Market Orientation and Innovation: The Impact of Entrepreneurial

Orientation among Traditional Snack Entrepreneurs in Sanan,

Malang, Indonesia

Ratih Indriyani, Widjojo Suprapto and Jessica Calista

Management Department, Petra Christian University, Surabaya, Indonesia

Keywords: Market Orientation, Entrepreneurial Orientation, Innovation, Small Medium Enterprises.

Abstract: The food and beverage industry has beome a mainstay sector in Indonesia and is projected to experience

better growth in the coming year. However, the growth of this industry also causes a tight competition

among similar businesses. In facing the competition, one key to succeed is innovation and entrepreneurial

orientation. This research aims to determine the influence of market orientation on entrepreneurial

orientation, the entrepreneurial orientation on innovation, and the market orientation on innovation in

traditional snack SME entrepreneurs in Malang. This research is quantitative research, which is using an

explanatory method. Data collection uses questionnaires that are distributed among 100 respondents of the

SME entrepreneurs in Sangan, Malang. The sampling method is using purposive sampling to determine the

amount of samples with certain considerations. The consideration is the length of operation for at least one

year for the SME owners in Sanan, Malang. The data analysis method is using Partial Least Square (PLS).

This research shows that market orientation has a positive significant influence on entrepreneurial

orientation, and entrepreneurial orientation also has a significant influence on innovation. Finally, market

orientation has a significant and positive influence on innovation among traditional snack SME

entrepreneurs in Sanan, Malang.

1 INTRODUCTION

Small Medium Enterprise (SME) has a big role in

Indonesia. Its existence has a big contribution to

business activities, and it has provided new

employment opportunities (Nurfadilah, 2018). SME

in the food and beverage sector is also rising in

Indonesia, especially in East Java. This sector

constructs 25% of the total business sectors in East

Java. Besides, it increases by 7.04% annually and

will still be potentially rising in the following years.

Some factors that influence the growth of small and

medium enterprises include massive product

development, various market demands, and their

adaptive capability (Waluyo, 2017). This shows the

importance of small medium enterprises to focus on

their market orientation. According to Kohli &

Jaworski (1990), market orientation refers to the

orientation of an organization in digging out

information from consumers, especially information

about their need and demand, in taking action based

on the information and research, and in formulating

the strategy based on the insights from the

consumers. Based on the understanding of the

consumers, market orientation becomes an important

aspect for an organization to stay alert in the

competition. Market orientation is an important

element to support the ability of an organization to

innovate based on the orientation of the consumer,

the orientation of the competitors, and the

interfunctional coordination (Grinstein, 2007).

Miller and Friesen (1983) study that companies

with strong entrepreneurial orientation tend to be

able to innovate if compared to others with no

entrepreneurial orientation. SMEs have a strong

growth because of several factors, such as the ability

to focus, flexibility, low cost, and fast innovation.

However, SMEs have to consider how to implement

the innovation. The purpose of innovation is to offer

different types of products or services from

competitors, which the customers should like them

(Setiawan, 2015). Innovation is important to an

organization's success and continuity. According to

Han, Kim, and Srivastava (1998), innovation creates

246

Indriyani, R., Suprapto, W. and Calista, J.

Market Orientation and Innovation: The Impact of Entrepreneurial Orientation among Traditional Snack Entrepreneurs in Sanan, Malang, Indonesia.

DOI: 10.5220/0008429902460253

In Proceedings of the 2nd International Conference on Inclusive Business in the Changing World (ICIB 2019), pages 246-253

ISBN: 978-989-758-408-4

superiority in competition, which becomes a mean to

survive in uncertainty environments. An

organization can create an innovative product,

increase the quality of the service, or do different

things that have not been done by the competitors

(Jiménez-Jiménez & Sanz-Valle, 2011).

Malang is a city that has many tourist

destinations, it has been visited by many tourists. On

the other hand Malang is a city that has various

natural resources which can be processed into

various snacks. Both this condition causes a variety

of typical foods to emerge, such as fruit chips and

tempeh chips. Sanan is an area in Malang that has

grown into a center area for the production of food

made from tempeh.

The tempeh industry has been in Sanan since the

year of 1.800 and has been managed across

generations. Now there are around 400 tempeh

producers in the area and have involved many

workers. The focus of the business is relatively the

same, but the models taken are slightly different

from each other. Most produce tempeh from

soybean as raw materials into semi-finished

products. The raw material is produced into chips

and other snacks. Some producers take semi-finished

materials from other producers to process them

again.

The growth of entrepreneurs in Sanan brings

competition between businesses in the area. On the

other hand, the abundance of modern Malang food

also becomes a competitor for Sanan's traditional

snacks. This encourages them to continue to strive to

innovate their products.

The owners of small tempeh businesses in Sanan

Malang have done some product innovation to

attract their consumers. The innovation is created

through the various existing snack products from

tempeh, such as tempeh chips with various flavors,

tempeh flavored brownies, tempeh flavored cake,

tempeh flavored steak, tempeh flavored chocolate.

However, these small businesses need to observe the

market demands and market opportunities to create

an innovation to build their competitive advantages.

To understand the market demands and market

opportunities, the business owners require the ability

to be proactive and take risks, which are reflected in

entrepreneurial orientation. Therefore, the aim of

this research is to investigate the impact of market

orientation toward entrepreneurial orientation,

entrepreneurial orientation to innovation. This

research also examines the impact of market

orientation toward innovation among small business

owners.

2 LITERATURE REVIEW AND

HYPOTHESIS DEVELOPMENT

2.1 Literature Review

2.1.1 Market Orientation

Market orientation is a process and activity that are

related to creating and satisfying customers by

evaluating their need and demand (Uncles, 2000).

Market orientation is an important factor for a

company to understand the market, so that the

company can develop product and service strategies.

The company with strong market orientations has a

faster basic improvement, and it is reflected on the

success of their new main products, profitability,

market share, and sustainable competitive advantage

(Baker and Sinkula, 2009). Market orientation is

related to the availability of resource management in

an organization because its purpose is to create new

added values for existing products or the services.

The market orientation measures some components,

such as customer orientation, competitor orientation,

interfunctional coordination (Grinstein, 2008; and

Kohli & Jaworski, 1990). Customer orientation can

be explained in some elements, such as to give the

best service to the customer, to offer the benefit to

the customer, to satisfy customer, to give value for

the customer (Grinstein, 2008). Competitor

orientation is described as an understanding the

short-term power and weakness, the recent long-

term capability and strategy, and the potential of the

main competitor. Interfunctional coordination can be

explained in these indicators, such as all departments

working together to fulfill costumer need, sharing

information and resources among departments, and

all functions in the organization working together to

offer value to the customer.

2.1.2 Entrepreneurial Orientation

Entrepreneurial orientation is the orientation of a

company that follows the principal of the effort to

identify and exploit business opportunities. Eshima

and Anderson (2016) define entrepreneurial

orientation as an attitude and tendency to do

entrepreneurship in an organization.

Entrepreneurial orientation must be possessed by

the leader and by all people in the managerial levels.

A company with a strong entrepreneurial orientation

tends to take the risk (Lumpkin & Dess, 1996).

Besides, that company also implements

innovativeness, proactiveness, and risk taking

tendency. Entrepreneurial orientation in a company

Market Orientation and Innovation: The Impact of Entrepreneurial Orientation among Traditional Snack Entrepreneurs in Sanan, Malang,

Indonesia

247

is behavioral dimensions and managerial attitudes

(Anderson et al., 2015). According to Rhee et al.

(2010), entrepreneurial orientation is shown through

active behaviors, ready to take the risk, fast response

in business changing.

Wang (2008) explains that entrepreneurial

orientation consists of three indicators;

aggressiveness, risk taking and proactiveness.

Aggressiveness is a competitive attitude reflected

through the desire to beat competitor’s products and

to seek market opportunity in order to win the

competition. Risk taking is an entrepreneur

willingness to use the available resources in the

uncertainty, and the courage to face the challenge by

exploiting resource or strategizing business.

Proactiveness is a process to search and identify

business opportunities by developing, introducing,

improving product or service, and anticipate the

market changes.

2.1.3 Innovation

Innovation is the main core of the entrepreneurial

process. According to Kotler and Keller (2009),

innovation is a new product, service, idea, and

perspective from someone. Innovation is always

perceived by the customers as the availability of new

products or services. Innovation is also defined as a

breakthrough related to new products.

Ramadani and Gerguri (2011) explain innovation

as a transformation of knowledge to a product,

process and service by using something new.

Innovation is a result of the success of exploitation

from a new idea. In other words, it is the result of

developing and employing knowledge, and

technological skill to create a new product through

the process of producing new goods or services.

Mahmoud et al. (2016) measure innovation by four

indicators: willing to try a new idea, searching new

ways to sell, implementing creativity in operational

methods, and being less resistant to innovation.

2.2 Hypothesis Development

2.2.1 Market Orientation and

Entrepreneurial Orientation

A company with a strong entrepreneurial orientation

produces higher profitability (Baker & Sinkula,

2009). The process to follow changes in customer,

competitor, the market response on a product, and

the coordination of resources forces small

enterprises to be active in adapting and improving

the changes. Market orientation makes a company

understand the importance of its resources to reach

success, and gives a chance to find important factors

to create a new product. Market orientation

encourages a small company to response to a

business environment with more aggressive and

proactive attitudes (Riviezzo et al., 2013).

: market orientation has a significant influence

on entrepreneurial orientation

2.2.2 Entrepreneurial Orientation and

Innovation

Entrepreneurial orientation has an important role in

innovation. The attitude in entrepreneurial

orientation triggers individuals to learn, be active,

and be able to adapt fast. Entrepreneurial orientation

as the company behavior can create a better

innovative environment (Madhoushi et al, 2011).

This behavior becomes the organizational culture

that encourages the leader's to be aggressive and

proactive in taking internal action and in facing

dynamic business environments. Entrepreneurial

orientation facilitates various developments and

product ideas. In the end, entrepreneurial orientation

encourages the ability to create new products and

innovation process. Entrepreneurial orientation has

moderating effects on innovation activities such as

product, administration and profit (Jaaffar et al.,

2017).

: entrepreneurial orientation has a significant

influence on innovation.

2.2.3 Market Orientation and Innovation

Market taste is always changing in accordance with

the changing trends, therefore, small businesses need

to comprehend their targeted market orientation.

Market orientation brings important roles in

innovation. The pressure of customer demands has

influenced the need of a company to innovate

(Manzano et al, 2005). Grinstein (2008) studies

market orientation components and its influence

omn innovation. Internal coordination as the

component of market orientation influences

company ability to innovate. Internal coordination is

the integration between organizations' supporting

activities, including innovation. Besides, market

orientation is one of the crucial elements that

encourage a company to innovate. Market

orientation acts as an antecedent involving many

things, and also focuses on competitions and internal

configurations that bring new values to customers

(Didonet et al., 2016).

ICIB 2019 - The 2nd International Conference on Inclusive Business in the Changing World

248

: market orientation has a significant influence

on innovation.

2.3 Research Framework

This research uses a research framework to show the

relationship between the research vaiables. The

framework is shown: below.

Figure 1: Research Framework.

3 RESEARCH METHOD

This is quantitative research. Quantitative research is

research that can be measured using statistical

methods. This quantitative research examines the

causal relationships. This research aims to describe a

generalization of samples from a population or to

explain the relationships, differences, or influences

of a variable with other variables including the test

for the causal relationship (Cooper and Schlinder,

2013). Causal relationships are relationships from

independent variables and dependent variables.

The population is the sum of all the

characteristics to be estimated (Cooper and

Schlinder, 2013). The population that becomes the

object in this study is the owners of Sanan Malang

Tempe UKM. The sampling technique in this study

is using a non-probability sampling technique,

namely purposive sampling with several

considerations. The sample for this research is as

many as 100 business owners of Tempe Sanan,

Malang. These small business owners must have

been operating the business for at least one year. The

research data are collected using questionnaires. The

measurement scale follows the Likert scale, as it is

used to measure attitudes, opinions, and perceptions

of a person or group of people about a social

phenomenon.

The data are processed by using Smart Partial

Least Square (PLS) software. There are some stages

to comply for using the Smart PLS software, such as

an outer model test, inner model test, and hypothesis

tests. Outer model is used to measure the convergent

validity, discriminant validity, composite reliabiity

and average variance extracted (AVE). Test for

structural model use R

(determinant coefficient)

and

predictive relevance (Ghozali, 2012). R

square classified to strong, moderat, and weak. The

strong R square is considered to be a good model to

predict the structural model of the research. PLS

model evaluation using Q

shows the predictive

relevance of the research model.

4 RESULT AND DISCUSSION

4.1 Outer Model Evaluation

Before testing hypotheses to predict relational

relationships in a structural model, testing the

measurement model must be done to verify

indicators and latent variables. These tests include

testing construct validity (Convergent and

Discriminant) and construct reliability.

The outer model analysis is to measure the

convergent validity and discriminant validity as

below.

Table 1: Convergent Validity.

Table 1 presents the convergent validity of each

measurement item.The value of convergent validity

for all items is presented by loading factors that are

higher than 0.70 in order to be declared as valid.

This reseach shows that all item is fullfill the validt

value.

Entrepreneurial Orientation

‐ Aggresiveness

‐ Risk taking

‐ Proactiveness

Market Orientation

‐ Customer orientation

‐ Competitior

orientation

‐ Interfunctional

coordination

Innovation

‐ Trying new ideas

‐ New ways to do a

thing

‐ Method creativity

‐ New product

development

Market Orientation and Innovation: The Impact of Entrepreneurial Orientation among Traditional Snack Entrepreneurs in Sanan, Malang,

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249

From table 2, The value of the loading factors of

each item to its construct is declared valid because

the value is higher than the value of each cross

Table 2: Cross Loading.

Table 3: AVE.

As in table 3, this research value of AVE

(

Average Variance Extracted ) of each construct is

higher than 0.50 so the construct does not have

problems in convergent validity.

Table 4: Cronbach’s Alpha.

This study uses Cronbach's alpha to measure

reliability or internal consistency among the items in

an instrument. Based on table 4, the results of testing

the measurement item is said to be reliable if it has

an alpha coefficient greater than 0.6. The test results

in this study are reliable because they have a value >

0.6.

4.2 Structural Model Evaluation

The goodness of Inner Model is used to determine

the ability of endogenous variables to explain the

diversity of exogenous variables. The inner model

evaluation is done by observing the value of R

and

Table 5: R square.

As in table 5, the result of R

in this research is

0.635, which is considered to be a strong value. This

shows that the variable of market orientation

influence innovation as 63.5%. R square value for

entrepreneurial to innovation is 0,696 . This reflectcs

that entrepreneurial orientation influence innovation

as 69,6%. The value of Q

in this research is

0.88904. It shows that this model has predictive

relevance, which means the structural model as a

relevant one.

Q square = 1–(1–R

EO) x (1–R

Innovation (1)

= 1–(1–0,696) x (1–0,635)

= 1–(0,11096)

= 0,88904

4.3 Hypothesis Testing

Hypothesis testing is used to determine the causality

developed in the model, to examine the influence of

exogenous variables on endogen

variables.

Significance testing can be known through t statistic

value, which is greater than the critical value 1.96.

Figure 2: Bootstraping structural model.

4.3.1 The Influence of Market Orientation

on Entrepreneurial Orientation

The result of the testing from the table above is that

the t-statistic value of market orientation to

entrepreneurial orientation is 21.558. The result of

the testing shows that the t-statistic is more than 1.96

and the P value is 0.000 less than 0.05. This means

that market orientation influences directly to

entrepreneurial orientation.

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250

4.3.2 The Influence of Entrepreneurial

Orientation on Innovation

The result of the testing above is that the t-statistic

of entrepreneurial orientation to innovation is 4.611.

The result shows that the t-statistic is more than 1.96

and the P value is 0.000 less than 0.05. It means that

entrepreneurial orientation influences directly to

innovation.

4.3.3 The Influence of Market Orientation

on Innovation

The result of this section is that t-statistic of market

orientation to innovation is 3.292. The result shows

that the t-statistic is more than 1.96 and the P value

is 0.001 less than 0.05. This means that market

orientation influences directly to innovation.

Table 6: Path Diagram.

The conversion of the path diagram into the

measurement model is intended to find out the

strength of the influence between constructs that are

explained in the effect of the model,both the effect

directly or indirectly, as for the model effects shown

in table 6.

4.4 Discussion

4.4.1 The Influence of Market Orientation

on Entrepreneurial Orientation

The result of the table describes that t-statistic of

market orientation to entrepreneurial orientation is

21.558. The result of the test shows that t-statistic is

more than 1.96 with P value 0.000 less than 0.05 and

the coefficient value is 0.835 which is positive or in

the same direction. The increasing variable of

market orientation will affect entrepreneurial

orientation about 0.835. It means that the market

orientation directly influences entrepreneurial

orientation significantly and positively. Market

orientation is the most important factor for a

company to understand the market, and develop a

strategy of the product and service to fulfill

customer and market needs (Baker & Sinkula,

2009).

Innovation is started from the selling strategy,

benefit of the product, strategy in delivering product

knowledge, delivery accuracy of the product

corresponding the benefit usability etc. The

requirement to fulfill customer changing-need, a

company needs to renew its product or innovate by

observing the market first. In launching an

innovation, a company needs to take the risk, follow

market development, observe the opportunity. A

company that has strong market orientation and

entrepreneurial orientation will produce high

profitability (Baker & Sinkula, 2009).

4.4.2 The Influence of Entrepreneurial

Orientation on Innovation

The result of the test shows that the t-statistic value

of entrepreneurial orientation to innovation is 4.611.

The result of the testing shows that t-statistic is more

than 1.96 with P value 0.000 less than 0.05 and the

coefficient value is 0.473 which is positive or in the

same direction. The increasing variable of

entrepreneurial orientation will affect innovation

about 0.473. It means that the entrepreneurial

orientation directly influences entrepreneurial

orientation significantly and positively.

Entrepreneurial orientation is the company

orientation that has the principal to identify and

exploit chances (Lumpkin & Dess, 1996).

Entrepreneurial orientation is shown in the behavior

such as active, aggressive, risk-taking, fast response

in every aspect of what happened in changing

business especially in a small medium enterprise that

is susceptible in facing giant companies. The

behavior toward entrepreneurial orientation triggers

individual to keep learning, active and adaptable

quickly. The aggressiveness and activeness in

learning are able to affect the new ideas creation.

The activeness affects in the experiment to try

various ways to sell a product, production, product

value improvement or the other innovation.

Moreover, by changing market target is one the

ways to innovate. By taking the risk, they are letting

go of the comfort zone as an entrepreneur. They

learn new thing, ask the expert, ask for suggestion

and apply the training process or knowledge as a

new strategy in innovating of product improvement.

4.4.3 The Influence of Market Orientation

on Innovation

The result of the test shows that the t-statistic value

of market orientation to innovation is 3.292 with P

value 0.001 less than 0.05 and the coefficient value

is 0.358 which is positive or in the same direction.

Market Orientation and Innovation: The Impact of Entrepreneurial Orientation among Traditional Snack Entrepreneurs in Sanan, Malang,

Indonesia

251

The increasing variable of market orientation will

affect innovation improvement about 0.358. The

result of the testing shows that t-statistic is more

than 1.96. It means that market orientation directly

influences innovation significantly and positively.

Market orientation is a process and activity related

to creation and customer satisfaction by keeping on

valuing customer need (Uncles, 2000). A company

has to develop ideas or innovation because

customers tend to be surfeited if the same product is

being produced without any variations. On the other

hand, before launching an innovation, a company

needs to observe what customers want

Consumer demand can be a trend happening in

the society. Market orientation can be a strategy of a

company to attract a customer through the

innovation of a new product, unique packaging, new

variants etc. Rhee et al. (2010) explain that market

orientation is a market target or segment by the

producer that has certain characteristics wanted by

the customer in targeted market level related with

their taste, desired product, packaging, selling

strategy, and branding to capture the market. The

success process in reaching the targeted market is by

the product selling, it will improve the innovation

process by the producer to reach the success of the

product in fulfilling customer demand.

5 CONCLUSIONS

The result of the study shows that the indicator of

interfunctional coordination plays the most

important role in the market orientation of the

business owners in Sanan. The highest mean for the

entrepreneurial orientation belongs to the level of

aggressiveness of the business owner in carrying out

their business operations. The business owners have

the tendency to try new ideas in running their

business.

The result of the study proves that market

orientation influences positively and significantly on

entrepreneurial orientation. Market orientation also

influences positively and significantly on

innovation. This result also proves that

entrepreneurial orientation influences positively and

significantly on innovation among the small medium

enterprise owners in Sanan, Malang. Entrepreneurs

need to do marketing activities more aggressively

and proactively. Marketing strategies in SMEs tend

to be created and run spontaneously according to the

habits that have occurred for a long time. So far,

more marketing has been done by reselling large

buyers such as souvenir centers. Many tempe

processed products are purchased in large quantities

for resale at higher prices. Employers must build

relationships and create communication with

consumers to get repeat and continuous purchases.

Business owners in Sanan can be more proactive

in sales and try to increase distribution channels

outside the region or abroad. The development of the

market can be done at an inexpensive cost.

Promotional media as well as distribution tools can

be reached by using online marketing. In general,

consumers prefer products that they have used

before, therefore it is very important to introduce

products online to be widely known to consumers.

Online marketing will help sellers to reach their

costomers and communicate with them in an easy

way.

This research is conducted in an industrial center

that encompasses a group of entrepreneurs who have

products made of tempeh. For future researchers, the

model can be replicated in other small businesses.

Other researchers can develop other variables to

investigate the factor affecting the success of

innovation in small medium entreprises. Innovation

also can be observed as one aspect that influences

business survival.

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