SECOND ORDER MODEL STRUCTURAL EQUATION MODELING FOR ANALYZING EXTERNAL ENVIRONMENTAL AND CAPABILITY ON COMPANY PERFORMANCE OF SMALL AND MEDIUM ENTERPRISE (SME) IN INDONESIA

Abstract

This study aims to explain the influence of the external environment on capability and their
impact on the performance of small and medium enterprise (SME). The research method used
is descriptive verification with a survey approach. Through online survey, 52 SMEs obtained
data with their observation unit being the owner of the enterprise or their supervisor. The
second order structural equation modeling model is used to prove the research hypothesis that
there is an influence from the external environment on capability and the impact on the
performance of SMEs. The second order approach is able to provide information on the level
of importance of each dimension not only research indicators. The results of the analysis
found that there is an influence of the external environment variable on capability but did not
have a direct effect on the performance of SME businesses. Capability variable gives a
significant influence on the performance of SME enterprise, so that the external environment
variable gives an indirect effect on the performance of SME.