable shows that the role of entrepreneurial orientation in the current situation is very necessary. The entrepreneurial orientation provides a viewpoint for the leader or owner to manage and utilize the resources and capital they have that can create a competitive advantage. Competitive advantage creates SMEs that are able to keep their products in demand by customers.

This research is expected to provide new insights for SME owners to be able to apply entrepreneurial orientation in their business practices. Ability to assess market opportunities, update products, take business risks, make decision-making and actively participate in training both from the Internet and provided by local governments. Attention to employees needs to be increased by sharing experiences and spurring efforts to achieve optimal performance.

Future studies can investigate the influence of other variables such as the role of government policy in providing growth opportunities for SMEs and expanding research areas for SMEs products. Such a study would establish whether the findings of this study specific to leadership constructs, entrepreneurial orientation, and competitive advantage apply to other constructs as well.