The Effect of Functional Integration on Operational Performance: The Mediating Role of Customization

Abstract

This study examines the effect of functional integration on operational performance and investigates the mediating role of customization among kebaya boutique small and medium-sized enterprises (SMEs) in Yogyakarta, Indonesia. Drawing on the Resource-Based View (RBV), the study explores how cross-functional coordination enhances operational capabilities in a make-to-order business environment. A quantitative causal research design was employed using purposive sampling of SME owners operating at least two functional divisions and offering both ready-to-wear and customized products. Data were collected through structured questionnaires and analyzed using Partial Least Squares Structural Equation Modeling (PLS-SEM) with SmartPLS 4.0. The findings reveal that functional integration has a significant positive effect on both operational performance and customization, indicating that effective coordination and information sharing across organizational functions improve operational efficiency and customer responsiveness. However, customization does not significantly influence operational performance and fails to mediate the relationship between functional integration and operational performance. These results suggest that although customization enhances responsiveness to customer needs, its operational benefits may not be realized without efficient processes and effective operational control. The study contributes to operations management literature by providing empirical evidence from culturally based creative SMEs and offers practical implications for improving competitiveness through stronger functional integration.