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ENTREPRENEURSHIP & INNOVATION | RESEARCH ARTICLE
COGENT BUSINESS & MANAGEMENT
2025, VOL. 12, NO. 1, 2440122
Modeling the signicance of strategic orientation for innovation
capabilities and enterprise performance: evidence from Ethiopian
SMEs
Aklilu Tukela Bekataa and Chalchissa Amentie Kerob
aManagement Department, Hawassa University, Hawassa, Ethiopia; bDepartment of Management, Jimma University, Jimma,
Ethiopia
ABSTRACT
There is a lack of studies that analyze simultaneously how customer, competitive, and
entrepreneurial orientations affect SMEs’ innovation capabilities and performance.
Hence, the main goal of this study is to examine the significance and enhance
understanding of strategic orientation in relation to the innovation capabilities and
performance of small and medium-sized enterprises (SMEs). This study used an
explanatory research design and multi-stage sampling to gather primary data from the
study area. The data and research hypotheses of the suggested structural regression
model were examined using structural equation modeling (SEM), based on empirical
data from 321 Ethiopian SMEs operating in Hawassa city. The SEM results indicate that
small and medium-sized enterprises with a higher level of strategic orientation can
ensure superior performance. The findings also indicate that innovation capabilities
partially mediate the relationship between strategic orientation and SMEs performance.
The study makes a valuable theoretical and practical contribution to the application of
resource-based and dynamic capabilities theories within the context of SMEs.
Furthermore, this study suggests that SMEs can leverage strategic insights to address
the real-world challenges of entrepreneurship and innovation while offering practical
solutions. Hence, strategic perspectives that spread acquired knowledge and new ideas
throughout internal decision-making processes ultimately enhance SMEs’ innovation
capabilities and performance.
1. Introduction
Small and medium-sized businesses (SMEs) are a major source of employment, income, and innova-
tion (ADB, 2019; Akhtar et al., 2021; Ali et al., 2020; Guzmán et al., 2018). Innovation is essential for
every country’s economic success (Rasheed etal., 2020). In light of this, innovation and entrepreneur-
ship have become crucial areas of attention, acting as both significant educational topics and policy
responses (Figueroa-Armijos & Johnson, 2016; Jones et al., 2017; Liguori et al., 2024). Thus, SMEs’
creative performance is essential to their country’s development (Kamalaldin etal., 2021). Therefore,
to maintain competitiveness, rising economies need to support innovation among SMEs (Kiani
et al., 2021).
Thus, countries are searching for strategic approaches to enable SMEs to guarantee economic viability
(M. Yang etal., 2022). Strategic orientation and innovation capabilities significantly influence the sustain-
ability and innovativeness of SMEs (Handa & Manuel, 2021; Kiani etal., 2021). Studies have demonstrated
that a company’s capacity for innovation has a major effect on its operational success, customer happi-
ness, and financial growth (Olowofeso et al., 2021; Rajapathirana & Hui, 2018). Furthermore, a company’s
innovation capability is crucial for achieving higher performance (Forcadell et al., 2021; Singh et al.,
2019). According to Guzman et al. (2018), the OECD (2005), and Saunila (2020), SMEs can achieve
© 2024 The Author(s). Published by Informa UK Limited, trading as Taylor & Francis Group
CONTACT Aklilu Tukela Bekata aklilu2003@gmail.com Management Department, Hawassa University, Hawassa, Ethiopia
https://doi.org/10.1080/23311975.2024.2440122
This is an Open Access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/), which
permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. The terms on which this article has been
published allow the posting of the Accepted Manuscript in a repository by the author(s) or with their consent.
ARTICLE HISTORY
Received 12 January 2024
Revised 27 October 2024
Accepted 4 December
2024
KEYWORDS
Customer orientation;
enterprise performance;
entrepreneurial
orientation; Hawassa City;
innovation capabilities;
strategic orientation;
structural equation
modeling
SUBJECTS
Business, Management
and Accounting; Strategic
Management;
Entrepreneurship and
Small Business
Management;
Management of
Technology & Innovation
2 A. T. BEKATA AND C. A. KERO
exceptional performance since they have a strong ability to enhance their products, processes, market-
ing, and management.
According to earlier studies, one important factor influencing an organization’s capacity for innova-
tion is the knowledge of its customers (Ali et al., 2020; Carvache-Franco et al., 2022; D’souza et al.,
2021). Strengthening customer orientation, such as allocating more time to hear customer opinions,
can enhance SMEs’ capacity for innovation. According to Tuominen et al. (2022), businesses can
increase their innovativeness and success by learning from their customers and incorporating their
suggestions into the decision-making process. Moreover, identifying and evaluating competitors’
behaviors, strategies, and products, as well as applying different strategies, improves customer value
(Mudanganyi et al., 2020). Furthermore, the previous research indicates that an entrepreneurial mind-
set is critical for enhancing performance (Alkhazali et al., 2020; Soares & Perin, 2020).
According to resource-based theory, market-oriented and entrepreneurial approaches are valuable,
unique, inimitable, and non-substitutable resources that help companies develop creative solutions to
increase market success rates (Ali etal., 2020; Anzola-Román etal., 2024; Kellermanns et al., 2016; Lonial
& Carter, 2015). Dynamic capabilities, as a novel theory, shows how a company’s resources: ideas, and
information are integrated and transformed into new ones that can affect its innovation capabilities
(Bogers et al., 2019).
Prior researches identified that customer and competitor knowledge and entrepreneurial orientation
as a critical factor that determine SMEs’ innovation capabilities (Ali et al., 2020; Carvache-Franco et al.,
2022). D’souza et al. (2021) state that in order to engage in product or service-level innovation, SMEs
must possess the requisite strategic orientation and dedication. An organization’s strategic orientation
reflects the procedures, directions, attitude, and methods of decision-making that guide its operations.
Strategic orientation generates the intended behavior in order to develop innovation capabilities and
guarantee the long-term survival of the business (Acosta etal., 2018; Kamalaldin et al., 2021; Kiani et al.,
2021; Schmidt et al., 2021). Hence, strategic direction is required in order to accelerate SMEs’ perfor-
mance (Cozzarin, 2017). However, the research gaps are as follows.
First, it is difficult to draw firm conclusions from the conflicting and ambiguous results of these stud-
ies on the relationship between strategic orientation and business performance (Ramírez-Solis et al.,
2022). Johnson and Sohi (2020) emphasized the importance of client orientation in impacting market
performance. However, Abid and Gulzar (2018), Ighomereho et al. (2022), Utami and Nuvriasari (2023),
and Zulfikar (2019) found no significant relationship between customer orientation and performance.
Moreover, certain studies indicates that performance is not directly affected by market orientation, spe-
cifically consumer orientation (Agus Zainul Arifin, 2020; Tuominen et al., 2022; Wahyono & Hutahayan,
2021). Therefore, the findings about the relationship between customer orientation and performance are
inconsistent and do not lend themselves to generalizations.
Furthermore, research by Kero and Sogbossi (2017) and H. Wang etal. (2021) indicates that competi-
tor orientation is critical to enhancing and forming competitive advantages and performance. Yet,
research by Utami and Nuvriasari (2023) and Wanjiru and Wambugu (2022) revealed that competition
orientation has no significant effect on performance.
While most research on the connection between performance and entrepreneurial orientation has
demonstrated a positive influence (Alkhazali et al., 2020; Soares & Perin, 2020), Contrary to the findings,
some researchers have shown that there is an insignificant relationship between performance and entrepre-
neurial orientation (Hernández-Linares et al., 2019; Shah & Ahmad, 2019), which is negative (Taheri et al.,
2019). This indicates that the results are not conclusive, which supports the need to reanalyze the
relationships.
Scholars (Lumpkin & Dess, 1996; Maaodhah etal., 2021) have suggested conducting additional research
on the contingency variables related to strategic orientation and performance. Additionally, mediators
can clarify the reasoning behind the relationship between these two variables in empirical studies,
demonstrating the relationship between strategic orientation and enterprise performance. This reduces
the misleading effect and enables a more precise and tangible understanding of the underlying relation-
ships (LIU, 2011).
COGENT BUSINESS & MANAGEMENT 3
The literature review primarily determines innovation capability based on customer orientation, com-
petitor orientation, and entrepreneurial orientation (Akhtar et al., 2021; Kiani et al., 2021; Kim, 2017;
Ramírez-Solis et al., 2022; Tuominen et al., 2022). Furthermore, previous studies have shown that innova-
tion capabilities are crucial for converting ideas, knowledge, and information into better goods, services,
and marketing campaigns (Ali et al., 2020; Guzmán et al., 2018; Saunila, 2020).
Hence, adding the innovation capabilities as a mediator into the relationship encourages innovative
behavior and supports the mediation effect that a previous study (Maaodhah et al., 2021) suggested
would strengthen the link between business performance and strategic orientation. Furthermore, previ-
ous research on strategic orientation and innovative abilities has mostly examined large, high-tech com-
panies in developed countries (Hailu, 2019; Kiiru, 2015; Lee etal., 2010).
The study’s focus is to examine the importance of strategic orientation for innovation capabilities and
SMEs’ performance. This article addresses the practical challenges faced by SMEs, offering solutions on
how to effectively utilize their diverse resources to improve their innovation capabilities and overall per-
formance. Therefore, we anticipate that this article will contribute to the strategic management frame-
work, demonstrating how strategic orientation enhances value through innovation capabilities and
influences SMEs’ performance indirectly.
2. Theoretical, empirical and conceptual hypothesis development
(a) Resource-based theory
Resources cause organizational performance differences, according to resource-based theory (Peteraf,
1993). The main tenet of resource-based theory is that companies compete with one another based on
their resources and skills. Resources comprise both tangible and intangible assets controlled by the busi-
ness, such as strategies and innovation skills (Barney, 1991). According to resource-based theory, a
resource must possess four characteristics to generate a sustainable competitive advantage: be valuable
(worth something to the business), rare (unique, not used by anyone else), imperfectly imitable (not
simply replicated), and non-substitutable (Barney, 1991). This approach emphasizes the importance of a
firm’s unique and valuable resources and capabilities in establishing a competitive edge and superior
performance (Khana et al., 2020; Tsai & Wang, 2017).
According to resource-based theory, market-oriented strategies and entrepreneurial attitudes are rare,
valuable, non-substitutable, imperfectly imitable, and have improved business performance (Al Marzooqi
& Abdulla, 2020; Kiessling et al., 2016). In this study, resource-based theory stresses the importance of
strategic resources like strategic perspective and capabilities, which are hard to replace, expensive, and
not perfectly copyable in order to achieve better results. Strategic orientation makes it feasible to com-
prehend and develop the process and product to fulfill customers’ expectations for greater business
success (Akhtar et al., 2021; Han & Zhang, 2021).
Hence, this theory can provide a basis for long-term innovativeness through valuable and unique
resources in the workplace. Therefore, to grow and seize opportunities, an enterprise must link to
resources such as customer ideas and market information (Teece, 2014). Moreover, to stay innovative, it
helps one understand the market and adjust its products or procedures (Akhtar et al., 2021).
(b) Dynamic capabilities theory
An organization’s dynamic capability is its capacity to sense, seize, and transform internal and external
resources in order to respond to a dynamic environment (Teece, 2014; Teece et al., 1997). The
resource-based strategy concentrates on issues related to the company’s current resources, whereas
dynamic capabilities aim to transform existing resources and create new ones (Schilke, 2014). Businesses
with high dynamic capacities perform better than those with low dynamic capacities, according to the
dynamic capability theory.
4 A. T. BEKATA AND C. A. KERO
Dynamic capabilities, which are responsible for realigning a business’s organizational capabilities and
culture to promote new knowledge and ideas, provide the foundation of innovation, according to
Pundziene et al. (2021). SME managers not only allocate resources, but they also recognize, shape, and
seize new business opportunities to enhance innovation capacities and new markets.
Bogers etal. (2019) integrated open innovation techniques with dynamic capabilities (sensing, seizing,
and transforming). Businesses may find, utilize, and assess critical external information with the aid of
sensing, seizing, and transforming capabilities. This study attributes these characteristics to market-oriented
strategies, knowledge and ideas from external sources, and internal initiatives to improve innovative
capabilities. Additionally, earlier research has shown that innovation talent is crucial for transforming
knowledge, information, and ideas into better goods, procedures, marketing campaigns, and inventive
management outcomes (Ali etal., 2020). By utilizing these three dynamic feature sets, firms can enhance
their capacity for innovation (Bogers et al., 2019).
Scholars say that in order to improve the results of innovation, businesses need to look into, convert,
and employ both internal and external information (Naqshbandi et al., 2018). To profit from their inno-
vative behavior, SMEs must thus explore, transform, and use consumer knowledge and ideas in an open
and integrated culture (Gao etal., 2008; Naqshbandi & Jasimuddin, 2022). This entails involving custom-
ers in the innovation process, which enhances performance and innovation (Pundziene et al., 2021;
Tuominen etal., 2022).
(c) The eect of strategic orientation on enterprise performance
In this study, Strategic orientation is seen as the overall organization’s strategy, guiding principles, pro-
cesses, and methods for making decisions to improve its performance. M. Yang et al. (2022) have con-
ducted a number of studies that have advanced the category of strategic orientation in the context of
SMEs. we are discussing the various forms of strategic orientation, including customer orientation, com-
petitor orientation, entrepreneurial (network) orientation, and innovation orientation.
A guiding principle or tactic that emphasizes using customer information to satisfy their needs is
known as ‘customer orientation’ (Handa & Manuel, 2021; M. Yang et al., 2022). The goal of customer ori-
entation is to help businesses better understand the requirements and expectations of their clients and
deliver higher value by gathering customer knowledge, developing and implementing customer-focused
strategies, and becoming aware of possible new markets (Jeong et al., 2006; M. Yang et al., 2022).
Customer orientation emphasizes that the best method to improve business performance is to place
customers at the center of strategic focus (Y. Wang, 2016). Businesses should contact their target client
groups directly and concentrate on them, as stressed by Nasir etal. (2017). SMEs should prioritize meet-
ing consumer needs to enhance their chances of growing product lines and achieving a competitive
advantage (Feng et al., 2019). The most notable influence on performance comes from the
customer-oriented approach (JiménezZarco et al., 2011).
Competitor orientation focuses on understanding rivals’ plans and strategies, developing competitor
strategies, and responding with better values and marketing initiatives (H. Wang etal., 2021). To be com-
petitive in today’s fiercely competitive market, organizations need to be competitor-oriented, which
entails having a strategic, flexible attitude. They also need to employ technology and competitor-driven
strategies to identify current market trends (Schmidt et al., 2021). Research indicates that the use of
differentiation and cost leadership tactics has a beneficial impact on performance (Rajiv et al., 2014). It
enables companies to enhance their products and services by differentiating themselves from their com-
petitors. Hence, research by Kero and Sogbossi (2017) and H. Wang etal. (2021) indicates that competitor
orientation is critical to enhancing and forming competitive advantages and enterprise performance.
Entrepreneurial orientation enhances performance by investigating new markets, technologies, and
business opportunities (Aziz et al., 2014). Entrepreneurial attitudes that strongly emphasize innovative-
ness, proactive elements, and risk-taking skills may successfully search for new business opportunities
(Soares & Perin, 2020). The innovative behavior of entrepreneurs provides creative solutions to customer
problems (Tutar etal., 2015). A proactive mindset is alert to provide quick responses to ensure customer
satisfaction (Tutar et al., 2015). Prior research indicated a significant influence of entrepreneurial orienta-
tion on performance (Alkhazali et al., 2020; Soares & Perin, 2020).
COGENT BUSINESS & MANAGEMENT 5
Hypothesis 1: Customer orientation has a signicant impact on Hawassa SMEs’ performance in Ethiopia.
Hypothesis 2: Competitor orientation has a signicant impact on Hawassa SMEs’ performance in Ethiopia.
Hypothesis 3: Entrepreneurial orientation has a signicant impact on Hawassa SMEs’ performance in Ethiopia.
(d) The eect of strategic orientation on innovation capabilities of SMEs in Hawassa
Innovation capability refers to capacity to transform information, knowledge and ideas into improved
product, process, marketing, and management innovation. Customer orientation is the critical factor in
looking for consumer information, ideas, expectations, and preferences in order to create new products
and improve the attributes, cost, and quality of existing ones (Ali etal., 2020; Voss & Voss, 2008). By gath-
ering ideas from clients and gaining access to data on market expansion, businesses can innovate and
improve their skills (Kiani et al., 2021). Consumers serve as external information sources for creative pro-
cesses. Thus, companies incorporate customer ideas into their own internal expertise to create new ones
(Bogers et al., 2019). Consequently, Wilden etal. (2016) suggest that customer orientation plays a crucial
role in determining dynamic innovation capacities, also known as strategic orientation.
Competitor orientation focuses on searching for competitors’ strengths and weaknesses, comprehend-
ing competitors’ skills and tactics, and providing more value for customers (Acar & Özşahin, 2018). It is
a novel behavioral category since it stresses providing novel products and developing original concepts
in response to market information (Cozzarin, 2017). Recent research by Akhtar et al. (2021) shows that
market orientation among Pakistani SMEs encourages innovation in both processes and products. Hence,
competitor orientation enhances product innovation.
Entrepreneurial orientation plays an important part in building capacities by promoting innovative
values (Kiani et al., 2021). Entrepreneurs’ innovative behavior encourages and supports new experimen-
tation, ideas, and creativity, which is likely to lead to the development of novel services, products, or
processes (Aziz et al., 2014). This innovative behavior fosters qualities of receptiveness that increase the
capacity for innovation, which is crucial for innovation (Kiani etal., 2021). A key component of having a
proactive mindset is being alert to new opportunities and quick to respond with creative solutions (Tutar
et al., 2015). The top leadership entrepreneurial mentality of SMEs greatly enhances the process level of
dynamic capability, according to Rasheed etal. (2020).
Hypothesis 4: Customer orientation signicantly inuences the innovation capabilities of Hawassa SMEs in
Ethiopia.
Hypothesis 5: Competitor orientation signicantly inuences the innovation capabilities of Hawassa SMEs in
Ethiopia.
Hypothesis 6: Entrepreneurial orientation signicantly inuences the innovation capabilities of Hawassa SMEs
in Ethiopia.
(e) The eect of innovation capabilities on enterprise performance in SMEs
Enterprise performance is the combination of all achievements of a business as a result of significantly
improved or developed processes, goods, and services. In the context of small businesses, prior research
shows a positive correlation between innovation capability and business performance (Zhang & Hartley,
2018). Innovation encompasses several components such as originality, improved processes, enhanced
offers, inventive techniques, and state-of-the-art technologies (Cozzarin, 2017). Therefore, the ability to
innovate leads to better performance (Saunila, 2020; Singh et al., 2019; Tutar et al., 2015). Superior per-
formance is a result of a high capacity to ensure a major shift and preferred enhancements to goods,
services, or procedures (Nasir et al., 2017).
Behnam and Cagliano (2019) suggest that innovation positively affects market performance. Product
innovation is the primary driver of exceptional market performance and can shield businesses from vol-
atile markets and competition (Nasir et al., 2017). Additionally, process innovation capacity allows SMEs
to have a cost advantage that increases business productivity (Rasheed etal., 2020). Therefore, SMEs can
6 A. T. BEKATA AND C. A. KERO
grow and assume leading positions in their respective industries with the help of process-level innova-
tion. Additionally, companies may increase their commercial performance through marketing innovations
(Yam et al., 2011).
The results of the existing studies indicate that intentional business initiatives to develop innovative
capabilities establish a foundation for sustained exceptional performance in an organization. Additionally,
these research studies (Ali etal., 2020; Guzmán etal., 2018; Saunila, 2020) suggest that innovation capa-
bilities enhance business performance. The findings of a thorough evaluation of innovation capability in
the context of SMEs, according to Saunila (2020), show that innovation capability affects SMEs’ success,
especially in the manufacturing sector. Studies have also shown that specific aspects of innovation capa-
bility positively influence organizational success.
Hypothesis 7: Innovation capabilities signicantly inuence the enterprise performance of Hawassa SMEs in
Ethiopia.
(f) The mediating eect of innovation capabilities
Consumer orientation, competitor orientation, and entrepreneurial orientation are the main factors that
determine innovation capability (Akhtar et al., 2021; Kiani et al., 2021; Kim, 2017; Tuominen et al., 2022;
Tutar etal., 2015). In addition, prior studies have demonstrated the importance of innovation capabilities
in transforming ideas, and knowledge into improved products, processes which enhance business per-
formance (Ali etal., 2020; Guzmán et al., 2018; Saunila, 2020). Hence, incorporating mediator innovation
capabilities into the link supports innovative behavior and validates the mediation effect suggested by
earlier research (Maaodhah etal., 2021) in improving the strategic orientation-enterprise performance link.
This study proposes the mediation effect by incorporating mediator factor innovation capabilities into
the relationship, which in turn encourages innovative behavior of SMEs.
Hypothesis 8: Innovation capabilities mediate the relationship between customer orientation and perfor-
mance of Hawassa SMEs in Ethiopia
Hypothesis 9: Innovation capabilities mediate the relationship between competitor orientation and perfor-
mance of Hawassa SMEs in Ethiopia
Hypothesis 10: Innovation capabilities mediate the relationship between entrepreneurial orientation and per-
formance of Hawassa SMEs in Ethiopia (Figure 1).
3. Methodology
3.1. Research design
The research design includes methods and steps involved in conducting a specific study, including the
development of generic hypotheses into specialized approaches for collecting, evaluating, and interpret-
ing data (Taherdoost, 2022). Based on the objectives of the investigation, an explanatory research design
was adopted. Additionally, the selection of the research design for this study is justified by the nature of
the investigation, including the research topic and analytical techniques that provide strong evidence to
support the proposed hypothesis (Asenahabi, 2019). It is vital to validate the developed conceptual
model and hypothesis to completely comprehend the role of strategic orientation in creative talent and
performance (Asenahabi, 2019; Tuominen et al., 2022).
The hypotheses were investigated using a quantitative cross-sectional field survey. According to Rindfleisch
et al. (2008), cross-sectional survey design is the most common type of survey design employed in social
research. Consequently, a cross-sectional research strategy was used in this study because of its nature.
3.2. Target population of the study
The target population of this study consisted of SMEs in the manufacturing and service sectors.
According to the inventory report of the Job and Skill Development Department of Hawassa City, 1,623
COGENT BUSINESS & MANAGEMENT 7
SMEs in the manufacturing and service sectors were established and put into operation in Hawassa City
during the course of the year. SMEs that had been in operation over the previous 3 years were the
subjects of this investigation. Therefore, 1,623 managers or owners of SMEs were selected as the target
population.
3.3. Sample size and sampling technique and frame
The sample size was the appropriate proportion of the target study group that would provide informa-
tion in the study, enabling generalization of the target group (Creswell, 2012). Yamane suggested another
simplified formula for the calculation of the sample size from a population. According to him, for a 95%
confidence level and p = 0.5, the sample size should be
n
N
Ne
=
+12
()
where n is the sample size, N is the population size, and the estimate of the target population size =
1,623, e is the Level of precision (0.05). It should be noted here that formula was used to calculate the
sample sizes. The sample size was computed as per the formula below:
n xx
= +
()
= =
1 623
11 623 0 05 0 05 1 623
5 0575 321
,, .. ,
.
,
Applying the above formula; the sample size is 321.
A multi-stage sampling was used for this survey. Hawassa City was therefore conveniently selected
for the first part of the study because the researcher was knowledgeable about the current challenges
pertaining to MSEs’ commercial performance in their active operations. In the second step, four of the
eight sub-cities under the supervision of the Hawassa municipal administration, Menaheria, Tabor, Addis
Ketema, and Haykidar, were chosen using the purposive sample approach. The high density of small to
medium enterprise locations in Hawassa City, as per the inventory report, is the basis for the area’s selec-
tion criteria (2023). Because the manufacturing and/or service sectors of firms inside each sub-city have
a prevalent focal constraint, the third step involved their deliberate selection.
A sampling frame is a list of all items from which a representative sample is taken when conducting
the research. It is capable of identifying each element and selecting the elements to include in the sam-
ple (Saunders et al., 2009).
Figure 1. Conceptual model.
8 A. T. BEKATA AND C. A. KERO
3.4. Data collection methods
Quantitative data collection is a method of collecting numerical data that can be converted into values
that can be analyzed using an appropriate statistical method. Quantitative data are typically employed
to assess the variables under investigation (Voelkel & Kretzschmar, 2021). Quantitative data collection
techniques and tools include document reviews, probability sampling, observations, interviews, and
questionnaires (Voelkel & Kretzschmar, 2021). Questionnaires were used to gather quantitative data for
the current study. Aryal (2022) defines a questionnaire as a quantitative data collection tool that consists
of a series of questions, along with several possible answers. They were sent to the study participants
and returned to the investigator.
Questionnaires used for quantitative data collection have numerous advantages. These include the
following: it speeds up the process of gathering data, is reasonably cost-effective when compared to
other tools, ensures respondent uniformity, removes interviewer bias, allows respondents to reflect on
and answer questions, and makes it simple for the researcher to contact the respondents (Aryal, 2022;
Taherdoost, 2021). Therefore, the questionnaire was one of the most practical and helpful instruments
for collecting data in this quantitative investigation.
We sent a questionnaire to each manager or owner of a selection of SMEs in the field to collect pri-
mary data. The researcher supervised ten enumerators who collected the data. The ethical approval for
the methods section and the ethical procedure to collect data from sampled respondents was approved
by Mr. Lanso Degela Maraso of Hawassa University, with approval number Mangt/0128/16. Moreover, the
participants provided their written informed consent that confirming their volunteerism to participate in
this study.
3.5. Measurement of variables
To fit the needs of the current investigation, the scales utilized in this study were adapted from
pre-existing measures. Therefore, utilizing 5-point Likert scales on pre-coded, closed-ended structure
questions, primary data were gathered. Respondents were asked to select whether they agreed or dis-
agreed with a number of items using a five-point Likert scale, where 1 = strongly disagree and 5 = strongly
agree. Jeong etal. (2006) defines customer orientation as the overall guidelines and principles that spec-
ify how an organization should comprehend its customers’ needs by gathering, disseminating, and
responding to the potential market. They employed three variable measurements: customer information,
customer-oriented strategy, and responsiveness (Bekata & Kero, 2024; M. Yang et al., 2022). Customer
orientation was measured using a nine-item scale in three dimensions.
Competitor orientation focus on an enterprise’s understanding of short-term strengths and weak-
nesses, long-term capabilities and strategies of key current and potential competitors, and applying dif-
ferent strategies. The typical strategies include cost leadership, differentiation, and overall focus strategies
(Bekata & Kero, 2024; Porter, 2000). Moreover, innovativeness, proactivity, and taking risks are all part of
an entrepreneurial orientation (Ighomereho et al., 2022; Miller, 2011). Product, process, marketing, and
dynamic innovation capacities have been used to measure the innovation capabilities dimension in the
context of SMEs (Fitz-Koch & Nordqvist, 2017; Guzmán etal., 2018). Three distinct methods of measuring
performance success were employed: market, finance, and innovative performance.
3.6 Data analysis
This study examined the linkages and magnitude of the main influences of customer orientation on the
enterprise performance and capabilities of SMEs in Hawassa, Ethiopia. The research hypotheses were
tested using structural equation modeling (SEM), which assesses the direct and indirect impacts of caus-
ative elements in a single model, while simulating complicated interactions between multiple observable
and latent variables in diverse dependent relationships. SEM is unique compared with other multivariate
statistical techniques. However, with multiple regression analysis, only observable variables can be
included and only direct effects can be observed. Structural regression models are therefore suitable for
data analysis, depending on the type of data (Civelek, 2018).
COGENT BUSINESS & MANAGEMENT 9
The way partial least squares structural equation modeling (PLS-SEM) and covariance-based structural
equation modeling (CB-SEM) handle latent variables in the model is a crucial conceptual difference
between the two methodologies (Hair et al., 2022). Typically, constructs are seen as shared factors that
account for the covariation among the indicators they are linked to in CB-SEM. Composite variables are
believed to serve as trustworthy substitutes for conceptual variables by offering thorough representa-
tions of the constructs being studied.
The choice between the estimation techniques: PLS-SEM, and CB-SEM, according to Hair etal. (2022)
and Hair et al. (2016), should also depend on the objective of the study. The majority of uses of CB-SEM
are in confirmatory research, which is defined as a study that verifies or disproves previously held con-
ceptual models and hypotheses. Additionally, CB-SEM shows how well a theoretical model matches the
covariance matrix for a particular collection of data (Hair et al., 2016). When the theory needs to be
verified and validated, and the model needs to be generally assessed using fit indices, the CB-SEM
approach is more accurate. Thus, with sound rationale, this investigation was applied the CB-SEM estima-
tion method.
The maximum likelihood estimate approach is the default option in the CB-SEM programs. This is the
default method for covariance-based structural equation modeling, and when compared to other estima-
tion methods, it yields precise and trustworthy results (Civelek, 2018; Hair et al., 2022). For idea testing
and assessing a specific composite structural model and relationship, it is the most dependable method
available. Based on the essential features of the AMOS software, the decision to use the Maximum
Likelihood Estimation (MLE) technique can also be supported. Therefore, Maximum Likelihood Estimation
(MLE) remains the best statistical analysis method for this investigation. Model specification, identifica-
tion, assessment, estimation, and hypothesis testing are the five processes of structural equation model-
ing (SEM) testing. If necessary, further modifications or adjustments will be made (Jain & Chetty, 2022).
4. Results of the study
4.1. Demographic characteristics
Data were collected from 118 (36.8%) manufacturing and 203 (63.2%) service sector enterprises to derive
new empirical insights into theory and to maximize the generalizability of the results. The data show that
Hawassa SMEs with 11–20 employees had the highest number of respondents (53%). In the case of
SMEs, only 64 or 20% have been operating for more than 8 years. A total of 137 SMEs (42.7%), have
been operating their business for to 5–8 years, 75 or 23.4% for around 4–5 years, while SMEs operating
for less than 4 years registered a percentage of less than 13.4%. The majority of SMEs were owned by
owners (61%), whereas the rest were owned by general managers. 48% of SMEs sold food, beverages,
and other hotel services, and 30% sold manufacturing products such as furniture, clothes, and metals.
4.2. Reliability tests of a construct
The degree of reliability of a measurement system can be characterized by its consistency of measure-
ment (Jain & Chetty, 2021; Karakaya-Ozyer & Aksu-Dunya, 2018). Because maintaining a consistent mea-
surement throughout all of the instrument’s component parts is what reliability testing refers to, it is very
important. If all the elements of the scale measure the same construct and are related to one another,
then the scale can be said to have high internal consistency and reliability. Two methods can be used
to evaluate the reliability of a dataset or structure. Internal consistency and composite dependability are
terms used to describe these methods.
Cronbach’s alpha values for each survey item included in the research were obtained to assess the
study’s internal consistency. Table 1 summarizes the internal coherence of the structures. All of the
dimensions’ Cronbach’s alpha values are thus significantly higher than the benchmarks of 0.70 (Table 1).
This shows the consistency of the measurement model (Field, 2013; Jain & Chetty, 2021).
The Kaiser-Meyer-Olkin measure of sampling adequacy (KMO) values for each construct were assessed,
and all of them earned scores higher than the minimum of 0.50. The KMO Measure of Sampling Adequacy
value of the five factors is 0.830 and hence acceptable. For current study, the KMO test values for all of
10 A. T. BEKATA AND C. A. KERO
the factors was greater than 0.5. Bartlett’s test of sphericity indicates that the sample is adequate and
suitable for factor analysis as the p value for this study was less than 0.05 and p value =.000 (Jain &
Chetty, 2022; Field, 2013).
4.2.1. Composite reliability in SEM analysis
Composite reliability evaluates the effectiveness of using underlying variables in structural equation
modeling (Jain & Chetty, 2021). This method examines the loading of an item’s variables to determine
its contribution or relevance of that item (Jain & Chetty, 2022). In SEM, construct reliability is represented
by confirmatory factor analysis (CFA). Composite reliability was estimated using a factor loading analysis.
Higher numbers suggest greater reliability (Hair et al., 2016). The composite reliability scale has a range
from 0 to 1. Composite scores in the range of 0.6 to 0.7 are considered sufficient for explanatory research,
while scores in the range of 0.70-0.90 are considered good enough for further study phases.
The composite reliability coefficients of the five factors in this analysis are greater than 0.7. In this
investigation, the five factors’ composite reliability coefficients exceed 0.7. The composite reliability of
customer orientation, competitor orientation, and entrepreneurial orientation in this analysis were 0.858,
0.883, and 0.866, respectively. Similarly, the innovation capabilities and inventive performance constructs
of CR, have values of 0.915 and 0.910, respectively, which is likewise greater than 0.7. As a result, the
composite reliability was good for the measurement models. Composite reliability was calculated using
standard estimates and error term variance from Amos’ confirmatory factor analysis (Table 2).
4.3. Convergent validity of a construct
The degree to which indicators that ought to be conceptually connected are related is known as con-
vergent validity. Convergent validity is the extent to which a common factor converges to explain the
covariation in its indicators. It also confirms that the observed variables being studied are related to the
latent concept (Jain & Chetty, 2021, 2022). The average value for each coefficient in the measurement
model was represented by the factor loading for confirmatory factor analysis. Factor loadings should
show significant loading with the latent construct and be more than 0.5 (Kero & Sogbossi, 2017; Hair
etal., 2016). The results of the final inquiry are shown in Table 3. A substantial effect was found between
the expected construct and all elements, with loadings greater than 0.50.
Average Variance Extracted (AVE): is used to determine how much a notion or thing that embodies
it may be shared (Jain & Chetty, 2022). A useful measure for assessing convergent validity is average
variance extracted (AVE), which explains the extent to which items are shared between conceptions
Table 1. Displays each construct, and its associated reliability coecients.
No Variables No. of items Correlation (r) Item-total corr Cronbach alpha
I. Customer Orientation
1Customer information 3 0.859 0.345 0.909
2Customer Strategy 3 0.827 0.332 0.896
3 Responsiveness 3 0.806 0.323 0.890
II. Competitor Orientation
1 Dierentiation 4 0.826 0.324 0.903
2 Cost-leadership 4 0.872 0.342 0.928
3 Focus 4 0.851 0.334 0.903
III. Entrepreneurial Orientation
1 Innovativeness 3 0.846 0.338 0.916
2 Proactiveness 3 0.817 0.326 0.892
3 Risk-taking 3 0.843 0.336 0.893
IV. Innovation Capabilities
1Product Innovation Cap. 3 0.948 0.293 0.971
2Process Innovation Cap. 3 0.933 0.288 0.964
3Marketing Capability 3 0.488 0.151 0.700
4Dynamic Capability 3 0.867 0.268 0.927
V. Enterprise Performance
1Market Performance 3 0.849 0.343 0.918
2Finance Performance 3 0.885 0.357 0.931
3Innovative performance 3 0.743 0.300 0.842
Source: Author’s presentation, from SPSS output.
COGENT BUSINESS & MANAGEMENT 11
(Sujati etal., 2020). Furthermore, the construct accounts for at least 50% of the variation in the indicators
that comprise the construct if the AVE is 0.50 or higher (Hair etal., 2022). Therefore, convergent validity
was achieved when the average variance extracted (AVE) values for all latent constructs were higher than
the 0.50 threshold (Hair et al., 2019).
Convergent validity was found for the data in both cases, as shown in Table 3, which also shows that
all AVE values were above 0.50, with the exception of marketing innovation capabilities, which was 0.3.
A lower AVE is due to lower weight or standardized estimate as lower understanding or application of
marketing innovation capabilities indicators in the study area. This illustrates the accuracy of the mea-
surement model.
4.4. Discriminant validity
Discriminant validity examines how effectively constructs capture the many facets of Customer
Orientation, Competitor Orientation, entrepreneurial Orientation, Innovation Capabilities and enterprise
performance. The uniqueness of the latent variable constructs is ensured via discriminant validity
(Chetty & Tomei, 2021; Hair et al., 2016; Sujati et al., 2020). To meet these requirements, a construct
Table 2. Composite reliability (using AMOS).
No Variables
Standard loadings
(r) (e)=1-(r) ∑(ri). ∑(ri) i = 1_n
∑(ri). ∑(ri) +∑(ei)
i = 1_n Composite reliability
I. Customer Orientation
1Customer information 0.774 0.226
2Customer Strategy 0.718 0.282 4.84 5.64 0.858
3Customer Responsiveness 0.708 0.292
I. Competitor Orientation
1 Dierentiation 0.727 0.273
2Cost leader 0.871 0.129 5.28 5.98 0.883
3 Focus 0.7 0.3
I. Entrepreneurial Orientation
1 Innovativeness 0.816 0.184
2 Proactiveness 0.718 0.282 4.98 5.75 0.866
3 Risk 0.697 0.303
I. Innovation Capabilities
1Product Innovation Cap. 0.984 0.016
2Process Innovation Cap. 0.901 0.099 9.64 10.54 0.915
3Marketing Capability 0.502 0.498
4Dynamic Capability 0.718 0.282
I. Enterprise Performance
1Market Performance 0.813 0.187
2Finance Performance 0.78 0.22 5.87 6.44 0.910
3Innovative Performance 0.829 0.171
Source: Author’s calculation, from SPSS and Amos output.
Table 3. Convergent validity based on loading factors (using SPSS) and AVE on constructs from Standardized estimate
(using AMOS).
V Loadings AVE
Customer Information 0.809 0.599
Customer Strategy 0.776 0.516
Responsiveness 0.786 0.501
Innovativeness 0.765 0.516
Proactiveness 0.738 0.516
Risk-taking 0.756 0.486
Dierentiation 0.835 0.529
Cost-leadership 0.876 0.759
Focus 0.824 0.490
Product Innovation Capabilities 0.896 0.968
Process Innovation Capabilities 0.874 0.812
Marketing Innovation Capabilities 0.615 0.252
Dynamic Capabilities 0.807 0.516
Market Performance 0.581 0.661
Finance Performance 0.624 0.608
Innovative performance 0.69 0.687
Source: Authors’ calculation. Extraction Method: Principal Component Analysis Varimax rotation with Kaiser normalization.
12 A. T. BEKATA AND C. A. KERO
needs to show a higher variance with its indicators than other model constructs. The discriminant
validity of this investigation was evaluated using the Fornell–Larcker criterion. To meet this condition,
the average variance extracted (AVE) square root must be larger than the corresponding correlation
coefficient (Fornell & Larcker, 1981; Hair etal., 2019). The development of Larcker’s Fornell-criterion was
predicated on the idea that a construct exhibits more variance with its indicators than any other
construct.
The results of this analysis showed that all square roots of the constructs’ average variance extracted
(AVE) values were higher than the matching correlation coefficient (Table 4). Compared the square root
of AVEs of the CuO, CO, EO, IC, and performance factors with their correlations, there was less association
between each factor with the other factors in the model. Thus, the criterion provided strong support for
the discriminant validity of the CuO, CO, EO, IC, and performance. In other words, the discriminatory
validity of all five factors was upheld.
Finally, the Variance Inflation Factor serves as a gauge off the level of multicollinearity in the regres-
sion analysis (VIF). This phrase describes the statistical hypothesis that the variance of a regression coef-
ficient increases with collinearity. Multicollinearity problems were estimated (inflation). In general,
multicollinearity may exist, and more research is needed if the VIF is greater than 4. Significant multicol-
linearity that requires correction is present when the VIF is greater than 10. This study indicates each
factor’s VIF score less than 3 and has no multi-collinearity. Table 4 further demonstrates that there was
no substantial collinearity or issue (Chin, 2010).
4.5. Control variables in the model
The survey form contained inquiries regarding the demographics of the respondents. An independent
sample t-test and analysis of variance (ANOVA) were used to examine how demographic traits affected
the research result variables. This study included several control factors to mitigate any possible impact
of these variables on creative capacity. These factors were included in the model to reduce the chance
of confounding effects on relevant variables. Depending on the industry, size of SME, and duration of
employment of the respondents, there were significant mean differences in enterprise performance.
4.6. Hypothesis testing
4.6.1. Model specication and identication
Structural regression models, which combine reflective measurement and structural models, were used
in this study. Three exogenous latent variables (customer orientation, competitor orientation and entre-
preneurial orientation) and two endogenous latent variables comprised the basic model (innovation
capabilities and enterprise performance). Indirect and direct links between the five latent variables and
the sixteen-dimensional sub-constructs of latent variables were included in the model.
The parameters in this structural model represent the relationships among the latent variables, and
between the observable and latent variables. Three types of parameters were discussed: covariations,
direct effects, and indirect impacts. The structural model is composed of seven path coefficients and
sixteen factor loadings. Two error terms were estimated to the endogenous variables and a measurement
error was linked to each manifested variable.
Table 4. Discriminant validity (using AMOS).
Fornell–Larcker
criterion VIF CustO CO EO IC EP
CustO 2.16 0.733
CO 2.42 0.118 0.766
EO 2.24 0.399 0.125 0.744
IC 2.51 0.295 0.126 0.281 0.776
EP 2.87 0.348 0.102 0.546 0.598 0.807
Source: Author’s calculation, from SPSS and AMOS outputs. CuO, customer orientation; CO, competitor orientation; EO, entrepreneurial orien-
tation; IC, innovation capability; EP, enterprise performance. The o-diagonal values in the Fornell–Larcker Criterion matrix are the correlations
between the latent constructs, and diagonal are square root values of AVEs.
COGENT BUSINESS & MANAGEMENT 13
4.6.2. Model estimation
The parameters were estimated using the Maximum Likelihood Estimation (MLE) approach with Amos 23
and IBM® SPSS® 26. Using AMOS, Figure 2 illustrates a structural regression model with standardized esti-
mates (r). The estimations of the parameters are finally shown by AMOS in in terms of both their stan-
dardized and unstandardized values (Tables 5 and 6). The critical ratio (C.R.), a z-statistic that determines
whether the calculated parameter statistically deviates from zero, is also provided.
4.6.3. Model evaluation
The basic purpose of model fitting is to establish an optimal fit between the model and the data. Upon
dividing SMIN by the degrees of freedom, the model yields a result of 2.2, which falls below the neces-
sary threshold of the upper bound of 3. Given the fit values proposed by Bayram and Hair etal. (2019),
this indicates a satisfactory fit of the data to the model. The GFI is an objective model fit metric that is
comparable to the R2 value. Our study model’s result of 0.923 satisfied the necessary criterion of 0.9 or
above for an acceptable match.
CFI is one of the most popular measures for evaluating the incremental fit between an independent
model and a specific research model (Kline, 2011). In general, values greater than 0.9 are thought to be
suggestive of a strong model. Furthermore, the 0.95 result of the model satisfied the required constraints.
An elevated RMSEA score denotes a poor match. The investigation result of 0.06 matched the
Figure 2. Structural regression model with standardized estimates (r).
14 A. T. BEKATA AND C. A. KERO
recommended cutoff value of 0.06, indicating the stability of the model even further (Hair et al., 2019).
Adding together all of the goodness-of-fit numbers, we conclude that the model fits the sample data.
4.7. Findings and decisions of hypothesis test
(a) Finding and decision of the hypothesis test 1, 2, and 3 (model, 1)
Customer orientation has a significant effect on the performance of Hawassa SMEs. Table 5 shows that
customer orientation has a favorable and significant impact on enterprise performance, with a direct
effect was (β = 0.12***) and total effect was (β = 0.23***) (Table 5). The overall effect (β = 0.23***) indicates
that enterprise performance increases by 23% when customer orientation increases by 1%. Additionally,
the model contains standardized estimates (r) for the causal routes of customer orientation on inventive
performance for the direct effects (r = 0.12***), indirect effects (r = 0.11***) of 48 percent of the total
effect, and overall effect (r = 0.23***) (Table 6). The overall effect (r = 0.23***) indicates that performance
rose by 0.23 standard deviation for every standard deviation rise in customer orientation. Therefore,
these findings confirmed Hypothesis 1. The decision was supported by the significant findings of the
hypothesis H1.
Competitor orientation has a significant effect on the performance of Hawassa SMEs. Table 5 shows
that competitor orientation has insignificant direct effect on enterprise performance, with total effect
(β = 0.05*) (Table 5). The overall effect (β = 0.05*) indicates that enterprise performance increases by 5%
when competitor orientation increases by 1%. Therefore, as competitor orientation has no significant
direct effect on enterprise performance this finding not supported Hypothesis 2.
Entrepreneurial orientation has a significant effect on the performance of Hawassa SMEs. Table 5
shows that entrepreneurial orientation has a favorable and significant impact on enterprise performance,
with a direct effect was (β = 0.40***) and total effect was (β = 0.51***) (Table 5). The overall effect
(β = 0.51***) indicates that enterprise performance increases by 51% when entrepreneurial orientation
increases by 1%. Additionally, the model contains standardized estimates (r) for the causal routes of
customer orientation on inventive performance for the direct effects (r = 0.46***), indirect effects
(r = 0.13***), 22 percent of the total effect, and overall effect (r = 0.59***) (Table 6). The overall effect
(r = 0.59***) indicates that enterprise performance rose by 0.59 standard deviation for every standard
deviation rise in entrepreneurial orientation. Therefore, these findings supported Hypothesis 3.
(b) Findings and decision of the hypothesis test 4, 5, and 6 (model, 2)
Customer orientation has a favorable and considerable impact on Ethiopian Hawassa SMEs’ capacity for
innovation. Table 5 demonstrates the direct effect (β = 0.24***) between client orientation and innovative
capacity. According to the direct effect (β = 0.24***), innovation capacities improved by 0.24 units for
every unit increase in customer orientation. The model also includes standardized estimates (r) for the
causal pathways leading to the direct (r = 0.23***) link between innovation skills and consumer orienta-
tion (Table 6). These immediate results show that for every standard deviation increase in customer
Table 5. Displays the results of the mediation conditions and regression weight estimations.
Unstandardized Eects (𝛽𝛽)Total Eects Direct Eects Indirect Eects indirect/Total
Customer Orientation →
Enterprise performance
.23*** .12*** .11*** .11/.23= .48
Competitor Orientation →
Enterprise performance
.05** Ns .05** .05/.05 = 1
Entrepreneurial Orientation →
Enterprise performance
.51*** .40*** .11*** .11/.51= .22
Customer Orientation →
Innovation capabilities
.24*** .24***
Competitor Orientation →
Innovation capabilities
.11** .11**
Entrepreneurial Orientation →
Innovation capabilities
.24*** .24***
Innovation capabilities →
Enterprise performance
.46*** .46***
Source: Author’s calculation, from AMOS output.
***Signicant at the p < 0.001 (2-tailed), n = 321.
COGENT BUSINESS & MANAGEMENT 15
orientation, innovation capacities improve by 0.23 standard deviations. In general, the hypothesis 4 was
supported. The decision was supported by the significant findings of the hypothesis H4.
Competitor orientation has a favorable and considerable impact on Ethiopian Hawassa SMEs’ capacity
for innovation. Table 5 demonstrates the direct relationship (β = 0.11***) between Competitor orientation
and inventive capacity. According to the direct effect (β = 0.11***), innovation capacities improved by 0.11
units for every unit increase in Competitor orientation. The model also includes standardized estimates
(r) for the causal pathways leading to the direct (r = 0.12***) link between innovation skills and Competitor
orientation (Table 6). These immediate results show that for every standard deviation increase in com-
petitor orientation, innovation capacities improve by 0.12 standard deviations. Consequently, the results
support hypothesis 5. In general, the hypothesis was supported.
Entrepreneurial orientation has a favorable and considerable impact on Ethiopian Hawassa SMEs’ capac-
ity for innovation. Table 5 demonstrates the direct relationship (β = 0.24***) between entrepreneurial ori-
entation and inventive capacity. According to the direct effect (β = 0.24***), innovation capacities improved
by 0.24 units for every unit increase in entrepreneurial orientation. The model also includes standardized
estimates (r) for the causal pathways leading to the direct (r = 0.26***) link between innovation skills and
entrepreneurial orientation (Table 6). These immediate results show that for every standard deviation
increase in entrepreneurial orientation, innovation capacities improve by 0.26 standard deviations.
Consequently, the results support hypothesis 6. In general, the following hypothesis was supported.
(c) Findings and decision of hypothesis test 7 (model, 3)
The enterprise performance of Ethiopian SMEs in Hawassa is positively affected by their innovation capac-
ities. Enterprise performance is impacted (β = 0.46) by the pathways from innovation capabilities, as Table 5
illustrates. Enterprise performance improved by 0.46 units for every unit increase in innovation capabilities
according to the direct effect (β = 0.46***). In addition, the standardized estimates (r) for the causal path-
ways relating to the direct effects of innovation capabilities on enterprise performance (r = 0.50***) were
included in this model (Table 6). These immediate results show that for every standard deviation increase
in innovation capacities, improve enterprise performance by 0.50 standard deviations. Based on these find-
ings, we conclude that innovation capabilities have a major influence on enterprise performance, the results
support hypothesis 7. The decision was supported by the significant findings of the hypothesis H7.
(d) Mediation tests, hypothesis 8, 9, and 10
The following requirements must be satisfied to validate mediation tests to be validated (Baron & Kenny,
1986): 1. changes to the mediator variable result from changes to the independent variable; 2. The depen-
dent variable changes as a result of the changes made to the mediator variable. 3. When the regression
analysis includes the mediator and independent variables, the influence of the independent variable on
the dependent variable either decreases or becomes negligible (Civelek, 2018; Kero & Sogbossi, 2017). This
implies that we first check all variables for correlation after building the model. Here, we confirm whether
Table 6. Below presents, the results of mediation conditions and regression weight estimates.
Standardized eects (rr) St. total eects St. direct eects St. indirect eects Indirect/total
Customer Orientation →
Enterprise performance
.23*** .12*** .11*** .11/.23= .48
Competitor Orientation →
Enterprise performance
.05** Ns .05** .05/.05 = 1
Entrepreneurial Orientation →
Enterprise performance
.59*** .46*** .13*** .13/.59= .22
Customer Orientation →
Innovation capabilities
.23** .23***
Competitor Orientation →
Innovation capabilities
.12** .12**
Entrepreneurial Orientation →
Innovation capabilities
.26*** .26***
Innovation capabilities →
Enterprise performance
.50*** .59***
Source: Author’s calculation, from AMOS output.
***Signicant at the p < 0.001 (2-tailed), n = 321.
16 A. T. BEKATA AND C. A. KERO
the model satisfies the first two requirements stated by Baron and Kenny. Table 7 presents sample cor-
relation Tables. In this case, three different models and model coefficients were compared.
Table 8 shows that the coefficient of the effect between each strategic orientation and enterprise
performance decreased when innovation capabilities were added to model 1. In this case, we found that
the roles of mediator innovation capacities were statistically significant. The fit index for each model is
also included in Table 8. Furthermore, these fit indices were within admissible bounds for the objective
confirmation of the mediator variable’ function.
To determine the levels of significance of the mediation effects, another analysis was performed using
AMOS. To better understand the relationship in between customer orientation, competitor orientation,
entrepreneurial orientation and enterprise performance, we examine the influence of mediators (innova-
tion capabilities). The mediation model includes standardized estimates (r) for the causal channels for the
direct effects (r = 0.12***), total effect (r = 0.23***), and indirect effects (r =.11***) of customer orientation
on enterprise performance. A partial mediation between customer orientation and enterprise perfor-
mance was shown by the indirect effect (r = 0.11***), which was 48 percent.
Similarly, the mediation model includes standardized estimates (r) for the causal channels for the
direct effects (r = 0) which was insignificant, total effect (r = 0.05*), and indirect effects (r = 0.05*) of com-
petitor orientation on enterprise performance. A partial mediation between competitor orientation and
enterprise performance was shown by the indirect effect (r = 0.05*), which was full mediation. Moreover,
the mediation model includes standardized estimates (r) for the causal channels for the direct effects
(r = 0.46***), total effect (r = 0.59***), and indirect effects (r = 0.13***) of entrepreneurial orientation on per-
formance. A partial mediation between entrepreneurial orientation and enterprise performance was
shown by the indirect effect (r = 0.13***), which was 22 percent.
These results indicated that innovation capabilities played a mediating role in between customer ori-
entation, competitor orientation, entrepreneurial orientation and enterprise performance, which sup-
ported hypothesis 8, 9, and 10. Overall, the results indicated that the decisions were supported by the
significant findings of hypothesis H8, H9, and H10. Finally, the findings and decisions of the hypothesis
testing are summarized in Table 9.
4.8. Discussion
4.8.1. The eect of strategic orientation on enterprise performance (Model 1)
This study indicated that searching for customer information, incorporating customer preferences and needs
into business development decisions, and responsiveness help SMEs provide excellent customer service and
Table 7. Correlation coecients sample table.
Variables
Customer
orientation Competitor
Entrepreneurial
orientation
Innovation
capabilities
Enterprise
performance
Customer orientation 1
Competitor orientation 0.118 1
Entrepreneurial orientation 0.399 0.125 1
Innovation capabilities 0.295 0.126 0.281 1
Enterprise performance 0.348 0.102 0.546 0.598 1
Source: Source: Authors’ calculation, from SPSS.
Table 8. Output of Standardized total eects.
Relations Model 1 Model 2 Model 3
CuO→ IP (H1) 0.22 0.12
CO→ IP (H1) 0.05 Ns
EO→ IP (H1) 0.59 0.46
CuO→ IC (H2) 0.23 0.23
CO→ IC (H2) 0.13 0.12
EO→ IC (H2) 0.27 0.26
IC→ EP (H3) 0.79 0.50
χ2/df = 2.86 CFI = 0.94
GFI = 0.93, RMSEA = 0.07
χ2/df = 2.35, CFI = 0.95
GFI = 0.936, RMSEA = 0.06
χ2/df = 2.2 CFI = 0.95
GFI = 0.923 RMSEA = 0.06
Source: Authors’ calculation, from Amos. NS = Not signicant.
COGENT BUSINESS & MANAGEMENT 17
ensure long-term success. The strategy selected should be in line with the demands of the target customers.
Hence, this study reveals that customer orientation leads to higher customer satisfaction because understand-
ing the needs of the customer and seeking better solutions helps to realize superior value for customers,
which has a big impact on how they behave. Furthermore, customer and market knowledge and ideas help
businesses make better decisions about standardizing or modifying processes, products, or services.
Hence, SMEs should prioritize keeping their present customers and forging profitable long-term rela-
tionships with them to help them obtain new ideas and understand their needs. According to earlier
research, interactions with customers may generate ideas that lead to the creation of new products. This
finding is consistent with those of previous studies (Boso etal., 2012; Salojärvi etal., 2015; Y. Wang, 2016).
The findings showed a statistically no impact of competitor orientation (differentiation strategy, focus,
and cost leadership strategy) on the performance of SMEs in Hawassa. Therefore, the study was unable to
substantiate the claims that the performance of SMEs in Hawassa, is significantly impacted by differentia-
tion strategy, customer focus, or cost leadership. Searching for competitors’ benefits, drawbacks, strengths,
and strategies to learn more about them delays decision-making until SMEs have validated and distributed
industry-specific market research. Therefore, because competitor orientation is reactive, it has no discernible
impact. In this study, competitor orientation only has a significant indirect impact rather than direct effect.
Entrepreneurial orientation is the search engine for new markets, technologies, and commercial pros-
pects to improve performance. This study demonstrates how an entrepreneurial mindset that prioritizes
creativity, initiative, and risk-taking abilities may effectively find new company prospects. Entrepreneurs
also demonstrate a creative approach to problem-solving. Being proactive also means being aware of the
need to act quickly to satisfy customers. This study’s results demonstrated that an entrepreneurial orien-
tation significantly impacts performance. These results are consistent with the research (Alkhazali et al.,
2020; Soares & Perin, 2020; Tutar et al., 2015).
According to this study, strategic orientation influences the procedures, decision-making, implementa-
tion, and resource allocation of SMEs in Ethiopia. This implies that when SMEs choose to have customer
orientation, competitor orientation, or entrepreneurial orientation from a strategic perspective, all strate-
gies, procedures, allocations, and choices are focused on satisfying the customer, which improves inno-
vation, market share, and finance performance of the SMEs. Meeting the requirements and demands of
both current and potential customers entails all efforts aimed at achieving superior performance through
strategic orientation, which is aligned with the study.
4.8.2. The eect of strategic orientation on innovation capabilities (Model 2)
The study’s findings, which examined how customer ideas, knowledge, and information might affect
SMEs’ ability to build their innovative skills, showed that it has a major and advantageous impact. To
make decisions, create innovative strategies, and give their customers the goods and services that best
suit their needs, they try to gain a deeper understanding of them. Thus, a better understanding of cus-
tomers promotes creative and customer-focused capabilities.
In this study, we tested how customer orientation, competitor orientation and entrepreneurial orien-
tation strongly affect and foster SMEs innovation capabilities, which in turn boost their performance.
Table 9. Summary of ndings and decisions regarding the hypotheses.
HProposed hypothesis Findings Decisions
H1 Customer orientation has positive eect on performance of Hawassa SMEs in Ethiopia Signicant Supported
H2 Competitor orientation has positive eect on performance of Hawassa SMEs in Ethiopia Insignicant Not-Supported
H3 Entrepreneurial orientation has positive eect on performance of Hawassa SMEs in Ethiopia Signicant Supported
H4 Customer orientation has a major impact on Ethiopia’s Hawassa SMEs’ capacity for innovation. Signicant Supported
H5 Competitor orientation has a major impact on Ethiopia’s Hawassa SMEs’ capacity for innovation. Signicant Supported
H6 Entrepreneurial orientation has a major impact on Ethiopia’s Hawassa SMEs’ capacity for innovation. Signicant Supported
H7 Innovation capabilities have signicant inuence on the performance of Hawassa SMEs in Ethiopia Signicant Supported
H8 The association between customer orientation and performance of Ethiopian SMEs is mediated by
innovation capabilities.
Signicant Supported
H9 The association between competitor orientation and performance of Ethiopian SMEs is mediated
by innovation capabilities.
Signicant Supported
H10 The association between entrepreneurial orientation and performance of Ethiopian SMEs is
mediated by innovation capabilities.
Signicant Supported
Source: Author’s presentation.
18 A. T. BEKATA AND C. A. KERO
Businesses must share knowledge, ideas, and information with customers, competitor and research insti-
tutions. Because they are an external source of knowledge that can be used as input in the processes
of innovation. This study noted that sensing, seizing, and transforming dynamic features help SMEs to
develop capability of innovation. Hence SMEs obtain ideas and integrate them with the existing internal
knowledge, transforming them into new ones. SMEs with a customer-oriented mindset might detect
fresh concepts, information, and knowledge from external sources and integrate them with their own
knowledge and develop capabilities of innovation. These results are consistent with earlier studies that
demonstrate how strategic orientation enhances innovation (Bogers etal., 2019; Y. Wang, 2016).
Entrepreneurship plays a major role in increasing usefulness, generating new company ventures, and
investigating potential markets. This study indicated that the innovativeness behavior of entrepreneurs
encourages and supports new ideas and creativity. This could lead to the development of novel services,
goods, or procedures. This entrepreneurial behavior fosters rate of receiving new ideas that increase the
capacity for invention. Moreover, proactive entrepreneurial behavior is characterized by alert scanning of
novel ideas from inside and out-side sources to develop capability of a business. These findings are in
line with the studies (Aziz et al., 2014; Kiani et al., 2021).
A product’s value chain begins with the supply of raw materials and moves through the manufacturing,
distribution, selling, use, renewal, and repair phases. By utilizing and capitalizing on business possibilities,
entrepreneurs can generate new business ideas that foster innovation capabilities from the beginning to the
end of the product value chain. This study indicated that to assure breakthroughs, SMEs with an entrepre-
neurial mindset should generate ideas from outside sources, integrate with their own ideas to ensure that an
idea is transformed to actual value to a customer. For an innovation process to be successful, all the sources
of knowledge, components and the links have to work in collaboration. Moreover, innovation requires man-
agers of SMEs to actively cultivate an entrepreneurial mindset. SMEs need to be more creative, proactive and
come up with more innovative methods of marketing. These findings are in line with (Han & Zhang, 2021).
4.8.3. The eect of innovation capabilities on enterprise performance (Model 3)
This study indicated that a high capacity to ensure improvements to products, services, or processes
results in superior performance. Because innovation encompasses several elements such as creativity,
novel procedures, improved processes, improved offerings, and cutting-edge technologies. According to
this study, SMEs must be creative to improve the value they provide to customers by implementing
process improvements. By reducing costs, improving efficiency, and improving service delivery, process
innovation helps firms improve their performance dramatically. Additionally, providing better customer
service, advancing services, and mass production are strategies to obtain a competitive edge and lower
prices. A better workflow and effective use of company resources provide higher performance. These
results are aligned with the study (Rasheed et al., 2020).
This study also indicated that improving a pricing strategy, packaging, design, or advertising marketing
strategies for existing goods or procedures enhance market performance of the SMEs. It helps businesses,
particularly small and medium-sized ones, find new markets, gain a competitive advantage, and boost revenue
by better understanding and catering to the wants and preferences of their clients. Businesses, especially
SMEs, can better match client requests when they have innovation skills, which improves their market position
and increases their sales. Furthermore, innovation makes client value-added services more feasible. For an
innovation to be effective and ultimately successful, it must offer substantial improvement over current prod-
ucts, services, or processes. Dynamic capabilities are the main forces behind the development of new concepts
for management innovation that add value to customers. The results of this investigation are consistent with
those of previous studies (Girod & Whittington, 2017; Gunday et al., 2011; OECD, 2005; Rasheed et al., 2020).
5. Conclusions and recommendations
5.1. Conclusions
This study examines the significance of strategic orientation for building capabilities of innovation and
performance of Ethiopian SMEs. The study used structural equation modeling (SEM) with a sample of 321
COGENT BUSINESS & MANAGEMENT 19
SMEs respondents to examine the research hypotheses in the suggested structural regression model. The
empirical findings demonstrate that SMEs with higher strategic orientation ensure enterprise perfor-
mance. This strategic viewpoint significantly enhances one’s capacity for innovation. Furthermore, inno-
vation capabilities positively impact enterprise performance. Finally, the results demonstrated that the
association between strategic orientation and the performance of Ethiopian SMEs was mediated by inno-
vation capabilities. Comprehending and employing strategic orientation enhances capacity of innovation
for SMEs, contributes value, and yields financial gains for small and medium enterprise. This study con-
tributes to the strategic management framework that strategic orientation creates better value through
innovation capabilities and; has an indirect effect on the performance of SMEs.
Moreover, this study emphasized the importance of having valuable and unique resources, ideas, and
expertise to guarantee better products or services and improved processes. It also shows how new prod-
ucts, services, and procedures can be created using dynamic capabilities, integrating and transforming
the ideas and knowledge of customers to guarantee higher customer value. Combining internal and
external knowledge and ideas allows entrepreneurs to generate concepts, spur innovation, and eventu-
ally lead to commercialization. The result shows that innovative capabilities are enhanced by a clear
strategic orientation and knowing how to implement it. This provides value and helps SMEs’ owners
financially, and in terms of customer pleasure.
5.1.1. Policy and theoretical implication
Theoretically, the relationship between strategic orientation and enterprise performance can be better
understood by providing empirical evidence of the gap between the two. It can also be shown that
innovation capabilities not only mediate this relationship, but also reinforce the indirect effect that stra-
tegic orientation has on the performance of Hawassa SMEs in Ethiopia. This study also examined the
mediating role of innovation capabilities, which are commonly mentioned as important facilitators of
enterprise performance.
According to the practical implications of the study’s findings, managers of SMEs can enhance their
ability to obtain and utilize key resources such as ideas, information, and knowledge by cultivating
strong relationships with their customers and environment. Managers can benefit from a deep under-
standing of their customers’ demands and ideas to ensure enterprise performance through innovation
skills. To do this, it is necessary to routinely solicit feedback from clients, attend to their needs, and
conduct satisfaction surveys.
SMEs’ management has to take an active role in the digital transformation process to improve busi-
ness operations and boost competitiveness through efficiency. Systems for managing ideas and informa-
tion should be automated to boost SMEs’ ability to innovate. SMEs can easily be prepared to use
technology to enhance their operations, marketing, and management when they approach the problem
from a strategic viewpoint. Furthermore, managers have the ability to recognize and establish
cross-organizational partnerships with important stakeholders, such as clients, academic institutions, and
government business development service centers.
Policy implications: The study recommends that governments endeavor to enhance a consistent, reli-
able, and transparent information management system to understand the circumstances of MSEs and
assist them, given the significance of SMEs. The information management system for SMEs needs to be
set up and automated using software that includes a small data server. The study suggests using the
results to develop entrepreneurship and innovation training programs by the Government of Ethiopia
(agencies organizing and supporting SMEs) that will boost the performance and growth of SMEs.
5.2. Limitations and suggestions for further study
Overall, the conceptual framework is strongly supported by the findings of this study. The results demon-
strate that customer orientation is a powerful instrument that can lead to effective innovation, both
directly and indirectly. Similar to other studies, this study has certain limitations. The primary limitation
of the present study is that it relied on the respondents’ perceptions of their business performance. If
accurate records of financial growth indicators, such as sales and profit, could have been gathered in
20 A. T. BEKATA AND C. A. KERO
quantitative terms at various times, the study would have been more thorough. Another drawback is
that to compare any oscillations in the results, future researchers need to utilize a longitudinal technique,
as this study coupled a quantitative research approach with a cross-sectional research design. Alternatively,
qualitative studies could be conducted to supplement the quantitative findings because they help to
describe the phenomenon in detail.
Author contributions
Aklilu Tukela Bekata contributed to the conception and design, data collection, analysis and interpretation, and writ-
ing of the paper. Dr. Chalchissa Amentie Kero (PhD, Associate Professor) is a supervisor who actively contributed to
data analysis and critically revised the paper for intellectual content. Both authors agreed to the nal approval of
the version to be published and to be accountable for all aspects of the work.
Disclosure statement
No potential conict of interest was reported by the author(s).
Funding
This study received no funding.
About the authors
Aklilu Tukela Bekata is a research scholar (PhD student) in the department of Management of
Hawassa University in Ethiopia. He researched and published articles on strategic management,
innovation, entrepreneurship and performance of SMEs. This article is a part of his PhD thesis work
of the rst author. Mr. Aklilu has also been development planner for the past 7 years in South
Region of Ethiopia. Moreover, he has worked as a General Manager for Sidama development cor-
poration (SDC) in Ethiopia for several years.
Dr. Chalchissa Amentie Kero (Associate professor in Management) is a senior researcher and consultant, Trainer and
Associate professor in strategic management and leadership. He has been working as Dean of Business and
Economics, Coordinator of Quality Assurance, Jimma University, Ethiopia. His main research and consultancy interest’s
area are focused on, Advanced Research method with advanced software, Strategic Management, Innovation and
Entrepreneurship, Project Management, Leadership, Change Management, Human Resource Management and
Marketing management.
Data availability statement
The data supporting this study’s ndings are available from the corresponding author, Aklilu Tukela Bekata, upon
reasonable request.
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