DRIVERS OF ORGANIZATIONAL INNOVATIVENESS AMONG SMEs IN MALAYSIA HALAL INDUSTRY

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1 DRIVERS OF ORGANIZATIONAL INNOVATIVENESS AMONG SMEs IN MALAYSIA HALAL INDUSTRY ABSTRACT Ida RizyaniTahir Faculty of Technology, Universiti Malaysia Pahang, LebuhrayaTunRazak, Kuantan, Pahang The Malaysia Halal Industry has been one of the lucrative and profitable areas of business in Malaysia with estimated global market value (food and non food) of US$2.1 trillion annually (Industry, 2006). The increasing awareness to select halal products has created a great demand for halal products and services. Malaysia is in a unique spot to become a global halal hub due to its outstanding infrastructure, favourable business atmosphere and well established policies and institutions that support initiatives engaged by the Malaysian Government. Unfortunately, majority of the entrepreneurs (SMEs) are unable to sustain in the market as after three years, the brand name disappear due to innovation, high competition with multinational companies and financial constraints.the main purpose of this paper is to emphasize the drivers of innovativeness in improving business performance among SMEs.Many theorists agreed that the organizational development depends on low or high level of innovativeness. This paper is based on the management behavior towards innovativeness which is crucial for enhancing business performance. It also highlighted the drivers of innovativeness in SMEs Malaysia Halal Industry and a framework for future empirical investigation is proposed. Keywords: Drivers of innovativeness, Innovativeness, Organizational culture, market orientation, entrepreneurial orientation INTRODUCTION Achievement in today s dynamic business environment requires innovation as it is said to be one of the most important factors in economic competition. It is also been considered as a fundamental organizational competency to sustain in the long run as suggested by Yu & Shen(2007). Meanwhile Hult, Hurley, & Knight(2004) proposed that innovativeness is a key factor for competitive advantage towards superior performance. Various studies have indicated the importance of innovativeness in enhancing organizational performance (Akgün, Keskin, & Byrne, 2009; Calantone, Cavusgil, & Zhao, 2002; Hult et al., 2004;(Jiménez-Jimenez, Valle, & Hernandez-Espallardo, 2008). For instance, Hult, et al.(2004) in their research regarding the effects of innovativeness on performance, consisting 1000 firms with sales above US$100 million per year, confirmed that innovativeness as an important determinant of business performance while Calantone, et al. (2002) also discovered organizational innovativeness is positively related to performance. Their empirical finding was confirmed in a survey of 400 large firms with various industry backgrounds. One of the recent meta-analysis study by Rosenbusch, et al. (2010) also confirmed that innovation orientation enhanced SMEs performance with culture as a moderator. This growing recognition has created a sense of interest among the scholars to discover methods and factors that influence innovativeness in the organization. Innovativeness is thought to be an antecedent of organizational performance (Hurley &Hult, 1998) but what drives innovativeness and key drivers is still underexplored(hult et al., 2004). Research has revealed that market orientation(john C & Slater, 1990), organizational culture (Jantan, Nasurdin, & Fadzil, 2003)and entrepreneurial orientation(lumpkin & Dess, 1996) as antecedents to innovativeness. Therefore, 119

2 understanding the drivers of organizational innovativeness is necessary to enhance business performance especially among SMEs in Malaysia halal industry. 1.1 INTRODUCTION The Malaysia Halal Industry has been one of the lucrative and profitable areas of business in Malaysia with estimated global market value (food and non food) of US$2.1 trillion annually (Industry, 2006). The increasing awareness to select halal products has created a great demand for halal products and services. Malaysia is in a unique spot to become a global halal hub due to its outstanding infrastructure, favourable business atmosphere and well established policies and institutions that support initiatives engaged by the Malaysian Government. With hostile growth aims, demand and competition, there is a need for those organizations to possess innovativeness but there is no rule to answer how to organize sustainable innovativeness. Due to this, organizations are finding ways to establish innovative structures and (Pohlmann, 2005)proposed six general rules concerning the question of innovativeness of social systems. Those rules are shown in Table 1. Therefore, exploring drivers of innovativeness is a need to assist organizations in enhancing their performance. Table 1- The Six Rules of Innovation First Rule There is no General Rule, How to Organize Sustainable Innovativeness Second Rule Although We do not Know About Innovation Factors, We do KnowSomething About Innovation Killers Third Rule Organizations Deal with Innovations in a Paradoxical Way Fourth Rule Innovations do not Happen by Chance. The Emergence ofinnovations is Dependent on Regional and Organizational Paths of Innovation Fifth Rule Innovations are Anchored in Paradigms of Interpretations. They Change Subsequent to Changes within Societies Sixth Rule There are Long Waves of Innovation Models. Cultural Hegemoniesin Defining the Interpretative Standards of Innovation are Moving inmid-term Periods Source:(Pohlmann, 2005) According to 2009 CIA World Fact book, total world Muslim population is 1.6 billion and according to Malaysia Industrial Master Plan 3 (IMP3), it is estimated that global Muslim population will be in the region of 3 billion by Thus, with the increasing number of Muslims in the world, it is a huge opportunity for the new venture to be the players in halal industry. With the increasing demand of halal products from all over the world, entrepreneurs are served with golden opportunities to capture the market fulfilment. Pertaining to investment in halal industry, it is estimated that between US$ 800 billion to US$1 trillion has been invested and is endlessly search for investment (Industry, 2006). From an industry perspective, Che Man(2009) halal concept offers excellent business prospect for everyone, either Muslims or non-muslims. The halal industry includes food products, non-food products such as pharmaceuticals, health products, medical devices, cosmetics and toiletries and services, among others are logistics, travel, finance and marketing (Industry, 2006). Based on Euromonitor Reports (2005), total market value for halal products was US$2.1 trillion. It composed of 62% food and beverages, 22% pharmaceutical, 10% cosmetic and personal care and 6% nutraceutical. As for Malaysia context, in 2010 itself the market size was RM9.4 billion and estimated 120

3 annual halal market increase by 2.5% yearly(bahli, 2011). For example, estimated annual market size for halal foods in Malaysia was US$ 5.4 million. Malaysia as the first country in the world to develop regulation on halal policies is moving toward its second phase which is also in line with the 10 th Malaysia Plan. In line with this, the government has allocated RM100 million to boost effort in making Malaysia as an international halal hub(adam, 2006). The Halal Industry Masterplan which consists of a three-phase roadmap for the development of halal industry has been divided into three phases. The first phase was from (to develop Malaysia as a global centre for Halal integrity and prepare the industry for growth), second phase from , which focuses on industrial development that enable the halal industry to contribute to the local economy, in trade, investment and employment. In this second phase, Malaysia is to develop strong market capabilities and capacity through enhancing innovation capabilities. The final phase is from with the planning to widen the access of halal export-ready companies worldwide. It can be summarised as depicted by Table 2. Table 2- Malaysia Halal Industry Master Plan PHASE ACTIVITY 1 ( ) to develop Malaysia as a global centre for Halal integrity and prepare the industry for growth 2 ( ) to establish Malaysia as one of the preferred locations for halal-related business 3 ( ) to broaden the access of halal export-ready companies worldwide Source: Halal Industry Development Corporation Based on IMP 3 ( ), one of the objectives is Malaysia becoming the global halal hub for the production and trade in halal goods and services. This is due to a great potential for promoting and widening the halal products and services for the international market. The increasing number of muslim population, halal products and services are gaining satisfactoriness among non Muslims and global market value is estimated at US$2.1 trillion annually are among factors that create interest of Malaysia government (Industry, 2006). Halal Industry can be categorised by sectors namely, food, pharmaceutical, toiletries and cosmetics, food additives, food supplements, drugs and vaccines, Islamic finance, leather products and insurance. In 2005, the contribution of halal industry to Malaysia GDP was RM28 billion which accounts for 5.8% (HDC,2009). It is imprudent if the entrepreneurs do not grab this opportunity to compete either domestically or globally. In addition to this, driving factors for global halal industry have been identified such as growth in muslim population which leads to greater demand, higher purchasing power among Muslim consumers due to income enhancement and increasing demand for halal products stimulate more research and development (Bahli, 2011). To elevate halal industry, Malaysia government had been organizing Malaysia International Halal Showcase (MIHAS) annually which provide a platform for the players to exhibit their products for the public at large. Innovative, uniqueness and quality are the conditions being imposed by the customers. This shows that organizations need to satisfy the dynamic needs of market. In order to enhance business performance of SMEs to obtain long term sustainability in the market, this paper proposes the drivers of organizational innovativeness through market orientation, entrepreneurial orientation and organizational culture. 1.2Organizational Innovativeness Organizational innovativeness can be defined as an organization s overall innovative capability of introducing new product to the market or opening up new markets through combining strategic orientation with innovative behaviour and process(wang & Ahmed, 2004). Furthermore, it is the notion of openness to 121

4 new ideas as an aspect of a firm s culture and its capability to introduce some new process, product or idea in the organization(hurley & Hult, 1998). As for (Johannessen, Olsen, & Lumpkin, 2001), they proposed organizational innovativeness as newness and developed a study that explore six different types of innovative activities that might contribute to a more significant definition. (Gumusluoglu & Ilsev, 2009) defined organizational innovativeness as the propensity of the organization to develop new product and services and its success in passing those products and services to the market while Sherlaraj, Song and Lee (2010) in testing a model of improving innovativeness found that it is a mixture of innovative culture and innovation in product and service and also in process. In addition to this, Calantone, et al.(2002) defined organizational innovativeness as openness to new ideas as a feature of a firm s culture by a readiness to attempt new ideas, search for new ways to do things, be creative in its technique of operation and rate of product introduction. Table 4 summarised various definitions by different scholars. Table 3: Definition of Organizational Innovativeness Authors Hurley &Hult(1998) Calantone, Cavusgil, & Zhao (2002) Wang & Ahmed (2004) Gumusluoglu&Ilsev (2009) Definition of Organizational Innovativeness the notion of openness to new ideas as an aspect of a firm s culture and its capability to introduce some new process, product or idea in the organization Openness to new ideas as a feature of a firm s culture by a readiness to attempt new ideas, search for new ways to do things, be creative in its technique of operation and rate of product introduction. An organization s overall innovative capability of introducing new product to the market or opening up new markets through combining strategic orientation with innovative behaviour and process Propensity of the organization to develop new product and services and its success in passing those products and services to the market. Source: Various authors Academic researchers and practitioners agree that innovation is a vital antecedent of firm survival in a rapidly competitive business environment. However, (Baer & Frese, 2003) proposed that innovation itself is insufficient and needs to be harmonized by climate for initiative and climate for psychological safety to be brought to its potential. In a survey of 6000 German mid-sized companies, they found that those companies that did not innovate, they were moderately profitable and successful while those companies with a high degree of process Innovations and high level of climate for initiative and climate for psychological safety did better than those who did not innovate. This is consistent with (Hewitt-Dundas & Thompson, 2004) that innovative companies have a better performance than non-innovative companies. Basically, according to various literatures(damanpour & Evan, 1984 ; Damanpour, Szabat, & Evan, 1989) organizational innovativeness can be categorised into two types, namely administrative innovation and technological innovation. Administrative innovation consists of basic work activity, affect the social system of organization and improvement related to organizational structure, administrative processes and human resource managementwhile technological innovation involves processes and technologies that is related to the production of products and services (Damanpour, et al., 1989) Wang and Ahmed (2004) developed an organizational innovativeness construct and proposed that multiple organizational innovativeness constructs depict organizational overall ability to produce innovative outcomes. The innovative constructs are product, market, process, behaviour and strategic. Their contribution is undeniable as (Gopalakrishnan & Damanpour, 1997) found that there is no universal accepted definition of innovation.therefore, this study defined innovativeness dimensions by the criteria suggested by Wang & Ahmed (2004). The definition of dimensions for organizational innovativeness is depicted in Table

5 Researchers have found several determinants of organizational innovativeness such as Jimenez- Jimenez &Sanz-Valle (2008) discovered Human Resource Management system as a determinant of organizational innovativeness. Wan, Ong, & Lee(2005) have found that several determinants of organizational innovativeness in Singapore and those were organizational resources, willingness to take risks and belief that innovation is important. Table 4- Definition of dimensions adopted for organizational innovativeness Product innovativeness The originality and significance of new products introduced to the market at appropriate time. Market Innovativeness Newness of strategies being adopted in order to go in and utilize the targeted market. Process Innovativeness The introduction of new production techniques, new management approaches and new technology that can be employed to enhance management and production process Behavioural Innovativeness Strategic Innovativeness Source: Wang & Ahmed (2004) Involve individuals, teams and management that are willing to change and devoted to stimulate new methods in executing tasks and also encourage new ideas. An organization s capability to recognize external opportunity and match with internal competency to deliver innovative products and search for new markets. Given the importance of product innovativeness, process innovativeness, market innovativeness, behavioural innovativeness and strategic innovativeness to enhance business performance, therefore, the organizational innovativeness is operationalized to be multidimensional comprising of these five types of organizational innovativeness.in order to achieve IMP 3, halal industry has to find out methods to encourage the players to produce more innovative product to fulfil market requirements. Therefore, it is essential to determine the drivers of organizational innovativeness for SMEs in Malaysia halal industry in order to sustain in the market. 1.3 Market Orientation A relationship exists between market orientation and organizational innovativeness. In recent years, there has been an increasing amount of literature on the relationship of market orientation and organizational innovativeness(hult, et al., 2004), (Atuahene-Gima & Ko, 2001),(Tajeddeni, Trueman, & Larsen, 2006) and (Kohli & Jaworski, 1990)proposed the antecedents of market orientation and defined market orientation as a set of three activities related to generation of market intelligence, dissemination and responsiveness to it. Consistent with Narver& Slater (1990), they suggested that market orientation includes contemplation of exogenous market factors that affect customer needs and preferences, current and future needs of customers. Their findings showed that whether the business required market orientation will depend on the nature of its supply- and demand-side factors. Furthermore, the senior managers must themselves certain with the value of market orientation and notify their junior employees regarding their commitment. An interesting point revealed by Kohli and Jaworski (1990) was the role of top management in communicating their commitment to the whole organization regarding market orientation. In relation to this, market orientation is engaged in being responsive to market intelligence. The changing preferences of customers urge market to introduce innovative products and services. Therefore, the management is responsible to clarify their clear vision in market orientation to ensure the employees are able to implement innovative ideas without fear. 123

6 Atuahene-Gima&Ko (2001) investigated the impact of market orientation on product innovation activity and performance. From a sample of 2000 Australian firms, they demonstrated that market and entrepreneurial firms are more effective in product innovation process. With highest profit and highest sales from new products, the organizations grant highest importance to innovation in human resource strategy. In a study by (Tajeddeni et al., 2006) the level of market orientation are related positively with the level of organizational innovativeness. This is consistent with (Rhee, Park, & Lee, 2010), Hult, et al.(hult, et al., 2004) and Keskin(2006). The organization has to be committed in market orientation due to dynamic preferences of customers and be more responsive to customers needs. The management is encouraged to cultivate a market orientation strategy as a mean to maintain competitive advantage. Furthermore, market orientation provides small firm with a potential competitive advantage over large firms because they are closer to customers. Due to lesser bureaucracy in the organizational structure, small firms are able to transmit customer intelligence quickly and able to exploit wants promptly. To determine the effects of market orientation and organizational innovativeness, (Low, Chapman, & Sloan, 2007) carried out a study among SMEs in Greater Western Sydney. They found out that as the level of market orientation increase, the level of organizational innovativeness is also increase. 1.4 Entrepreneurial Orientation Academic literature examining the importance of entrepreneurial orientation in enhancing organizational innovativeness may seem limited. However, lately there is a growing literature regarding this area as entrepreneurial organization aggressively pursue innovation regardless to challenges(miller & Friesen, 1982). There were mixed results regarding entrepreneurial orientation and performance. (Lumpkin & Dess, 1996) in their study revealed that the relationship of entrepreneurial orientation depends on the characteristics of the external and internal factors. Those factors possibly will moderate that relationship. Hence, the effect of entrepreneurial orientation may perhaps different in diverse types of environment.. Entrepreneurial orientation is positively related to organizational innovativeness. This findings are revealed by Hult, et al (2004) and Rhee, et al.(2009)stated that entrepreneurial orientation plays a vital role in constructing an innovative organization.the fundamental nature of entrepreneurial orientation was more understandable when (Miller, 1983) proposed the three dimensions: innovativeness, proactiveness, and risk taking. Related to the work of Miller (1983), Lumpkin &Dess( 1996) refine the dimensions and include other two elements: autonomy and competitive aggressiveness. (Covin & Slevin, 1989) have developed a scale for innovativeness, proactiveness and risk taking. They define innovativeness as a propensity to support new ideas, original and creative process while proactiveness refers to reaction towards future needs in the market. Risk taking is defined as an action that associate with willingness to commit liabilities on a project whereby the cost of failures is very high. Interestingly, they found that entrepreneurial orientation had a larger effect on performance in hostile than in benign environment. The level of entrepreneurial orientation is positively related to the level of organizational innovativeness (Hult, et al., 2004). Furthermore, in low and high market turbulence, entrepreneurial orientation had a significant effect on innovativeness. The findings clearly showed that entrepreneurial firms have a privilege regardless of market situation. The organization which adopts its human intellectual resources may achieve sustainable competitive advantage as expected by Dynamic Capabilities Theory. Due to dynamic condition of business world, organizations need to adopt entrepreneurial orientation to identify more business opportunities specifically in halal industry. 1.5 Organizational Culture Organizational culture is said as one of the determinant of organizational innovativeness (Jantan, et al., 2003). (Denison, 1996)refers culture as the deep structure of organizations, which is embedded in the values, thinking and postulation believed by organizational associates. He measures the twelve dimensions under four general traits as depicted by Table

7 Table 6- Denison Organizational Cultural Model TRAIT DIMENSION Mission Strategic direction and intent Goals and objectives Vision Consistency Core values Agreement Coordination and integration Involvement Empowerment Team orientation Capability development Adaptability Creating change Customer focus Organizational learning Source: (Denison & Mishra, 1995) Mission refers to a clear route and purpose that provides a proper way of action for the organization and its members. It defines goals and objectives in order to achieve organizational future look. Based on the model, this trait is measured by three dimensions: a) Strategic direction and intent b) Goals and objectives c) Vision Consistency is where organizational activities are well incorporated and organized. A clear rules and procedures are available to encourage employees commitment and loyalty. Three indexes were used to measure this trait. a) Core values b) Agreement c) Coordination and integration The third trait is involvement where all levels of employees have the opportunity to contribute and make decisions. With strong sense of ownership, employees are more committed to their jobs. Involvement is measured by: a) Empowerment b) Team orientation c) Capability development The final trait in this model is adaptability and refers to its flexibility to adjust with environment. The organization is actively improving its internal system for growth and survival. This trait is measured by: a) Creating change b) Customer focus c) Organizational learning 1.6 The Framework Of Organizational Innovativeness Based on outlined theoretical cognition, this discussion focuses on the framework and conditions for increasingthe level of innovativeness in organizations. In that framework we outline the role of market orientation, entrepreneurial orientation and organizational culture in improving the SMEs business performance. This overview about organizational innovativeness represent an important starting point for 125

8 increasing innovativeness. This framework, thus suggest neededchange in most important drivers of organizational innovativeness in order to sustain for longer term in the domestic and global market. Market Entrepreneurial Orientation Orientation Organizational Innovativeness Business Performance Organizational Culture Adapted from: Hult, Hurley & Knight (2004) and Jantan, Nasurdin&Fadzil (2003) CONCLUSION The main purpose of this paper is to emphasize the role and importance of determining the drivers of organizational innovativeness in enhancing business performance of SMEs in Malaysia Halal Industry.Further research activities are aimed to the empirical testing of proposed relations. In that framework, a survey aiming to measure drivers of organizational innovativenessand actual state of innovativeness in organizations must be done REFERENCES Adam, Z. R. (2006). RM100m boost to make Malaysia halal hub. Business Times. Akgün, A. E., Keskin, H., & Byrne, J. (2009). Organizational emotional capability, product and process innovation, and firm performance: An empirical analysis. Journal of Engineering and Technology Management, 26(3), doi: /j.jengtecman Atuahene-Gima, K., & Ko, A. (2001). An Empirical Investigation of the Effect of Market Orientation and Entrepreneurship Orientation Alignment on Product Innovation. Organization Science, 12(1), Baer, M., & Frese, M. (2003). Innovation is not enough: climates for initiative and psychological safety, process innovations, and firm performance. journal of organizational behavior, 24(1), Calantone, R. J., Cavusgil, S. T., & Zhao, Y. (2002). Learning orientation, firm innovation capability, and firm performance. Industrial Marketing Management, 31(6), Retrieved from Covin, J. G., & Slevin, D. P. (1989). Strategic Management of Small Firms in Hostile and Benign Environments. Strategic Management Journal, 10(1), Damanpour, F., & Evan, W. M. (1984). Organizational Innovation and Performance: The Problem of Organizational Lag. Adminitsrative Science Quarterly, 29(3), Denison, D. R. (1996). What is the Difference between Organizational Culture and Organizational Climate? A Native s Point of View on a Decade of Paradigm Wars. Academy of Management Journal, 21(3). Denison, D. R., & Mishra, A. K. (1995). Toward a Theory of Organizational Culture and Effectiveness. Organization Science, 6, Gopalakrishnan, S., & Damanpour, F. (1997). A review of innovation research in economics, sociology and technology management. Omega, 25(1), doi: /s (96) Gumusluoglu, L., & Ilsev, A. (2009). Transformational leadership, creativity, and organizational innovation. Journal of Business Research, 62(4). 126

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