Mediating Effect of Product Innovation on Market Orientation and Marketing Performance of SME’S During the COVID-19 Pandemic in Indonesia

The outbreak of the corona virus in the world, including in Indonesia since the beginning of 2020, has had an impact on business continuity, including Micro, Small and Medium Enterprises (MSMEs). China was forced to close 80% of existing MSMEs due to the impact of the virus. Meanwhile, in Indonesia, based on a survey conducted by UNDP, it was found that the income of MSMEs experienced a shortage of around 77% [1].

The impact of COVID-19 on the business world is very significant, as a result of declining purchasing power due to government policies implementing lockdown and other restriction scheme. The decline in people's purchasing power can have a direct impact on the decline in the economic growth of a country. In ASEAN countries, the impact of many countries experiencing economic contraction is that they are classified as countries facing an economic recession. Countries belonging to the Economic Recession during COVID-19 in ASEAN are Indonesia in 2020 with economic growth (-3.49%), Singapore in 2020 by -5.8%, Malaysia -2.7%, Philippines (-11.5), Thailand (-6.4%). Only Vietnam did not experience an economic recession, where its economic growth was (2.64%) (OECD, 2020). Impact of COVID-19 on MSMEs in ASEAN, based on research by the OECD 2020, the effect of COVID-19 on business is 30% of SMEs expect to lay off 50% of their staff. It is estimated that 50% of SMEs have a month cash reserves or less.

MSME problems as the impact of COVID-19 in Indonesia, MSMEs lack resilience and flexibility in dealing with this Pandemic due to several things such as the low level of digitalization, difficulties in accessing technology and a lack of understanding of strategies to survive in business (OECD, 2020). The results of the survey on the impact of COVID-19 on Indonesian MSMEs on 722 MSME respondents starting from March 31 to April 20, it was found that 35.6% of MSME actors in the food processing sector were affected by COVID-19. Then followed by the handicraft sector 13.8%, fashion by 16% and the rest are other sectors such as restaurants, services, manufacturing, agriculture, coffee shop, pastries, trade and more [2].

Based on the survey above, this study chose the MSME coffee shop to be researched because the coffee shop has become a place for business, social, and family activities. Facts on the ground show that coffee shops that have a wide and open location are more attractive to the public during the COVID-19 pandemic, so they do not have a significant impact are still operating during COVID-19 even though the government makes a rule of 50% of the capacity of consumers who come and reduce operating hours only until 8.00 pm. Different/contrast things were experienced for coffee shop MSMEs during COVID-19, where the impact was very significant, especially for coffee shop MSMEs whose businesses were located in malls, hotels, office buildings and campuses as a result of the limited lock down policy and work from home. The research question is whether coffee shops can maintain their business performance in the midst of the economic crisis as a result of the COVID-19 pandemic due to product quality?

This study is important because the contribution of MSMEs to the economy is estimated to reach 60.4% [3]. Coffee Shop is one type of MSME that experienced rapid growth before the pandemic because coffee shops have become a trend for the lifestyle of urban people from all their activities.

There are only a few studies that focus on the MSME sector, especially on the Coffee Shop business. Therefore, Research is done for MSME coffee shops that have a stable marketing performance. Many studies have been conducted on the business sector affected by COVID-19, but research for coffee shop businesses that have survived during the COVID-19 pandemic is still rarely done. Based on this situation, researchers are interested in researching what business strategies are used by coffee shop SMEs to survive during COVID-19.

3.1 Model development

Market Orientation is defined as an independent variable, while Marketing Performance is classified as a dependent variable. Product Innovation is defined as intervening variable, which is they are dependent constructs because they are predicted by Market Orientation, but they are also independent constructs because they predict Marketing Performance.

3.2 Data collection and processing

After the construction of the research's conceptual model (Figure 1), the questionnaire for data collection was created. The questionnaire consists of four sections. Section 1 involves general data, such as personal. Section 2 deals with Market Orientation. Section 3 accommodates the questions on Product Innovation. Section 4 contains questions related to Marketing Performance. Each question in the questionnaires uses a five-point Likert-scale. Cohen produced a table for researchers to determine the sample size of their research using partial least square (PLS) structural equation modeling (SEM). In this model, there are four arrows pointing at a construct, therefore, this research required 65 samples to reach an 80 percent statistical power [28]. The questionnaire was distributed to coffee shop owner in the Medan Area. A total of 143 responses were recorded. The data were then processed by using PLS-SEM. SEM is a powerful statistical approach for identifying the relationships between variables. PLS-SEM is a variance-based structural equation model estimation approach. The objective is to increase the amount of endogenous latent variables that can be described [28].

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Figure 1. Result of structural model using SEM-PLS

3.3 Model testing

Composite reliability, individual indicator reliability, and average variance extracted (AVE) are all used to evaluate the measurement model's internal consistency and convergent validity. Additionally, the Fornell–Larcker criterion and cross-loadings are used to assess discriminant validity. According to a common rule of thumb for indicator reliability, a latent variable should explain a significant part, usually at least 50% or 0.5 of each indicator's variance [28]. All the indicators for the four constructs in this work were well above the minimum acceptable level for outer loadings (Table 1). The composite reliability varied from 0 to 1, with greater values indicating greater levels of reliability. Specifically, the composite reliability values of 0.60–0.90 can be regard as satisfactory [28]. Hence, all four constructs in this work were satisfactory in terms of composite reliability (Table 1).

Convergent Validity of the measurement model by reflexive indicators is calculated based on the relationship between the recommended item scores and the PLS Program. The reflexive measure is said to be high if more than 0.70 is associated with the construct being measured. Outer loading value > 0.7 is the most expected / best value, but values > 0.4 to < 0.4 then the indicator must be removed from the variable [28]. The loading factor limit of 0.60 will be used in this study. From the results of data processing with SEM PLS shows that all items of the questionnaire statement are valid because they have a loading factor value above 0.60, thus the questionnaire can be used (Table 1).

Discriminant validity is carried out to ensure that each concept of each latent variable is different from other variables. The best new measurement criterion is to look at the Heretroit-Monotrait Ratio (HTMT) value. If the value of HTMT < 0.90 then a construct has good discriminant validity (Hair et al., 2016). All variables have a Heretroit-Monotrait ratio value < 0.90 which means that the discriminant validity is good or completely different from other constructs (the construct is unique) (Table 1).

Table 1. Result summary of models

From this study it is found that the effect of market orientation on product innovation is positive significant. This finding means that if the value of market orientation increases, then product innovation also increases and this significant value means that market orientation significantly affects product innovation at the Coffee Shop in Medan City. The better SMEs understand the market through customer orientation, competitor orientation, and inter-functional coordination; it will increase product innovation from the Coffee Shop in Medan City. Likewise, with what happened to the Coffee Shop in Medan City, in product innovation, stimulation from consumers and competitors are a factor that must be considered. Knowledge of consumer needs and market conditions, especially competitors in the same sector can encourage the continued growth of new innovations for SMEs in Medan City.

Previous studies have also examined how market orientation relates to product innovation. Obtained research results similar to previous researches are conducted by Slater et al. [4, 17, 29-32].

From this study also found that the effect of market orientation on marketing performance is positive but not significant. This finding means that if the value of market orientation increases, then marketing performance also increases and the insignificant value means that market orientation does not significantly affect marketing performance at the Coffee Shop in Medan City. The better Coffee Shop's efforts to understand the market through customer orientation approaches, competitor orientation, and inter-functional coordination will improve the marketing performance of Coffee Shop in Medan City. Market orientation is a tradition by businesses that can direct a business unit to improve marketing performance. The company will be able to determine what will be done for the company in the short and long term through market orientation. Companies and business units must try to identify the strengths and limitations of current competitors in the short term, while in the long-term companies must examine what businesses can do to maximize successful marketing performance in the future.

However, from the results of research is conducted by the author, the results show that market orientation has a positive and insignificant effect on marketing performance, because of the time this research is conducted; economic conditions and other sectors are experiencing an imbalance due to the Covid 19 pandemic. The whole order of life has changed as well as the marketing performance of Coffee Shop in Medan City. The value of market orientation has a very small percentage in influencing its marketing performance. The unstable economic situation affects consumer behavior and changes in the market situation, causing many coffee shops to experience a decline.

Consumer orientations have not always a positive influence on marketing performance in all situations and conditions, when the unstable technology situation can affect the relationship less significantly [4]. The importance of estimating the risks to be taken in decision making is emphasized in this study. The research by Han et al, suggests that there is no significant but positive effect of market orientation on company performance. Next, according to Greenley finds that the relationship between market orientation and marketing performance is not significant [23, 24].

In addition, this study shows that product innovation has a positive and significant effect on marketing performance. This finding shows that marketing performance also increases if product innovation increases, and it is significant that product innovation affects the marketing performance of Coffee Shop in Medan City. By designing and developing new concepts, designing more attractive designs, introducing new products at every opportunity, and continuing to develop the quality of their products, the better and more often Coffee Shop makes good innovations, it will improve the marketing performance of Coffee Shop in Medan City [24-26].

The role of product innovation in mediating the effect of market orientation on marketing performance substantially mediates the effect of market orientation on marketing performance. This means that the influence of market orientation on marketing performance at the Coffee Shop beverage in Medan City can be mediated by product innovation. The greater the product creativity, the greater the market interest to improve marketing performance. The findings of this study indicate that if the Coffee Shop in Medan City is market-oriented as well as the Coffee Shop which is able to choose strategic actions quickly, customer satisfaction commitments and all of its features will collaborate to be able to put the customer first, then the market orientation attitude can increase product innovation and, in the end, it will be able to improve marketing performance at the Coffee Shop in Medan City. The findings of this study are in line with previous research conducted by Pardi et al. [14, 33].