The Effects of Marketing Capabilities on Financial Performance

through Innovation Capabilities in Fashion Small and Medium

Enterprises in Medan

Yeni Absah

, Rismayani

, R. Hamdani Harahap

Department of Management, Universitas Sumatera Utara, Jl. Prof. T.M Hanafiah, SH, Kampus USU, Medan, Indonesia

Department of Anthropology, Universitas Sumatera Utara, Jl. Dr. Sofyan, Kampus USU, Medan, Indonesia

Keywords: Marketing Capabilities, Innovation Capabilities, Financial Performance, SMEs

Abstract: Every Small and Medium Enterprises should have their own characteristics that can be a strategic resource.

The utilization of strategic resources as core competencies optimally by SMEs will improve their financial

performance. The population of this study was Medan’s 93 fashion SMEs. This study uses quantitative

methods with inferential statistical analysis using path analysis to measure the effect of marketing capabilities

on financial performance through innovation capabilities. The results showed that directly marketing

capabilities had a positive and not significant effect on financial performance, marketing capabilities directly

had a positive and significant effect on innovation capabilities, innovation capabilities directly had a positive

and significant on financial performance, and marketing capabilities had a positive and significant effect

towards financial performance through innovation capabilities of fashion SMEs in Medan.

1 INTRODUCTION

Small-Medium Sized Enterprises (SMEs) have been

vital to the economy of Medan city. This sector

absorbed 4.950.955 workers in 2015 (republika.co.id,

accessed on 05 February 2017 at

19.30 Western Indonesian Time), which was an

increase from the 2014’s 4.676.143 workers. SMEs in

Medan have contributed significantly to the city’s

economy, which is obvious from the growth of SMEs

within 3 years (2013-2015), from 82.888 in 2013,

86.063 in 2014, and 99.002 in 2013 based on BPS (the

Statistical Bureau) of North Sumatra 2015

(Dongoran, 2016).

Fashion business is a potentially promising and

profitable business sector due to its nature as a

secondary need for people. In major holidays, there

are always significantly increased demands for

fashion products. The ever-dynamic trends for

fashion modes make fashion business worth a try.

Many entrepreneurs started their fashion business by

becoming resellers or dropshippers of famous

products due to their lack of skills in fashion

manufacturing.

There has been a significant increased number of

fashion businesses in Medan, which create tight

competitions for the owners and encourage them to

innovate to attract customers and to improve their

business performance as well. To upgrade its

performance, a firm must manage its resources and

capabilities (Barney, 1991).

Despite their growth, SMEs are often faced with

obstacles such as the lack of marketing capabilities

skills in terms of wider market access. Another

ignored issue is the tendency of product imitation

rather than innovations as generally desired by

customers.

1.1 Research Questions

1. Are marketing capabilities critical in innovation

capabilities of fashion SMEs in Medan?

2. Are marketing capabilities critical to financial

performance of fashion SMEs in Medan?

3. Are innovation capabilities critical to financial

performance of fashion SMEs in Medan?

4. Are marketing capabilities critical to financial

performance of fashion SMEs in Medan through

innovation capabilities?

Absah, Y., Rismayani, . and Harahap, R.

The Effects of Marketing Capabilities on Financial Performance through Innovation Capabilities in Fashion Small and Medium Enterprises in Medan.

DOI: 10.5220/0009204003510355

In Proceedings of the 2nd Economics and Business Inter national Conference (EBIC 2019) - Economics and Business in Industrial Revolution 4.0, pages 351-355

ISBN: 978-989-758-498-5

351

1.2 The Usefulness of Research

1. As an input for SMEs to upgrade their financial

performance through an improved marketing and

innovation capabilities,

2. As an input for academics to develop science,

especially in marketing, strategic management,

and SMEs.

2 LITERATURE REVIEW

2.1 Marketing Capabilities

Marketing Capabilities belong to the category of

resources and skills in marketing sector which arise

from accumulated knowledge and integration of

values and norms developed within an organization.

Marketing capabilities are an integrated process

designed to create an accumulated knowledge, skills,

and resources from a firm to a business related to a

market (Lovelock dan Lauren, 2007). Marketing

capabilities of a firm in performing various marketing

objectives will provide with sustained competitive

advantages. Marketing capabilities are an evaluation

concept on process performance in marketing.

Marketing capability classified into two

categories, specialized and architectural capabilities

which guide firms gain performance and competitive

advantages. The specialized reflects marketing

employees' knowledge that is utilized in such

activities like selling, communication abilities and

pricing and etc. Moreover, communication with

existing and future consumers depends on this

capability (Boulding, et al., 1994; Day, 1994).

The literature on the effects of marketing

capabilities on business competitiveness is recent,

and the performance indicators used differ among

researchers. A number of available researches

reflected analysis of the link between business

capabilities and financial performance, (profits,

returns, etc.) indicators. Such an approach is evident

in the studies of Fahy et al. (2000), Tsai and Shih

(2004), and Vorhies and Morgan (2003), who

confirmed a positive link between marketing

capabilities and financial performance.

Marketing capability criteria must be satisfied to

generate superior performance of the resources

possessed (Andersén, 2011). Having strong

marketing capabilities is an important parameter in

succeeding product development (Drechsler et al.,

2013) and effects different types of innovation

(Mariadoss et al., 2011; Weerawardena, 2003).

Marketing capability is critical at the product

development stage where consumer needs and

competition must be assessed and information shared

for comprehensive new product ideas to be advanced

into the development stage (Weerawardena, 2003).

Based on this discussion, we argue that marketing

capability is related at all types of innovations

pursued by the firm. Marketing capability can be a

key source of competitive advantage, and can

influence firm’s innovation. Accordingly, the

relationship between marketing capability and

organizational innovation is hypothesized (Potočan,

2013).

Marketing capabilities could improve financial

and market performance (Tsai and Shih, 2004) and is

an important source of competitive advantage for

firms (Fahy, 2000).

H1: marketing capabilities are positively and

significantly critical to innovation capabilities of

fashion SMEs in Medan

H2: marketing capabilities are positively and

significantly critical to financial performance of

fashion SMEs in Medan

2.2 Innovation Capabilities

A critical character to be owned by an entrepreneur is

the capability to innovate. One projecting to be an

entrepreneur must be innovative (Larsen, 2007),

Innovation capabilities are an ability to develop

new products or markets through strategic innovation

orientation adjustment with innovative attitude and

process (Wang & Ahmed, 2004). Capabilities owned

by a firm in devising new ideas to produce

innovations is a concept of innovation capabilities

(Lawson dan Ben, 2001). Furthermore, Terziovski

(2010), stated that innovation capabilities provide

with potentially effective innovation.

Hastuti’s research (2018) revealed direct and

positive effects of innovation capabilities towards

financial performance of SMEs. The capability

configuration approach requires a firm to remain

original and creative, rather than an imitator, in

creating a sustainable competitive advantage

(Taghian, 2010: 829).

H3: innovation capabilities are positively and

significantly critical to financial performance of

SMEs in Medan.

EBIC 2019 - Economics and Business International Conference 2019

352

2.3 Financial Performance

Financial performance is the accomplished result by

the firm’s management in running its function to

manage the firm’s assets effectively in a given period

(Rudianto, 2013:189). Financial performance is

required to measure or evaluate a firm’s level of

profitability based on its accomplished financial

objectives.

H4: marketing capabilities are positively and

significantly critical to financial performance of

fashion SMEs in Medan through innovation

capabilities.

3 METHOD

The research used a quantitative approach to test the

hypothesis. Sample of the research is 93 fashion

SMEs in Medan. The sampling was done through area

clustering, while the primary data collection was done

through questionnaire. Data used in this study are

quantitative data in the form of numbers, consisting

of the results of statistical data management. Sources

of data in this research are the primary data source,

data obtained directly from respondents through

questionnaires related to marketing and innovation

capabilities, and financial performance on SMEs that

are located in Medan. The data analysis method used

was model analysis to test the direct and indirect

effects of the research variables.

4 RESULTS AND DISCUSSION

4.1 Inferential Analysis

Table 1 Model I Analysis

Coefficients

Model

Unstandardized

Coefficients

Standa

rdized

Coeffici

ents

Sig.

Std.

Erro

Bet

(Constant)

22.886 5.497

.241

4.1

.000

Marketing

Capabilities

.264 .111 2.3

.020

a. Dependent Variable: Innovation Capabilities

Table 2 Model Summary

Model

Square

Adjusted

R Square

Std. Error of the

Estimate

.241

.058 .048 3.95927

a. Predictors: (Constant), Marketing Capabilities

4.1.1 Coefficient of Model 1

Table 1 shows regression result of model 1. The

regression output of model 1 on its coefficient table

shows significance value of marketing capabilities is

0,020 < 0,05. This result suggests, as for model 1

regression, marketing capabilities are significantly

critical to innovation capabilities. The R2 value in

table 2 of Model Summary is 0,058, which means that

the effect of marketing capabilities contributes to

innovation capabilities for 5,8%, while the remaining

94,2% is shared by other variables not under research.

Table 3: Model II Analysis

Coefficients

Model Unstandardized

Coefficients

Standardized

Coefficients

Sig.

Std.

Erro

Beta

(Constant) -9.068 8.279

1.095

.276

.193 .159

.118

1.218 .226

Y1 .617 .145

.412

4.264 .000

a. Dependent Variable: Financial Performance

Table 4 Model Summary

Model

R Square Adjusted R

Square

Std.

Error of the

Estimate

.455

.207 .190 5.46506

a. Predictors: (Constant), Innovation Capabilities, Marketing

Capabilities

4.1.2 Coefficient of Model 2

Model 2 regression output on coefficient table

column showed the significance value of marketing

capabilities is 0,226 > 0,05, while the significance

value of innovation capabilities of innovation

capabilities is 0,000 < 0,05. Such result concluded

that marketing capabilities produced positive but

insignificant influence towards financial performance

on. On the other hand, innovation capabilities are

positively and significantly critical to financial

performance. The value of R2 on Model Summary

table is 20,7% with the remaining 79,3% value is

contributed by variables not under research.

Furthermore, table 3 revealed direct effect of

marketing capabilities towards financial performance

The Effects of Marketing Capabilities on Financial Performance through Innovation Capabilities in Fashion Small and Medium Enterprises

in Medan

353

for 0,118 and indirect effect of marketing capabilities

towards innovation capabilities for 0,241 x 0,412 =

0,0993. Thus, the total effect of marketing

capabilities towards marketing performance is adalah

0,118 + 0,0993= 0,217. This concluded that through

innovation capabilities marketing capabilities

indirectly are positively and significantly critical to

financial performance.

5 DISCUSSION

The research result showed that marketing

capabilities directly contribute positively and

significantly towards innovation capabilities.

Marketing capabilities have an influence on

innovation development and facilitate innovation

success and creativity in the market (Weerawardena

and O’Cass, 2004; Dutta et al., 1999). Marketing

capabilities play a significant role in improving

innovation in firms and create competitive

advantages for companies (Shahhoseini and

Ramezani, 2015). Marketing and innovation are

necessary for firm to gain competitive and vantages

(Song et al., 2005; Moorman and Slotegraaf, 1999;

Möller and Anttila, 1987).

The research result showed a directly positive yet

insignificant effect of marketing capabilities towards

financial performance. As a matter of fact, marketing

capabilities without product innovation often troubles

fashion SMEs to boost their financial performance.

Another research result revealed directly positive

and significant effect of innovation capabilities

towards the financial performance of SMEs in

Medan. Therefore, SMEs owners must be innovative

in developing not only products but also services,

technology, and market. Product innovation is

possible through new model development by using

new designs, materials, and colour variations

compatible with the target market. Furthermore,

service innovation may use technology to enable

more responsive and accurate service; while

technology innovation is applicable through ordering

and payment systems. On the other hand, market

innovation is made possible through sustainable

market development or niche. Various innovations

may boost selling and, thus, should improve the

selling performance.

The last research result found that marketing

capabilities directly have positive and significant

effects towards financial performance through

innovation capabilities, while indirectly insignificant

to financial performance. Thus, it may be concluded

that only innovation capabilities will improve

financial performance. Marketing capabilities include

entrepreneurs’ skills in maximizing their marketing

mix strategies, which should help boost financial

performance of SMEs.

The marketing capabilities aim to fulfil the market

related needs of the business, allowing firms to

provide superior added value and to adapt better to

changing market conditions (Vorhies, 1998).

Marketing capabilities are evident when individuals

use accumulated knowledge of clients, markets, and

the environment; their experience; and the firm’s

resources to resolve commercial problems, to

generate higher value for the organization’s clients

and to be competitive (Tsai and Shih, 2004; Vorhies,

1998; Weerawardena, 2003).

6 CONCLUSIONS

Research results and discussions reveal that

marketing capabilities directly contribute positively

and not significant on financial performance,

marketing capabilities directly had a positive and

significant effect on innovation capabilities,

innovation capabilities directly had a positive and

significant on financial performance. On the other

hand, marketing capabilities are positively and

significant critical to financial performance through

innovation capabilities.

ACKNOWLEDGEMENTS

The authors gratefully acknowledge that the present

research is supported by Ministry of Research and

Technology and Higher Education Republic of

Indonesia. The support is under the research grant

DRPM Dikti of Year 2019.

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The Effects of Marketing Capabilities on Financial Performance through Innovation Capabilities in Fashion Small and Medium Enterprises

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