SME’s development indicators and organizational capability

1 Introduction

Essential to creating employment [1], micro as well as small and medium enterprises (SMEs) play a vital role in the development and economic growth of developing countries. There are three reasons underlying recent trends in developing countries, pertinent to SMEs [2]. First, SME performance tends to be outstanding, in terms of productively generating employment. Second, their business dynamics show that SMEs often achieve increased productivity through investment in technological change. Third, SMEs provide a comparative advantage over large businesses, in terms of flexibility.

Indonesia, as a developing country, recognizes the important role of SMEs in the economy, especially after the 1997 monetary crisis [3]. Assistant Deputy for Cooperative Resource Assessment Affairs stated that small and medium enterprises during the Reform era crisis functioned as a safety valve for the national economy [4]. When the crisis in Indonesia struck, it disrupted many levels economy level, while big business struggled with dependency on foreign loans, which tend to swell in times of crisis, SMEs are flexible. Small and growing businesses have gone through financial crises, especially SMEs engaging in business-oriented foreign trade (exports): in times of crisis, they play an important role in driving the Indonesian economy.

Bandung, the capital of West Java, is also the province’s economic foundation, which accounts for 12.23% of the province’s economy, second only to Bekasi West Java [5]. Based on Indonesia Statistics Center Bandung [6], Bandung has the highest capacity of SMEs. By 2013, the total business unit of SMEs was 9,714, and this unit is able to provide employment for 79,398 people. SMEs in Bandung are scattered in several separate areas, and there is also a centralized group of SMEs in an area called Central. An example of SME centers in the city of Bandung is Textiles Central and Products (TPT) located in Cigondewah. This central business has a target marketing area covering all parts of Indonesia. It produces more commodities with more diversification than most other centers. The main problem of small businesses - in addition to capital, marketing, raw materials, skills, information, technology, and market issues - is the institutional aspect [7]. Small businesses are exposed to the opportunities and challenges of the ASEAN Economic Community (AEC), which leads to global competition. Small businesses must be independent and strong institutional. Thus, their institutional development level needs to be improved, both internally and externally [8].

The small business included in this study meets the criteria as stipulated in Law no. 20, enacted in 2008, for SMEs [9]. A small business is a stand-alone productive economic entity operated by an individual or a company, and not a subsidiary or branch owned by, controlled by, or partly, directly or indirectly, of medium or large businesses that (a) Net of more than Rp 50,000,000 (fifty million rupiah) not more than Rp 500,000,000 (five hundred million rupiah) excluding land and buildings; or (b) has an annual sales turnover of more than Rp 300,000,000 (three hundred million rupiah) at the most Rp 2,500,000,000 (two billion five hundred million rupiah). Institutions are limiting or controlling elements that govern behavior and relationships between members or between groups [10]. By this definition, the most common type of institution is an organization that has rules governing relationships between members and others outside the organization [11].

The purpose of economic institutions is to meet human needs by increasing family income, increasing production, improving product processing, and distributing property and objects [12]. Institutional business (a business enterprise) is formed based on profit motive. The institutional capacity building can be seen as a process to encourage change at various levels in individuals, groups, organizations, and systems to strengthen the ability to adapt to individuals or organizations and respond to environmental change. Measuring institutional capacity building involves focusing on the main pillar of an activity, including the following elements: communities, organizations, networks, and policy areas. Institutional capacity building constituents include internal aspects such as leadership, shared commitment, recognition of weakness and institutional strength, participation, innovation, and transparency, as well as external aspects including networks, information, and regulations [10]. This study aims to describe and explain the constituents of the institutional capacity development of small-scale garment business in Cigondewah center in Bandung.

2 Method

This research used descriptive explorative research, based on the use of qualitative and inductive approaches. It focused on apparel small businesses and pertinent stakeholder groups, at the Cigondewah center, in Bandung. Research participants were selected based on the essential role they play in organizational capability development. Data collection involved interactive interviews, participatory observations and the examination of related documents.

3 Results and discussion

There is 120 and 104 of SMEs in Cigondewah Kidul and Cigondewah Kaler,respectively. Those SMEs produceT-shirt, sweat pant, school uniform, private institutional uniform, shirt, jacket, Muslim cloth, and other products. Their products have been sold to all over Indonesia. Therefore, those SMEs can occupated 556 and 616 people in each place respectively.

Internal features.

1) Leadership Aspects

A leader is someone who organizes, directs, and serves as the main planner of organizational action [13]. Small business leadership organizes the implementation of all business vities including marketing management, production management, human resource management, and financial management. Leaders also direct employees’ actions to achieve business goals. In a small-scale garment business, leadership is systematically implemented spontaneously based on conditions as they arise. Small business owners of the garment in Cigondewah have demonstrated leadership skills by always providing and increasing opportunities for employees to take initiative, especially when there are orders from customers associated with new products, or to provide information and ideas about the developments or trends of products in the market.

These small business owners generally only have the skill and experience of sewing clothes and creating clothing patterns. Their experience is usually the previous garment employees who then opened their own business. However, they still lack the skills to manage and manage business issues as a whole, such as the ability to provide clothing-making guidelines for their employees and employing disciplinary and employment penalties. They consider their ability or competence enough to open a business and just rely on ordinary business management. Generally, their leadership focus is limited to run clothing production [5].

2) Shared commitment aspects

Most owners of business owners lack entrepreneurial competence - knowledge, skills, attitudes, values, and behaviors - needed to establish employee liability and overall direct activity in business. Most of these small owners only have knowledge and skills related to production, such as raw materials, production processes, and mechanisms. The owners are committed to maintaining their way of life and to improve their skills in tailoring and designing their clothing brand patterns [7]. Owners are committed to not relying on bank loans and other debt to create jobs. They do business according to the expectations and wishes of the customer as much as possible, such as in completing the production on time, so as to generate profits to meet their needs as owners and employers.

3) Business Weaknesses and Strengths Recognition

a. The Weaknesses of the Small-Scale Convections Businesses at Cigondewah:

Generally, the owners still plan their operations to gain short-term profit.

b. The Strengths of Cigondewah Convection Small-Scale Businesses

They are flexible and resilient in anticipating and adapting to market change.

4) Participation Aspects

Participants in the small-scale business convections include all stakeholders from the employee to the business owners. Participation can be the act of decision-making, planning, and implementation for solving problems to achieve business purposes. Participation can also take the form of contributing advice, opinions, and skills that help the business to develop. In the opinion of the present researchers, the development of institutional capacity by the owners of the small clothing shops in Central Cigondewah has been implemented with the aspect of participation, as was mentioned before. Participation may also mean that the decision makers and the community are equally involved in the process because community members give advice and opinions, items, skills, materials, and services to reach the business purposes together [11].

5) Innovation aspect

Aspects of innovation in these enterprises have not been applied to initiate or improve products or services produced and rendered. This is due to the following reasons: 1) The products do not yet have a specific characteristic or signature brand. 2) There has not been a feature or element of novelty, in which the resulting product is determined more by the customer. Most products are the result of following the trends or models that are popular in the market. 3) The innovation plan for the brand is still lacking. 4) The efforts to achieve business purposes have not been directed at innovative programs.

6) Transparency aspect

The sources and amounts of funds being managed need to be clearer. The transparency of financial management can avoid internal financial problems and ensure the honesty of owners and employees.

External features

1) Networking aspect

Building cooperative business networks can improve the sense of unity and communication links, which are beneficial to the business. Network building serves a very important function for business owners as the medium through which to obtain information about the development of technology, raw materials resources (inputs), market potential, and market developments. Forms of partnership networks include cooperative partnerships with customers, cooperative relations with suppliers, and resource utilization partnerships [2].

2) Information aspect

a. Business owners’ sensitivity to customer needs

The owners in our study showed sensitivity to customers’ needs based on customer reviews and orders. This was considered to be a function of the employees’ resources and expertise. However, the owners’ sensitivity to the customers’ needs has not extended to the long-term future. This is evidenced by the lack of business planning in managing the varied resources of small-scale convection businesses’ resources for the future. The owners we surveyed did not know about the ASEAN Economic Community (AEC) that would go into existence in December 2015, either as an opportunity or as a threat that they should be prepared for. Good long-term management will help the businesses to attract new customers [3]. To the contrary, good marketing sensibility without good management will make it difficult for businesses to survive the incursions into their markets from new business competitors.

b. Technology utilization

Most convection businesses have not been able to utilize technology developed for their equipment or machinery to gain added value for their products. This was due to owners’ limited venture capital to invest in computers and in clothes-making machineries such as Obras machines, buttonhole machines, and others. However, the business owners are utilizing information technology including cell phones and smartphones. They commonly use social media installed on the smartphone. We often found the owners promoting their products through social media, blogs, and the website of the Bandung government. Information technology helps the businesses to search for the information needs of the market: the trends of garment product modeling, product promotion, market information, product prices, competitor prices, business transactions, information policies, and business regulations that affect their business developments [7].

c. Ease of access level of government information

Most owners find it difficult to get information from the government of Bandung, such as information on entrepreneurial education and training, business exhibitions, credit, licensing, facilities, and existing governmental policies.

3) Regulation Aspect (Law)

Licensing is considered to be the component that brings completeness to operating a business. In the past, business owners usually licensed their products after they had operated their businesses for a long time. Licensing was thought of as a process that involved spending a lot of money and time, so the owners would likely go through with it after other aspects had been taken care of. In February 2015, the government issued a policy to facilitate the maintenance of the IUMK (in English, the Small Micro Business License) with the help of the village or sub-district patriarch. This policy was marked by the signing of a Memorandum of Agreement by three ministers: the Minister of Cooperatives and SMEs, the Minister of Trade, and the Minister of Interior. With the licensing process eased, it is expected to be easier to develop a small business in the community. The Indonesian president created the regulation in Presidential Decree No. 28, the year 2015. However, not all persons who operate businesses have knowledge of this regulation [8]. According to the head office of the Ministry of Cooperatives and Small and Medium Enterprises of the Republic of Indonesia (KUKM Indonesia) and Bandung’s Department of Industry and Commerce (Perindag), the issuance of such permits or licenses for micro and small enterprises (IUMK) has not been realized in Bandung [2]. It is expected to reach Bandung next year; it is at present a reality only in some areas outside of Bandung.

4 Conclusions

The constituents that we found can influence the development of small-scale garment business in Cigondewah, Bandung. We have divided them into internal and external features. Internal features include (a) aspects of leadership, which need to be further developed; (b) the aspect of commitment, which has been enhanced to be better prepared for long-term business objectives; (c) management of weaknesses and strengths; (d) aspects of participation, which have been properly implemented in accordance with our findings; (e) aspects of innovation, which need to be further developed; And (f) business finance management, which needs to be more transparent.

External features we have examined include (a) networks, which we think is still limited; (b) information, which still needs to be developed; and (c) the regulatory aspect, where we find a high degree of inconsistency and uncertainty. Overall, this study shows that apparel small-scale businesses in Cigondewah centers do not develop the professional business skills necessary for their survival and prosperity. The practical implications show opportunities for apparel small-scale business enterprises to enhance their entrepreneurial competence, and the vital role that governance plays in facilitating firms’ self-development capability.