The role of innovation in business strategy as a competitive advantage: Evidence from Indonesian MSMEs

The rapidly changing business climate and competition that has been getting stricter demand companies to have a proper strategy to grow and sustain their business. The objective of this quantitative study is to analyze the benefits of innovation in business strategy to create a competitive advantage for micro, small and medium enterprises (MSME). Inferential statistical analysis was performed on three mediating variables: people innovation, process innovation, and product innovation, in their involvement in business strategies as an independent variable, against competitive advantage as a dependent variable. Twenty-nine MSMEs in Indonesia were used as a sample of this study to examine four hypotheses. Thirty indicators of five variables were transformed into 50 questions in a Likert-scale questionnaire distributed to selected respondents using purposive sampling. The results of the T-test show that business strategy has a significant effect on competitive advantage, which means that business strategy without innovations creates only 20.2% of its competitive advantage. On the other hand, Sobel test results demonstrate that innovations significantly mediate the influence of business strategies on companies’ competitive advantages. Finally, product innovation potentially increases the competitive advantages by 53.1%, followed by process innovation and people innovation by 47.2% and 44.5%. AcknowledgmentThe author would like to express special gratitude to the Department of Industrial Engineering at Universitas Kristen Krida Wacana, who supported this investigation, as well as all participating MSMEs. This study received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.