Proactive and Reactive Innovation Toward Market Performance of

Indonesian Furniture

Yudha B. Abadi, Moeljadi, Mintarti Rahayu and Dodi W. Irawanto

Universitas Brawijaya, Malang, East Java, Indonesia

Keywords: Market Performance, Product Innovation, Proactive Innovation and Reactive Innovation.

Abstract: For the furniture business, the current domestic market situation is not easy. Reviewing the tight competition

map for the domestic market, among others, is represented by imported home appliance retail companies.

Indonesian Furniture Association reported that the growth of imported products has been pushing down its

domestic market performance by 10-15% compare to 3-5% annual growth. This study aims to explore market

performance in terms of proactive and reactive innovation, both in terms of product innovation and the

organization of furniture companies. This research is based on a literature study to obtain basic results. The

results expected to describe how Proactive and Reactive Innovation can improve Market Performance, both

in terms of products and organizations. Based on these findings, this research is expected to become a study

material and basic literature for furniture companies to determine the direction of market performance

development. The literature perspective provided on this study, deepen its strategy of Indonesian furniture

companies in developing management to face various changes and competition through innovative strategies

that have a positive impact on company performance.

1 INTRODUCTION

The performance of the national furniture industry

needs a new game-changer. It can be seen at least

from the ratio of productivity growth in the domestic

and international markets, which has not been

encouraging. Performance is reflected in the

aggregate data on furniture exports-imports up to

2020, which is still below that of 2008. The

Indonesian furniture industry, although continuing its

positive growth in 2015, reached 1,902 million USD,

only a slight increase of 1.3% from 2014's figure of

1,878 million USD, then until 2020, it reached 1,911

million USD, an increase of 8.1% compared to 2019,

but still lower than the 2008 achievement, which had

reached 1,954 million USD (BPS, 2019). Other data

shows that the export value of Indonesian furniture in

2015 was still 1.81 million USD and was ranked 21st

in world export products, lower than the previous year

with exports of 1.9 billion USD (BPS, 2016).

In summary, from 2008 to 2020, export

performance has not yet touched the figures achieved

in 2008. In fact, the domestic market is under

significant pressure from imported products that

continue to increase, suppressing national products

by +/-200% since 2015, worth 624 million USD in

2020. Compared to the export-import trade balance

from 2015 to 2020, the performance of this sub-sector

continues to grow. However, experienced a negative

growth trend of 16.7%. Even though there was an

8.1% increase in exports in 2020 compared to 2019,

the balance has never reached USD 1,546 million

since 2015. In other words, the growth ratio of the

furniture industry until 2020 has not been

satisfactory. As reflected in the performance data

above, the pressure on imported products is felt by

these industry players. According to HIMKI, this

industry is facing intense competition from imported

products in the domestic market. HIMKI assumes that

the growth of imported products is in the range of 10-

15%, while the growth of national furniture products

in the domestic market is only around 3-5% (Sobur,

2018). The growth of imports of furniture products in

Indonesia has now controlled 45% of the domestic

market, and if it continues, the domestic market is

very likely to be dominated by imported products.

The current domestic market situation is not easy for

local furniture business players, so that there is a need

for innovation in a product.

Research by Edeh et al. (2020) on SMEs in

Nigeria, found that product innovation was not

significantly related to export performance, although

Abadi, Y., Moeljadi, ., Rahayu, M. and Irawanto, D.

Proactive and Reactive Innovation Toward Market Performance of Indonesian Furniture.

DOI: 10.5220/0011865100003582

In Proceedings of the 3rd International Seminar and Call for Paper (ISCP) UTA â

Z45 Jakarta (ISCP UTA’45 Jakarta 2022), pages 32-40

ISBN: 978-989-758-654-5; ISSN: 2828-853X

 2023 by SCITEPRESS – Science and Technology Publications, Lda. Under CC license (CC BY-NC-ND 4.0)

the results of his study found that process innovation

and marketing innovation lead to an increase in

export performance. From Puspita et al. (2020), who

conducted a study on the Indonesian furniture

industry, found that innovation capability as

measured by: product innovations, process

innovations, marketing innovations and managerial

innovations did not have a positive and significant

effect on business performance. Then the research by

Bisbe & Otley (2004), which tested the model

previously developed by Yang et al. (2009) regarding

the level of Management Control System (MCS) by

top management in both product and process

innovation activities on business performance,

resulted in the finding of a negative correlation

between product innovation. On business

performance on the use of MCS in high-innovating

companies. Also, from Yalcinkaya et al. (2007)

reported an insignificant effect of product innovation

on firm performance, although much of the literature

shows a higher level of product innovation will be

able to improve market performance. El-Kassar &

Singh (2019) stated that the results were also quite

surprising. His research which focuses on the creation

of Green Product Innovation (GPI), finds that it has

no significant effect on Organizational Performance

as well as on Competitive Advantage. Another study

conducted by Harwiki & Malet (2020) through a

comparison between the handicraft MSME industry

in Indonesia and Spain has revealed that the

innovation variable does not have a significant

influence on the performance of MSMEs in

Indonesia, the opposite result occurs in Spain where

innovation has a significant influence on the

performance of MSMEs. Spanish. The same thing

was found by Nandan et al. (2020) study that

Technological Innovation has no significant effect on

financial performance.

Different results are obtained from the research

findings conducted by Bustinza (2018), which reveals

the complexity of the relationship between product-

service innovation (PSI) or servitization on firm

performance, which results in a mismatch between

theoretical predictions empirical evidence. The

results of his research show a positive and linear

relationship between product-service innovation

(PSI) variables on firm performance. According to

this study, Resource-based Theory directs companies

to focus on exploiting their unique resources, as

driven by PSI being able to contribute to generating

competitive advantages that are difficult to imitate in

the long term. Also, research by Khan & Naeem

(2018), which examines the relationship between

quality practices, service innovation and

organizational performance in telecommunications

operator companies in Pakistan, shows that quality

practices improve service innovation and

organizational performance, while service innovation

has a positive impact on organizational performance

so that the results of his research recommend that

telecommunications operator companies must give

importance to quality practices and service

innovation to ensure an increase in organizational

performance.

As far as the researcher is concerned, strategic

innovation studies are still rarely found in the

furniture industry in Indonesia; therefore, this review

will investigate how much influence product

innovation has on market performance in the

Indonesian furniture industry. Referring to previous

studies, this research intends to offer a perspective on

organizational capabilities in combining strategic

orientation into a model as a novelty of this research

by adopting the views of Hunt & Morgan (1997) on

the RAToC (Resource Advantage Theory of

Competition) theory about proactive innovation and

reactive innovation. Therefore, the review intends to

find out the climate of proactive innovation and

organizational innovation and how its ecosystems are

created within the Indonesian furniture industries.

2 LITERATURE REVIEW

Before Hunt (1997) put forward RAToC, Chamberlin

(1933) stated that Perfect Competition Theory &

Monopolistic Theory had expanded the important

role of product differentiation in meeting various

needs, wants, tastes, and requirements also different

for each consumer. For him, high prices and low

quality will be inevitable when the production scale

is small. In the RAToC proposition built by Hunt

(1997), the market character will always be provoked

into an imbalance because every company will

always try to move the market through product

innovations to meet different consumer needs. This

proposition underscores that innovation is an

embedded factor of competition. The thickness of

RAToC in discussing the theory of competitive

strategy can be seen from the view of Hunt &

Madhavaram (2020), which explains that qualitative

changes in the demand phase are far more important

than quantitative changes in the supply phase,

becoming the basis for companies to carry out outside

renewal competence in proactive innovation

strategies in generating resources. RAToC connects

proactive innovation and reactive innovation when

explaining three requirements for a company to

Proactive and Reactive Innovation Toward Market Performance of Indonesian Furniture

maintain its competitive advantage, namely by: (1)

the company engaging in proactive innovation, (2)

continuously investing in resources that generate

competitive advantage, (3) acquiring and thwarts

reactive competitor innovation. Proactive innovation

is defined as a motive to achieve superior financial

performance, not caused by special competitive

pressures, but genuinely caused by entrepreneurial

intuition. And reactive innovation is stated to protect

its market segment (isolation mechanism) through the

company's learning process. Both contribute to the

dynamic nature of RAToC.

The view of Innovation Theory put forward by

Sundbo (1995), states that innovation results from an

organization's competitive advantage. Kim and

Mauborgne (1999) define innovation as a concept that

makes competition meaningless because it provides a

valuable advantage that is fundamentally new and

superior in the market and can drive exponential

jumps by generating new markets. Although, as a

study developed through separate academic thinking,

the strategy includes the strategic planning process or

innovation, including the new product process (Adler

et al., 1992; Englund and Graham, 1999), very rarely

applied to the corporate perspective (Varadarajan and

Jayachandran, 1999). The substance of innovation is

related to new ways of thinking in the realm of

employee supervision, including monitoring and

reward systems, new skills and habits (Deming,

1982).

The innovation stage needs to be built because an

organization cannot immediately innovate (Dosi,

1982; Teece, 1988), starting with basic questions

about why choosing the business to the business

model itself (Geroski, 1998). Questions about: What

business are you in? Who are the customers? And

how do we generate value? (Hamel, 1998; and

Markides, 1997). Such basic questions allow

managers to dig deep into the rules to the implied

assumptions that make up the business systems that

run in the industry. In general, strategic innovators are

reluctant to accept immediately and take care that

mental models and implicit industrial rules are not

formed; they often ignore their company's core

business, instead of focusing on what can be used as

opportunities (Kim and Mauborgne, 1999; Markides,

1997).

At the strategic level, in addition to more

comprehensive innovation, time-based competitive

advantages emerge as options (Stalk, 1988), mass

customization (Pine, 1993) and mass fashion (Baden-

Fuller and Stopford, 1994). Further to the supply

chain, pushing for a new system of managing partners

and cooperation networks will make it easier for

companies to restructure new provisions while

emphasizing the importance of new distribution

channels, review of delivery points that are

significantly more efficient and effective in providing

better services than competitors (Lamming, 2003).

Most innovation studies in the literature are about

product innovation and service innovation. Among

the various innovative approaches, generating new

products and new services in the area of highest

interest (Craig and Moores, 2006) that enables firms

to achieve competitive advantage (Berg and

Einspruch, 2009). Cormican and O'Sullivan, 2004;

Craig and Moores, 2006). In the context of its

function, product innovation is important to increase

company productivity because it can be a source of

competitive advantage needed to satisfy the needs of

customers and targeted market segments. Not

infrequently, the formulation of product innovation

strategies also plays an important role in an

organization's priorities (Quinn, 2000). Alignment of

strategy, tactics and operations leads to innovative

products, which are generally characterized as

something new, valuable and frequently (as an object)

introduced to the market. New products or unique

services result from a differentiation strategy to

achieve a competitive advantage. The company's

ability to produce a premium product above industry

norms is developing and commercializing new

products or improvements to existing products

following market orientation (Porter, 1997; OECD,

2019). These studies state that innovation is an

organizational mechanism to survive and increase the

chances of its sustainability, although other

researchers provide a different view, stating that the

antecedent to organizational performance cannot be

influenced by one type of innovation alone but

consists of a combination of several innovations.

From the perspective of Lessig (2002), it is stated

that innovation is a research, development, and

engineering activity aimed at developing the practical

application of new scientific values and contexts, or

new ways to apply existing science and technology

into products or production processes. More

specifically, according to Knight (1967), product

innovation means that a new product or service is

introduced to meet the needs of external users or

markets, and process innovation is a new element

introduced into an organization's production or

service operations between others: raw materials, task

specifications, workflow mechanisms and

information, and equipment used to produce products

or create services.

Organizational theory has long considered how

organizations evolve and adapt to their environments,

ISCP UTA’45 Jakarta 2022 - International Seminar and Call for Paper Universitas 17 Agustus 1945 Jakarta

including the effect of technological change on

organizational evolution (Tushman and Nelson

1990). Most of the previous publications agree that

organizational innovation affects performance

positively. Irwin et al. (1998) used a resource-based

view to demonstrate a positive relationship between

technological innovation and organizational

performance and suggested that innovation

characteristics (rare, valuable, and immutable)

moderate this relationship. In the face of a changing

environment, new entrants to the industry can replace

established organizations that cannot adapt quickly

enough. At the same time, new organizations tend to

develop through the entrepreneurial activities of new

companies. According to Hurley, Tomas and Hult

(1998), higher levels of innovation in corporate

culture are associated with greater innovation

capacity to develop a competitive advantage.

Organizational innovation is a subject that influences

various categories, including individuals,

organizations and the environment. Of all the

potential influences, organizational variables are the

most studied, and several researchers have

demonstrated the importance of organizational

studies as a determinant of innovation (Damanpour,

1984; Kimberly & Evanisko, 1981).

From the RAToC theory, Hunt (1996)

distinguishes between proactive and reactive

innovation. Proactive innovation is defined as a

motive to achieve superior financial performance, not

because it is driven by specific competitive pressures

but is genuinely driven by entrepreneurial intuition.

Reactive innovation is defined as innovation that is

driven directly by the learning process of companies

competing to protect their market segments (Hunt,

1996). Furthermore, Hunt (1997) also states that

proactive innovation includes: imitating resources

(competitors), finding (creating) equivalent resources

or finding (creating) superior resources. For Hunt

(2020), RAToC responds to the need for market

orientation strategy theorists to broaden their

perspective beyond their exclusive focus not only on

customers and competitors (Carpenter, 2017; Line,

Runyan, & Gonzalez-Pardon, 2019). From Vazquez

et al.'s (2001) research, market orientation promotes

two strategic dimensions of corporate behavior that

are strongly related to innovation behavior:

aggressiveness and proactiveness.

In comparison, both market orientations should be

the basis of the company's innovation efforts (Narver

et al., 2004). To support this argument, Narver et al.

(2004) found in an empirical study that market

orientation is positively related to innovation

orientation and more strongly associated with

proactive market orientation. Furthermore, another

empirical study by Tsai et al. (2008), showed that

both market orientations are important drivers of new

product performance. Furthermore, both proactive

and responsive market orientations may require

different organizational conditions to influence

innovation performance positively.

As previously mentioned in the Problem

Formulation regarding the concept of market

performance, many researchers state that this concept

does not yet have a standard consensus in defining it,

but many researchers have found the results of studies

relating innovation to both business performance and

organizational performance. Turang (2015) mentions

the term market performance as business

performance resulting from business strategies in a

marketing process. Both business performance,

organizational performance, firm performance and

market performance by most researchers are

considered as multi-dimensional constructs.

Organizational performance and market performance

are also considered as subjective perceptions due to

the measurement of the success of an organization

through financial parameters, which are generally

constrained by access to company financial data.

The study of performance itself has become an

object that rarely stops because organizational

performance may be the ultimate goal in every form

of organization, whether in the private sector, public

sector or society. The Indonesian government system,

for example, defines performance as the output/result

of activities/programs that have been or are to be

achieved concerning the use of the budget with a

measurable quantity and quality (Presidential

Regulation No. 29/2014 concerning Performance

Accountability System for Government Agencies).

From the literature review, Lumpkin and Dess (1996)

state that business performance is a multidimensional

construct related to the organizational strategy that

has different effects on organizational goals. While

Ferraresi et al., (2012) mention firm performance as a

broad concept even though its measurement is often

discussed in the literature but there is no consensus on

what should be specifically included in its

measurement (Neely et al., 1995), except measures of

effectiveness and efficiency (Porter, 1985).

3 METHODS

This study uses literature sourced from articles

published online. The keywords used in searching the

literature are Proactive Innovation, Reactive

Innovation, Product Innovation and Market

Proactive and Reactive Innovation Toward Market Performance of Indonesian Furniture

Performance. Variables used in building hypotheses

based on articles reviewed using keywords. This

research is a study using a literature study or literature

review method, which is a comprehensive overview

of the research that has been done on a specific topic

to show the reader what is already known about the

topic and what is not known to seek rationale from the

research that has been done or for further research

ideas (Denney & Tewksbury, 2013). According to

Mestika Zed (2014), literature study research has a

main characteristic; namely, researchers deal directly

with available sources. In this article, sources are

taken in the form of articles originating from journals

that have been well accredited.

4 RESULTS AND DISCUSSION

The need to continuously update competencies to

develop organizational innovation coupled with

strategic leadership capable of producing innovation-

oriented capabilities is a basic prerequisite for

managing survival or growth (Arbore and Ordanini,

2006). Perceived market uncertainty is an important

variable that influences the company's business

policy to seize the market by developing a strategy

that places the importance of accurately controlling

demand in market dynamics, especially due to

changes in customer preferences and expectations

(Saeed 2015). Proactive innovation can be a strategy

that can guide management in finding new

opportunities, ways and approaches to satisfy

customer expectations. Strategic leadership that can

produce creative destruction to isolate the

competitiveness of competitors and at the same time

develop experience through the utilization of methods

to form new companies that can sustainably move the

market. Affirming a mental model that

comprehensively maps and directs competition to a

new form of regulation that is more profitable for the

company in the long term.

Urban and Hauser (1984) and Ernst (2002) assess

that the company's performance can be achieved by

creating new products with differentiation. At the

strategic leadership level, product innovation success

requires a mental model to direct the organization's

strategic orientation in managing internal resources

that proactively respond to latent customer needs by

creating a comparative advantage in achieving sales

performance. Proactive innovation implies that a

firm's innovation strategy is oriented towards the

latent wants of existing customers or customer needs

through the introduction of new products, the creation

of new markets, or the adoption of new distribution

channels (Ahuja and Lampert 2001; McGrath, 2001;

Danneels 2002; Jansen et al., 2006). McGrath (2001)

considers that a decentralized hierarchy in

organizational management is beneficial for

developing appropriate proactive innovation to meet

local requirements. Strengthened by Bierly and

Chakrabarti (1996), who refers to a flexibility

strategy that accelerates the ability to adapt to

changes in the external and internal environment by

changing strategies to help companies manage risk

quickly, responding proactively or reactively (Grewal

and Tansuhaj, 2001). In various studies, proactive

innovation can improve market performance because

of its ability to direct product innovation in finding,

offering and satisfying latent customer needs.

As Hunt & Morgan (1997), the study of Tutar et

al. (2015) revealed that proactive innovation plays an

important role in predicting customer preferences in

particular and can predict hidden and new consumer

expectations for product innovation. The research

results of Tutar et al. (2015) also found that proactive

market orientation has a positive and significant

impact on all innovation capabilities, both process,

product and market innovation. Proactive innovation

is used to accurately predict future markets,

preferences, competitive conditions and the evolution

of environmental forces and respond to unarticulated

customer needs that have particular relevance to the

innovation context (Thomas et al., 2015; Atuahene-

Gima, 2005; Narver et al., 2004). Being proactive

means reducing threats by taking preventive steps to

implement product development strategies actively

and become the basis of its innovation efforts because

it results in new product performance (Narver et al.,

2004; Tsai et al., 2008).

High environmental turbulence can occur

anytime, both from within and from the external

environment. Various studies seek and relate

organizational capabilities to the most effective

corporate response systems to various pressures and

resource scarcity. Hunt (2019) calls it a controversy

between static versus dynamic; even Hunt states that

the substance of the market is a system that will

always be provoked dynamically. Internal changes

caused by mergers, share ownership, brand changes

and others do not reduce external pressures that can

take the form of new challenges with the presence of

new entrants, new innovations from competitors,

lower prices and better benefits. Challenges from

followers require agility and speed in action. The key

to its success lies in managing internal resources to

generate new offerings in the form of products with

new benefits, although reactive innovation does not

always only produce incremental innovation. Some

ISCP UTA’45 Jakarta 2022 - International Seminar and Call for Paper Universitas 17 Agustus 1945 Jakarta

studies even mention that reactive innovation will

require a different structure than product innovation.

tion Various previous research evidence suggests that

organizations must always carry out renewal

competence and encourage each organization to

produce sustainable innovations to maintain and seize

its competitive advantage position and achieve

superior financial performance. "To innovate or die"

has become a widely recognized adage, implying that

the challenge of achieving market performance

requires a continuous response to innovation.

Most of the previous publications stated that

organizational innovation would affect performance.

Irwin et al. (1998) used a resource-based view to

show a positive relationship between technological

innovation and organizational performance, while

Hurley, Thomas and Hult (1998) suggested higher

levels of innovation in corporate culture to promote

greater innovation capacity in developing

competitive advantage. Research by Fang Wang

(2020), suggests that organizational innovation is

considered important for the performance of Chinese

manufacturers. Even though studies on organizational

innovation are considered to be still rare (Armbruster

et al., 2008), especially in terms of empirical evidence

(Battisti & Stoneman, 2010), but several studies have

been found about the effect of organizational

innovation on organizational performance, which

consistently shows a significant positive relationship

(Prajogo & Sohal, 2006; Caroli & Van Reene, 2001;

Greenan, 2003; Osterman, 1994). In the face of a

changing environment, new entrants to the industry

can replace established organizations that cannot

adapt quickly enough.

Meanwhile, new organizations will tend to

develop new company entrepreneurship in achieving

market performance. It makes organizational

innovation produce dynamic capabilities in achieving

market performance in the form of superior financial

performance. For Schlegelmilch et al. (2003),

strategic innovation is a "fundamental

conceptualization of the business model and

redefining the existing market through changing the

rules of the game and the level of competition to

obtain a significant increase in value for customers

and high growth for the company". Just to meet

customer expectations even though they are in the

same industry.

It is stated that a new product or unique service

resulting from a differentiation strategy through a

premium product above the industry norm is the

development and commercialization of a new product

or improvement of an existing product following a

market orientation (Porter, 1985; OECD, 2019) to

achieve a competitive advantage. Previous studies

have also stated that innovation becomes an

organizational mechanism to survive and increase the

chances of its sustainability by creating a comparative

advantage in achieving organizational performance.

As emphasized by Urban and Hauser (1984) and

Ernst (2002), company performance can be achieved

by creating new products with differentiation.

Product innovation has become a source of profit,

especially for companies that are early to innovate in

dynamic industries (Lieberman and Montgomery,

1998, 2013). Product innovation which is called by as

a source of heterogeneity between competitors (Irwin

et al., 1998), have found a positive relationship

between technological innovation and organizational

performance and stated that the characteristics of

product innovation that are rare, valuable, and non-

immitable moderate this relationship. Product

innovation is important to increase company

productivity because it can be a source of competitive

advantage needed to satisfy the needs of customers

and targeted market segments. Its influence on

organizational performance, From Sriwong et al.

(2004), Levitt has reminded the conception of what is

called 'total product'.

5 CONCLUSIONS

Based on the literature study obtained, Proactive

Innovation can improve Organizational Innovation.

Furthermore, the better Proactive Innovation, the

better Market Performance and Product Innovation

will be. In the reactive innovation study, when a

furniture company focuses on reactive innovation, the

innovation can actually make a good contribution to

the resulting product so that it leads to an increase in

market performance that is obtained as optimally as

possible. Likewise, organizational innovation that is

always improved also contributes optimally to market

performance. Therefore, the results of this study can

be taken into consideration or predictors in improving

market performance, especially in the furniture

industry. Future research of this study would

addressing the dominant factors on how Indonesian

furniture companies should develop their strategies to

face various changes and competition through

comparative advantage to gain superior financial

performance. The aim is to help managers understand

the most effective way to increase market

performance for years to come.

Proactive and Reactive Innovation Toward Market Performance of Indonesian Furniture

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