Asia Pacific Management Review 25 (2020) 65e74

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Asia Pacific Management Review

journal homepage: www.elsevier.com/locate/apmrv

Knowledge creation process, customer orientation and firm performance:

Evidence from small hotels in Malaysia
Melissa Liow Li Sa a, *, Sam Choon-Yin a, Yeow Kim Chai b, John Heng Aik Joo a
a
PSB Academy City Campus, 6 Raffles Boulevard, Marina Square, #03-200, Singapore, 039594
b
Faculty of Computer Science and Information Technology, University Malaya, University Road, 50603, Kuala Lumpur, Malaysia

a r t i c l e i n f o a b s t r a c t

Article history: This paper investigates how knowledge creation process mediates the relationship between customer
Received 13 August 2018 orientation and firm performance for small hotels in Malaysia. A survey was conducted to gather data for
Received in revised form this study from 308 small hotel owners located in five tourism regions in Malaysia. The results show that
19 May 2019
i) customer orientation has a direct relationship with firm performance 2) a firm's customer orientation
Accepted 29 July 2019
Available online 16 August 2019
initiatives have an impact on firm's knowledge creation process that are dependent on the dynamic
capabilities of their tourism entrepreneurs and 3) customer orientation displayed by small hotels is
found to be partially mediated by the knowledge creation process and its impact on firm performance.
Keywords:
Customer orientation
This paper maintains that small hotels that display customer orientation are mostly dependent on their
Knowledge creation process own resources instituted internally by their owners. However, firm performance improves if the firm
Small hotels dutifully builds its knowledge database from internal and external knowledge sources through social-
Entrepreneur ization, externalization, combination and internalization processes. This study establishes the impor-
Malaysia tance of customer orientation and knowledge creation, especially to those of as resource-based and
dynamic capabilities respectively into renewed firm outcomes, to both academics and industry practi-
tioners. This research findings are useful for tourism entrepreneurs, who are seeking to compete and
achieve superior firm performance for effective business practices and enhancing return on investment.
© 2019 The Authors. Published by Elsevier B.V. on behalf of College of Management, National Cheng Kung
University. This is an open access article under the CC BY-NC-ND license (http://creativecommons.org/
licenses/by-nc-nd/4.0/).

1. Introduction Knowledge creation forms another driver of success. Firms un-

The hospitality industry is fiercely competitive. Hotels, espe-
cially boutique hotels, face pressure from their competitors offering
similar products, and consumers who are more demanding and
impatient in this fast-paced society. To maintain a competitive
advantage, hotels need to place customer orientation in the heart of
their businesses. Tsiotsou and Ratten claimed that customer
orientation has a direct influence on firm performance in the hotel
industry. Additionally, both scholars are of the view that further
investigations on customer orientation in various tourism sub-
sectors are necessary to have a better comprehension of its role
on firm performance.
* Corresponding author.
E-mail addresses: melissa.liow@psb-academy.edu.sg (M.L. Li Sa), Choon-Yin.
SAM@psb-academy.edu.sg (S. Choon-Yin), yeow@siswa.um.edu.my (Y.K. Chai),
John.heng@psb-academy.edu.sg (J.H. Aik Joo).
Peer review under responsibility of College of Management, National Cheng
Kung University.
derstand the importance of transforming novel knowledge into
economic opportunities with the use of information communica-
tion technologies such as company websites, online travel booking
platforms, travel blogs and forums. Acs, Braunerhjelm, Audretsch,
and Carlsson (2009) argued that such knowledge creation process
involves a spiral or a non-uniform set of aptitudes, skills, and cul-
tural beliefs held by entrepreneurs and capable workers. Much has
been written on the constructs of customer orientation and
knowledge creation process, but there was little effort to study their
combined role in improving firm performance.
We took reference to the hospitality industry in Malaysia,
particularly small hotels. Small hotels are primarily dependent on
the tourism entrepreneurs who are the main decision makers of
their firms. While they may face greater resource constraints, there
is no lack of competition. The challenge is to identify and adopt best
practices.
The overarching theme of this paper is to examine whether
knowledge creation and customer orientation contribute to supe-
rior firm performance. This paper pays particular attention to two

https://doi.org/10.1016/j.apmrv.2019.07.002
1029-3132/© 2019 The Authors. Published by Elsevier B.V. on behalf of College of Management, National Cheng Kung University. This is an open access article under the CC
BY-NC-ND license (http://creativecommons.org/licenses/by-nc-nd/4.0/).
66 M.L. Li Sa et al. / Asia Pacific Management Review 25 (2020) 65e74
theories for resource development - Resource-Based Theory and
Dynamic Capabilities Theory - and their respective contribution to
the performance of small hotels in Malaysia. The resource-based
view claims that the heterogeneity of firm resources influences
the degree of a firm's competitive advantage and firm performance
(Barney, 1991). The dynamic capabilities view focuses on a firm's
internal capabilities that combine, transform and reconfigure re-
sources that are valuable, rare, inimitable and non-substitutable
(VRIN) to improve firm performance (Helfat & Peteraf, 2009).
Although both theories are well established in explaining the in-
ternal resource development, it remains unclear in the literature
how externally acquired knowledge could enhance firm perfor-
mance in combination of customer orientation initiatives in small
hotels. We empirically link internal customer orientation initiatives
with externally acquired knowledge, and establish their explana-
tory power toward firm performance within a mediation model;
the knowledge creation process mediates the relationship between
customer orientation and firm performance.
This paper aims to advance the literature on Resource-based
view and Dynamic Capabilities view by providing answers to how
internal firm capability could lead to renewed firm outcomes
where dynamic capabilities assume a mediating role. A survey was
conducted to gather data for this study from 308 owners of small
hotels located in five tourism regions in Malaysia. We show that
customer orientation has a positive influence on knowledge crea-
tion process and firm performance. While knowledge creation
process is a partial mediator between customer orientation and
firm performance, is also has a direct influence on firm
performance.
This rest of the paper is organised in the following manner. The
next section provides a brief description of the tourism sector in
Malaysia. Underpinned by the resource-based view and dynamic
capabilities view, the hypotheses are developed thereafter. This is
followed by the discussion of the research methods and results. The
implications are examined in the concluding section.
2. Small tourism businesses in Malaysia
Malaysia is a Southeast Asian country that consists of thirteen
states and three federal territories. The capital city of Malaysia is
Kuala Lumpur. A multi-ethnic and multi-cultural country with a
total population of 30 million people (Malays, 50.1%; Chinese 22.6%;
Indigenous, 11.8% and Indians, 6.7%), Malaysia has enjoyed rapid
economic growth over the last five decades (Malaysia was a formal
British colony before it gained independence in 1957). Traditionally,
agriculture was the main sector in Malaysia. Malaysia has trans-
formed from an agriculture-based country since the 1980s to
include more prominent sectors such as science, tourism, com-
merce and medical. Malaysia launched the Economic Trans-
formational Programme on September 21, 2010, introducing
initiatives and plans to transform the country into a high-income
economy by the year 2020.
Tourism industry contributes significantly to the Malaysian
economy, accounting for about 15% of Malaysia's total employment
and 12% of its gross domestic product (GDP). In the Economic
Transformation Programme of the Tenth Malaysia Plan, covering
the years 2011e2015, the Malaysian government demarcated the
tourism industry as one of the key economic pillars. The aim was for
the small hotels to identify and adopt relevant advancements in
technology to improve customer experience and support their
operations. The government is prepared to do more to globalise the
brand name with the aim of attracting more tourists into the
country (Giap, Gopalan, & Ye, 2016).
In this study, small hotels are defined as independently managed
properties by the owners known as the tourism entrepreneur. The
accommodation properties primarily offer sleeping facilities to
guests but do not include the home-stay facilities where guests stay
and live with the local families. These service-based enterprises,
totalling 980 establishments, employ between five to 29 employees
and generate between US$ 77,000 to US$ 800,000 in annual sales
turnover (SME Corporation Malaysia, 2018). The hotels are located
along beaches as well as in the city area, serving inbound visitors
from other Malaysian cities/states and foreign visitors.
Small tourism businesses serve a mix of local and international
clientele, arriving in Malaysia to enjoy its equatorial climate.
Malaysia has beautiful beaches, mountains, remarkable shopping
centres and a mix of ancient and modern architectural designs. It
offers a fascinating mix of cultural festivals, food, art and craft.
Located close to Cambodia and Vietnam in the north and Indonesia
and Singapore in the south, Malaysia is an ideal holiday location.
Tourism has become an important sector in Malaysia, contrib-
uting to both employment and income to the nation. At the same
time, tourists around the world are spoilt for choices as tourist
destinations clamour for their attention and tourist dollars. It is
therefore useful to examine the factors contributing to organisa-
tional excellence in the tourism sector as a means to retain
Malaysia's competitiveness and attractiveness as a tourist
destination.
3. Theoretical background and hypotheses development
3.1. Resource-based view and dynamic capabilities view
Resource-based view and dynamic capabilities view are prom-
inent in the literature to explain the contribution of firm resources
to firm performance. The resource-based view argues that with a
heterogenous set of firm resources that are VRIN, firms can gain
competitive advantage that results in enhanced firm performance
(Barney, 1991). Teece, Pisano, and Shuen (1997) have argued that
resources owned by an individual firm could determine its market
position in dynamic environmental forces. The dynamic capabil-
ities view extends the resource-based view; that a firm's internal
capability can positively renew firm outcomes by combining,
transforming and reconfiguring resources that become VRIN. Such
dynamic capabilities are mostly embedded as formalized activities
that are conducted to renew firm performance (Teece et al., 1997;
Winter 2003). Researchers (example, Chesborough, 2003; Lin,
2003) claim that both internal and external firm resources are
important to maintaining firms' competitive advantage. In this
study, we are keen to establish the link between a firm's capability
(customer orientation), dynamic capabilities (knowledge creation
process) and renewed firm outcomes (firm performance).
3.2. Customer orientation and firm performance
Globalisation has exerted much pressure on firms. Small hotels
are no exception. To win business, there is a constant demand for
small hotels to focus on consumer needs and provide quality
product and services. Consumer orientation matters; an internal
capability that is expected to be demonstrated in small tourism
businesses (Thomas, Shaw, & Page, 2011; Tsiotsou & Ratten, 2010).
Through the lens of the resource-based view, this internal capa-
bility possessed in the small hotels contributes to a firm's
competitive advantage and profitability (Barney, 1991). Customer-
centricity is associated with gathering of first hand customer in-
formation (Shaw, Bailey, & Williams, 2011) and identifying and
closing service gaps (Altinay, 2010). Tajeddini (2010) surveyed 156
hotel managers and owners in German and French speaking can-
tons located in Switzerland, and showed that customer orientation,
entrepreneurial orientation, and innovativeness have a positive
 M.L. Li Sa et al. / Asia Pacific Management Review 25 (2020) 65e74 67

impact on firm performance. Tajeddini and Trueman (2012) Trivago.com, to take an example, allows end consumers to find
reached similar conclusions in their study on small retailers in their ideal hotels by comparing hotel rates with accompanying
Switzerland. customers testimonials. Its hassle-free booking features enable web
A large number of studies have examined the link between features that suit customers’ budget and preferred destinations.
customer orientation and firm performance, focusing mainly on Similarly, TripAdvisor.com has online travel forums that empower
manufacturing firms, large hospitality enterprises, and organisa- travellers to suggest service providers for an all-inclusive travel
tions in general service sectors (Cheng & Krumwiede, 2012; Tang, services from hotels, restaurants, and attractions. Other than of-
2014). Fewer studies have focused on small tourism businesses fering easy price comparison and candid photos of many top tourist
(some exceptions include Shaw & Williams, 1987; Tsiotsou & destinations, TripAdvisor.com provides latest reviews of hotels and
Ratten, 2010). Comparatively speaking, small hotels are more allows customers to find hotels that offer the lowest prices and save
capable in providing novelty seeking, attentive and value sensory money.
customer service experiences due to their organisational flexibility In sum, smaller hotels that practise customer orientation are
compared to their large hotel chain counterparts (Grissemann, prone to place efforts on knowledge creation process. A successful
Plank, & Brunner-Sperdin, 2013; Tajeddini, 2011; Tang, 2014). In tourism entrepreneur exploits the knowledge through the spirals of
the case of Malaysian hotel resorts, memorable customer experi- knowledge creation and adoption, transforming the customer-
ences positively influence organizational performance outcomes orientated activities implemented in their firms. Accordingly,
such as instituting fond memories and customer loyalty (Ali, customer orientation is critical because of its positive impact on
Hussain, & Ragavan, 2014). Liat, Mansori, and Huei (2014) knowledge creation process, and this leads to the next hypothesis:
demonstrated that customer satisfaction and customer loyalty are
H2. Customer orientation of small hotels has a positive impact on
important for hoteliers to sustain long-term business growth. From
knowledge creation process.
the above synthesis, it can be observed customer orientation is
crucial in enhancing firm performance. The following hypothesis is
established.
3.4. Knowledge creation process and firm performance
H1. Customer orientation of small hotels has a positive impact on
firm performance. Knowledge is reckoned to be a strategic resource for businesses.
The dynamic capabilities view argues that possession of VRIN re-
sources such as knowledge can contribute to firm performance.
3.3. Customer orientation and knowledge creation process
However, success is dependent on the capabilities of entrepreneurs
to generate and exploit knowledge, that enable them to forge a
The dynamic capabilities view focuses on a firm's internal
sustainable competitive advantage for their firms (Li, Huang, & Tsai,
capability that combines, transforms and reconfigures resources
2009; Soon & Zainol, 2011; Yeow, 2014). The immobility and het-
that become valuable, rare, inimitable and non-substitutable
erogeneity characteristics of knowledge suggest that the role of
(VRIN) into enhanced firm performance (Helfat & Peteraf, 2009).
knowledge creation process is crucial to transform a firm's
Customer orientation focuses on collection and application of
knowledge pool into the firm's competitive advantage that reflects
customer information efficiently, therefore compelling small hotels
the success of a new business venture (Hunt & Arnett, 2006; Li
to conscientiously learn of customer needs by combining internal
et al., 2009). Knowledge creation process constitutes a contempo-
and external knowledge sources about their customers that create
rary strategic orientation for small tourism businesses to remain
firm value. Lages and Piercy (2012) collected data from frontline
competitive. This strategic approach is taken by small tourism
catering employees in fast-food outlets and restaurants in the
businesses as a response to intense international competition and
United States, and concluded that organizational commitment, job
eroding customer loyalty to tourism service providers (Tsiotsou &
satisfaction and the ability to read consumer needs had a significant
Ratten, 2010). Muthuveloo, Shanmugam, and Teoh (2017) claimed
impact on knowledge creation that eventually led to improved firm
that tacit knowledge management is hard to manage, however
performance.
established that tacit knowledge management has a significant
It is known that the collection and application of information
impact on the firm performance for electronic based industry firms
gathered from internal and external knowledge sources goes
as well as medical and pharmaceutical firms in their recent study.
through a dynamic spiral process (Nonaka, 1994). According to
Investigating the role of knowledge creation process on firm
Nonaka and Takeuchi (1995), knowledge creation involves a series
performance is an emerging research topic. Ramadani, Abazi-Alili,
of self-transcendental processes: socialization, externalization,
Dana, Rexhepi, and Ibraimi (2017) confirmed the importance of
combination and internalization (SECI) processes that facilitate
the knowledge spillovers as a contributing factor to firm perfor-
knowledge conversion and transformation. Marketing activities
mance in the Balkan countries (particularly the micro and small
and new product development start with the socialization process
firms). The disintermediation of tourism distributors and the
which involves face-to-face meetings, brainstorming sessions, and
increasing number of prosumers have disrupted how knowledge is
grapevine whereas externalization process triggers the under-
generated, transferred, and received in tourist destinations. The
standing of different organizational stakeholders that lead to the
discussion calls for a need to investigate whether the firm perfor-
formulation of marketing and product concepts. Combination
mance of small hotels will be positively impacted with the adoption
process screens the concepts before tangible efforts are put into
of knowledge creation process in their firms. Therefore, the
production and marketing campaigns. Internalization process re-
following hypothesis is presented:
fers to the conversion of explicit knowledge to tacit knowledge
where knowledge is internalized and formalized into standard H3. The knowledge creation process in small hotels has a positive
operating procedures. As businesses grow and formulate customer impact on firm performance.
orientation, the tourism entrepreneurs can adopt the SECI process
to combine novel and existing knowledge from their competitors,
intermediaries, and customers. Customer orientation activities are 3.5. The mediating role of knowledge creation process
then integrated and distributed among the firm stakeholders to
generate more knowledge applications on online travel platforms. Broadly speaking, knowledge creation generates customer
68 M.L. Li Sa et al. / Asia Pacific Management Review 25 (2020) 65e74
intelligence for hotels to continually and speedily respond to their
competitive environment. To sustain superior firm performance,
the dynamic capabilities view maintains the importance of internal
firm capabilities to combine with externally acquired knowledge as
a way to improve firm performance (Chesborough, 2003; Lin,
2003). Knowledge gained from these customer-driven activities
has enabled small tourism businesses to provide better customer
service relative to their competitors, providing directions to the
businesses on their day-to-day activities, contributing to enhanced
firm performance (Cheng, Chen, Hsu, & Hu, 2012; Zhou & Li, 2010).
In an interesting study on 126 hotels in Taiwan, Tang (2014)
concluded that service innovation and service improvement
mediated the relationship between customer orientation and
organisational excellence, suggesting that customer orientation
had a positive impact on firm performance through enhancement
and improvement of service capabilities. Hotel websites and the
advent of big data analysis enable hoteliers to better understand
their consumers, and a safe, secure and good quality website can
serve to strengthen trust between the firm and its consumers. The
provision of accurate, current, and complete information on the
official websites tend to increase consumer trust in online trans-
actions, leading to more online bookings, and walk-in sales (Wang,
Law, Guillet, Hung, & Fong, 2015). This implies that knowledge
creation process is capable of guiding small customer-oriented
hotels with directions on their day-to-day business, resulting in
enhanced firm performance. On this basis, it can be hypothesized
that knowledge creation process is a mediating factor between
customer orientation and firm performance.
H4. The knowledge creation process in small hotels mediates the
impact of customer orientation and firm performance.
Based on the literature, this study posits a conceptual model as
shown in Fig. 1 and gather empirical data to establish the rela-
tionship between customer orientation, knowledge creation pro-
cess and firm performance.
4. Research methodology
The sample of small hotels was drawn from the following da-
tabases: Malaysian Hotel Association (with 900 members) and
Malaysian Budget Hotel Association (with 1,800 members). The
hotels are either Orchid rated (below 1-star rating) or 1-star, if not,
2-star, 3-star, 4-star, 5-star rating. The sample was selected using
stratified random sampling, which is suitable to ensure a good
representation of small hotels. These establishments employ be-
tween five to 29 employees and generate between US$ 77,000 to
US$ 800,000 in annual sales turnover (SME Corporation Malaysia,
Fig. 1. A Mediation Model (conceptual and empirical).
2018). The sample was extracted from the five tourism regions in
Malaysia and care is taken to ensure adequate representation from
each tourism region, namely East Malaysia and the East Coast,
South, North and Central regions of Peninsular Malaysia. The tar-
geted respondents were the hotel entrepreneurs or the owners of
the small hotels. This is based on the understanding that these
entrepreneurs are heavily involved with the daily business opera-
tions. Small hotel entrepreneurs were the primary targeted re-
spondents because they are likely the individuals who have the
most knowledge about their firms (Jaafar, 2012; Keh, Nguyen, & Ng,
2007).
An email survey questionnaire was developed for this study. The
questionnaire followed scale measurements that have been
adapted based on clearly marked constructs to suit the context of
the small Malaysian hotels. The questionnaire was pre-tested using
seven small hotel entrepreneurs and three senior tourism lecturers
to ensure that the survey content and scale measurements are
valid, clear and appropriate. A total of 900 questionnaires was
distributed thereafter, and 308 usable questionnaires were
collected, giving us a response rate of 34%.
The questionnaire used was designed to measure the de-
mographic information of the respondents, and to measure small
tourism businesses that demonstrate customer orientation and
embrace knowledge creation process through the SECI dimensions
and the impact on firm performance.
Statistical Package for Social Science software version 21 was
used to perform the descriptive statistical analysis and the
exploratory factor analysis of this study. The latter procedure had to
be performed for the data was extracted from questionnaires in a
new context, mainly the small hotels in Malaysia. The exploratory
factor analysis was useful for discovering the number of factors
influencing the variables and which variables are to be combined
into the research model of this study (Hair, Black, Babin, &
Anderson, 2010; Yong & Pearce, 2013). Extant studies that inves-
tigated on the heterogenous nature of the small hotels and their
service offerings, had led researchers into examining too many
variables that may be trivial (Thomas et al., 2011). By performing
the exploratory factor analysis, it was helpful for placing the vari-
ables under this study into meaningful categories for further
analysis (Yong & Pearce, 2013). The combination of examining the
three variables: knowledge creation process, customer orientation
and firm performance in a research model altogether remained
novel; limited studies in the past had investigated these variables in
the context of small tourism businesses. Therefore, the data for this
study was gathered by adapting previously tested measurements:
Deshpande , Farley, and Webster Jr (1993) customer orientation
scale, Sabherwal and Becerra-Fernandez's (2003) knowledge
 M.L. Li Sa et al. / Asia Pacific Management Review 25 (2020) 65e74 69

creation process scale and Zeglat and Zigan's (2014) firm perfor- on the rest of factor solutions (Hair et al., 2010). Items with factor
mance scale. The data was further analyzed using the Confirmatory loading below 0.5 were deleted, resulting each sub-construct for
Factor Analysis by assessing the goodness of measure primarily knowledge creation process with three measurement items, the
unidimensionality, convergent validity, discriminant validity and unidimensional customer orientation construct with seven items
reliability; and tested the developed hypotheses using Analysis of and the unidimensional firm performance construct with four
Moments Structure software version 21 that performed the items. All constructs and sub-constructs achieved the minimum
covariance-based Structural Equation Modelling (CB-SEM). CB-SEM acceptable level of Cronbach's alpha of 0.7 and above.
was deemed appropriate for this study since the causal modelling The customer orientation construct was quantified using the
situation was based on prior theories that are fundamentally strong nine-item Deshpande  et al.‘s (1993) scale. This scale was based on a
(resource-based theory and dynamic capabilities theory) and the five-point Likert-scale (1- Strongly Disagree to 5 e Strongly Agree)
research objective of this study is for further testing and confir- which was adapted in this study and previously tested in prior
mation of applying the two underpinning theories rather than studies such as Tajeddini's (2010) and Tajeddini, Elg, and Trueman's
theory-building (Anderson & Gerbing, 1988; Hair, Ringle, & (2013) studies. The maximum likelihood with varimax rotation
Sarstedt, 2011). suggests a unidimensional construct consisting seven items (CO1 to
CO6 and CO8) with a factor loading above 0.5. The Cronbach's alpha
5. Research findings of the customer orientation construct exceeded 0.70, establishing
the construct's reliability (Hair et al., 2010). The Kaiser-Meyer-Olkin
5.1. Firm profile test resulted in a value of 0.891 and the Bartlett's test of sphericity
was significant. See Table 2.
The profiles of the sampled hotels are reported in Table 1. Half To measure the knowledge creation process construct, the five-
(51%) of the hotels are generating between US$ 77,000 and US$ point scale of Sabherwal and Becerra-Fernandez (2003) model was
270,000 in revenue and employing five to ten employees. 35% of applied that comprised the SECI (socialization, externalization,
the respondents are hotels earning revenue in between US$ combination, internalization) processes (Nonaka, 1994; Nonaka,
270,001 and US$ 540,000 and staff strength is between 11 and 20 Toyama, & Nagata, 2000). The maximum likelihood with varimax
employees. The remaining 14% are hotels that generate revenue in rotation establishes four sub-dimensional constructs consisting
between US$ 540,001 and US$ 800,000 and have a staff strength three items each with a factor loading above 0.5. Twelve of the
between 21 and 29 employees. sixteen items have been retained and the items were loaded highly
The small hotels have been operating for at least three years, a on the following four factors, that were C - combination (factor 1), I
benchmark used to indicate their survival success since their - internalization (factor 2), E - externalization (factor 3) and S-
inception phase. Of these firms, 47% of these small hotels achieved socialization (factor 4), with eigenvalues 1.0 and above (Hair et al.,
an annual occupancy rate of 61%e80%. These small hotels remained 2010). The Cronbach's alpha value was 0.855 that exceeds the
low yield since 79% make US$ 37.50 or less in their average room minimum guideline of 0.70 (Hair et al., 2010). The Kaiser-Meyer-
rate. Olkin test resulted in a value of 0.832 and the Bartlett's test of
sphericity was significant. See Table 3.
The firm performance construct in this study encompasses
5.2. Exploratory factor analysis operational and financial performance items that are regarded as
primary accommodation industry indicators (Zeglat & Zigan, 2014).
The Principal Component Analysis using the varimax rotation Occupancy rate and revenue per available room are applied to
was applied in this study, a function that enabled the high items measure their operational performance. Return on capital and gross
loadings to load on one factor and the small item loadings to load operating profit were used to measure their financial performance.
All four performance items (FP 1 to FP 4), referring to Table 4, were
Table 1 worded in such a manner that entrepreneurs evaluate their firm
Profiles of the sampled hotels (n ¼ 308). performance against their competitors. To reduce year-to-year
variations that exist in the firm performance results, a three-year
Characteristics Frequency %
period was chosen. A different descriptor for firm performance (1
Annual sales turnover; employee numbers - Much worse to 5 - Much better) was applied. The intention was to
US$ 77,000 to US$ 270,000; 5 to 10 employees 156 51
US$ 270,001 to US$ 540,000; 11 to 20 employees 108 35
make it easier for respondents to compare their firm performance
US$ 540,001 to US$ 800,000; 21 to 29 employees 44 14 with their competitors.
Number of years in operations The factor analysis has established that the firm performance
1 year - - construct was unidimensional. A computation of the Cronbach's
2 years - -
alpha value was 0.820, exceeding the 0.70 level (Hair et al., 2010).
3 years 108 35
4 years 85 28 The Kaiser-Meyer-Olkin test resulted in a value of 0.776 and the
5 years 66 21 Bartlett's test of sphericity was significant.
6 years and above 49 16 This study is based on self-reported data, therefore there is a risk
Annual Occupancy Rate of common method bias. A Harman's single test was performed as
21e40% 23 8
41e60% 84 27
suggested by Hair et al. (2010), and the test revealed there are
61e80% 146 47 altogether five factors with eigenvalues above 1. One of these fac-
More than 80% 55 18 tors explained 18 percent of the total explained variance, therefore
Average Room Rate there is no single factor that explained most of the variance.
 US$ 12.50 14 5
Thereby, common method bias is not likely to be a severe problem
US$ 12.51e25.00 143 46
US$ 25.01e37.50 85 27 in this study.
US$ 37.51e50.00 28 9
US$ 50.01e62.50 19 6 5.3. Goodness of measurement (measurement model)
US$ 62.51e75.00 8 3
> US$ 75.00 11 4
Correlation values of less than 0.85 suggest that customer
70 M.L. Li Sa et al. / Asia Pacific Management Review 25 (2020) 65e74

Table 2
Factor analysis of customer orientation.

Items Factor Loading Communality

CO1. My hotel has routine or regular measures of customer service. 0.667 0.445
CO2. My hotel's service development is based on good market and customer information. 0.844 0.712
CO3. My hotel knows our competitors well. 0.722 0.521
CO4. My hotel has a good sense of how our customers value our product and services. 0.748 0.559
CO5.My hotel is more customer focused than our competitors. 0.804 0.646
CO6. My hotel competes primarily based on product and/or service differentiation. 0.761 0.578
CO8. My hotel's products/services are the best in the industry. 0.736 0.541
Eigenvalue 4.003
Cumulative explained variance (%) 57.180
Cronbach's Alpha 0.872
Kaiser-Meyer-Olkin 0.891
The Bartlett's test of sphericity (p-value) 0.000

Note: Loadings less than 0.3 were supressed in varimax rotation; * reverse coding item.

Table 3
Factor analysis of knowledge creation process.

Items Factor Factor Factor Factor Communality

1 2 3 4

S2. My hotel uses apprentice and mentors to transfer knowledge. 0.617 0.503
S3. My hotel usually adopts brainstorming retreats or camps. 0.864 0.795
S4. My hotel usually adopts employee rotation across areas. 0.825 0.731
E1. My hotel usually adopts problem-solving system such as Property Management System (PMS). 0.817 0.829
E2. My hotel usually adopts groupware and other learning collaboration tools. 0.816 0.821
E5. My hotel usually does capture and transfer experts' knowledge. 0.792 0.644
C1. My hotel usually uses web-based data which is accessible by employees. 0.871 0.893
C2. My hotel usually uses web pages (intranet and Internet). 0.779 0.758
C3. My hotel usually uses databases and it is accessible to the employees. 0.881 0.899
I1. My hotel usually adopts on-the-job training conducted by senior employees to equip new recruits with necessary 0.878 0.888
knowledge, skills, and abilities.
I2. My hotel usually adopts learning by doing, a knowledge sharing process which usually helps in the work performance of 0.828 0.802
employees.

I3. My hotel usually adopts learning by observation among employees. 0.879 0.860
Eigenvalue 5.545 1.469 1.311 1.099
Cumulative explained variance (%) 46.206 58.450 69.377 78.537
Cronbach's Alpha 0.720 0.816 0.909 0.904
Composite Cronbach's Alpha 0.855
Kaiser-Meyer-Olkin 0.832
The Bartlett's test of sphericity (p-value) 0.000

Note: Loadings less than 0.3 were supressed in varimax rotation.

Table 4
Factor analysis of firm performance.

Factor Loading Communality

FP1. How would you rate your hotel's occupancy rate in the last 3 years as compared with your competitors? 0.728 0.530
FP2. How would you rate your hotel's gross operation profit in the last 3 years as compared with your competitors? 0.772 0.596
FP3. How would you rate your hotel's revenue per available room in the last 3 years as compared with your competitors? 0.927 0.860
FP4. How would you rate your hotel's profitability measured by return on capital in the last 3 years as compared with your competitors? 0.865 0.748
Eigenvalue 2.733
Cumulative explained variance (%) 68.330
Cronbach's Alpha 0.820
Kaiser-Meyer-Olkin 0.753
The Bartlett's test of sphericity (p-value) 0.000

Note: Loadings less than 0.3 were supressed in varimax rotation.

orientation and knowledge creation process constructs are not
redundant (Awang, 2015). At first, the Fitness Indices of the mea-
surement model did not achieve the level of acceptance, despite the
absence of low factor loading items (<0.5). The next step is to
consider pair(s) of items - modification indices of more than 15 that
indicate redundant items in the model. Pairs CO2 and CO3 as well as
CO5 and CO6 in the customer orientation construct have registered
modification indices of more than 15. Both pairs of the redundant
items are set as free parameter estimates and the measurement
model is re-specified. Our results show a model fit for the mea-
surement model (root mean square of error approxima-
tion ¼ 0.047; goodness of fit index ¼ 0.900; comparative fit
index ¼ 0.964; Tucker-Lewis index ¼ 0.959; normed-fit in-
dex ¼ 0.919; Chisq/df ¼ 1.724).
Evaluating the unidimensionality, validity, and reliability for the
measurement model is normally performed before constructing
the structural model. Unidimensionality is met since all measure-
ment items corresponded to items with factor loading above 0.50
 M.L. Li Sa et al. / Asia Pacific Management Review 25 (2020) 65e74 71

(Hair et al., 2010). Construct validity is achieved; fitness indices for show that customer orientation accounted for 19% of the variance
all three constructs (customer orientation, knowledge creation in knowledge creation process. The customer orientation and
process and firm performance) show a good model fit (Hair et al., knowledge creation process constructs accounted for 25% of the
2010). Convergent validity is established since the average vari- variance in firm performance, suggesting a large effect of both
ance extracted value for every construct and sub-construct is above constructs for the path analysis model according to Cohen (1988).
0.50. The composite reliability for each construct and sub-construct H1, H2, and H3 are supported by the path analysis results. The path
is greater than 0.60, which shows the measurement model is reli- from customer orientation to firm performance or H1 is significant
able in measuring all items in the analysis (Hair et al., 2010). Refer (b ¼ 0.363 p < 0.05). This result is aligned with studies (example,
to Table 5. Tajeddini, 2010; Tajeddini & Trueman, 2012). Customer orientation
As shown in Table 6, the square root of the average variance has a significant positive impact on knowledge creation process
extracted (AVE) is greater than the correlations between each (b ¼ 0.434, p < 0.05), and therefore H2 is supported. It implies that
construct and other constructs, providing evidence of discriminant the more customer-orientated the small hotel is, the more
validity (Awang, 2015). committed their entrepreneurs are in knowledge creation process.
The next step was to model all constructs into a structural model Additionally, knowledge creation process is established to have a
using Analysis of Moments Structures version 21. The indices for significant positive impact on firm performance (b ¼ 0.218,
the structural model displayed a good model fit (root mean square p < 0.05). Therefore, H3 is supported and concurred with findings of
of error approximation ¼ 0.050; goodness of fit index ¼ 0.894; past studies for example, Li et al. (2009) and Yeow (2014).
comparative fit index ¼ 0.959; Tucker-Lewis index ¼ 0.953; Referring to Fig. 2, the indirect effect is found to be smaller than
normed-fit index ¼ 0.91; Chisq/df ¼ 1.764). The correlation coeffi- the direct effect (the indirect effect is 0.095, p < 0.01 and the direct
cient is below 0.85, suggesting that both exogenous constructs - effect is 0.363, p < 0.01). This result indicates a potential partial
customer orientation and knowledge creation process - are not mediation role of knowledge creation process since all three paths
redundant. (1) customer orientation to firm performance (2) customer orien-
Fig. 2 displays the standardized path coefficient, path signifi- tation to knowledge creation process, and (3) knowledge creation
cance and the variance explained for each path or R2. The results process to firm performance, are significant. To verify the media-
tion test result, we compared the value of the direct effect between
independent variable and dependent variable in a single model,
Table 5 with its value when the mediator enters the model. If the value is
Measurement model (n ¼ 308).
reduced when the mediator is included, partial mediation occurs
Constructs Item Factor Loading CR > .6 AVE >.5 (Awang, 2015). The path of customer orientation to firm perfor-
Customer Orientation CO1 0.645 0.875 0.502 mance in a single model was found to be significant (b ¼ 0.461,
CO2 0.809 p < 0.01). The value was reduced when the knowledge creation
CO3 0.630 process, the mediator, enters the model (b ¼ 0.095, p < 0.01).
CO4 0.699 Therefore, the results reveal that partial mediation occurs. Hence-
CO5 0.780
forth, H4 is supported. Table 7 reports the results of the four
CO6 0.685
CO7* - hypothesised relationships: H1, H2, H3, H4.
CO8 0.694
CO9* - 6. Discussions and implications
Construct Sub-constructs Factor Loading CR > .6 AVE >.5

Knowledge Socialization 0.621 0.801 0.504

This study establishes a stepwise link between customer
Creation Externalization 0.696 orientation, knowledge creation process and firm performance.
Process Combination 0.790 This relationship defines customer orientation as an internal
Internalization 0.722 resource. Both its direct and indirect effects to the firm performance
are investigated to conceptually link to the resource-based view
Sub-constructs Item Factor Loading CR > .6 AVE >.5
and the dynamic capability view. The results show that i) customer
Socialization S1r* - 0.763 0.524 orientation has a direct relationship with firm performance 2) a
S2 0.560
firm's customer orientation initiatives have an impact on firm's
S3 0.848
S4 0.734 knowledge creation process that is dependent on the dynamic ca-
Externalization E1 0.941 0.851 0.667 pabilities of their tourism entrepreneurs and 3) customer orienta-
E2 0.912 tion displayed by small tourism businesses is found to be partially
E3* - mediated by the knowledge creation process and its impact on firm
E4* -
performance.
E5 0.532
Combination C1 0.936 0.917 0.787 Therefore, we maintained from the resource-based view that
C2 0.781 small hotels are mostly dependent on their own resources that are
C3 0.936 internally instituted by their owners [this result aligns with Hall
C4* -
and Rusher's (2005) and Thomas et al., (2011). However, if the
Internalization I1 0.946 0.910 0.771
I2 0.817
firm dutifully builds its knowledge database from internal and
I3 0.892 external knowledge sources through socialization, externalization,
combination and internalization processes, this would enable the
Construct Item Factor Loading CR > .6 AVE >.5
firm to compete more effectively in the crowded market. This
Firm FP1 0.608 0.891 0.681
means a customer orientated tourism entrepreneur can potentially
Performance FP2 0.670
FP3 0.974 institute a routine of creating new knowledge, combining new and
FP4 0.978 existing knowledge, and incorporating them into new business
Note: CR is composite reliability and AVE is average variance extracted. Item S1r is a
vision. Knowledge assets can evolve into new forms of knowledge
reverse coding item. The items* were deleted after exploratory factor analysis. No that are informative to staff, travel intermediaries, consumers and
further items were deleted during the confirmatory factor analysis. even for their direct competitors. When the small hotels participate
72 M.L. Li Sa et al. / Asia Pacific Management Review 25 (2020) 65e74

Table 6
Discriminant validity.

Construct Customer orientation Knowledge creation process Firm Performance

Customer orientation 0.709

Knowledge creation process 0.434*** 0.710
Firm Performance 0.455*** 0.376*** 0.825

Note: The diagonal elements in bold in the ‘correlation of constructs’ matrix is the square root of the average variance extracted. ***p < .001.

Fig. 2. Path analysis model.

Table 7
Hypotheses and results.

Hypotheses Standard p-value Results on hypotheses

Estimate

H1: Customer orientation of small hotels has a positive impact on firm performance. 0.363 *** Supported
H2: Customer orientation of small hotels has a positive impact on knowledge creation process. 0.434 *** Supported
H3: The knowledge creation process in small hotels has a positive impact on firm performance. 0.218 *** Supported
H4: The knowledge creation process in small hotels mediates the impact of customer orientation and firm performance. Direct effect: 0.461. Supported
Indirect effect is
0.095 and this
value is reduced
when mediator
enters the model. A
partial mediation
occurs.

in the spiral of knowledge creation, the tacit knowledge combined
with the external environmental information enable entrepreneurs
to optimise their resources and enhance firm performance.
From the dynamic capability view, it appears there is a need for
small hotels to appreciate the SECI spiral of knowledge creation and
its role in customer orientation that impacts firm performance. For
example, entrepreneurs can make continuous efforts to schedule
frequent staff briefings and quality circles. Novel spirals of knowl-
edge that are identified and shared in these sessions are compiled
into shared databases. This include the customer experiences
shared by new staff, senior front-line staff and the entrepreneurs
themselves as well as information received from the public, their
travel intermediaries and consumers. To drive the desired behav-
iour, tourism entrepreneurs can offer attractive schemes and
incentives to their staff who deal with these stakeholders
frequently. Baule and Soost (2016) find non-financial incentives and
social environment as drivers of intrinsic motivation for staff. Non-
financial incentives in small hotels such as giving awards to
recognise staff suggestions on continuous customer service im-
provements can compensate for the financial incentives such as the
one-time job promotion and annual bonuses.
Arguably, this study claims that customer orientation positively
impacts firm performance operationally and financially. Our results
show that small hotels can influence their firm performance by
focusing on customer needs. The reason being that a tourism
entrepreneur who upholds customer orientation, provides the
firm's stakeholders with a better understanding of its customers
(Tajeddini, 2011; Tajeddini, Elg, & Trueman, 2013). This
 M.L. Li Sa et al. / Asia Pacific Management Review 25 (2020) 65e74
consequently leads to returned customer visits. They are more
likely to inform the travelling public of the unique customer ex-
periences that the small hotels have to offer. These gains ultimately
lead to long-term emotional bonds with their customers.
Our results suggest that it might be useful for tourism entre-
preneurs to conduct internal staff training in customer service or
enrol their staff in customer-centric courses offered by the local
hotel associations. Local hotel associations can initiate national
customer service awards to recognise the outstanding professionals
from the small hotel businesses. Tourism entrepreneurs can seek
public subsidies, grants, and training to internationalise their
unique customer experiences through online travel booking plat-
forms such as Booking.com, Trivago.com and Hotel.com. Other
marketing initiatives can include showcasing promotional pack-
ages on the firm's corporate website and portraying the small ho-
tels as iconic attractions or destination per se in the national
tourism campaigns.
This paper sheds some light specifically for small Malaysian
hotels which formed the primary sample of this study. The findings
of this study established that customer orientation forms a core
strategy among small hotels in Malaysia. This paper supports as-
pects of past research, but also provides some new insights of the
importance in measuring customer orientation initiatives in small
hotels in Malaysia. Firm performance is highly dependent on the
cultural mindset of their entrepreneurs that advances the resource-
based view using a firm's internal capabilities. The service quality
rendered by the hotel employees and the continuous improvement
of product/service efforts in public areas and guestrooms are
dependent on the degree of customer orientation and to some
extent the knowledge creation process that integrate into effective
business practices such as standard operating procedures that
result in positive return on investment.
It is worth noting that Malaysia scores a high score of 100 on the
power-distance cultural dimension and for the individualism
dimension, Malaysia scores low at 26 out of 100 (Insights, 2018).
Centralised organisational structure and autocratic leadership
styles are popular in Malaysia. Employees prefer to be told what to
do and loyalty is paramount to refrain from loss of face or shame.
Therefore, in the Malaysian context, the employees mostly play the
implementer role. The small hotel owners are likely the primary
planner, organiser, leader, and controller of the customer orienta-
tion initiatives in their firms. Therefore, measurements of customer
orientation initiatives instituted by the small hotel owners at firm-
level are paramount to establish its significance to the firm per-
formance. We suggest that continual measurements of both oper-
ational and financial performance indicators which better reveal
whether there is a need to continue or improve the existing
customer orientation initiatives should be instituted by the owners
of small hotels in Malaysia.
From the resource-based view, we maintained that small hotel
owners are the key individuals who internally institute the
customer orientation initiatives in their premises. From the dy-
namic capabilities view, to sustain firm performance, we encourage
that the small hotel owners do invest time and effort in seeking for
internal and external knowledge resources accessible to them.
Regular guest feedback and travel booking sites serve as reliable
sources of data to form a knowledge database unique for each
hotel's information needs and for comparison with its main
competitors.
This study suggests small hotels in Malaysia need to customise
their knowledge database. Small hotels mostly serve niche market
segments in different tourism regions in Malaysia. Therefore, the
firm's customer orientation initiatives should be developed based
on the information rendered from their internal stakeholders such
as their employees as well as their external stakeholders who
73
include competitors, customers, and travel intermediaries in their
respective locations. In other words, the knowledge databases
cannot only rely on internal information sharing between small
hotel owners and employees. Automating chatbots on the firm
websites and partnering with online travel sites are a few cost-
effective ways to inform small hotel owners on the development
of customer orientation initiatives in their firms. The aim is to ap-
peal to the niche market segments that the different small hotels
are serving, well beyond their customer expectations, which is
gainful towards enhancing their firm performance.
Overall, we gathered that firm performance improves if the firm
dutifully builds its knowledge database from internal and external
knowledge sources through socialization, externalization, combi-
nation and internalization processes that design the customer
orientation activities of small hotels. This study establishes the
importance of customer orientation and knowledge creation to
academics, especially to those of as resource-based and dynamic
capabilities into renewed firm outcomes. The research findings are
useful for tourism entrepreneurs managing the small hotels, who
are seeking to compete through effective business practices and in
turn achieving superior firm performance and enhancing the
returns on their business investment.
7. Limitations and recommendations for future research
This study has several limitations. Firstly, a cross-sectional study
and a parsimonious approach have been undertaken. Further
research should include additional dimensions with respect to
strategic resources that can enhance firm performance, for
instance, their branding orientation and their innovation culture.
The sample of this study is primarily drawn from small hotels.
Therefore, some caution needs to be practised when generalising
the findings of this study to other service sub-sectors in the tourism
industry due to their heterogenous characteristics (Thomas et al.,
2011; Tsiotsou & Ratten, 2010). Therefore, there is a one prom-
ising research avenue to establish whether the results of the rela-
tionship for the customer orientation and firm performance would
be similar by extending the research to other service sub-sectors in
the foodservices, event management and for the travel agencies.
Additionally, what is lacking is the study on the overarching public
policies that are recognised for their influences on the entrepre-
neurship programs that they can offer to small enterprises (Dana,
Gurau, & Lasch, 2014; Nielsen, 2016). Future research should
study the social and environmental effects since this study has only
examined the economic perspective for improving firm perfor-
mance. It is also possible that if this study is performed in other
countries, the results may differ, thereby future research should be
examined if the results are transferable to other tourism-based
nations.
Funding
This study did not receive any funds from any commercial, non-
for-profit sectors, and public agencies.
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