The Moderating Effect of Entrepreneurial Orientation ...

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The Moderating Effect of Entrepreneurial Orientation in the Competitive Strategy - Firm Performances Link. Firdaus Basbeth1 , Ainon Ramli 1, Muhammad Ashlyzan Bin Razik1 Rosmaizura Mohd Zain1, Noorshella Bin Che Nawi1 1Faculty

of Entrepreneurship and Business, Universiti Malaysia Kelantan

Email: [email protected]; [email protected]; [email protected]; [email protected]; [email protected]

Abstract - Despite the increase market in catering industry by 37% per year, the number of SMEcatering service firms is only 30.000, or only 5% from the total number of SME in 2016. From 30,000 registered catering service company, only 10% is an active business with annual growth rate (3%). Therefore, the variables and factors that affecting slow growth is of great interest. In order to achieve competitive advantage and growth, firms will develop appropriate competitive strategy, strategy which directly relate to firm performance. The study involves Entrepreneurial orientation in SME catering service firms as a moderator. The purpose of this paper is to develop a better understanding of the relationship between competitive strategy and firm performance in an different entrepreneurial orientation through assessing the mediating influence of entrepreneurial orientation between competitive strategy and firm performance. The objective of this study was to examine questions: how entreprenurial orentation dimension innovativeness, risk taking and proactiveness influence the relationship between competitive strategy and performance of the firms?To examine these questions, we constructed a model and collected data from a sample of 71 catering firms in Jakarta. Structural equation modeling by means of partial least square bootstrapping resampling was used for hypotheses testing. The statistical results revealed a) innovativeness, risk taking and proactivenss were found to have a significant and positive moderating effect on the relationship between differentiation strategy and firm performance b) innovativeness, risk taking and proactivenss were found to have a significant and positive moderating effect on the relationship between cost leadership strategy and firm performance. Theoretically, the study is hopeful to further understandings of the moderating role of individual Entrepreneurial orientation,in the relationship between differentiation strategy and firm performance, as well as cost leadership strategy and firm performance. The findings of the study will also help the SME catering service firm’s owner to improve their entrepreneurial orientation and to choose the right competitive strategy to contribute growth and contribute to more GDP for the local government.

Keywords: Entrepreneurial Orientation, Innovation Adoption, Business Performance, Catering SME

1. Introduction Small and medium enterprises (SMEs) play a pivotal role in developing economies in terms of employment generation, output growth, export growth, poverty alleviation, economic (Harvie, 2015). Indonesian SMEs are one of the economic pillars of the country. Around 99 per cent of the Indonesian business are SMEs and they are the main providers of employment in Indonesia. There are 41 million small economic units in the overall economy (including the agricultural sector), 60,000 medium-sized enterprises, and their contribution to GDP is 22 percent (IFC, 2016). There are five sectors of the SMEs which has economy contributing significantly to GDP, and the market share for the industry as follow: 1) Trade, Hotel and Restaurant (37%) 2) Agriculture, Livestock, Forestry and Fisheries (27%) 3) Processing Industry (21%) 4) Services (11%) 5)

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Finance, Leasing and Corporate Services (10%). Including in the services is catering service. The market for SMEs catering service sector continues to experience a growth rate of 37% per year (Morisseau & Kunni, 2014), which has great potential to develop further. However from the preliminary survey it was found that the number of SMEcatering service firms is 30.000, or only 5% from the total number of SMEs in 2016, and among them the number of active or survived catering services is only 10%, with low sales growth rate (3%). Influences impacting as both external and internal factors, such as innovation, social changes, financial support and Entrepreneurial orientation (Mahmood & Hanafi, 2013). In order to be able to seize the opportunities and improving the business performance, SMEs need to refigure their existing competitive strategy and Entrepreneurial orientation. These firms need particular strategy that fit the resources they have and high level of Entrepreneurial orientation that enable the competitive strategy to strengthen their business performance. It is proposed that entrepreneurial orientation interacting with the relationship of competitive strategy and firm performance. Entrepreneurial orientation constitutes a potential source of key success factors of SMEs catering performance. The study has two objectives, first to examine the relationship between competitive strategy and firm performance, second to investigate the moderating effect of Entrepreneurial orientation in the relationship between competitive strategy and SMEs Catering firms’ performance. Specifically, this study aims to determine the moderating effect of innovativeness, risk taking and proactiveness between differentiation and cost leadership strategy and SMEs catering performance. The present study contributes to theory in two critical ways. First, it contributes to the emerging fields of strategic entrepreneurship by integrating two core concepts: Entrepreneurial orientation and Competitive strategy. Second, it views Entrepreneurial orientation as a construct that has an impact on the relationship between competitive strategy and performance.

2. Literature Review 2.1

Competitive Strategy and Firm Performance

It is widely assumed that there is a clear link between strategy, firm performance and competitive advantage to generate above-average returns (Porter, 1980). Over the years, these strategies have been shown to yield competitive benefits for survival and profitability (Miller, 1988). While various frameworks are available to classify firm strategies (e.g value discipline and value innovation), the Porter model is widely accepted (Allen, Helms, Takeda, White, & White, 2006). Differentiation strategy creating more value for the customer than the average and cost leadership strategy reaching lower costs than competitors have been found to be common competitive strategy among ventures (Block, Kohn, Miller, & Ullrich, 2015). However, sustainable competitive advantage can only be obtained by matching competitive strategy to available resources (Barney 1991): for example, exceptional creative or scientific talent is useful for innovative differentiation, and economical production cost structures are needed to support sustained cost leadership. In other words, each of these strategies relies on a different set of resources. This resourcematching constraint can have a major impact on the strategic choices, especially in a restrictive resource profile. (Block et al., 2015). Therefore, the development of effective business strategies become critical for the progression of the SMEs business, because it

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is indicated that firm survival is lowest when firms are small and young (Thornhill & Amit, 2003). Differentiation means to fulfil customer needs in a unique way so, to realise superior value include product design, quality, range and type of features or after-sales support, etc. Differentiation, especially if based on speed, customer service and flexibility, is an option for Entrepreneurial firms to compete (Tzokas, Carter, & Kyriazopoulos, 2001). Cost leadership requires substantial financial resources (partially needed to invest in fixed assets); it is based on learning curve benefits, economies of scale and design for manufacturing (Allen et al., 2006). Generally, cost leadership seems to be less appropriate for small and medium firms, given resource constraints. However, research has shown that cost leadership can be a successful strategy for Entrepreneurial firms, Thus, the development of cost leadership is essential for the performance of small firms (Thornhill & Amit, 2003). Prior research also has shown for both strategy differentiation and cost leadership they are positively associated with small firm performance (Lechner & Gudmundsson, 2014), in other words, competitive strategy does matter. Thus, both generic strategies should enhance firm performance. The development of one effective strategy is essential for the SMEs firm’s performance (Lechner & Gudmundsson, 2014) leading to our first and second hypotheses: H1: Differentiation strategy is positively associated with firm performance. H2: Cost leadership strategy is positively associated with firm performance 2.2

The Moderating Effect of Entrepreneurial Orientation.

Entrepreneurial orientation is a firm-level construct (Covin & Slevin, 1991) that is closely linked to strategic management and the strategic decision making process (Lumpkin & Dess, 1996). Entrepreneurial orientation should be distinguished from entrepreneurship, which relates to new business entry and is concerned primarily with questions such as, “What business do we enter?” and “How do we make the new business succeed?” Entrepreneurial orientation is a process construct and concerns the “methods, practices, and decision-making styles managers use” (Lumpkin & Dess, 1996: 136). According to (Lumpkin & Dess, 1996) Entrepreneurial orientation is grounded in the strategic choice perspective and concerns the intentions and actions of key players functioning in a dynamic generative process. An Entrepreneurial orientation promotes initiative and dispersion which is the involvement of multiple management levels in the formulation and implementation of Entrepreneurial strategies (Richard, Barnett, Dwyer, & Chadwick, 2004). An Entrepreneurial orientation is not created or imposed by top management, but reflects the strategic posture as exhibited by multiple layers of management (Stevenson & Jarillo, 2007). According to (Covin & Slevin, 1991), Entrepreneurial orientation is a firm level outcome, management related preferences, beliefs, and behaviours as expressed among a firm’s top-level managers. (Dess & Lumpkin, 2005) theorized Entrepreneurial orientation as a frame of mind and perspective about entrepreneurship that are reflected in a firm’s ongoing process and corporate culture. According to (Rauch, Wiklund, Lumpkin, & Frese, 2009) Entrepreneurial orientation has its roots in the strategymaking process literature, and has been describes as the strategy making processes that provide organization with a basis for Entrepreneurial decisions and attractions. Thus, Entrepreneurial orientation encompasses those and practices that provide a basis for Entrepreneurial decisions and actions, and comprises of strategy-making practices and 3

processes, beliefs and behaviors aimed at developing firm opportunities (Wales, Gupta, & Mousa, 2013). The current study views Entrepreneurial orientation as a dynamic capability firm-specific ability that allows organizations to reconfigure their existing resources and continuously reshape the organization (Teece, Pisano, & Shuen, 1997), (Zahra, Sapienza, & Davidsson, 2006). According to this perspective, wealth creation and economic rents are a result of the interplay between the exploitation of existing capabilities and the development of new capabilities. Further (Ismail & Rashid, 2012) also posit that Entrepreneurial orientation generally used to explain the behavioral tendency and it is about the intention and actions of individuals actively involved in dynamics processes. A firm’s Entrepreneurial orientation is its propensity to act autonomously, innovate, take risks, and act proactively when confronted with market opportunities (Lumpkin & Dess, 1996), on the other hand Competitive strategy explores how a firm operates in order to increase firm performance (Porter, 1980). Both Entrepreneurial orientation and competitive strategy are strategic business unit-level concepts (Covin & Lumpkin, 2011) the former being the strategy-making-process, and behavior of firms, the latter describing the content to achieve firm performance. In this sense, Entrepreneurial orientation can act as a moderator, or able to change the strength of the relationship between the content or competitive strategy and firm performance. In highly entrepreneurial orientation, competitive strategies will positively impact their business performance. Competitive strategy may increase firm performance for different character of Entrepreneurial orientation, for example differentiation strategy may increase firm performance on a firm with more innovativeness orientation than risk taking, and so we would say that Entrepreneurial orientation, moderates the causal effect of Competitive strategy on firm performance. We viewed the dimensions of entrepreneurial orientation as interacting with competitive strategy to affect firm performance but saw the moderating effects of the dimensions as likely to differ. Study on the Entrepreneurial orientation as a multidimensional concept that can influence the strength of the competitive strategy – performance link is lack on the literature. Accordingly, the aim of the present study is to understand how individual Entrepreneurial orientation dimensions impact the strength of the relationship between competitive strategy–firm performance relationships. 2.2.1 The Moderating effect of Innovativeness Generally, cost leaders are characterised by lower levels of research and development (R&D) expenditure (Grant, 1995). Cost leadership implies cost minimisation in R&D (Miller & Friesen, 1986; Porter, 1980). In this sense, cost leadership is about reducing the R&D intensity of a firm which, in turn, is an indicator of the strategic importance of innovation (O'Brien, Folta, & Johnson, 2003). it is argued that innovativeness should be an important feature of firm performance, it is reasonable to assume that small firms with a cost leadership strategy tend to be at the lower end of the innovativeness scale (O'Brien et al., 2003). Greater innovativeness will be detrimental to the cost leadership strategy in small firms. (Lechner & Gudmundsson, 2014), previous research on direct relationship to cost leadership showed that Innovativeness has a positive but non-significant influence on cost leadership, which in turn leverage the firm performance (Lechner & Gudmundsson, 2014). As entrepreneurial orientation defined as strategy-making-process, and behaviour of firms 4

(Covin & Lumpkin, 2011), in this sense, as previously stated that Entrepreneurial orientation able to change the strength of the relationship between the cost leadership strategy and firm performance, then we posit that in highly innovativeness orientation, cost leadership will negatively impact their firm performance which leads us to fourth hypothesis: Hypothesis 3. Firm innovativeness will moderate the relationship between cost leadership and firm performance in such a way that high levels of firm innovativeness will negatively relate to performance Innovativeness is characterized by a strong R&D emphasis, technological leadership, the introduction of new products and the degree of changes in product or service lines (Covin & Wales, 2012). Differentiation (Porter, 1980) is about creating products and services that are perceived as unique by customers; this strategy is based strongly on product innovation and marketing activities (Miller, 1988). Moreover, product innovation, along with differentiation, requires marketing orientation, which itself is associated with Entrepreneurial orientation (Tzokas et al., 2001). Thus, differentiation requires innovation capabilities, leading to new products that increase the value to the customer, justifying price premiums (Porter, 1980). Product innovation is considered to be one of the main driving forces of differentiation by creating uniqueness in customers’ eyes (Grant, 1995). A firm’s innovation practice will differ according to its competitive strategy, and there is a strong association between product innovation and differentiation (Blumentritt & Danis, 2006). If we assume that small businesses have a lower inclination for innovation (Runyan, Droge, & Swinney, 2008), then comparatively, more innovativeness will enhance the differentiation strategy of small firms Innovativeness reflects the propensity of a firm to actively support new ideas, novelty, experimentation, and creative solutions in pursuit of a competitive advantage (Lumpkin & Dess, 1996). Conceptually, an innovative strategic posture is thought to be linked to firm performance because it increases the chances that a firm will realize first mover advantages and capitalize on emerging market opportunities (J. Wiklund, 2006). Based on that explanation, we believe that the differentiation strategy and performance link will be positively influenced in firms with innovative orientations. Thus, we expect that high and level of Innovativeness dimension of Entrepreneurial orientation will improve the relationship between differentiation and firm performance. Thus we posit that: Hypothesis 4. Firm innovativeness will moderate the relationship between differentiation strategy and firm performance in such a way that high levels of firm innovativeness will positively relate to performance. 2.2.2 The Moderating effects of proactiveness Proactiveness is an important factor for differentiation and uniqueness. Innovation as a driver of uniqueness requires proactive behaviour (Blumentritt & Danis, 2006). Proactiveness deals with anticipation and creating future demand, pre-empting competition and favouring uniqueness; it is less about efficiently fulfilling existing demand (Hughes & Morgan, 2007). Proactiveness is its propensity to take the initiative to compete aggressively with other firms (Covin & Slevin, 1989). A cost leadership and 5

differentiation strategy suggests that they will need high levels of proactiveness. Firm proactiveness dimensions of Entrepreneurial orientation require a firm to make quick decisions and aggressively compete in the face of uncertainty. Thus, we expect that proactiveness will positively moderate the relationship between differentiation and firm performance, and the relationship between cost leadership and firm performance. The combination of a highly proactive and high levels of cost leadership and differentiation strategy is likely to have the most positive impact on firm performance. This leads us to our fifth and seventh and eight hypothesis: Hypothesis 5. Firm proactiveness will moderate the relationship between cost leadership and performance in such a way that high, levels of firm proactiveness will positively relate to performance Hypothesis 6. Firm proactiveness will moderate the relationship between differentiation and performance in such a way that high, levels of firm proactiveness will positively relate to performance 2.2.3 The Moderating effects of risk taking Small-firm managers differ in their risk-taking behaviour and perception of affordable loss, which influences Entrepreneurial choices (Dew, Sarasathy, Read, & Wiltbank, 2009). While the implementation of any strategy is not without risk, an important decision variable for any entrepreneur is potential loss in the event of failure (Miller, 2007). Compared to cost leadership, differentiation strategy can be a means for a small firm to control risks, reducing fixed costs and upfront investment. Cost leadership requires higher upfront investment than differentiation in order to enable economies of scale (Allen et al., 2006; Grant, 1995). Therefore, risk-taking should be more important for cost leadership than for differentiation in small firms. The risk-taking dimension of entrepreneurship orientation is a firm’s propensity to take business-related chances with regard to strategic actions in the face of uncertainty. A cost leadership and differentiation strategy suggests that they will need high levels of risk-taking. Firm risk-taking dimensions of Entrepreneurial orientation require a firm to make a risky decisions in the face of uncertainty. Thus, we expect that risk taking will positively moderate the relationship between differentiation and firm performance, and the relationship between cost leadership and firm performance. The combination of a highly risk-taking and high levels of cost leadership and differentiation strategy is likely to have the most positive impact on firm performance. This leads us to our third and fifth and sixth hypothesis: Hypothesis 7. Firm risk taking will moderate the relationship between differentiation strategy and firm performance in such a way that high, levels of firm risk taking will positively relate to performance. Hypothesis 8. Firm risk taking will moderate the relationship between cost leadership strategy and performance in such a way that high levels of firm risk taking will positively relate to performance.

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Figure 1:

Research Framework : Entrepreneurial Orientation Mediating the relationship between Competitive Strategy and Firm Performance

3. Methodology The present study is based on a survey of SMEs firms. The sample was drawn randomly from the Jakarta association of catering firms and consisted of 77 firms to whom specific surveys were addressed. All firms in the sample had operated for at least three years and were still active when the sample was taken. Survey questionnaires were distributed to firm’s owner and managers of SMEs throughout Jakarta. A preliminary test of their design was carried out to further improve the clarity of the content. Fieldwork on the final questionnaire occurred during March-September 2016. To further improve the response rate, follow-up telephone calls were made to request participation. The final response and useable questionnaires were 77, which provided the final effective response rate of 86%. To test the theoretical model, PLS-SEM was employed for theory development and explanation of prediction of the construct. We used PLS-SEM path modelling to carry out the hypothesis testing: a causalpredictive method that is appropriate for limited theoretical knowledge. The method is suitable for revealing associations that might not appear with standard regression or covariance-based structural equation modelling methods (Wilcox, 1998). All the items in the measurement model (outer model) were reflective and accounted for observed variances.

4. Measures Competitive strategy was measured through two constructs, differentiation and cost leadership, composed of subjective items, all on a five-point scale. The decision-makers were asked to assess the relative position of their firm vis-à-vis their competitors (Dess, Lumpkin, & Covin, 1997). There are basically two major conceptualizations of Entrepreneurial orientation construct (Covin & Lumpkin, 2011; George & Marino, 2011) unidimensional conceptualization is associated with (Covin & Slevin, 1989; Miller & Friesen, 1982) and multidimensional conceptualization is associated with (Lumpkin & Dess, 1996). Entrepreneurial orientation is conceptualized as having anywhere from three to five dimensions, which may vary independently (Lumpkin & Dess, 1996) and an organization could exhibit relatively high levels of one or more dimensions and, at the same time, relatively low levels of other dimensions (Lyon, Lumpkin, & Dess, 2000). In our research, we focused on the three most commonly cited Entrepreneurial orientation 7

dimensions: innovativeness, risk taking, and proactiveness. The three dimensions of Entrepreneurial orientation within a firm was described by (Rauch et al., 2009) as the following: 1) Risk taking describes the ability of a firm to take bold actions through ‘venturing into the unknown, borrowing heavily, and/or committing significant resources to undertaking in uncertain environments’. 2) Innovativeness involves the tendency ‘to engage in creativity and support new ideas, experimentation, novelty and creative processes that may result in new product services as well as technological leadership via R&D in new processes. 3) Proactiveness focuses on the ‘opportunityseeking, forward –looking perspective characterized by the introduction of new products and services in advance of the competition and action in anticipation of future demand (Lumpkin & Dess, 2001). To measure dimensions of Entrepreneurial orientation, we used (Covin & Slevin, 1989) nine-item 5-point scale Entrepreneurial orientation scale, which is intended to assess three components of firm-level Entrepreneurial orientation—innovativeness, risk taking, and proactiveness. This measurement scale has been used satisfactorily by a number of empirical papers. (Green, Covin, & Slevin, 2008). We measure firm performance to include financial performance and non-financial performance (Wiklund, 2006). Financial performance, concentrating on growth, and profitability and non-financial performance concentrating on customer and employee outcomes. It has also been generally recognized that objective measures of performance are more appropriate than subjective evaluation of performance. However, collecting objective data is very difficult largely because owner/managers are generally unwilling to release firm’s information to outsiders. In addition, they may provide biased evaluation of their firm’s performance (Mahmood & Hanafi, 2013). Therefore, subjective approach was adopted in this study where the performance of the firm was measured by the perception of the owner/managers providing responses to the survey. They were asked to state their firms’ performance on criteria likely profitability and market share for the past three years. This variable was also gathered using 5-point Likert scale items.

5. Analysis and Findings To test the theoretical model, PLS-SEM was employed for theory development and explanation of prediction of the construct. (Hair Jr, Hult, Ringle, & Sarstedt, 2014).. 5.1

Model Assessment on Entrepreneurial Orientation- Cost Leadership - Firm Performance

5.1.1 Measurement Model Evaluation of the moderator variable’s measurement model includes internal consistency (Cronbach’s alpha, composite reliability), convergent validity (indicator reliability, average variance extracted (Jing & Avery) and discriminant validity (Cross Loadings, Fornell-Larcker criterion, HTMT) (Hair Jr et al., 2014). The result shows that the construct measure are reliable and valid, Cronbach’s Alpha (0.76) and composite reliability (0.814) are above 0.7 respectively indicating internal consistency and reliability. For convergent validity yield an AVE of 0.705, providing support for convergent validity of the Entrepreneurial orientation moderator. In terms of Discriminant Validity, cross loading report shown that all indicator's outer loading on the associated construct are greater than all of its loadings on other constructs, therefore

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cross loading is fulfilled. The Fornell-Larcker criterion the square root of each construct's AVE is greater than its highest correlation with any other construct, thus Fornell-Larcker criterion was fulfilled. The HTMT examination based on the average of heterotrait-heteromethod correlation as suggested by (Henseler, Ringle, & Sarstedt, 2015), shown that the value is lower than 0.90 (at 95% confident interval). Further we tested whether the HTMT values are significantly different from 1. The result of bootstrapping report on Confidence Interval Bias Corrected, showed that neither of the confidence interval includes the value 1, therefore discriminant validity established for the model. 5.1.2 Structural Model To test the structural model, collinearity, path coefficient, coefficient of determination (R2 Value), effect size (f2), and blind folding predictive relevant (Q2) was employed for theory development and explanation of prediction of the construct. (Hair Jr et al., 2014). The evaluation of Collinearity was shown that All VIF value are below 5, thus predictor construct doesn’t have collinearity problem. The coefficient of determination R2 for Firm Performance is 0.368 (moderate), and the f2 effect size of Cost Leadership strategy on Firm Performance is 0.095 (small), and Differentiation strategy to Firm Performance is 0.291 (medium). On Blindfolding and Predictive Relevance (Q2), the resulting Q2 values with omission distance D=7, for Firm Performance Q2 values (0.175), which all values are greater than 0, indicate that the model has predictive relevance. Therefore, all criteria to evaluate the structural model has satisfied. On Path Coefficients, the relationship between Cost Leadership and Firm Performance with Entrepreneurial Orientation, showed that Cost Leadership has a weak relationship to Firm Performance (0.254), and not significantly relate to firm performance with p values = 0.070, and t stats < 1.96. Path coefficient of Differentiation to Firm Performance is 0.454, and significant with t value 3.479 and p value 0.001. This is to confirm that for small firm choosing cost leadership strategy to be less appropriate. 5.2

Model Assessment on Entrepreneurial Orientation – Differentiation - Firm Performance

5.2.1 Structural Model The evaluation of Collinearity has shown that for all VIF value are below 5, thus predictor construct doesn’t have collinearity problem. The coefficient of determination R2 for Firm Performance is 0.387 (moderate). The f2 effect size of Cost Leadership on Firm Performance is 0.095 (small), and f2 effect size of Differentiation to Firm Performance is 0.291 (medium). For Blindfolding and Predictive Relevance (Q2), The resulting Q2 values with omission distance D=7, for Firm Performance Q2 values (0.175), which all values are greater than 0, indicate that the model has predictive relevance. Therefore, all criteria to evaluate the structural model has satisfied. On Entrepreneurial Orientation moderation the relationship between Differentiation and Firm performance, Differentiation has a strong relationship to Firm Performance (0.401) than relationship between Cost Leadership to Firm Performance (0.240). The relationship significantly relate to firm performance with p values = 0.004, and t stats > 1.96. This is to confirm that for small firm choosing differentiation strategy is more appropriate.

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5.3

Moderating Effects of Individual Entrepreneurial Orientation

5.3.1 The Moderating effect of Innovativeness, Proactiveness and Risk Taking on the relationship between Cost Leadership and Firm Performance The size of moderating effect can be seen in the Figure 2, as for Innovativeness the interaction term has a negative effect on Firm Performance (-0.089), whereas the simple effect of Cost Leadership on Firm Performance is 0.254. Jointly these result suggest that the relationship between Cost Leadership and Firm Performance is 0.254 for an average level of Innovativeness. For higher level of Innovativeness the relationship between Cost Leadership and Firm Performance decreases by the size of the interaction term 0.254-0.089 = 0.165. On the contrary for lower level of Innovativeness, the relationship between Cost Leadership and Firm Performance becomes 0.254+0.089 = 0.343.

Figure 2. EO – Cost Leadership Moderator Analysis Result in SmartPLS Hence the simple slope plot support our discussion of the negative interaction term. Higher Innovativeness level (Innovativeness plus one standard deviation) entail a weaker relationship between Cost Leadership and Firm Performance, and lower innovativeness level show stronger relationship between cost leadership and firm performance.

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Figure 3 Simple Slope plot Innovativeness – Cost Leadership - Firm Performance Next we assess whether the interaction term is significant. For this purpose, we run the bootstrapping procedure with 5000 bootstrap sample using No Sign Changes portion, BCA bootstrap, two tailed testing and the standard setting for PLS-SEM algorithm, and the missing value treatment. The analysis yields p value 0.457 for the path linking the interaction term and Firm Performance. Similarly the 95% bias corrected bootstrap confidence interval of the interaction term’s effect is (-0.337, 0.136). As the confidence interval include zero, we conclude that the effect of Innovativeness on the relationship between Cost Leadership and Firm Performance is not significant. For Proactiveness the interaction term has a negative effect on Firm Performance (-0.108), whereas the simple effect of Cost Leadership on Firm Performance is 0.254. Jointly these result suggest that the relationship between Cost Leadership and Firm Performance is 0.254 for an average level of Proactiveness For higher level of Proactiveness the relationship between Cost Leadership and Firm Performance decreases by the size of the interaction term 0.254-0.108 = 0.164. On the contrary for lower level of Proactiveness, the relationship between Cost Leadership and PF becomes 0.254+0.108 = 0.343. Higher Proactiveness level entail a weaker relationship between Cost Leadership and Firm Performance, and in a lower Proactiveness level entail a stronger relationship between Cost Leadership and Firm Performance (Figure 4). The analysis yields p value 0.361 for the path linking the Proactiveness and Firm Performance. Similarly the 95% bias corrected bootstrap confidence interval of the interaction term’s effect is (-0.367, 0.098). As the confidence interval include zero, we conclude that the effect of Proactiveness is not significant.

Figure 4 Simple Slope plot Proactiveness – Cost Leadership – Firm Performance For Risk Taking, the interaction term has a positive effect on Firm Performance (0.041), whereas the simple effect of Cost Leadership on Firm Performance is 0.254. Jointly these result suggest that the relationship between Cost Leadership and Firm

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Performance is 0.254 for an average level of Risk Taking. For higher level of risk taking the relationship between Cost Leadership and Firm Performance increase by the size of the interaction term 0.254 + 0.041 = 0.294. On the contrary for lower level of Risk Taking, the relationship between Cost Leadership and Firm Performance becomes 0.254-0.0041 = 0.213. Higher Risk Taking level entail a stronger relationship between Cost Leadership and Firm Performance.

Figure 5 Simple slope plot Risk Taking – Cost Leadership - Firm Performance The analysis yields p value 0.807 for the path linking the interaction term and Firm Performance. Similarly the 95% bias corrected bootstrap confidence interval of the interaction term’s effect is (-0.367, 0.299). As the confidence interval includes zero, we conclude that the effect of Risk Taking is not significant. Overall these result provide clear support that Innovativeness and Proactiveness, exerts a not significant and negative effect on the relationship between Cost Leadership and Firm Performance. The higher the Innovativeness and Proactiveness the weaker the relationship between Cost Leadership and Firm Performance. On the other hand, Risk Taking shows a positive and non-significant effect on the relationship between Cost Leadership and Firm Performance. The higher the Risk Taking, the stronger the relationship between Cost Leadership and Firm Performance. 5.3.2 The Moderating effect of Innovativeness, Proactiveness and Risk Taking on the relationship between Differentiation and Firm Performance The size of moderating effect can be seen in the Figure 3, for Innovativeness the interaction term has a negative effect on Firm Performance (-0.163), whereas the simple effect of Differentiation on Firm Performance is 0.401. Jointly these result suggest that the relationship between Differentiation and Firm Performance is 0.401 for an average level of Innovativeness.

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Figure 6 Entrepreneurial Orientation – Differentiation Moderator Analysis Result For higher level of innovativeness the relationship between Dif and Firm Performance decreases by the size of the interaction term 0.401-0.163 = 0.238. On the contrary for lower level of Innovativeness, the relationship between Cost Leadership and PF becomes 0.401+0.163 = 0.564. Hence the simple slope plot support our discussion of the negative interaction term. Higher Innovativeness level entail a weaker relationship between Differentiation and Firm Performance. Lower innovativeness exhibit a stronger relationship between Differentiation and Firm Performance (Figure 7). Next we assess whether the interaction term is significant with 5000 bootstrapping procedure. The analysis yields p value 0.244 for the path linking the innovativeness and Firm Performance. Similarly the 95% bias corrected bootstrap confidence interval of the interaction term’s effect is (-0.414, 0.134). As the confidence interval does include zero, we conclude that the effect of Innovativeness is not significant.

Figure 7 Simple slope plot Innovativeness – Differentiation – Firm Performance

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For Proactiveness the interaction term has a negative effect on Firm Performance (-0.118), whereas the simple effect of Differentiation on Firm Performance is 0.401. Jointly these result suggest that the relationship between Differentiation and Firm Performance is 0.0.401 for an average level of Proactiveness. For higher level of Proactiveness the relationship between Differentiation and Firm Performance decreases by the size of the interaction term 0.401-0.118 = 0.284. On the contrary for lower level of Proactiveness, the relationship between Differentiation and Firm performance becomes 0.401+0.108 = 0.519. Higher Proactiveness level entail a weaker relationship between Differentiation and Firm Performance. Lower Proactiveness level show a stronger relationship (Figure 8).

Figure 8 Simple slope plot Proactiveness – Differentiation – Firm Performance The analysis yields p value 0.299 for the path linking the Proactiveness and Firm Performance. Similarly the 95% bias corrected bootstrap confidence interval of the interaction term’s effect is (-0.333, 0.120). As the confidence interval include zero, we conclude that the effect of Proactiveness is not significant. For Risk Taking, the interaction term also has a negative effect on Firm Performance (-0.010), whereas the simple effect of Differentiation on Firm Performance is 0.401. Jointly these result suggest that the relationship between Differentiation and Firm Performance is 0.401 for an average level of Risk Taking. For higher level of risk taking the relationship between Differentiation and Firm Performance decrease by the size of the interaction term 0.401 - 0.010 = 0.391. On the contrary for lower level of Risk Taking, the relationship between Differentiation and Firm Performance becomes 0.401+ 0.010 = 0.411. Higher Risk Taking level entail a weaker relationship between Differentiation and Firm Performance. Lower risk taking level entail a stronger relationship (Figure 9).

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Figure 9. Simple slope plot Risk Taking – Differentiation – Firm Performance The analysis yields p value 0.946 for the path linking the interaction term and Firm Performance. Similarly the 95% bias corrected bootstrap confidence interval of the interaction term’s effect is (-0.340, 0.263). As the confidence interval include zero, we conclude that the effect of Risk Taking is not significant. Overall these result provide clear support that Innovativeness, Proactiveness, and Risk Taking exerts a not significant and negative effect on the relationship between Differentiation and Firm Performance on SMEs. The higher the Innovativeness, Proactiveness and Risk Taker the weaker the relationship between Differentiation and Firm Performance. 5.4

Hypothesis Testing

Below is the summary of hypothesis testing, the t-values were calculated using a bootstrap resampling procedure with 5000 subsamples. Table 1. Result of Hypothesis Testing Relationship between construct Cost Leadership  Firm Performance Differentiation  Firm Performance Higher level of Innovativeness  weaker relationship Cost Leadership - Firm Performance Higher level of Innovativeness  stronger relationship Differentiation - Firm Performance Higher level of Proactiveness  stronger relationship Cost Leadership - Firm Performance Higher level of Proactiveness  stronger relationship Differentiation - Firm Performance Higher level of Risk Taking  stronger relationship Cost Leadership - Firm Performance

Higher level of Risk Taking  stronger relationship Differentiation - Firm Performance

Path Coefficient 0.241 0.480 -0.089 -0.163 -0.108 -0.118

t-value 2.809 5.342 0.745 1.165 0.914 1.039

P value 0.005 0.000 0.457 0.244 0.361 0.299

0.041

0.244

0.807

-0.010

0.067

0.946

Finding H1 Supported H1 Supported H3 Supported H4 not Supported H5 not Supported H6 not Supported H7 Supported

H8 not Supported

Note: *Significant at 0.05(1-tailed)

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6. Discussion and Conclusion The first objective of the study was to examine the relationship between Cost leadership and Differentiation to Firm Performance of the SME. The empirical results provide support to the two hypothesized relationships as depicted in Table 12. Cost Leadership and Differentiation strategy is significantly related to Firm Performance (H1 and H2 supported). These findings highlight the importance of the use of competitive strategy for SMEs. Consistent with (Lechner & Gudmundsson, 2014) findings the analysis revealed a significant and positive relation between Cost leadership, Differentiation strategy and Firm Performance. The second objective of the study was to determine the moderating effect of innovativeness, proactiveness and risk taking between differentiation and cost leadership strategy and SMEs catering performance. The results revealed that higher Risk Taking level entail a stronger relationship between Cost Leadership and Firm Performance. The findings support (Allen et al., 2006) and suggest that cost leadership requires higher upfront investment in order to achieve economic scale, therefore risk taking moderate the relationship between cost leadership and firm performance. In the relationship between differentiation strategy and firm performance, higher Risk Taking level entail a weaker relationship, and lower risk taking level entail a stronger relationship. This suggest that it will need low levels of risk-taking to grab businessrelated chances with regard to strategic actions in the face of uncertainty. Innovativeness mediate the relationship between cost leadership strategy and firm performance. In higher innovativeness level it entail a weaker relationship between Cost Leadership and Firm Performance. This finding support (O'Brien et al., 2003) that small firms with a local cost leadership tend to be at the lower end of the innovativeness scale. Surprisingly, innovativeness was not moderate the relationship between differentiation strategy and firm performance. Our findings shows that the interaction term is not significant and higher Innovativeness level entail a weaker relationship between Differentiation and Firm Performance, and lower innovativeness exhibit a stronger relationship between Differentiation and Firm Performance. A further possible explanation for this could be that small business has a lower inclination for innovation but not comparatively more innovation will enhance the differentiation strategy, due to resource constrained and incompatibility. Higher Proactiveness level entail a weaker relationship for both between Cost Leadership and Firm Performance and between Differentiation and Firm Performance. And in a lower Proactiveness level entail a stronger relationship between Cost Leadership and Firm Performance, and Lower Proactiveness level show a stronger relationship between Differentiation and Firm Performance. Proactiveness negatively moderate for both relationship between cost leadership and firm performance and differentiation and firm performance, because small catering firm are not in the state that require quick decision making, and aggressively compete with other firms due to resorce-matching constraint that resulted to low competitive advantage and lack of matching strategy to available resource. The findings highlight again the role of the owner to establish competitive advantage obtained by matching strategy to available resources. The practical significance of these findings suggests that the owner and managers and decision makers within SMEs catering firm aiming to improve financial and non-financial should use competitive strategy differentiation. The findings also suggest that SMEs striving to achieve firm performance through entrepreneurial 16

orientation should focus their energies on creating resource-matching strategy and the adoption of cost leadership strategy with higher level of risk taking.

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