The Effect of Information Communication Technology Readiness and Knowledge Management on Entrepreneurial Strategic Orientation and its Implications on Firm Performance

Performance aims to determine how a company achieves goals or objective standards (Okeyo, Gathungu, & K’Obonyo, 2016). In business research, the definition depends on the discipline or field of study. Wu and Zumbo (2009) associated performance with the value of customers and other stakeholders of a company. Performance means achieving stakeholder interests in a way that is superior to competitors (Okeyo et al., 2016). Therefore, having superior performance requires an organisation to achieve its goals effectively and efficiently (Gathungu, Aiko, & Machuki, 2014). Efficiency and effectiveness have become popular measures, and a series of measures in manufacturing, finance and marketing have been used in the past. In manufacturing, Kombo, K’Obonyo, and Ogutu (2015), Atalay, Anafarta, and Sarvan (2013), and Wu, Zumbo (2009) have advocated measuring five key dimensions, namely, reliability, quality, product price or cost, and flexibility to determine performance. The aim is to use a multi-dimensional approach that takes into account the combination of various factors that affect performance, thereby combining the interests of shareholders and stakeholders (Okeyo et al., 2016).

Operationalisation of performance remains a problem in academic research until this research was carried out. Information is considered a contextual issue. Therefore, measurement becomes more of a factor than what is being determined and even where and when it is measured. In business in general, and in more specific fields such as entrepreneurship, there is a general consensus that the main concern of a company is performance (Gathungu et al., 2014). Despite this consensus, there is no agreed-upon performance measure. According to Odhiambo (2015), previous studies have been carried out to justify the selection of indicators to measure performance and tend to follow tradition. Performance measurement has finally changed in the last few decades, from purely financial indicators to non-financial performance (Okeyo et al., 2016).

SME owners were described by Stewart and Roth (2001) as growth-oriented, while Jenkins and Johnson (1997) defined SME entrepreneurs as individuals who build and manage businesses for the purpose of furthering personal goals. Carland, Carland, Hoy and Boulton (1988) described an entrepreneur as an individual who operates a small business for profit and growth. Carland, Hoy and Carland (1984) distinguished MSME owners from entrepreneurs in terms of extension of the small business owner’s personality, continuation of personal goals and generation of family income. This position was corroborated by Jenkins and Johnson (1997) who showed that small business owners engage in coherent personal strategies such as earning a living and having more free time. A high entrepreneurial spirit among MSME owners increases the formation and activation of personal strategies that have an impact on business growth and performance. Entrepreneurial behaviour influences entrepreneurs and MSME owners in their involvement in business and product innovation, and market development (Carland et al., 1984). It is clear that MSME entrepreneurs are involved in business innovation.

According to Law Number 9 of 1995, Indonesian MSMEs are defined as small businesses that have assets other than land and buildings equal to or smaller than 200 million rupiah with an annual turnover of up to 1 billion rupiah. Medium businesses are legal business entities that have assets between IDR 200 million and IDR 10 billion. In this study, the reference to Law no. 9 of 1995 is the operational definition of UMKM (Table 4).

Meanwhile, according to data from Bank Indonesia, MSMEs in DKI Jakarta until this research was conducted amounted to 18,068 MSMEs (www.bi.go.id).

In today’s business environment, more and more organisations are using information technology to improve their competitive position (Martínez-Caro & Gabriel Cegarra-Navarro, 2010). Information communication technology readiness is a term that is applied to assess the development of ICT (Spinelli et al., 2013). This study uses the concept of Spinelli et al. (2013) to focus on the development of the ICT infrastructure at the level of MSME companies. With ICT readiness meaning the presence of a series of strategies, organisational and structural features are prerequisites for MSMEs to be able to fully utilise the potential of ICT (Dyerson & Spinelli, 2011). In other words, there is growing interest in exploring the extent to which small companies can reap the rewards of the strategy, through previous investments in ICT infrastructure and ICT capabilities. Operationally, this translates into whether the company has access to up-to-date ICT and importantly understands what to do with the technology. Haug, Graungaard and Arlbjorn (2011) argued that although there have been many studies that have explored the decision to adopt ICT in SMEs, empirical facts show that attention has been much less (Spinelli et al., 2013). To emphasise the focus on the decision-making process, Haug et al. (2011) used the term ICT readiness, which refers to the relevant operational processes both in selecting ICT projects and in getting companies to accept and implement ICT projects. These factors include external pressure for change and experience and support for ICT by senior managers, as well as employees. However, the study of Haug et al. (2011) is limited to three longitudinal case studies. Similarly, the notion of ICT readiness is also evident in the analysis of Chen, Sen and Shao (2006) about the adoption of web services, where in this case, the simulation is used. Previously Johnston and Carrico (1998) suggested that organisational readiness should include both leadership within the managerial team and the development of an internal knowledge base as a precursor to the strategic integration of ICT. In contrast, Daniel, Hoxmeier, Smart and Smart (2004) viewed ICT readiness as varying depending on the culture and strategic goals of individual companies.

The following are the constituent elements of the ICT readiness dimension (Dyerson & Spinelli, 2011):

Knowledge management is a combination of values, experiences, contextual information and expert views, which forms a framework for evaluating and incorporating new experiences and information. Within organisations, knowledge sharing is adapted into norms, practices and processes (Ke & Wei, 2007). This construct recognises that knowledge is an important strategic resource for a company to maintain its competitive advantage. Knowledge is an asset that needs to be managed properly (Davenport & Prusak, 1998). Knowledge management is a concept that emerged in the field of management and was widely adopted in organisations of developed countries to improve organisational performance (Gharakhani & Mousakhani, 2012). It is promoted as an important foundation for companies to develop sustainable competitive advantages and to stay at the forefront of excellence in the market.

Previous research stated that knowledge management is a source of sustainable competitive advantage and is the basis for economic performance (Gharakhani & Mousakhani, 2012). Knowledge management has become a significant research area in the last two decades (Maddan, 2009). Novak and Bojnec (2005) stated the importance of knowledge for economic growth in Slovenia. Knowledge is an important asset for small and medium companies at times of global competition (Gharakhani & Mousakhani, 2012). Knowledge management can determine important factors in the success of MSMEs (Gharakhani & Mousakhani, 2012). Gloet and Terziovski (2004) concluded that knowledge management is a conception of and access to experience, knowledge and expertise that create new capabilities, enable strong performance and innovation, and leverage added value. Knowledge management has grown significantly in recent years, where many researchers and practitioners realise that the potential of knowledge can stimulate innovation and improve performance (Cavaleri, 2004). Some researchers defined knowledge management as a discipline with the aim of promoting knowledge growth, knowledge communication and knowledge preservation within an organisation (Steel, 1993) in order to achieve better exploitation of this important resource. Knowledge management is important for every modern organisation. Knowledge management has received attention through in-depth research, especially in developing countries (Bruton, Dess, & Janney, 2007).

Entrepreneurial strategic orientation has been studied extensively beyond the last decade (Wiklund, Patzelt, & Shepherd, 2009). Most have various disciplines in entrepreneurship and strategic management and thrive on the relationship between entrepreneurial orientation and performance. Entrepreneurial strategic orientation is proven to have an atmosphere of entrepreneurship in the company (Okeyo et al. 2016). Entrepreneurial strategic orientation has become the main concept formed from several disciplines: entrepreneurship, strategic management, organisational behaviour, marketing and operations (Dess, Pinkham, & Yang, 2011). Covin and Slevin (1989) defined entrepreneurial strategic orientation as a managerial characteristic that is a combination of risk taking, innovativeness and proactiveness. The entrepreneurship literature has examined the relationship between entrepreneurial strategic orientation and firm performance (Wiklund & Shepherd, 2005). Empirical evidence from Wiklund and Shepherd (2001) suggests that entrepreneurial strategic orientation has a positive effect on a company’s performance. Other research studies have found that entrepreneurial strategic orientation leads to higher market growth rates and firm performance (Wang, 2008).

The findings of Wiklund and Shepherd (2005) have revealed that entrepreneurial strategic orientation increases the company’s positive performance. Wiklund and Shepherd (2005), in a study on the influence of the environment on entrepreneurial strategic orientation and firm performance in 413 MSMEs in Sweden, found that entrepreneurial strategic orientation positively influences MSME performance. Lumpkin and Dess (1996) argued that companies with entrepreneurial strategic orientation have the ability to find and take advantage of market opportunities and can respond to challenges to prosper and thrive in a competitive and uncertain environment. These findings indicate that entrepreneurial strategic orientation improves firm performance.

Conceptual Framework and Hypotheses (Figure 1)

Figure 1.

Lack of understanding of the strategic role of ICT in the context of new approaches to marketing, active relationships with customers, and product and service development, as well as continuous innovation in products and services, is suspected to be the low ICT readiness of SMEs (Spinelli et al., 2013). The design of the ICT readiness mechanism by categorising it specifically becomes the basis for stronger policy support (Spinelli et al., 2013). In the ICT readiness dimension, it is stated that through a strategic vision, it is hoped that MSME entrepreneurs have a far-sighted vision in the use of ICT in order to achieve a sustainable competitive advantage. Through capabilities and management processes, as well as the willingness and ability to apply ICT, MSME entrepreneurs can maximise their entrepreneurial strategic orientation (Dyerson & Spinelli, 2011). Through these processes, the entrepreneurial characteristics of MSME entrepreneurs become increasingly honed and skilled. Based on the aforementioned analysis, the hypothesis is built as follows:

H1: ICT readiness has a positive effect on entrepreneurial strategic orientation.

Knowledge is an important asset for small and medium companies in times of global competition (Gharakhani & Mousakhani, 2012). Knowledge management can determine important factors in the success of MSMEs (Gharakhani & Mousakhani, 2012). Gloet and Terziovski (2004) concluded that knowledge management is a conception of and access to experience, knowledge and expertise that create new capabilities, enable strong performance and innovation and leverage added value. Based on the aforementioned analysis, the hypothesis is built as follows:

H2: Knowledge management has a positive effect on entrepreneurial strategic orientation.

The introduction of innovative new technologies supported by effective and efficient knowledge management (McAdam & Reid, 2001) enables organisations to gain a sustainable competitive advantage over their competitors. In addition, it was also stated that ICT readiness affects average sales growth even higher if MSMEs have a higher entrepreneurial orientation level. Based on the aforementioned analysis, the hypothesis is constructed as follows:

H3: ICT readiness and knowledge management simultaneously have a positive effect on entrepreneurial strategic orientation.

Abebe (2014) stated that ICT readiness has a significant positive effect on MSME’s average sales growth rate. MSMEs that adopt ICT have a significantly higher average sales growth rate than MSMEs that do not adopt ICT. Through previous investments in ICT infrastructure and ICT capabilities, operationally, this translates to whether the company has access to up-to-date ICT and, importantly, understands what to do with the technology. Through the aforementioned analysis, the hypothesis is built as follows:

H4: ICT readiness has a positive effect on UMKM performance.

Wang and Yen (2012) found that knowledge has a positive association with a company’s operational performance. Wang and Yen (2012) found that explicit knowledge sharing was positively associated with innovation speed and financial performance. Nilsen, Nordström and Ellström (2012) suggested that employees find it easier to share experience-based knowledge. The flow of knowledge among individual employees, organisational decision-makers and corporate units produces a strong positive association with innovation (Zhou & Li, 2012). Based on the previous explanation, the hypothesis is constructed as follows:

H5: Knowledge management has a positive effect on UMKM performance.

High entrepreneurial orientation among MSME owners increases the formation and activation of personal strategies that have an impact on business growth and performance (Omisakin et al., 2016). Entrepreneurial orientation influences entrepreneurs and MSME owners in their involvement in business and product innovation, and market development (Carland et al., 1984). From the results of Omisakin’s et al. (2016) and Carland et al. (1984), it is clear that entrepreneurs and MSME owners are involved in business innovation. Therefore, it is assumed that the number of existing entrepreneurial orientation affects the overall success and performance of the MSME business. Therefore, the hypothesis is constructed as follows:

H6: Entrepreneurial strategic orientation has a positive effect on UMKM performance.

Bergeron (2003) stated that the knowledge management process or approach consists of eight fundamental components, namely, acquisition, modification, use, archiving, transfer, translation, access and completion. Experts have discussed several knowledge management processes or activities, including the acquisition or creation, storage, sharing or transfer and the use or application of knowledge (Beckman, 1999; Shearer & Bouthillier, 2002; Wig, 1999). Meanwhile, Johnston and Carrico (1998) suggested that organisational readiness should include both leadership within the managerial team and the development of an internal knowledge base as a precursor to the strategic integration of ICT. Daniel et al. (2004) viewed ICT readiness as varying depending on the culture and strategic objectives of the MSME company. These two variables are thought to have an influence on the company’s performance. From the aforementioned analysis, the hypothesis is constructed as follows:

H7: ICT Readiness, knowledge management and entrepreneurial strategic orientation simultaneously have a positive effect on UMKM performance.

At this stage, an analysis of respondents’ profile and other information related to MSME respondents in DKI Jakarta was carried out, as stated in the first part of the questionnaire. The analysis was carried out one by one based on the questions in the questionnaire. Based on the results of data collection by distributing questionnaires to MSME respondents in DKI Jakarta, the characteristics of each respondent can be identified with the hope that this information can be used as input for MSME managers in DKI Jakarta. The characteristics of the respondents who have been determined consist of five characteristics: (1) gender, (2) age, (3) formal education, (4) length of business and (5) turnover per year.

Turnover per year

Table 9 shows that most of the turnover per year is at 100–150 million, that is, 185% or 47.2% of respondents, and only a small proportion of respondents are at <100 million, that is, 54% or 13.8% of respondents.

Table 9.

Turnover per year

Turnover per year	Frequency	Percentage
< 100 IDR million	54	13.8
100 — IDR 150 million	185	47.2
> IDR 150 million	153	39.0
Total	392	100

Source: SPSS 24 output appendix.

In Table 10, each variable gets a Cronbach’s alpha value of > 0.6, meaning that the instrument can be said to be reliable.

Table 10.

Research variable reliability test results

No	Variable	Nilai Cronbach’s alpha	Decision
1	ICT readiness	0.924	Reliable
2	Knowledge management	0.932	Reliable
3	Entrepreneurial strategic orientation	0.938	Reliable
4	Firm performance	0.939	Reliable

Source: SPSS 24 output appendix. Reliability Test.

The model standardised image displays a complete model trajectory diagram with numbers that are standardised results (Figure 2).

Figure 2.

The standardised solutions model image displays a model trajectory diagram complete with numbers that are the results of standardised (Figure 3).

Figure 3.

The t-values model image displays a complete model trajectory diagram with numbers indicating the t-value of each estimated number. In the results of data analysis using the Structural Equation Modeling (SEM) method and using the LISREL 8.80 application software processing tool, a summary of the model suitability index is obtained, as shown in Table 11.

Table 11.

Model fit index

GOF indicator	Expected size	Estimated results	Conclusion
Absolute fit size
RMSEA	RMSEA < 0,08	0,073	Good fit
Incremental fit size
NFI	NFI > 0.99	0,91	Good fit
NNFI	NNFI > 0,90	0,92	Good fit
CFI	CFI > 0,90	0,92	Good fit
IFI	IFI > 0,90	0,92	Good fit
RFI	RFI > 0,90	0,91	Good fit
GFI	GFI > 0,90	0,92	Good fit
AGFI	AGFI > 0,90	0,90	Good fit
RMSEA: The Root Mean Square Error Approximation
NFI: Normed-Fit Index
NNFI: Non Normed-Fit Index
CFI: Comparative Fit Index
IFI: Incremental Fit Indices
RFI: Relative Fit Index
GFI: Goodness of Fit Index
AGFI: Adjust Goodness of Fit Index

Source: Processing results with LISREL 8.80.

Table 11 shows that eight model suitability indices have a good model suitability index (good fit): RMSEA, NFI, NNFI, CFI, IFI, RFI, GFI and AGFI. Thus, it can be used in the next analysis. Furthermore, Figures 4 show estimation results of structural equations.

Figure 4.

The model estimates image displays a complete model trajectory diagram with numbers which are non-standardized estimation results, while in this section relates to the evaluation of the coefficients or parameters that indicate a causal relationship or the influence of one latent variable on another latent variable. The resulting structural model equation is given in Table 12.

Table 12.

The value of the coefficient or parameter is a previously estimated value that is used as a comparison of the t-value to test the hypothesis of the study. The results of this evaluation is summarised Table 13, which is accompanied by the assumptions of the hypotheses of the research model.

Table 13.

Structural equation modeling coefficient evaluation

Path	Estimated	t-value	Conclusion
ICT readiness has a positive effect and significantly on entrepreneurial strategic orientation	0.48	8.29	Accepted
Knowledge management has a positive effect and significantly on entrepreneurial strategic orientation	0.25	4.79	Accepted
ICT readiness and knowledge management have a positive effect and significantly on entrepreneurial strategic orientation	Fvalue212.651	R Square0.34	Accepted
ICT readiness has a positive effect and significantly on firm performance	0.21	5.14	Accepted
Knowledge management has a positive and significant effect on firm performance	0.17	4.87	Accepted
Entrepreneurial Strategic Orientation has a positive effect and significantly on firm performance	0.69	13.75	Accepted
ICT readiness, knowledge management and entrepreneurial strategic orientation simultaneously have a positive and significant effect on firm performance	Fvalue235.529	R Square0.80	Accepted

Source: Processing results with LISREL 8.80.