1. Introduction
The increasingly advanced era development is one of the challenges that must be faced in the business world to be able to keep developing excellence. In the current era of globalization, fierce competition in all business sectors is not easy to avoid. The competition will make organizations face various opportunities and threats. It also requires companies to be able to increase the utilization of resources and establish good relationships with stakeholders.
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International Journal of Business and Economy (IJBEC) eISSN: 2682-8359 [Vol. 2 No. 2 June 2020]
Journal s: http://myjms.mohe.gov.my/index.php/ijbec
COMPETITIVE ADVANTAGE THROUGH INNOVATION AND HUMAN CAPITAL
Muthia Roza Linda1*, Gesit Thabrani2, Firman3, Sutiyem4 and Suhery5
1 2 3 Faculty of Economics, Universitas Negeri Padang, Padang City, INDONESIA
4 5 STIE Perdagangan, Padang City, INDONESIA
*Corresponding author: [email protected]
Article Information:
Article history:
Received date : 12 September 2019 Revised date : 18 December 2019 Accepted date : 20 January 2020 Published date : 28 May 2020
To cite this document:
Linda, M., Thabrani, G., Firman, F., Sutiyem, S., & Suhery, S. (2020).
COMPETITIVE ADVANTAGE THROUGH INNOVATION AND HUMAN CAPITAL. International Journal Of Business And Economy, 2(2), 41-53.
Abstract: This study aimed to find out the effect of human capital and innovation on competitive advantage in banking companies in Padang. The population of this study was the banking employees who had worked for more than 5 years and had a structural position in the companies. The number of research samples used in the data analysis totaled 109 respondents. The research data were collected through the distribution of research questionnaires which were then analyzed using multiple linear regression analysis with the aid of SPSS program ver. 24. The results of this study revealed that human capital and innovation had significant positive effect on competitive advantage. The R- squared value of this study was 0.327, which means that the percentage of the effect of human capital and innovation simultaneously on competitive advantage was 32.7%, while 67.3% was determined by other factors not examined in this study.
Keywords: competitive advantage, innovation, human capital.
Independence in developing programs and optimally mobilizing human resources is a driving force for companies to gain competitiveness. To succeed in achieving a strategic focus, based on human resource strategy, the employees with a lot of experience must be retained to achieve an organization's visions (Chen and Hsieh, 2005: 155-163 in Prasetyo, 2014), and the company must employ them efficiently and effectively, in an attempt to reach competitive advantage. An organization must be an increased competitive advantage and improve competitiveness to maintain its existence (Ward and Pepard, 2002 in Prasetyo, 2014). Boyer and Lewis (2002) explain that competitive advantage is the ability of a company to create value that is not owned and cannot be imitated by existing competitors. Bratic (2011) mentions that competitive advantage is a company's ability to create a position that maintained against competitors. According to Sharma (2005) in Kamukama (2013), competitive advantage has the indicators of product differentiation, cost leadership, and outreach level.
An organization can be said to have a competitive advantage if it can create higher economic value compared to similar organizations because the focus of the business world is no longer only on tangible assets but also on intangible assets. One of the sources of a competitive advantage which is an intangible asset and is very important in the information and knowledge era is human capital.
Human capital owned by a company allows the company to create knowledge, make the right decisions and produce something new through employees’ creativity (Hitt, 2006).
Human capital is a human factor in an organization, collective intelligence, skills and expertise that give an organization a specific character. Human elements in an organization are those who are able to learn, change and provide creative encouragement which, if added with strong motivation, can guarantee the long-term survival of the organization (Bontis, 1999). Therefore, a company needs to see that the employees it employs are the key factor in improving company performance, creating and maintaining the competitive advantage of the company. This is in line with what is stated by Chatzkel (2004) that human capital is a differentiator in an organization to achieve a competitive advantage. Collins (2003) says that the good management of the human capital of employees owned by a company utilized to create value for the company.
Besideshuman capital, the other factor that supports competitive advantage is innovation.
Innovation is now considered a basic source of creating value, knowledge, new ideas and facilitating business operations in an organization on an ongoing basis. The innovation aims to improve internal processes and structure in an organization. Innovation is often described in terms of what changes a company offers to the world (product/service innovation) and how to create and provide these offers (process innovation) (Liao, Fei, and Chen, 2007). O'Regan and Ghobadian (2005) see innovation as a new idea that can create added value for a company. A company must be able to innovate in order to keep competing in the market and not to be eliminated from the market.
Currently, banks have carried out various innovations on either the types of products or services offered to consumers by utilizing the use of the information technology system. Various innovations in the banking world today are increasingly developing and adjusting to the needs of society, like
2. Literature Review 2.1 Competitive Advantage
Dirisu, et al (2013) state that a company is said to have sustainable competitive advantage if potential competitors cannot duplicate what is/are produced by the company. Heizer and Render (2017) argue that competitive advantage means creating a system that has unique excellence over other competitors with the company’s ability to create customer value continuously in an efficient manner.
Additionally, Porter (in Farhas et al, 2016) elucidates that competitive advantage developed from the value that a company creates for its costumers that exceed the company’s costs of creating it.
Value is what customers are willing to pay, and excellent value is based on bid prices that are lower than competitors’ for commensurate benefits or unique benefits that are more than just compensating for higher prices.
To achieve competitive advantage, there are several strategies that can be implemented by a company, as follows: (Heizer & Render, 2017)
1. Differentiation Strategy
Differentiation is related to the presentation of uniqueness. Uniqueness can include the physical characteristics and service attributes of a product that can affect customers’
perceptions of the value of the product. A company’s opportunities to create uniqueness can be done in all company activities.
2. Low cost strategy
This strategy means providing maximum value according to customers’ perceptions. The low-cost strategy does not mean that the value or quality of the item is low.
3. Quick response strategy
Response acts like the whole value related to the development and delivery of products on time, reliable scheduling, and flexible performance. A flexible response can be considered the ability to fulfill the changes that occur in the market with design integration and volume fluctuation.
In terms of measuring a company's competitive advantage, Kamukama (2013) brings up several indicators for its measurement, as follows:
1. Product differentiation is the process of differentiating a product or service that makes it more attractive to a particular target.
2. Cost leadership is a product or service produced at lower costs than its competitors with the same quality.
3. Outreach level is a company’s affordability or the extent to which a company can do things.
2.2 Human Capital
Human capital arises from the thought that employees are assets that have many advantages, that is, if the employees use their abilities and knowledge and share them with other employees, it will not reduce the ability and knowledge of the employees themselves, on the contrary, it will be increasingly better for both the employees and the company. Employees are potential resources for a company’s success. Today companies that want to compete and survive must pay attention to their human resources as catalysts for competitive advantage in doing business. The potency of human capital in applying knowledge to their work makes a company have competitive advantage.
According to Davenport (2003), human capital is the overall effort that employees bring to be invested in a company. The investment referred to by Davenport is in the form of work management that will yield company performance. In working, employees will use their knowledge, expertise, abilities, and provide time to always increase their productivity.
Schultz et al (2002) define human capital as employees’ knowledge, skills, and abilities to provide solutions for customers. It is in line with Xu et al (2002) who say that human capital includes the knowledge, skills, and abilities of employees. Stockley (2003) also defines human capital. He said,
"the term of human capital is a recognition that people in organization and business are an important and essential asset who contribute to development and growth, in a similar way as physical assets such as machines and money. The collective attitude, skill, and abilities of people contribute to organizational performance and productivity. Any expenditure in training, development, health, and support is an investment, not just an expense”. The indicators used to measure human capital in a company are learning and education, experience and expertise, innovation and creation. (Starovic, D. and Marr, B, 2004)
2.3 Innovation
Environmental changes faced by a company provide opportunities to create new and different chances through systemic innovation that requires changes in an organized and directed manner so that there are opportunities to create innovation in both economic and social. Innovation can also be said as a new change towards improvement, which is different from the previous one, which is done intentionally and planned or not by chance. Lin and Chen (2007) say that innovation is one of the determinants of company performance in an increasingly fierce competition environment. Gray, et al (2002) suggest that a company’s ability to innovate will guarantee the company's competitive ability.
Innovation is an important activity for companies and companies that do not innovate risk being eliminated from the market (Liao, et al, 2007)
Sooner or later the acceptance of innovation by society is very dependent on the characteristics of the innovation itself. The characteristics of innovation that affect the pace of receiving information are as follows (Rogers, 2003):
1. Relative advantage
Relative advantage is the extent to which innovation is considered beneficial for recipients.
The more profitable it is for recipients, the faster the spread of innovation is.
2. Compatibility
Compatibility is the degree of suitability of innovation to value, past experience, and recipients’ needs.
3. Complexity
Complexity is the recipients’ level of difficulty to understand and use innovation.
4. Triability
Triability is whether innovation can be tried or not by recipients.
5. Observability
What is meant by observability is whether observation of innovation result is easy or not. If the result is difficult to observe, it will take long to be accepted by society.
Liao (2007) measures innovation using three indicators which are then developed into statement items, namely:
1. Product innovation, which is developed into questions including product and service development. Some of the benefits of product and service development, product or service development evoking competitors’ imitation, the pace of launching products or services compared to competitors’, better R&D capability compared to competitors and development of skills in changing products.
2. Process innovation, developed into questions including innovation of operating procedure to realize company goals, innovation of new skills or equipment to improve manufacturing operations and services, innovation of developing manufacturing process or operating procedure, flexibility in providing products and services and benefits of manufacturing process or operating procedure to evoke competitors’ imitation.
3. Management innovation then developed into questions including innovation of performance sharing, adoption of a new leadership approach, adoption of a new staff welfare system, adoption of a new financial management system, innovative and creative abilities in recruiting staff, and adoption of a new performance appraisal method.
2.4 Conceptual Framework
Based on the literature review described in this study, a conceptual framework could be developed that human capital and innovation, if managed properly, will be able to create a competitive advantage for a banking company. The relationship between human capital and innovation as independent variables and competitive advantage as a dependent variable is presented in Figure 1 below:
Figure 1: Conceptual Framework
2.5 Problem Statement
The problem statements from this research, there are:
1. How is the impact of human capital on the competitive advantage of banking companies in Padang.
2. How is the impact of innovation on competitive advantage of banking companies in Padang.
3. Method 3.1 Samples
The data used in this study were primary data obtained through a survey using research questionnaires. Because this was a survey study with one of the advantages lies in its generalization, the more respondents participate the better it is (Kerlinger and Lee, 2000). Out of 125 questionnaires distributed, there were 118 questionnaires given back, and the questionnaires that were eligible to be used for data analysis were 109 questionnaires. The population of this study was the employees of banking companies in Padang who had worked for more than 5 years and had structural positions in the companies.
3.2 Site
This research was conducted at a banking company in the city of Padang. Which consists of Bank Permata, BCA, BNI, BRI, BTN, Bank Nagari, Bank Syariah Mandiri, and Bank Mega. This research was conducted at the banking company because the banking sector is an industry sector that is a knowledge-based business. Knowledge-based business is a business that is run by utilizing more human capital.
Human Capital
Innovation
Competitive Advantage
3.3 Procedures
The research design used in this study is a causative study that aims to determine the causal relationship of an independent variable on the dependent variable.
Table 1: Operational Definition
No Variable Definition Indicator Scale Role
1 Competitive Advantage
Creating a system that has unique excellence over other competitors with the company’s ability to create customer value continuously in an efficient manner.
1. Product differentiation 2. Low cost 3. Outreach level
Likert Dependent Variable
2 Human
Capital
The knowledge, skills, and experiences that employees bring to the company are generated through competence, attitudes, and intellectual intelligence.
1. Learning &
Education 2. Experience &
Expertise 3. Innovation &
Creation
Independent Variable
3 Innovation A change in the process or development of knowledge for better results
1. Product innovation 2. process
innovation 3. Management
innovation
Independent Variable
3.4 Hypotheses
Based on the literature and conceptual framework of this study, the hypotheses could be formulated as follows:
H1: Human capital has a positive and significant effect on the competitive advantage of banking companies in Padang.
H2: Innovation has a positive and significant effect on competitive advantage of banking companies in Padang.
3.5 Measurement
To answer the study hypotheses, data analysis was calculated by multiple linear regression using the SPSS program ver. 24. Before the multiple regression data analysis is carried out, the first time tested for validity and reliability using the SmartPLS approach. (Hair, 2010)
• Convergent Validity Test
The rule of thumb used for convergent validity is outer loading> 0.7, communality> 0.5 and average variance extracted (AVE)> 0.5
• Discriminant Validity Test
The validity test of discrimination is measured by cross-loading with the constructor by comparing the AVE roots for each construct with the correlation between the constructs and other constructs in the model.
3.5 Reliability Test
The reliability test in PLS uses Cronbach's alpha and Composite reliability approaches. Rule of thumb value of Cronbach's alpha or composite reliability > 0.7.
To test the hypothesis using the t-test. This t-test aims to determine the magnitude of the influence of the independent variable (independent) individually (partial) on the dependent variable (dependent). The rules of the decision are:
If the significance level <0.05, Ha is accepted and Ho is rejected.
If the significance level> 0.05, Ho is accepted and Ha is rejected.
4. Results and Discussion 4.1 Convergent Validity
After conducting several tests of convergent validity, the final results of the convergent validity test are as follows:
Table 2: Loading Factor Outer Loading
Human
Capital
Knowledge
Management Innovation
HC10 0.848
HC11 0.759
HC12 0.810
HC13 0.818
HC8 0.804
HC9 0.832
KM1 0.818
KM2 0.836
KM7 0.703
KM8 0.702
IN1 0.807
IN2 0.794
IN4 0.739
IN5 0.789
IN6 0.744
Based on table 2 above, it can be seen that the loading factor value for each indicator is > 0.7, which means the indicator above meets the requirements of convergent validity.
4.2. Descriminant Validity
The measurement of discriminant validity is done by comparing the value of AVE square root.
Table 3: AVE Square Root
Human Capital Innovation Knowledge Management
Human Capital 0.812
Innovation 0.376 0.775
Knowledge Management 0.705 0.632 0.767
From the output results shown in Table 31, the diagonal is the square root value of AVE and the value below it is the correlation between constructs. So it appears that the AVE square value is higher than the correlation value. Through this, it can be concluded that the data have met the discriminant validity criteria.
4.3. Reliability
Table 4: Cronbach’s Alpha and Composite Reliability
Cronbach's Alpha Composite
Reliability
Human Capital 0.897 0.921
Knowledge Management 0.768 0.850
Innovation 0.835 0.883
From table 4, it can be seen that the Cronbach’s Alpha value and the composite reliability of each variable indicate values above 0.70. Thus, all instruments can be said to be reliable.
Before testing the hypotheses, normality test of the data was first carried out to find out whether the data were normally distributed or not. The assumption test conducted in this study was the normality test with Non-parametric One-Sample Kolmogorov-Smirnov Test. Based on the data normality test, Standardized Residual Sig. was 0.200 > 0.05, meaning that the variables in this regression model had normal data distribution.
After discovering that the data were normally distributed, then the model testing was done by carrying out F-test to find out whether human capital and innovation could affect companies’
competitive advantage and whether the model built in this study was indeed worth further investigation. The F-test results using Anova analysis can be seen in table 5 below:
Table 5: ANOVA
Model Sum of Squares df Mean Square F Sig.
1 Regression 6.821 2 3.411 25.789 .000b
Residual 14.018 106 .132
Total 20.839 108
a. Dependent Variable: CA b. Predictors: (Constant), IN, HC
Based on the results of the F-test shown in Table 1 above, F-value was 25.789 with sig. value of 0.000 < 0.05, meaning that the F-test carried out proved that human capital and innovation simultaneously had a significant effect on companies’ competitive advantage. The size of the effect of human capital and innovation simultaneously on competitive advantage can be seen in Table 2 below:
Table 6: Model Summary Model R R Square Adjusted R
Square
Std. Error of the Estimate
1 .572a .327 .315 .36366
a. Predictors: (Constant), IN, HC b. Dependent Variable: CA
From table 6 above, it can be seen that the value of R-squared was 0.327. This indicated that the contribution of the independent variables to the dependent variable was 32.7% while 67.3% was determined by other factors not examined in this study.
The results of F-test carried out indicated that the research model could be accepted. Next, the hypotheses were then tested using t-test. The results of hypothesis testing can be seen in table 7 below:
Table 7: Coefficients
Model Unstandardized Coefficients Standardized
Coefficients t Sig.
B Std. Error Beta
1 (Constant) 1.176 .394 2.986 .004
HC .246 .067 .291 3.651 .000
IN .450 .072 .497 6.236 .000
a. Dependent Variable: CA
Table 7 shows the output of the relationship among variables. It can be seen that human capital (X1) had a significant positive effect on competitive advantage (Y) with a regression coefficient of 0.246 significant at α 0.05 (P-value 0.000). This could be proven by noting that the value of t-statistic (3.651) was higher than the value of t-table (1.64). Thus, the first hypothesis in this study
The next relationship was between variable X2 and variable Y. Innovation (X2) had a significant positive effect on competitive advantage (Y) with a regression coefficient of 0.450 significant at α 0.05 (P-value 0.000). This could also be proven by noting that the value of t-statistic (6.236) was higher than the value of t-table (1.64). Thus, the second hypothesis in this study was accepted.
5. Discussion
Based on data analysis, it was found that human capital had a significant positive effect on competitive advantage in banking companies in Padang. The data analysis showed that the regression coefficient was 0.246 (positive) and the value of t-statistic was 3.651 with the significance of 0.000 < 0.05. This result illustrates that the better the condition of human capital owned by banking companies is, the easier it will be for the companies to achieve a competitive advantage in the industry.
Therefore, it is necessary for companies to keep developing employees’ capabilities, especially through training and education in order that they can work better and better. This result supports the study conducted by Kamukama (2013) with the conclusion that human capital, which is part of intellectual capital, has a significant substantive relationship with a company's competitive advantage directly.
On the basis of the result of the t-test that had been carried out, the regression coefficient of innovation was 0.450 and the value of t-statistic was 6.236 with the significance of 0.000 < 0.05, meaning that there was significant positive effect between innovation and competitive advantage of banking companies in Padang. Innovation made by banking companies will be able to create a competitive advantage because innovation will help the process of creating, improving and enhancing sustainable advantage. Companies must realize that changes in a business environment run so fast. Things that are considered new today will never be considered innovative again on the next day. For this reason, it is necessary for companies to keep making continuous improvements in their business in order to maintain the companies’ competitive advantage. This result supports the study conducted by Chatzoglou and Chatzoudes (2017) with the conclusion that innovation has a direct positive effect on competitive advantage.
6. Conclusions
Considering the literature discussed previously and the results of tests carried out to the data collected, some conclusions can be drawn as follows:
1. The ability of banks to manage their employees well and the development of employees in accordance with their skills will provide benefits to the companies through the creation of competitive human capital in the companies which then gives a significant positive impact on achieving the companies’ competitive advantage.
2. To be able to keep competing in business, companies have to always create new innovations because the companies’ ability to innovate will result in a competitive advantage for the companies.
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