Proceeding. International Seminar on Industrial Engineerig and ManagementMenara Peninsula, Jakarta, August 29-30, 2007 ISSN: 1978-774X

KEY PERFORMANCE INDICATORS BASED ON EXTERNAL ANDINTERNAL ENVIRONMENTS OF MICRO AND SMALL ENTERPRISE

IN PROPINSI LAMPUNG

Rakhma OktavinaGunadarma University Jakartarakhmaoktavina@yahoo.com

ABSTRACT

The improvement of Micro and Small Enterprise (MSE) depends on how an excellentperformance is conducted. Excellent performance could be managed effectively andefficiently if it is supported by an optimal performance measurement process, based on itsappropriate key performance indicator. Identification of key performance indicator on MSE isdeveloped based on expert and its stake holders elicitationjudgment that is conducted by depthinterview technique to describe the influence of external and internal environment to the MSEperformance. SWOT analysis is used to explore strategy that can exploit MSE's internalstrengths to overcome its external threats, and exploit its opportunities to minimize itsweaknesses. Structural Equation Modeling (SEM) is used to confirm the key performanceindicator that is essential in MSE's performance measurement process. On the performancemeasurement model, key performance indicator are determined based on its external andinternal environment. Verification on 120 MSE banana chips in Lampung Province shows 7ofkey performance indicator that could influence the MSE performance, and will be used in theMSE 'sperformance measures.Key Word : Micro and Small Enterprise (MSE) of Horticulture's Snack, Key PerformanceIndicator, SWOT analysis, Structural Equation Modeling (SEM).

INTRODUCTION

According to Yowono et al.(2004), to identify thesuccessfulness in the competition, it requires astrategy that can adapt between the planning andcontrolling activities. The company couldtransfer the strategy into the better certainmeasurement system in performing its strategywith the minimum risk. The result of themeasurement is used as a good a feedback thatwill give the in formations about the achievementin any activities in the company's chain value orit is known as the performance. According toYoungker (1993), the effective performanceplanning includes the three main processes thatare the measurement of the performance in thebeginning, the planning of performance'improvement based on the strategy , and themeasurement of performance after theimprovement.

The improvement efforts toward theperformance can be done if it uses not only theinternal environment but also the externalenvironment of the company. Besides that, indetermining the company's performance scale

C42

enterprise is one the factor that should beconsidered. The terms of micro and smallenterprise, the middle industry, and big industryhave the basic difference. From the threedifferent term above, small and micro enterprise(SME) is group that dominate the entrepreneur'sactivities. (Heryadi,2004). Seeing From thewhole of the economic structure, from 39.72billion the entrepreneurs that recorded therearearound 39,71 billion or 99.85 percent are theentrepreneurs of micro and small enterprise(Tambunan, 2002).

The small and micro is basically one ofthe activator of economic region that couldproduces the goods and services which uses themain raw material based on the using of thenatural sources, the talented and the traditionalart works from the certain region (IndustryandTrading Department, 2005). In the developmentof micro and small enterprise as the activatortheeconomics' region, it is stated that the scopeofthe prior commodities are: (1) Snack industry,(2)silk industry, (3) tannin industry, (4) oil palmindustry, (5) fertilizer industry (nature andorganic), (6) salt industry, (7) roof industry,(8)

Key PerformanceIndicators Based OnOktavina

8.to AIin deaterisbtfunct

Proceeding,International Seminar on Industrial Engineering and ManagementMenaraPeninsula, Jakarta, August 29-30, 2007

blacksmithindustry, (9) boat industry < 100 GT,(10)the fishennen's motorization industry, (11)traditional of fanning tool industry, (12)traditional weaving industry, (13) jewelryindustry,(14)plaiting industry.

Lampung is one of the provinces whichhas big potential in developing micro and smallenterprise, mostly in snack industry with theorientation of regional and export market(Industryand Trading Department, 2002). It isbecauseLampunghas the potential supply of rawmaterialsand supporting the industry's climatethat exist for the perfonning of economic ofdemocracy.One of the snack industry that hasbig prospect is banana chips. Banana chipsindustriesin Lampung are spread out in region ofTanggamus,Lampung Selatan, Tulang Bawangand lampung Tengah (Cooperation of Industryand Trading Department, 2004). It is predictedthat the number of this industry will increasecontinuallybecause banana is the one of the maincommodity of Lampung (The minister ofThchnology and Research of LampungUniversity,2003).

The improvement of competitive powerin micro and small enterprise of banana chipsdependon how well the perfonnance in microandsmallenterprise itself. The good perfonnancecan be managed efficiently and effectively if issupported by the optimal measurement ofperfonnanceprocess, which is based on the keyperformance indicators. The aims of thisresearch are to identify the key perfonnanceindicators of micro and small enterprise inLampung based on external and internalenvironment.

TBEORITICALBACKGROUND

The problems in developing micro and smallenterprise of banana chips in Lampung are thelow level of productivity, quality, andcompetitivetoward the competitor. It is becauseof the inability of micro and small enterprise tooptimize the sources and to control the internaland external business environments. Accordingto Anderson (1982), one of main causing factorin decreasing the role of micro and smallenterprise in the countries with the high incomeis because of the movement of consumptionfunctionin the society.

In accordance with Engel theory, thewealthy society tends to spend most of their

Key Performance Indicators Based On....OIctavina

ISSN: /978-774X

income to buy non-food things which mostlyimported product or the products that areproduced by the middle and big industry and ithas the better quality, the nicer color and shape,the nicer in the perfonnance comparing with theproducts of micro and small enterprise. If thenthis theory is revealed, the strategy that should bedone by the owner of micro and small enterprisein order to survive in the competition is toincrease the perfonnance of company through theimprovement in any perspective dealing withmicro and small enterprise by designing modelcomprehensive of increasing perfonnance. Theimprovement of competitive power in micro andsmall enterprise of banana chips depend on howwell the performance in micro and smallenterprise itself. The good perfonnance can bemanaged efficiently and effectively if issupported by the optimal measurement ofperfonnance process, which is based on the keyperformance indicators.

RESEARCH MEmODS

In this case, performance's measurement use theBalanced Scorecard method. SWOT analysis isused to explore strategy that can exploit MSE'sinternal strengths to overcome its externalthreats, and exploit its opportunities to minimizeits weaknesses. Structural Equation Modeling(SEM) is used to confirm the key performanceindicator that is essential in performancemeasurement process.

Performance's Measurement

According to The New Webster Dictionary(200 I), performance is achievement which isoften used to show the ability or "The Show"which is commonly used to show up theperformance or it also means the "doing the taskthat shows someone's action in working.Bernardin and Russel (1993) define thatperformance is the record of the result whichgained from the function of certain work orcertain activities in the certain period of time.

The collision between the irresistible

force to build long-range competitivecapabilities and the immovable object of thehistorical-cost financial accounting modelhas created a new synthesis: the BalancedScorecard. The Balanced Scorecard

complements financial measures of past

C43

Proceeding, International Seminar on Industrial Engineerig and ManagementMenara Peninsula, Jakarta, August 29-30, 2007

performance with measures of drivers offuture performance. According to Kaplan andNorton (1996), there are some obstacles inimplementing the strategy that can be overcameby implementing the components of managementstrategy. In the perspective of managementstrategy, environment is the important andcontextual factor which has the effect to theperformance of the company (Child, 1997). Theconcept of modem management shows that theindustry which is conducting economic activitiesdoes not stand independently, but it is in thebusiness environment which is affected eachother. Generally, the company is in the centre ofbusiness environment that consists of thegovernment, the people, customers, distributors,employees and the same industry which alsobeing the competitor.

The strategy is needed by the industry inorder to be able to achieve the result based on thevision, mission, goal and target of the company.The company's ability to place its position in theenvironment by considering and evaluating itselfcondition nom environmental factors whichaffects each other will hardly determine thesuccess of the company. According to Wheelenand Hunger (1992) the environment that shouldbe observed by the company consist of (I)internal environmental which consists ofstructural culture and sources (2) externalenvironmental which consists of socialenvironment and work environment.

SWOT Analysis

SWOT analysis is a way to identify any factorssystematically in order to form the organizationstrategy. This analysis is based on the logicallythat can maximize the strength and opportunities,but in the same time it can also minimize theweaknesses and the threats (Rangkuti, 1958).SWOT analysis considers the internalenvironmental of strength and weaknesses andthe external environmental of opportunities andthreat which are faced in the business. SWOTanalysis compares the external opportunities andthreat factors with internal strength andweaknesses so that nom this analysis can betaken a decision of organization strategy.

SWOT analysis begins with identifyingthe organization position through the valuesevaluation of internal factors and the valuesevaluation of external factors. SWOT matrixdescribes clearly how the external opportunities

C44

ISSN: 1978-774X

and threat faced by the industry can be adaptedby the strength and weaknesses. From its matrix,it will be formed four possibilities of alternativestrategy, the following picture is SWOT matrixdiagram and the possibility of appropriatestrategy.

Structural Equation Modeling

According to Supranto (2004) structural equationmodeling is the widening of statistic techniquewhich is used to evaluate the pararelism ofdependant correlation stimulant to a free variablein the next dependant correlation. MPS consistsof some variables which formed of any factorsvariable or observed variable which is analyzedby using EQS<, AMOS, SAS and LISRELprogram. The reasons of using MPS are:1. It gives a method which is easy to understand

in relation with the double temporarycorrelation resulting effective statistics,

2. It has the ability to access the correlationcomprehensively and to give a transition ofexplanatory to confirmatory analysis. Thistransition is appropriate with the biggerefforts leading the development to thesystematic and holistic point of view towardproblem solving. This efforts need the abilityto evaluate a series of correlation whichconsists of a big model, involving tens orhundreds variables with has manysimilarities, a set of basic principles or thewhole theory.

According to Dillon and Goldstein(1984), MPS is used to study the cause and effectof a variable set that adapted the path analysisapproach. The steps in MPS according to hair etal (1998) are:a. Developing basic theory of modeling. In this

step, it is formed a causal relationship whichleads to the changes of a variables towardthe other variables.

b. Developing the diagram causal relationshippath. Path diagram is developed based on theconcept of cause and effect which is formedin step I, forming a construction theoreticallybased on the concept that has a role toseparate the variables in this construction andhas a function to explain the relationshipbetween the variables. The relationshipbetween variables is described by usingarrow.

Key Performancelndicators Based OnOktavina

PrM.

c.

d

.~'.'. '

Proceeding, International Seminar on Industrial Engineering and ManagementMenaraPeninsula, Jakarta, August 29-30, 2007

c. Changing path diagram in the form ofstructural and building the measurement ofmodeling.In this step the interpretation of path diagramis done in to a series of structural similaritiesand determines the dependent variablespredictor. The measurement of modeling isdeveloped based on the analysis therelationship resulting through the result oftransitional analysis factor so that it isproduceda confirmatory modeling. The nextstep is continued by the determination ofindicatornumber which will be used in eachconstructionand connected the constructionsand its indicators.

d. Choosingthe type of matrix input (correlation,Varian / co-Varian) and stating the research

ISSN: 1978-774X

problem s (the assumption of MPS,evaluating the effects, choosing the methodsto estimate the model).

e. Evaluating the identification of structuralmodel. In this step, it is determined the levelof free research, determine the assumptions,diagnose the problem, and determine thetechnique of identification problem.

f. Evaluating of modeling, conducting the test ofkindness and interpreting of modeling.

g. Interpreting and modification of modelingIn this step, the standardization, re-specification, of modeling is done so that it willresult the last structural modeling.

Strength:S.IRaw material is available

anywhere/easy to getS.2 Basic skills that have been

descendent for yearsS.3 Technology is available and

easy to be mastered ortransferred

S.4 Could be as the main industryor main job for many people

S.5 There is policy support andprogram from private or all.overnmental elements

Maxi-Maxi strategy(Strength/Opportunity)(S 1, S4, S5,02) Strengthen thepartnership between UMK andother big industrieslBUMN orsupporting institutions

Weakness:

W.l Management, technology andmachinery/tools that are usedstill simple and less efficient

W.2 Various quality of products,and no standardization

W.3 Limited access to market

W.4 Packaging that is technicallyhas not fulfilled therequirements yet, and isuninteresting for theconsumers

Opportunity0.1 Local market that is quite

large0.2 The fundamental of

Indonesia's macroeconomy that is gettingbetter

0.3 Can be expanded toexport market

Threat:T.l Low product competitionT.2 Tight competitionT.3 Compared to other

competitor's counties, theindustry condition isIncondusive

T.4 The government's policyin some aspects such ascost for fuel,transportation cost, andthe raise in electricity cost I I

Pic. I. Snack Industry's SWOT Matrix Diagram

Maxi-Maxi strategy(StrengthlThreat)(S2, S3, n, T2) increasing

company's ability through structuremaintenance, culture, and the useof company's resource

THE KEY PERFORMANCE INDICATORSOF BANANA CHIP'S MSE

KeyPerformance Indicators Based On....OIctavina

Mini-Maxi strategy(Weakness/Opportunity)(W3, 01, 03) increasing theinformation access and snacksUMK marketing

Mini-Maxi strategy(WeaknesslThreat)(WI, W2, W4, T3, T4) Theincrease of facilities and workingenvironment that support MSE'sprogress

C45

Proceeding, International Seminar on Industrial Engineerig and ManagementMenara Peninsula, Jakarta, August 29-30, 2007

According to the Industry and TradingDepartment (2005), snack industry's SWOTmatrix describes clearly how the externalopportunities and threat faced by the industry can

ISSN: 1978-774XP,M

be adapted by the strength and weaknesses (Pic.1). This strategic planning can be used to fmdthevariables of Micro and small enterprisePerformance Measurement in Snacks Industry(Table I).

E:Olerarer.shmde:teosopcellfoexdiE<(it(9tea

prfo(2neof

Table I. The Variable Identification of Micro and Small Enterprise Performance Measurement inSnacks Indus

Strate Variable1. Strengthening the partnership between UMK, External Environment

distributor, and stakeholder2. Increasing the information access and snacks

UMK marketing3. Improving the facility and industry atmosphere

to support the UMK progress1. Increasing ability of the company through the I Internal Environment

improvement in structure, culture, and the useof comDanvresources.

Indicators of The Balanced Scorecard

Perspectives

The four perspectives of the scorecard permit abalanced between short and long-term objectives,between outcomes desired and the performancedrivers of those outcome, and between hardobjectives measures and softer, more subjectivemeasures. There are financial perspective,customer perspective, internal business processperspective, and learning and growth perspective.Financial perspective measures indicate whethera company's strategy, include growth, sustain,and harvest stages. Growth businesses(g) are theearly stage of their life cycle, consist of (1) salesgrowth rate, (2) percentage revenue from newproduct, and (3) sales percentage. Sustain stage(s) consists of (I) share of targeted customers,(2) cross-selling, (3) percentage revenue fromnew applications, (4) customer and product lineprofitability, (5) cost versus competitor's costreduction rates, (6) indirect expenses, (7)working capital ratios, (8) RaCE, and (9) assetutilization rate. Harvest stage (h) consists of (1)customer and product line profitability, (2)percentage unprofitable customers, (3) unit cost,and (4) payback throughput.

Customer perspective represent thesources that will deliver the revenue componentof the company's financial objective, includecustomer core measurement group and measuringcustomer value propositions. The customer coremeasurement (cc)) group consists of (1) numberof customer, (2) rupiah's spent, unit volume sold,(3) number of new customer/customer

C46

acquisition, (4) number of existingcustomer/customer retention, (5) satisfactionlevel of customer, and (6) the profit of acustomer. Customer value proposition (cpv)consists of (1) product attribute, (2) customerrelationship, and (3) image and reputation.

Internal business process perspective isidentification of process that are most critic forachieving customer and shareholder objective. Itis include of innovation process, operationprocess, and guarantee. Innovation process (ip)consists of (1) type of new products, (2) time todevelop new product, (3) innovation cost, and (4)number of new product. Operation process (op)consists of(1) manufacturing cycle effectiveness,(2) scrap level, (3) frequency of rework, (4) lostorder. Guarantee and after sale service (ass)consist of (1) delivery time, (2) quality of service,(3) service cost, (4) number of product defect, (5)production failure, and (6) inspection time.

Learning and growth perspectivedevelops objectives and measures to driveorganizational learning and growth. It is consistof employee capabilities, information systemcapabilities and employee motivation. Indicatorof employee capability (l) is (1) rate of employeecapabilities. Indicators of system informationcapability (sic) are (1) rate of informationsystem, (2) ease to get information, and (3)duration to get information. Motivation ofemployee (me) consist of (1) rate of employee'smotivation and (2) rate of empowerment ofemployee.

ellin!MSejRc

allcQ

Gst,.CT'

~(

Indicators of External environment

Key PerformanceIndicators Based OnOIaavina

K.a

Proceeding, International Seminar on Industrial Engineering and ManagementMenaraPeninsula, Jakarta, August 29-30, 2007

Externalenvironment is the condition that existsoutsidethe company which consists of socialenvironmentand working environment (HungerandWheelen, 1992). Social environment is theenvironmentthat is related indirectly with theshort-termactivities of organization which can ormost of the time can influence the long-termdecision.It consists of the power of economy,technology,law of the politic, and the power ofsocio-culture.The power of economy (PE) is thepowerthat manages material exchange, money,energy,and information. The indicators are asfollow: (I) Inflation rate, (2) Currency valueexchange rate, (3) Interest rate, (4) Moneydistribution, (5) Unemployment rate, (6)Economic growth, (7) Supply of material(includefuel), (8) Price of material (include fuel),(9) Workers' wage, (10) Income. The power oftechnology (PT) is the power that resultsproblem-solvingdiscovery. The indicators are asfollow:(I) The number of expense for research,(2) Technology rate being used, (3) number ofnewproduct, (4) Paten protection, (5) The speedoftechnology-transfer,(6) Automation.

Working environment consists ofelements or group that directly involves or isinfluencedby main operations of organization.New comer's threats(NCT) are: (I) Economicscale, (2) Differentiation of product, (3)Regulations of government. The competitionsamong the companies that have existed (localcommunities/LC)are as follow: (I) Numbers ofcompetitors, (2) Industry growth, (3)Characteristics of competitor's product andservice, (4) Competitor's fixed cost, (5)Competitor's product capacity. The threats ofproducts of substitution (I'PS) are: (I) Productsof substitution's performance similarity, (2)Products of substitution's basic price, and (3)Products of substitution's quality. The strengthsof dealer's supply (SDS) consist of (I) Locationof dealer (spread), (2) Characteristic of dealer,(3) Numbers of the dealer, (4) Characteristic ofgood being supplied. The strengths of buyers(SB)are: (I) The quality product ofUMK (microand small enterprise), (2) Competitive price, (3)Guarantee. The relative strength from otherstakeholders/RSS (government, workers united,creditor, trading association, stakeholder, andgroup's special need) is external obstacles(marketpenetration).

Key Performance Indicators Based On....Oktavina

ISSN: 1978-774X

Indicator of Internal Environment

Internal environment is the condition inside thecompany itself. It consists of structure,

culture, and resources (Whellen andHunger, 1992). Structure (S) is the ways how thecompany being managed related tocommunication, rights, and the flow of work. Theindicators of structure are as the followings: (I)Communication level in chains of assignment,(2) Advantage and disadvantage of decisionmaking in company, (3) Advantage anddisadvantage of tasks distribution and authorityin company. Culture (C) is pattern of surety,hope, and other values that are distributed by themember of the organization. The indicators are:(I) The existence of culture that companyfollows, (2) The existence of hope that companyapplies, (3) The existence of values that areavailable in company. Number of company'sresources and its applications (CR) is the assetthat becomes the raw material for goodproduction and organization service. Theindicators are as follow: (I) Durability(the levelwhich shows the durability of resources andcompany, whether it is decreased or out-of-date),(2) Transparency (the pace of other competitorsin order to understand the link between resourcesand things that support the success of company'sstrategy), (3) Transferability (the skills ofcompetitors to collect resources and thingsneeded to face competitor's challenge), (4)Replicability (the skills of competitors to usetheir resources and to replicate the company'ssuccess).

Data processing shows that MSE'sperformance could be influenced by external andinternal environment, and will be used in theMSE's performance measures. Externalenvironment describe 81 % of banana chipSME's performance and internal environmentdescribe 16 % of banana chip SME'sperformance. Verification to 45 indicators inexternal and internal environment yielding 7 keyperformance indicators (factor loading coefficient>0,5 after partial aspect reduction process) ofbanana chip's SME (Pic. 2) with. There are (1)Inflation rate, (2) Supply of material (includefuel), (3) Price of material (include fuel), (4)Workers' wage, (5) Technology rate beingused, (6) number of new product, and (7)replicability.

C47

-

Proceeding, International Seminar on Industrial Engineerig and ManagementMenara Peninsula, Jakarta, August 29-30, 2007 ISSN: 1978-774X

Pic.2 Structural Model ofMSE's Key Performance Indicators

Table 2. Good f Fit Statistics S

Analysis of GOF (Table 2) showsthat model is unfit. Chi-square is too large, Pvalue is too small, RMSEA> 0,08, GFI, NFland NNFI < 0,90. This result indicates thatmodel wasn't appropriate with data, andneed to be modified. Usually this case becaused by sample size that un sufficient (n =120) for the parameters (x = 45). Result ofcalculation of GOF (Table 2) shows thatmodel is unfit. Chi-square is too large, Pvalue is too small, RMSEA> 0,08, GFI, NFland NNFI < 0,90. This result indicates thatmodel wasn't appropriate with data, andneed to be modified. Usually this problemcould be caused by sample size that unsufficient (n = 120) for the parameters (x =45).

CONCLUSION(1) Structural model shows that external

environment describe 81% of bananachip SME's performance and internalenvironment describe 16 % of bananachip SME's performance, but thegoodness of fit test shows that themodel is unfit and need to be modified.

(2) Confirmatory analysis of structuralequation modeling yielding 7 key

I Model ofMSE's Kev Pern Indicators

performance indicators of banana chip'sSME.

REFERENCESChild J. 1997. ''''Strategic Choice in The

Analysis of Action, Structure,Organization and Environment:Retrospect and Prospect"Organization Studies, Vol. 18, pp. 43-76.

Dillon G. 1984. Multivariate Analysis:Methods and Applications. Toronto:John Willey and Sons.

Kaplan R and Norton DP. 1996. TheBalanced Scorecard :TranslatingStrategy Into Action. 1st edition.Boston: Harvard Business SchoolPress.

Pearce II JA and RB Robinson. 1007.Strategic Management: Formulation,Implementation, and Control. SixthEdition. Illinois: Richard D. Irwin Inc

Tambunan T. 2002. Small and MediumEnterprise in. Jakarta: SalembaEmpat.

Wheelen TL and David Hunger. 1992.Strategic Management and BusinessPolicy. Fourth Edition. New York:Addison Wesley Publishing Company.

C48Key PerformanceIndicators Based On

OIctavina

Test EstimatesChi-Square 865.81754P Value 0,0000Root Mean SquareError of Approximation(RMSEA) 0,251Goodness of Fit Index (GFI) 0,52370Nor med Fit Index (NFl) 0,71003Non-Nor med Fit Index (NNFI) 0,68545