“The role of innovation in business strategy as a competitive advantage: Evidence from Indonesian MSMEs”

The rapidly changing business climate and competition that has been getting stricter demand companies to have a proper strategy to grow and sustain their business. The objective of this quantitative study is to analyze the benefits of innovation in business strategy to create a competitive advantage for micro, small and medium enterprises (MSME). Inferential statistical analysis was performed on three mediating variables: people innovation, process innovation, and product innovation, in their involvement in business strategies as an independent variable, against competitive advantage as a dependent variable. Twenty-nine MSMEs in Indonesia were used as a sample of this study to examine four hypotheses. Thirty indicators of five variables were transformed into 50 questions in a Likert-scale questionnaire distributed to selected respondents using purposive sampling. The results of the T-test show that business strategy has a significant effect on competitive advantage, which means that business strategy without innovations creates only 20.2% of its competitive advantage. On the other hand, Sobel test results demonstrate that innovations significantly mediate the influence of business strategies on companies’ competitive advantages. Finally, product innovation potentially increases the competitive advantages by 53.1%, followed by process innovation and people innovation by 47.2% and 44.5%.


INTRODUCTION
All business sectors must change their business model to excel in competition.Innovation involvement as part of business strategy is expected to be the strength of a company to grow and sustain.Unfortunately, not all companies encourage innovation in their business activities.It is because innovation is commonly associated with the application of advanced technologies that require significant investments to ignore other aspects that are no less important.
Continuous innovation is one of the demands in today's modern industrial era.The existence of digital technology increasingly encourages all business sectors to adapt and modify their business models.Relying on the company's popularity, networks, and capital to excel in competition is no longer a critical performance.The dynamics of the business world have changed dramatically.Innovation encourages companies to improve their activities, or at least improve the ability to survive in increasingly unpredictable conditions (Adam & Alarifi, 2021).Unfortunately, many companies, especially micro, small and medium enterprises (MSMEs), ignore the role of innovation in their business.As a result, they are reluctant to involve innovation as part of their business strategy.Cantwell (2017) believes that one of the keys to success in the global business environment is the speed with which companies innovate effectively and adapt to change.
Although micro, small, and medium enterprises are classified differently in each country, according to Gherghina et al. (2020), their existence is crucial for economic growth.Generally, its classification is determined based on the amount of income, assets owned, and the number of employees employed.In Indonesia, based on government regulation number 7 of 2021, micro-scale businesses have a business capital of fewer than 1 billion rupiahs (about 69,000 USD), and their annual income is a maximum of 2 billion rupiahs (138,000 USD).Small-scale businesses have a capital of between 1 to 5 billion rupiahs (69,000-345,000 USD) with annual revenues between 2 and 15 billion rupiahs (138,000-1,035,000 USD), and medium-sized businesses own a capital between 5 to 10 billion rupiahs (345,000-690,000 USD) with revenues between 15 to 50 billion rupiahs a year (1,035,000-3,450,000 USD).Business capital does not include the land assets and buildings.
MSMEs are an indicator of economic conditions, at least in Indonesia (Hamza & Agustien, 2019).Juminawati et al. (2021) found a 90.1% influence of MSMEs in Indonesia on national economic growth.They proved that MSMEs could encourage economic equality, increase employment opportunities, contribute foreign exchange to the country, and help meet the community's needs.2021 data reinforce that MSMEs contribute 61% to Gross Domestic Product, absorb 97% of the total workforce, and collect 60% of total investment in Indonesia (Nurhaliza, 2022).However, the fact that MSMEs lose the competition because they failed to empower their resources cannot be denied.Moreover, MSME entrepreneurs need more knowledge to innovate as part of their business strategy.As a result, they have no competitive advantage.
The Ministry of Cooperatives and Small and Medium Enterprises noted that 99.9% or 65.4 million businesses in Indonesia are micro, small, and medium-sized enterprises (Mahdi, 2022).The most are micro-scale businesses, which are 64.6 million, followed by small-scale businesses (798 thousand) and medium-sized enterprises (65 thousand).This figure continues to increase by about 2-3% every year.About 17.2 million MSME actors were connected to the digital ecosystem in February 2022 and are targeted to be 30 million MSMEs by 2024 (Catriana, 2022).This leads to the fact that MSMEs must have a competitive advantage through innovations in their business strategies.It is also built on the thinking of Yuan et al. (2020) that companies with innovation-oriented strategies will work better and survive the development of the times.In short, it is imperative and urgent for MSMEs to innovate in their businesses, particularly in Indonesia.

LITERATURE REVIEW AND HYPOTHESES
Business activities are a dynamic process.It takes a good plan before running a business activity.However, even though it has been planned, the implementation of business activities can still change depending on the actual situation.Therefore, a company needs to be careful and dexterous when carrying out business activities.Business performance is determined by the company's business strategy (Karel et al., 2013).A business strategy must be able to optimize the resources owned by a company, including its advantages and disadvantages.Business strategies should be reviewed continuously and updated as soon as necessary.Therefore, business strategy variables are shaped by indicators when the company's management is committed to: 1) identifying strengths, weaknesses, opportunities, and threats; 2) choosing a strategy; 3) developing its vision; and 4) measuring its performance in an integrated manner.(2016) define process innovation as a new or significantly improved implementation for added value for its users.However, Žižlavský (2013) reported that process innovation is not aimed at improving a single activity but continuing activities that are included in all business processes.Process innovation improves every phase of continuous activity, such as: 1) order acceptance process; 2) material handling process; 3) production process; 4) quality control process; 5) inventory process; 6) delivery process; 7) data recording process; and 8) customer service process.
The eight processes act as research indicators for process innovation variables.Products, including services, are the keys to business continuity as the consumers will pay for products or services offered.The willingness of consumers to pay supports companies in financing their activities.Therefore, product innovation is needed.Waribugo et al.
(2016) define product innovation as an effort to improve the quality and benefits of products that can significantly satisfy their users.They believed that product innovation could arouse consumer motivation to buy the product.The five indicators for product innovation variables used in this study refer to Maier (2018), namely: 1) display; 2) usefulness; 3) durability; 4) quality; and 5) competitiveness in the market.
Empirical conditions have demonstrated the enormous contribution of MSMEs to the national economy, while theoretical studies demand that MSMEs must have a competitive advantage through innovation.Both things lead to an important and urgent question: how much the benefits of innovation in business strategies will become a competitive advantage for MSMEs?Moreover, the literature review supports the need for innovations in a business strategy for a competitive advantage.It further supports the need to establish if such is occurring in the current business setting, even more so from a lower middle-income country perspective such as Indonesia.
This study is motivated to help MSME entrepreneurs understand the magnitude of the benefits of people innovation, process innovation, and product innovation in business strategies to generate competitive advantages.The influence and relationship between these variables are revealed through this quantitative study.The findings will be helpful for MSME entrepreneurs to prioritize the development of innovations that are required.Therefore, this study aims to disclose the magnitude of benefits of people innovation, process innovation, and product innovation in a business strategy to become a competitive advantage for MSMEs in Indonesia.Therefore, this study formulates the following hypotheses: There is a significant direct effect of business strategy on competitive advantage.
H 2 : There is a significant indirect effect of business strategy on competitive advantage through people innovation.
H 3 : There is a significant indirect effect of business strategy on competitive advantage through process innovation.

METHODS
A conceptual framework is built on a logical understanding and literature review of the problems that have been formulated.As the main goal to be achieved, competitive advantage acts as a dependent variable (Y), and business strategy acts as its independent variable (X).The roles of people innovation (M1), process innovation (M2), and product innovation (M3) are three intervening variables that each mediate the relationship between an independent variable and a dependent variable.The conceptual framework presented in Figure 1 shows the relationships between these variables.
Referring to the conceptual framework (Figure 1), there are four relationships between business strategy (X) and competitive advantage (Y).The hypotheses that have been formulated are tested for the influence between variables.Each variable was formed through several relevant indicators to the collected data.All variables and indicators in this study are summarized in Table 1.
There is a total of 30 indicators of 5 variables involved in the study.The thirty indicators were transformed into 50 questions in a Likert-scale questionnaire distributed to selected respondents using purposive sampling.The non-probabilistic selection was applied to ensure that questions were answered only by competent respondents, including MSME owners or leaders in Indonesia who have been developing and responsible for their business performance for at least five years.Data on respondent demographics,  such as age, gender, marital status, education level, background of experience, etc., were not collected in this study because the study focused more on business characteristics unrelated to the respondent's profile.Twenty-nine respondents representing an MSME participated in the data collection from January to March 2022 (Table 2).
The data analysis in this study was conducted with classical assumption tests through normality tests, multicollinearity tests, and heteroskedasticity tests.If the data pass the classical assumption test, meaning that the data are distributed normally and there was no multicollinearity and heteroskedasticity, then testing can be continued to determine

RESULTS
Before analyzing each hypothesis, a classical assumption test needs to be performed for each regression to ensure that the constructed equation is precise, unbiased, and consistent.This study used three classical assumption tests: the normality test, the multicollinearity test, and the heteroskedasticity test.Normality tests ensure that the data are distributed normally and that no data differ to the extreme.Multicollinearity tests are performed because there is more than one independent variable, so it is necessary to ensure that there is no correlation that is too strong between the independent variables.Finally, heteroskedasticity tests are performed to avoid the inequality of error variants from one observation to another.
For the normality test in the first regression equation, the business strategy variable (X) against the people innovation (M1), process innovation (M2), and product innovation (M3) variables obtained asymp value.Sig.(2-tailed) of 0.200, 0.131, and 0.200, as indicated in Table 3.The results showed that the data were distributed normally because all the numbers were greater than 0.05 for a 5% signification rate.

Product Innovation (M3)
.985 For the normality test in the second regression equation, the variables of business strategy (X), people innovation (M1), process innovation (M2), and product innovation (M3) against the competitive advantage (Y) variable obtained asymp values.Sig.(2-tailed) by 0.200, as shown in Table 6.They indicated that the data were distributed normally because all the numbers were greater than 0.05 for a 5% signification rate.
For the multicollinearity test in the second regression equation, the business strategy (X), people innovation (M1), process innovation (M2  8.These results indicated no heteroskedasticity because all the numbers were greater than 0.05. The study applied a path analysis to predict a causeand-effect relationship between two or more variables that are hypothesized on a conceptual framework.In the first regression, the effect of the business strategy variable (X) was tested on the people innovation (M1), process innovation (M2), and product innovation (M3) variables.Table 9 shows a Beta value of 0.499 for the effect of business strategy on people innovation (X  M1), 0.406 for the effect of business strategy on process innovation (X  M2), and 0.545 for the effect of business strategy on product innovation (X  M3).Path analysis for the second regression tests the relationship of business strategy (X), people innovation (M1), process innovation (M2), and product innovation (M3) on competitive advantage (Y).Table 10 shows a Beta value of 0.202 for the effect of business strategy on competitive advantage (X  Y), 0.487 for the effect of people innovation on competitive advantage (M1  Y), 0.664 for the effect of process innovation on competitive advantage (M2  Y), and 0.604 for the effect of product innovation on competitive advantage (M3  Y).
Based on the results of the path analysis for the first and second regressions, predictable direct effects and indirect effects of each relationship are summarized in Table 11.
To determine how significant the effects of each independent variable are, the study statistically analyzed each hypothesis that had been constructed.For the first hypothesis (H1), there is a significant direct effect of business strategy (X) on competi-tive advantage (Y), the study applied the T-test.It produced t count of 3.225, so the t table is 2.473 for a significance level of 0.012 (Table 12).Theoretically, because t count is greater than t table , the first hypothesis is accepted, meaning that there is a significant direct effect of business strategy (X) on competitive advantage (Y).
The second hypothesis (H2), there is a significant indirect effect of business strategy (X) on competitive advantage (Y) through people innovation (M1), was determined using the Sobel test.The results presented in Figure 2 inform its one-tailed probability value of 0. Because the value is less than 0.05, theoretically, the second hypothesis is accepted, meaning that the people innovation variable (M1) significantly mediates the effect of business strategy (X) on competitive advantage (Y).The third hypothesis (H3), there is a significant indirect effect of business strategy (X) on competitive advantage (Y) through process innovation (M2), was calculated using the Sobel test.
The results presented in Figure 3 inform its onetailed probability value of 0.00000012.Because the value is less than 0.05, theoretically, the third hypothesis is accepted, meaning that the process innovation variable (M2) significantly mediates the effect of business strategy (X) on competitive advantage (Y).
The fourth hypothesis (H4), there is a significant indirect effect of business strategy (X) on competitive advantage (Y) through product innovation (M3), was calculated using the Sobel test.The results presented in Figure 4 inform its one-tailed probability value of 0. Because the value is less than 0.05, the- oretically, the fourth hypothesis is accepted, meaning that the product innovation variable (M3) significantly mediates the effect of business strategy (X) on competitive advantage (Y).

DISCUSSION
The inferential statistical analysis applied to this study has revealed the magnitude of the benefits of people innovation, process innovation, and product innovation for the competitive advantages of MSMEs.These three kinds of innovations significantly mediate the effect of business strategies on the competitive advantages of MSMEs in Indonesia.In addition, the classical assumption test also reveals that location, age, business, and scale of the business do not show a difference, meaning that people innovation, process innovation, and product innovation are useful to produce competitive advantages for all MSMEs.
When comparing the effect of each variable, it turns out that without innovation, the business strategy only contributes 20.2% to a competitive advantage.However, when mediated by innovations, competitive advantages can be increased.Product innovation has the most significant influence over people innovation and process innovation.Product innovation involvement in competitive advantage was 53.1%, followed by process innovation at 47.2% and people innovation at 44.5%.This figure can be a reference for MSME entrepreneurs to prioritize product innovation in their business strategy.Product innovations have more potential to produce greater competitive advantages.However, process innovation and people innovation cannot be ignored because they contribute to the competitive advantages of MSMEs.
To win the competition, product innovation must immediately get special attention from MSME entrepreneurs.It is necessary due to the total changing of consumer behavior that tends to change frequently (Timotius & Octavius, 2021).The presence of social media supports the popularity of products faster; therefore, MSMEs must continuously improve the quality and features of products, be responsive to consumer dynamics, always create something unique, and not only focus on a mature market In short, the findings of this study reinforce the belief that innovation is critical in creating a company's competitive advantage.This is also supported by the findings of Herlinawati and Machmud (2020) that innovation improves the business performance of MSMEs in Indonesia.Product innovation, process innovation, and people innovation should be part of the company's strategy.Indirectly, this is following Fatemi's report (2016) that people, processes, and products can accelerate business growth.Companies in the global era are increasingly being made aware that innovation is fueled by creating added value by leveraging new knowledge and relevant resources.Ideas must be boldly transformed into real practice as markets and industries evolve (Varadarajan, 2018;Winarso, 2019).

CONCLUSION
Referring to the empirical findings that MSMEs need to innovate to build their competitive advantage, this quantitative study examined the role of innovation as part of the business strategy of MSMEs in Indonesia.The formularized conceptual framework leads to the findings that innovation is vital in business strategy and benefits business people.Therefore, it can increase the competitive strategy significantly.The study found that product innovation has the most significant effect on competitive advantage.At the same time, both process innovation and people innovation also have an essential contribution to business strategy to trigger the competitive advantage.They encourage MSMEs to do sustainable innovation by prioritizing innovation in products, processes, and people in their business to excel in competition.
Product innovation can be constructed by the attractive display and product knowledge that informs the usefulness, durability, and quality.However, MSMEs also need to be concerned about competitiveness in the market when innovating their product.Therefore, the recommendation for MSMEs to innovate the process included the order acceptance process, material handling process, production process, quality control process, inventory process, delivery process, data recording process, and customer service process.In addition, this study concluded that cooperation training, cohesive development, increasing trust in each other, and strengthening support from colleagues are recommended for MSMEs when innovating in people.
This study made MSMEs aware that innovation is not static and must be developed continuously following the development of science and market demands.However, MSMEs should not innovate without strategic planning to avoid financial losses.Therefore, innovation must be performed carefully and integrated as part of the business strategy so that the benefits can be maximized in creating the company's competitive advantage.
To maintain innovation, MSMEs need support from stakeholders.It is because MSMEs must be swifter to adapt to changes that are difficult to predict amid increasingly fierce competition.With competitive advantages, MSMEs can excel in competing so that their business can continue to grow and sustain, focus and prioritize product innovation, process innovation, and people innovation.
Although the object of this study is only MSMEs in Indonesia, the findings could be the same in other countries.The recommendation is also applicable in certain countries.However, data retrieval at different times can produce different findings.The expansion of research objects involving more respondents and the addition of relevant variables are recommended to minimize the limitations of this study.This study is expected to initiate future studies as a comprehensive comparison.The emerging new theories will be academically and practically useful for MSME entrepreneurs to excel in competing in the global era.

Table 1 .
Research variables and indicators

Table 2 .
Profile of participated MSMEs

Table 1 (
cont.).Research variables and indicatorsthe causality of the hypothesis predictively.Path analysis was applied to determine the magnitude of influences between variables, while hypothesis tests using the T-test and the Sobel test were used to determine the significance of each effect.

Table 3 .
Normality test for the 1 st regression

Table 4 .
Multicollinearity test for the 1 st regression

Table 9 .
Path analysis for the 1 st regression

Table 6 .
Normality test for the 2 nd regression Note: a. Test distribution is Normal; b.Calculated from data; c.Lilliefors Significance Correction; d.This is a lower bound of the true significance.

Table 7 .
Multicollinearity test for the 2 nd regression Note: a. dependent variable: Competitive Advantage (Y).

Table 10 .
Path analysis for the 2 nd regression

Table 11 .
Summary of direct and indirect effects
(Dai & Cheng, 2018;Christensen et al., 2016)very are the keys to the success of product innovation.However, it does not mean MSMEs must be sophisticated in marketing strategies and provide large budgets.Product innovation can be successful if it can exceed customer expectations and increase company revenue(Dai & Cheng, 2018;Christensen et al., 2016).