“Factors affecting performance excellence in Indonesian state-owned enterprises”

State-owned enterprises (SOEs) have a strategic position as architects of public services, balancing large private powers, helping to foster small businesses or cooperatives, and a considerable basis of state revenue in numerous forms of taxes and dividends. For Indonesia to compete in the global market, its economic actors (private sector, SOEs, and cooperatives) must amplify their performance. This paper aims to explore the factors affecting performance excellence in Indonesian SOEs, namely business environment and innovation capability through business strategy. Data were obtained from questionnaires distributed to 100 directors/managers representing SOEs in 12 clusters. The partial least squares structural equation modeling (PLS-SEM) procedures were operated to evaluate the path coefficients and identify the pivotal factors of each construct using SmartPLS. The results exhibited that the business environment (β = 0.357, p < 0.05) and innovation capability (β = 0.518, p < 0.05) positively and significantly affected Indonesian SOEs’ business strategy. Meanwhile, business environment (β = 0.263, p < 0.05), innovation capability (β = 0.273, p < 0.05), and business strategy (β = 0.459, p < 0.05) positively and significantly affected SOEs performance excellence. Moreover, business strategies can partially mediate the effect of the business environment (β = 0.164, p < 0.05) and innovation capability (β = 0.238, p < 0.05) on performance excellence. An important implication of this study is that to maintain and improve performance excellence, SOEs must first focus on the capability of innovation to initiate the implementation of business strategies by constantly addressing the business environment.


INTRODUCTION
In the present era of globalization, the corporate landscape is witnessing heightened competition, resulting in rapid transformations that wield substantial influence on the economy.Consequently, implementing prominent initiatives to enhance organizational performance has become fundamental for all enterprises.Every company aspires to elevate its competitive prowess to achieve world-class competitiveness (Petrillo et al., 2019).For sustained success, businesses must possess the capacity to adapt and react effectively to changing conditions and competitive pressures over time (Dereli, 2015).As one of the actors in Indonesian's economic system, state-owned enterprises (SOEs) play a vital strategic role by administering public services, maintaining equilibrium amidst influential private entities, fostering the growth of small businesses and cooperatives, and serving as a substantial revenue generator for the government through diverse forms of taxes and dividends.The more sumptuous role of SOEs must be fortified to recover the concept of Indonesia Incorporated, as the efforts to grow the SOEs and their private partners to boost the country's economy (Trihatmoko & Susilo, 2023).
The current issue is how SOEs can help developing market countries overcome numerous development challenges.Outstanding SOEs hold significant potential as catalysts for fostering inclusive economic growth and development within emerging markets.In numerous developing nations, such as Indonesia, SOEs play a predominant role in the business world.Despite concerns surrounding their average operational performance, their economic contribution remains substantial (Pranoto, 2017).SOEs from different countries increasingly compete with private enterprises globally as they participate in trade and investment integration (Kowalski et al., 2013).On the other hand, SOEs still need to realize people's expectations of obtaining great benefits from their existence.Many SOEs must adequately execute their functions and duties (Iqbal et al., 2020).SOE performance measurement is still focused on financial output only.To that end, the Ministry of SOEs, since 2012, has been applying the balanced scorecard perspectives and Criteria for Excellent Performance Assessment (Kriteria Penilaian Kinerja Unggul/KPKU) adopted from the Malcolm Baldrige Criteria for Performance Excellence.The main reasons to implement the criteria include targeting capital expenditure, assessing the number of Indonesian SOEs in the Global Fortune 500, measuring their contribution to state revenue, and evaluating their performance excellence scores.
The measurement of performance excellence at the Ministry of SOEs must show the company's strategic position.The business strategy has yet to support the assessment of performance excellence fully.The business environment (external and internal) has not supported business strategy in SOEs, so the impact on sustainable performance excellence could be much higher.Innovation capability in SOEs has yet to endow business strategy, so its impact on sustainable performance excellence is relatively lower.Thus, this study examines in more depth the influence of business environment and innovation capabilities on business strategy and the impact on the performance excellence of SOEs in Indonesia in a sustainable manner.

LITERATURE REVIEW AND HYPOTHESES
This study abides strategic management as a grand theory (Wheelen et al., 2017), which is crystalized to dynamic capability (Chowdhury & Quaddus, 2017; Teece, 2018) and performance management (Ndevu & Muller, 2018) as a middle-range theory.This dynamic capability is related to environmental scanning in the overall environment faced by an organization, which can be divided into three conditions, i.e., the internal (micro) environment, the macro environment, and the industrial environment.The industrial environment in this context is part of the mezzo environment.
Performance excellence involves balancing stakeholder needs and expectations while improving operational, customer-related, financial, and market performance for long-term organizational success.Business excellence is an experience in which organizations continually develop and strengthen their management systems and processes to deliver excellent results for their stakeholders.
Performance excellence is a framework applicable to any organization seeking to enhance its overall performance.While the essential traits, aims, and purposes of the criteria have remained consistent, they have evolved substantially over time to assist organizations in tackling contemporary economic and market challenges and capitalizing on opportunities.Performance excellence measurement in Indonesian SOEs refers to the following criteria: (1) leadership, (2) strategic planning, (3) customer and market focus, (4) measurement-analysis-and-knowledge-management (MAKM), (5) workforce focus, ( Based on the framework presented in Figure 1, this study aims to analyze the effect of business environment and innovation capability on performance excellence of SOEs directly and through the business strategy.
This study proposes five hypotheses to test the direct effects and two hypotheses to test the indirect effects: H1: Business environment positively affects business strategy.
H2: Innovation capability positively affects business strategy.
H3: Business environment positively affects performance excellence.
H5: Business strategy positively affects performance excellence.
H6: Business environment positively affects performance excellence through business strategy.
H7: Innovation capability positively affects performance excellence through business strategy.

METHODS
The study adopted a quantitative method to analyze and look for the influence between variables: the impact of business environment and innova-tion capability on business strategy and their implications for performance excellence.Business environment (with seven dimensions) and innovation capability (with five dimensions) are exogenous latent variables.The position of the business strategy (with three dimensions) is a mediating latent variable, while performance excellence (with seven dimensions) is an endogenous latent variable.Table 1 exposes the operationalization of variables.

SOE results
The population of this study is the management (Directors or D-1 who represent them) in 100 SOEs that have implemented the Criteria for They deserve to be used as data sources because they already understand the company's strategic management process related to the business environment, innovation capability, business strategy, and performance excellence models.The questionnaire was made in the form of a list of closed written questions with numerical scale 1 to 5, and distributed (directly and using Google Forms) in August-October 2022, after testing the validity and reliability of the instrument.To analyze the data, the paper used descriptive analysis to describe each variable in terms of average score.The study also used the partial least squares structural equation modeling (PLS-SEM) procedure to investigate the formulated hypotheses.

RESULTS
Table 2 shows 12 clusters of the 100 state-owned enterprises (SOEs).The study also analyzed the profile of respondents and the descriptive analysis for business environment, innovation capability, business strategy, and performance excellence of the SOEs.After that, the paper revealed the measurement and structural models.The respondents' profiles were based on gender, age, and tenure (length of service) in SOEs (Table 3).

No.
Clusters Frequency Based on the results of this measurement, all constructs are proven to be related to other dimensions in each of these constructs.In other words, each dimension can measure its construct well.According to Hair et al. (2014), the purpose of assessing discriminant validity is to ensure that all reflective constructs have the strongest relationship with each indicator compared to other constructs in the PLS model.All values for each construct reliability for ρc and α show an ideal value, which is above 0.7, which means that the reliability of this construct is indeed consistent in its measurement (for each construct studied).This loading value is related to the reliability of the indicator (here called the dimension because it is first-order), which is the proportion of the variance that can be explained by the latent variable, which requires that the outer loading value should be greater than 0.7 or at least more than 0.5 and if the value is less than 0.4 then the indicator can be discarded (Hair et al., 2014) because it can usually interfere with the reliability of the construct and indicator as a whole.Table 5 shows that all dimensions in each construct have a loading value > 0.7, meaning each dimension can reflect each construct.The results of the measurement model analysis prove that all the measured constructs meet the requirements for further analysis using the structural model.Based on the calculation results of the structural model, the performance excellence model, which is influenced by the business environment, innovation capability, and business strategy, is portrayed in Figure 2.
This direct effect model (using a bootstrap procedure to test hypotheses 1 and 2) tests the structur-  sults for hypotheses 3, 4, and 5.All hypotheses are supported.The value of the path coefficient shows that the direct influence of BS on PE is the greatest, followed by the direct influence of IC on PE and finally BE on PE.These findings show the vital role of BS in improving PE as a whole.
The mediation effect test proves that BS can be a mediating or intervening variable that is "partial mediation" in the effect of BE on PE and IC on PE.These findings confirm hypotheses 6 and 7 (Table 8).

DISCUSSION
The findings confirm that business environment positively affects business strategy.The right business environment can encourage the implementation of business strategies in SOEs.
The current business environment in SOEs refers more to the internal technology environment.This aspect of the internal technological environment relates to the level of relevance of technological capabilities in supporting the strengthening of the company's business processes and market needs.This aspect of the internal technology environment is also related to the smoothness of technological processes in strengthening the company's business processes, namely the technology used in internal processes to anticipate market needs.In addition, it can be seen here regarding the level of technology dominance in work to strengthen the company's business processes under the main characteristics of the company's operations, including basic technology, applied technology, and development technology (Tjahjadi et al., 2019).
These aspects' importance can encourage business strategy formation, especially in implementing a differentiation-based strategy.This differentiation-based strategy is strengthened by product differentiation in supporting company performance, including goods, services, and information.Apart from that, another aspect that is also important is the level of differentiation in product delivery in supporting company performance, which includes delivery methods, including goods, services, and information to the market.The level of marketing differentiation also supports this strategy to support company performance by focusing on marketing channels.The level of differentiation of infrastructure facilities in supporting company performance according to the core business and characteristics of SOEs also supports implementing a differentiation-based strategy (Silva, 2015).
This study finds that the SOE business environment focusing on the internal environment of technology will encourage the implementation of business strategies with a focus on differentiation-based strategies.In this case, each SOE uniquely implements the technology used to support each business process.Currently, business processes in SOEs cannot be separated from information technology related to strategies at each business level.These findings confirm the research results of Drnevich and Croson (2013) that information technology (IT) is essential for business achievement because it directly influences the devices through which IT creates and obtains value for profit.Here, IT is an integral part of a company's business-level strategy.This finding also confirms the findings of Prajogo (2016) regarding the need for a strategic fit between innovation capabilities and the business environment in achieving the performance of the enterprises.The role of the business environment (dynamism and competitiveness) as a contingency factor is vital in influencing the effectiveness of numerous types of innovation strategies (in terms of products and processes) in leading to business performance.
Furthermore, the results show that innovation capability positively affects business strategy.These findings indicate that innovation capability can drive the implementation of business strategy in SOEs.The current innovation capabilities in SOEs are generally more dominated by marketing and R&D innovation.Essential aspects in shaping marketing innovation are the level of innovation in introducing new products in the company today, both limitedly and widely.More than that, the level of innovation in evaluating new products in SOEs is currently essential in shaping marketing innovation, especially related to instrument innovation and the evaluation process.Determining the current product selling price, related to the market price and purchasing power, has influenced marketing innovation.The critical aspects in shaping R&D innovation are innovation in identifying market segments (both existing and new).In addition, in expanding the market network, SOEs need innovation to focus on new markets.
The findings of this study confirm the results of Pisano (2015)

CONCLUSION
This study explored the effect of the business environment and innovation capability directly and through business strategy on the performance excellence of state-owned enterprises (SOEs) in Indonesia.
It also revealed that innovation capability tended to significantly influence SOEs' business strategy and performance excellence (directly and indirectly) compared to the influence of the business environment.
This showed the importance of innovation capability in utilizing the business environment to jointly formulate and implement the right business strategy in encouraging the implementation and achievement of SOE performance excellence.Improvements in innovation capability and the business environment could enhance the formulation and implementation of business strategies in realizing SOEs' performance excellence.Business strategy was fundamental in influencing the performance excellence of SOEs.This business strategy could be a bridge for the business environment and innovation in increasing performance excellence.This showed that business strategy could mediate or intervene for the business environment and innovation capabilities in influencing performance excellence in SOEs.Several dimensions of each variable required unique actions to be sustained, adjusted, developed, and enhanced.
In essence, this study examined the effect of the external and the internal environment directly on performance excellence and through business strategy in SOEs, which had not been studied much by previous research.This paper also refined methods and concepts related to SOE performance excellence, which were influenced by business strategies based on the company's external and internal environment.The novelty of this analysis was to improve the old theory in measuring the business environment and innovation capabilities, as well as business strategies that aligned with SOE performance excellence.Future research could develop a new model regarding business strategy based on the business environment and innovation capabilities that impacted sustainable SOEs' performance excellence.

Figure 1
Figure 1.Research model

Table 1 .
Operationalization of variables

Table 3 .
Respondent profile

Table 4 .
Convergent validity, discriminant validity, and construct reliability Note: BE = Business Environment; IC = Innovation Capability; BS = Business Strategy; PE = Performance Excellence.Figure 2. Performance excellence model

Table 6 .
Hypotheses testing effects of BE and IC on BS

Table 7 .
Hypotheses testing effects of BE, IC, and BS on PE Note: *significant.BE = Business Environment; IC = Innovation Capability; BS = Business Strategy; PE = Performance Excellence.

Table 8 .
Mediation effect SOEs must adapt by developing R&D and marketing innovations to create new products and services that meet consumer needs and preferences so that SOEs' products/services stay ahead.Through these innovations, SOEs can improve the efficiency of production processes and reduce cost strategies.Applying new technology in SOEs can improve process automation, increase efficiency, and reduce waste.Thus, this can result in a cost-saving strategy in making products more affordable and attractive to consumers.Because SOEs are usually responsible for providing services to the public, SOEs need to develop innovations that align with business strategies to meet the various needs of the wider community.Efforts to develop technology in support of new and re-newable energy can be one of the innovation capabilities in driving SOE performance excellence in Indonesia through the right business strategy.Future studies should focus on how innovation capabilities can boost performance excellence in specific sectors.