Journal of Distribution Science (유통과학연구)

Korea Distribution Science Association (한국유통과학회)
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Increasing Innovation Performance in SMEs Trade: Organizational Forgetting, Knowledge Management, and Business Agility as Predictors

  • Irfan BUDIONO (Sekolah Tinggi Agama Islam Idrisiyyah (STAI Idrisiyyah)) ;
  • Gromyko BONGSO (Business Creation Program, Management Department, BINUS Business School Undergraduate Program, Bina Nusantara University)
  • Received : 2024.02.28
  • Accepted : 2024.06.05
  • Published : 2024.06.30
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Abstract

Purpose: Trade in small and medium businesses must improve innovation performance before and after the COVID-19 pandemic. The requirement for rapid innovation is being able to compete and survive post-pandemic. This research attempts to investigate the influence of organizational forgetting, knowledge management, and business agility in distributing innovation performance improvementsto SMEs in Tasikmalaya, Indonesia. Research design, data and methodology: In this research, a structural equation modeling approach with SmartPLS was applied. This research used 221 Tasikmalaya SMEs as samples. The findings of this study show that SMEs are still underrepresented in technological advancement. Results: Organizational forgetfulness does not have a significant impact on innovation performance, nor does it have an indirect impact through knowledge management. Business agility, on the other hand, has a significant indirect effect on innovation performance. Knowledge management does not have a significant and direct impact on innovation performance, but business agility has a significant impact. Conclusions: Efforts to enhance SMEs' trade must be willing to challenge the status quo or abandon knowledge that is no longer relevant to current developments to improve business agility and innovation. Technology-oriented SMEs can quickly become agile by implementing organizational forgetting. SME owners must be willing to adapt to technological advances to adopt organizational forgetfulness.

Keywords

1. Introduction

Innovation performance has become a phenomenon for small and medium business owners to trade and be able to survive the impact of the pandemic and prepare to face the post-pandemic era. Innovation is a crucial feature that can make a business survive and excel. Innovation must be the goal of SMEs because innovative organizations can identify new opportunities, technologies, competencies, and knowledge assets for the company (Bessant & Tidd, 2015). Small and medium-scale businesses must compete based on their innovation performance. The decline in trade among SMEs is the main victim of the COVID-19 pandemic. Unlike larger corporations, these enterprises generally lack sufficient resources, particularly in terms of finances and management, leaving them ill-equipped to handle prolonged disruptions, as highlighted (Prasad et al., 2015).

SMEs are the most defenseless since they have lower capital reserves, fewer assets, and poorer productivity than large enterprises. More specifically, the existence of SMEs in West Java province. Most of the turnover of SMEs in West Jawa has decreased, and few have even experienced bankruptcy (going out of business). Aside from lower income, the COVID-19 epidemic has caused raw material prices to skyrocket and become scarce. Government regulations regarding restrictions on the logistics delivery of goods cause prices to skyrocket. Only a few SMEs that can adapt and innovate will be able to remain steady and thrive. SME owners in West Java reached 4.6 million businesses in 2021 (98% are micro and small businesses). Only about 12.5% of SMEs were not economically harmed by the pandemic, and only 27.6% of them could grow sales. Amid a pandemic, SMEs are one of the sectors concerned. The pandemic has made SMEs adapt to digital technology and engage in the digital market. However, because the culture of SMEs is accustomed to face-to-face sales, online marketing models are less successful, especially for SME owners who need help adapting to technology.

The conditions of the online digital era, which should encourage the businesses of SMEs, have yet to be able to help the businesses they run because there is no desire to adapt to technology. This issue leads to poor innovation performance, which has a negative impact on their survival and sales. The poor performance of SMEs in terms of innovation will result in their inability to grow and sales decline. Innovation performance can help businesses gain a competitive advantage to face existing competition (Chen et al., 2009). Innovation performance can be obtained if business owners are willing to be agile in business (Al-Qaralleh & Atan, 2022; ZareRavasan, 2023), implement knowledge management (Brand, 1998; Lundvall & Nielsen, 2007; Lai et al., 2014), vulnerable in the process of unlearning old knowledge, experience, and learning something new, also known as organizational forgetfulness (Benkard, 2000; Easterby-Smith & Lyles, 2011; Mieres et al., 2012; Aydug & Agaoglu, 2023). Post-pandemic, SME owners should relearn where the new knowledge structure replaces the old one. Organizational Forgetting serves as a strategy for enterprises to shed outdated knowledge and challenge previously entrenched convictions, allowing them to flexibly respond to diverse shifts in their environment (Anand et al., 1998). Organizational forgetting can foster creativity by enhancing sensitivity and adaptation to the environment (Holan et al., 2004). Organizational forgetting is abandoning outmoded routines, conventions, attitudes, processes, policies, values, and approaches while concurrently adopting and integrating new ones, as appropriate, to efficiently adapt to changing circumstances (Huang et al., 2018).

It is true that few researchers have highlighted the challenges that SMEs face regarding trade. In fact, to increase market participation, micro and small-medium enterprises require information extraction and distribution from both internal and external sources, drive innovation, and enhance performance (Morgan & Berthon, 2008). Based on the results of existing research as well as referring to the condition of SMEs in West Java, especially in Tasikmalaya (Indonesia), the researcher considers that there is still little research that reveals the problems of organizational forgetting, knowledge management, business agility, and performance innovation in SMEs so that research on the unit of analysis of SMEs with these variables has a very important urgency to be carried out.

2. Literature Review

2.1. Innovation Performance

Innovation is a crucial element that can make a business survive and excel. Innovation is done on products or services offered to consumers and processes (Schmidt-Tiedemann, 1982). Innovation in business processes involves various aspects, from production processes to the distribution of goods or services to consumers. Innovation related to enhancing product or service distribution has been carried out in various types of businesses (Vries, 2006; Rosca et al., 2017; Chen et al., 2009). Perlines and Montes (2019) discovered that innovation performance can contribute significantly to explaining 27.5% of the variability to corporate performance, particularly in terms of quality performance.

Businesses or organizations that can implement innovation are often known as organizational innovators. Excellent and innovative organizations will be able to create a high business performance, so a new term known as innovation performance emerges. In principle, innovation performance is developed based on the theory of organizational innovativeness (Prajogo & Ahmed, 2006). Small and medium business owners must be able to share their perceptions or views with all members to create the right communication, especially to facilitate the spread of knowledge and business agility. When all members within a business understand the significance of knowledge and how to implement it, it is expected to enhance innovation performance (Molina-Morales et al., 2011). New goods, new manufacturing methods, new supplier sources, new market exploitation, and new corporate structures are all examples of innovation performance (Inauen & Schenker-Wicki, 2011). Innovation performance is measured by three indicators: product, process, and organizational (Exposito & Sanchis-Llopis, 2018). Most research on innovation is conducted on product/service innovation (Frishammar & Horte, 2005; Hanaysha et al., 2022; Visnjic et al., 2014). In principle, this research focuses on the products/services offered to consumers. This is due to changing consumer needs, which continuously push businesses towards innovation. However, in a business context, not only products are crucial for innovation, but it can also be seen through process factors and innovation within organizational distribution.

2.2. Organizational Forgetting

Organizational forgetting is a method for a corporation or organization to discard obsolete knowledge and reconsider previous ideas to adjust to environmental changes (Raisal et al., 2019). Organizational forgetting is an interesting phenomenon today because it still needs to be studied, especially in the scope of SMEs. Organizational forgetting is essential for SME owners. They must remain open to learning new things and let go of old experiences or information. SME owners who want to discard old information and learn new knowledge are more likely to be innovative in their businesses.

Various studies have shown that organizational forgetting can improve innovation performance (Huang et al., 2018; Bongso et al., 2020). Even though previous research focused on different units of analysis, the findings indicate that organizational forgetting can have a positive and significant impact on innovation performance. The first hypothesis (H1) of this study is that organizational forgetting has a favorable impact on innovation performance.

2.3. Knowledge Management

Knowledge management (KM) is defined as a process that tries to ensure the change and use of diverse knowledge acquired by an organization or corporation to solve challenges and improve firm performance (Acosta-Prado et al., 2020). This factor considers the internal and external conditions of the company in acquiring knowledge. Knowledge management will create effective resource utilization. Effective resource utilization will create performance improvement and process management, which will then create company innovation (Bresciani, 2010). Knowledge Distribution is one of the key factors for a company to have a competitive advantage. KM is a technique for systematically collecting, transferring, safeguarding, and managing information in an organization (Zahedi & Khanachah, 2020). KM is one of the organizational guidelines for action to improve performance. Much research has shown that knowledge management can affect the innovation performance of a business (Acosta-Prado et al., 2020; Di Vaio et al., 2021). The second hypothesis(H2) of this study isthat knowledge management has a positive impact on innovation performance.

Organizational forgetting can also affect knowledge management. Several previous studies related to organizational forgetting and knowledge management showed a relationship between variables. (Nafei, 2017; Bongso et al., 2020; Ershadi & Eskandari, 2019; Holan & Phillips, 2004; Fernandez & Sune, 2009). Organizational forgetting is often known as organizational unlearning. In dynamic knowledge management, organizational unlearning and relearning are needed (Zhao et al., 2013). The third hypothesis (H3) of this research is that organizational forgetting has a favorable impact on knowledge management. The fourth hypothesis (H4) states that organizational forgetting has an indirect impact on innovation performance via knowledge management.

2.4. Business Agility

Business agility is a concern for all businesses, from small to large. Previous research has found that business agility is a factor that supports innovation (Brand et al., 2021). One of the keys to improving the innovation performance in a company is making the business more agile. Business agility requires rapid adaptation and a growth mindset in the owner. Research by Shuradze et al., (2018) aims to increase innovation from an exploratory and exploitative perspective. Both types of innovation have a function. This research shows that an agile organization can positively increase innovation. The fifth hypothesis (H5) of this study is that business agility has a positive impact on innovation performance.

Organizational forgetting is also suspected to be an important factor that can increase business agility in SMEs. Previous studies on organizational forgetting and business agility show a relationship between variables(Chenari et al., 2015; Kavosi et al., 2021). Hypothesis 6 (H6) of this study states that organizational forgetting has a positive impact on business agility. The seventh hypothesis (H7) states that organizational forgetting has a positive impact on innovation performance via business agility. The following is the framework of this research (Figure 1).

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Figure 1: Research Framework

In figure 1, this research was developed based on relevant studies (Huang et al., 2018; Nafei, 2017; Bongso et al., 2020; Chenari et al., 2015; Brand et al., 2021). Based on Figure 1, to increase innovation performance, it is suspected that it can be affected by organizational forgetting directly and indirectly through knowledge management and business agility. Knowledge management and business agility are also suspected of directly influencing innovation performance. The following are the hypotheses in this research:

1. H1: Organizational forgetting has a direct positive and significant effect on innovation performance.

2. H2: Knowledge management has a positive and significant direct effect on innovation performance.

3. H3: Organizational forgetting has a direct positive and significant effect on knowledge management.

4. H4: Organizational forgetting has a positive and significant indirect effect on innovation performance through knowledge management.

5. H5: Business agility has a direct positive and significant effect on innovation performance.

6. H6: Organizational forgetting has a direct positive and significant effect on business agility. 7.

H7: Organizational forgetting has a positive and significant indirect effect on innovation performance through business agility.

3. Research Methods and Materials

This is a quantitative study employing a survey (questionnaire). A survey was carried out in this study on small and medium-sized business owners in Tasikmalaya. The SEM-PLS method was employed in this study. During the SEM-PLS test, measurement tests are conducted on the outer model and inner model.

3.1. Data Source and Sample Frame

The sample in this questionnaire is small and medium-sized business owners/administrators in Tasikmalaya. The survey was conducted by distributing questionnaires with a purposive sampling approach. The expected sample criteria are businesses with the capital of no more than 1 billion Indonesian Rupiah. Thus, in the questionnaire, the obtained sample is 221 business owners of SMEs in Tasikmalaya.

3.2. Measures

This study uses four latent variables (organizational forgetting, knowledge management, business agility and innovation performance). Exogenous latent variables in this study are organizational forgetting, while endogenous latent variables are knowledge management, business agility, and innovation performance. The manifest variables used as variable indicators as may be seen in the following table:

Table 1: Measurement Scales

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4. Results and Discussion

4.1. Measurement Model

The value cut on factor loading in the measurement model must be above 0.7 (Hair et al., 2017). Suppose the factor loading value is below 0.7. In that case, the manifest variable must be eliminated so that the model is tested again with a new model (without including the manifest variable that is included). Furthermore, Cronbach's alpha and composite reliability must both be higher than 0.7 (Hair et al., 2017).

Based on Table 2, in the first model, IP03-IP09, and IP12 have a value below the cut-off value, namely 0.7. This also impacts the AVE value of the IP variable of 0.463 < 0.500. So that the manifest variable is eliminated. Meanwhile, Cronbach's alpha and composite reliability are both higher than 0.7, as a result, the data can be considered reliable. After improving the model (final model) by eliminating invalid manifest variables, all manifest variables have factor loading above 0.7. Meanwhile, the AVE on the IF variable has also met the cut-off value of 0.774 > 0.500.

Table 2: Measurement Models

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4.2. Discriminant Validity

In the discriminant validity test, each manifest variable must be bigger than the other variables when measuring its latent variable. If the visible variable's value in assessing the latent variable is high in comparison to other variables, it can be valid. Table 3 is the result of discriminant validity testing.

Table 3: Descriminant Validity (Cross-loading)

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Each manifest variable in measuring its latent variable must be bigger than other variables in the discriminant validity test. As a result, if the value of the factor / manifest variable in measuring the latent variable is higher than other variables, it is valid.

4.3. Hypotheses Results of The Structural Model

The structural model evaluation will discuss hypothesis testing and path analysis (direct, indirect, and total effect). Figure 2 is a structural model of research with SmartPLS tools. The table in Figure 2 depicts the link between latent variables. So, to test the hypothesis and see the effect in detail is summarized in Table 4. Based on Table 4, hypothesis testing is based on the results of questionnaires distributed to 221 SME entrepreneursin Tasikmalaya. Based on the results of the path analysis test in Table 4. The p-values must be below 0.05 or the T-Statistics above 1.96, so it can be concluded that it has a significant influence (the hypothesis is accepted). Meanwhile, the magnitude of the positive or negative influence can be seen in the original sample.

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Figure 2: Research Results using SmartPLS (Final iteration)

Table 4: Path Analysis & P Values

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This study shows that innovation performance can only be caused by business agility (H1). Hypotheses 2 (H4) and Hypothesis 4 (H4) are rejected, indicating that knowledge management and organizational forgetting have no direct influence on innovation performance. However, this study shows that organizational forgetting can indirectly affect innovation performance through business agility (H6). Organizational forgetting can significantly affect business agility (H3) and knowledge management (H5). However, organizational forgetting does not indirectly affect innovation performance through knowledge management (H7).

Only business agility has a direct impact on trade and the innovation performance of SMEs in Tasikmalaya. Business agility has the greatest influence on innovation performance. The importance of business agility isthat during the COVID-19 pandemic, entrepreneurs in Tasikmalaya continue to innovate and adapt for the survival of themselves and their businesses. Kohtamaki et al. (2020) state that businesses that have a strategy to be agile will be able to increase innovation. In practice, every business must be agile to change dynamically. Of course, this statement aligns with this research so that not only large companies but also SMEs must be agile to increase innovation. Organizational forgetting in this study can only create innovation performance indirectly. Organizational forgetting has no direct influence on innovation performance in Tasikmalaya SMEs. Of course, this finding can also be caused by respondents who are SMEs that have yet to use many systems or technology in their business. Organizational forgetting can improve innovation performance through business agility but not through knowledge management. KM does not affect innovation performance in Tasikmalaya SMEs. Of course, this is due to the lack of business systems implemented and distributed. Knowledge management has become increasingly important not been a special concern for SMEs entrepreneurs in Tasikmalaya. Not only SMEs, based on research by Lee et al. (2013), it is stated that gaining knowledge from competitors or carrying out the knowledge management process does not necessarily mean the company will have high innovation performance. The importance of technological factors in the study of a new manufacturing company will help knowledge management that can increase technology-based innovation. Organizational forgetting in this study can only create innovation performance indirectly. Organizational forgetting has no substantial direct impact on innovation performance in Tasikmalaya SMEs. This finding can also be caused by respondents who are SMEs that have yet to use many systems or technology in their business. Organizational forgetting can improve innovation performance through business agility but not through knowledge management. KM does not affect innovation performance in Tasikmalaya SMEs. Of course, this is due to the need for more business systems to be implemented. The importance of distributing knowledge has not yet become a specific concern for SME entrepreneurs in Tasikmalaya.

SMEs in Tasikmalaya require consistency and a focus on business agility to improve innovation performance. High business agility will elevate innovation performance significantly, ultimately supporting the distribution of new knowledge and business sustainability.

5. Conclusions

Organizational forgetting and knowledge management have little direct bearing on innovation performance, whereas business agility does. SME owners in Tasikmalaya have transformed due to technical advances in the trade sector and the impact of the COVID-19 epidemic. This shift is what motivates business owners to think creatively about how to run their business in the new normal era. Organizational forgetting has no significant direct influence on innovation performance. Trade in SMEs in Tasikmalaya still needs to use an adequate system. During the pandemic COVID-19, one of the shifts was a shift in transactions to online food delivery (OFD) and payments via e-wallet, particularly QRIS. OFD is one of the latest logistics systems for distributing products to consumers that SMEs must pay attention to. The unlearning process occurs while they manage their business, which was first centered on traditional and face-to-face methods before transitioning to a digital system.

However, organizational forgetting indirectly affects innovation performance through business agility. This role is needed so that even though the system owned is yet to be technology-based, SMEs are expected to use traditional trading methods that are as simple as possible but still prioritize change and knowledge distribution. Business owners who want to do organizational forgetting in their business will easily face changes during the COVID-19 pandemic. They will try to change the old system and be adaptive to survive.

The major variable driving strong innovation performance in Tasikmalaya SMEs is business agility. This study demonstrates that business agility is an intervening variable requiring driving forces, one of which is organizational forgetfulness. Organizational forgetfulness has an indirect impact on this study, thus SMEs in Tasikmalaya must abandon the status quo and primitive thinking. This primitive mindset hinders them from directly affecting innovation performance. One of them is that they must adapt to technological advances, such as the use of online food delivery (OFD) services. Of course, with internet distribution, innovation performance will improve. Innovation performance in SMEs in Tasikmalaya will be high if business owners are willing to be adaptive to change, especially doing business agility. This research proves that business agility can have an impact on improving innovation performance. One of the findings of this study is that KM is yet to be needed and is a significant factor in efforts to increase innovation performance. KM has little influence because they have not considered the long-term use of the system. Trade win Tasikmalaya SMEs still tends to use books or paper to record recipes, purchases, and even notes for customers. This kind of thinking is what prevents knowledge management from influencing innovation performance.

This research has limitations, namely that it was only conducted in the Tasikmalaya area, West Java. Although this research was only conducted in Tasikmalaya. Tasikmalaya is one of the areas with the most SMEs in Indonesia. This research may not necessarily be generalized to SMEs in various regions. So, for further research, it is hoped that it can be carried out on SMEs in urban areas. This is because urban areas will experience technological changes more quickly, allowing organizational forgetting and knowledge management in SMEs.

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