The role of employee engagement as a mediating effect in influencing corporate culture and human capital of defense industry

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Erry Herman, Haryono Umar, Willy Arafah*

Citation: Erry Herman, Haryono Umar, Willy Arafah, ”The role of employee engagement as a mediating effect in influencing corporate culture and human capital of defense industry.” American Research Journal of Business and Management, vol 6, no. 1, 2020, pp. 1-9.

Copyright Erry Herman , et al. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.


Based on the research model of the organization effectiveness variable which affected by three variables that is corporate culture, human capital and employee engagement. Furthermore, this research also identified the consequences of the importance of the organization effectiveness in the defense industry, PT Pindad Persero, PT Dirgantara Indonesia and PT Pal Indonesia Persero. A quantitative  explorative techniques  SEM/Lisrel 8.80. The data were collected from the leaders and the employees between ages of 18 to 50 years old, which represented the generation of X, Y and Z by random proportional sampling to obtain factors that can be estimated as the causes related to the sub optimal organizational effectiveness by the variables that affect it. The research  has shown that organization   effectiveness  of defense industry   need  to improve  an intangible  resources,  because  intangible  asset  is difficult to imitate. It relates to the character, qualification, competency, creativity, commitment, teamwork and psychology and these asset can give positive impact to organization effectiveness. The centerpiece for transforming organization effectiveness is generation Y and Z as a strong point for developing corporate culture, human capital and employee engagement. The model proposed in this research shows the organization effectiveness related with three direct variables that is corporate culture, human capital and employee engagement. For the future, it is need to research the effect of organization effectiveness affected by other important variables such as integrity, level of trust technology and business intelligence/bigdata analytics. This research demonstrates that the organization effectiveness could reached with proper theoretical approaches by the researcher and manager for defense industry in order to  apply corporate culture,  human capital and employee engagement program.

Keywords:corporate culture, human capital, employee engagement and organization effectiveness.



These  days,  public  and  private  organization  have  faced  a  new challenge to reach its value added products caused by the rise  of  globalization.  It  is  characterized  by  the  uncertain  and  turbulence  environment.  Consequently,  every  organization  has  to  embrace  a  continuous  improvement  in  order  to  reach  an  organization  effectiveness.  Similarly,  defense  industries are  trying  to  produce  advance  defense  weapon  system.    In  Asia  country,  such  as,  China,  Japan,  South  Korea,  Taiwan and  Singapore  defense  industry  capability  have  developed significantly.    Defense  Industry  is  a  complex  organization with   high   technology   platform.   In   the   future,   Indonesia   defense  industries  need  to  improve  its  effectiveness  by benchmarking  with  other  advance  defense  industries  nation.    Currently,  defense  industries  in  the  world  have  changed  the  way  they  are  doing  business  in  order  to  adapt  and  respond  the new environment. Diversification strategy, restructuring, downsizing,  merger  and  acquisition  strategy  have  done  to  streamline the organization. However, these strategies are not enough, while culture and employee have not grasped carefully.  Therefore, the crucial prerequisite to develop   an effective   defense industry is transforming corporate culture, developing human capital and improving employee engagement.The  importance  of  organization  effectiveness  is expanding since the idea of Adam Smith and developed on Taylor’s Scientific Management, then the concept of efficiency and efficacy has introduced until 2000 afterwards.  According to      Nidhi  (2019)  the  discrepancies  view  between  scholar come  up  to  the  holistic  concept.  Oghojafor  (2012)  states that organization effectiveness is an ambiguous and complex concept.  Sateesh V. Shet (2018) states it relates to  organization goal,  stakeholder  anda  external  environment.    Thus,  these complex   concept have to deal with an appropriate parameter. The  fallacies  of  parameter  leads  to  the  wrong  judgment  and  conclusion. As a matter of fact organization effectiveness  is  a key  for  organization success to achieve its target  and  how far    social  system  reach    the  goal.  Effectiveness  should  be distinguished with efficiency, which it means the appropriate cost  and  outcomes,  while  effectiveness  is  the  capability  of organization  to  reach  its  goal. According  Sateesh  V.  Sheet (2018) refers to Mott scale has defined the organization ability to activate the power center in terms of productivity, adaptation and  flexibility.  In  other  words,  organization  effectiveness should do the right thing in order to achieve a positive results. It represents the capacity of learning, adaptation and respond to market demand.These  are  also  other  variable  such  as  corporate  culture,  human  capital  and  employee  engagement  in  shaping  organization  effectiveness.  Corporate  culture  is  a  complex, develop  and  vary.  In  business  environment,  it  is  related  to  human resource and a strategic asset.  According to  Duma and  Cuganesan  (2011)  corporate  culture    in  nature    is    an intangible  and crucial  in business contemporary  and it can be described  as follows; upper  layer can be  observed  in day to day basis such as  norm and activities.  The core layer is  belief and  value and it create an holistic concept as  an  corporate attribute or DNA as  organization character. These attribute can  accelerate  risk  taker  attitude,  ethics,  strategic  thinking,  planning, professionalism, entrepreneurship and bureaucratic frame of mind.  According  to  Morita  and  Sugawara  (2015)  in knowledge  economy  era,  globalization  and  revolution  of  information   technology   has   put   forward   human   capital   approach  to  obtain  innovation  and  competitive  advantage.    It  shows  knowledge  is  more  crucial  than  others  production  factor such as land, capital and labor. Oviedo-Garcia (2014) states  that  knowledge  is  strategic  resource  to  organization  performance.  Mention  and  Bontis  (2013)  elaborates  human capital is a core element, formed by competency, knowledge, skill, experience, and capability. However, human capital is not only competency and its contribution to organization, but also to measure how   knowledge can be implemented within organization.  According to Ndinguri (2012) human capital is difficult to imitate, thus it so important to the organization.  Massingham (2018) states turn over in organization   leads to knowledge loss. Therefore, the productivity and   capacity within organization has decreased significantly. Organization   effectiveness   is   correlate   with   employee  engagement,  which  is      defined  as  the  level  of commitment   and   employee   involvement   on   organization   and  its  value.  According  to    Anitha  J,  (2014)    employee engagement  can  offer  positive result  among  employee, because    the  employee        has    a  sense  of  responsibility  and      try  to    persuade    other    employee  to  do    the  best.  Employee  engagement can increase the level of commitment, motivation, job satisfaction and organization. Those positive emotion can lead  to  the  performance,  and  even  the  employee  can  work  beyond his responsibility.  Byrne (2015) shows that employee work  with        passion  and  productive  physically,  cognitively  and  emotionally.     According  to  Islam,  Talat  (2017)  based on  statistic  data,  there  is  only  13%  employee  working  in enthusiasm and responsible. This is   a very challenging task for any organization to dealt with uncertain business environment such as the complex working environment, the development of  advance  technology,  automation  and  digitalization.  All  of  these business environment need a solid team work.The description of the effective defense industry PT Pindad  Persero  (Land  Platform),  PT  Dirgantara  Indonesia (Aerospace Platform) and PT Pal Indonesia Persero (Naval Platform)  have  shown  the  good  progress,  however,  those defense  industry have  faced   the daunting  task and challenges in  order  to  adopt,  to  research  and  to  develop      a  state  of  the  art technology. It can be argued that a tangible resources such as finance, operational, marketing, production, inventory and infrastructure  are  not  enough  without  intangible  resources  consideration  such  as  human  capital,  corporate  culture  and  employee engagement.

Hypothesis development

According to Amarjeev Kaul, (2018) strategy and corporate culture produce  new model of business development. Strategy should be the driving force for every organization to be effective   and culture is the foundation to reach legitimacy. Mahadevan (2017) shows the relationship between learning organization and  leadership  as  an  essential  component  which  can  shape  a  good commitment among employee.   Golnaz, Sadri (2001) identifies culture can create value and wellbeing in working place.  Lund, Daulatarm B (2003) describe corporate culture is relate to the employee commitment. Based on the research, it can be formulated the hypothesis.H1:  Corporate  culture  influence  positively  to  employee engagement. According  to  Benon  Muhumuza,  (2019)  explains  that human capital can improve employee engagement. Human is a valuable and can increase return on investment ROI in terms of cost and benefit and it affect a high output. It can influence employee to adapt any circumstances in working place easily. Baron, Angela (2011) elaborates human capital is a knowledge, skill  and  best  practices   and  it  can  disseminate  value      in  organization. Measuring human capital is not only to measure skill  and  its  contribution  to  productivity  but  also  to  measure  how   knowledge   translates   into   knowledge   management.   According  to Wan, Hooi Lai (2017) human capital influence positively    on  employee  engagement  such  as    satisfaction  in  working place,  productivity, profit, employee retention and customer satisfaction. Based on the research above, it can be formulated the hypothesis.H2:  Human  capital  influence  positively  on  employee engagement.Corporate  culture  as  a  strategic  asset  is  very  important  because  it  relates  on  organization  effectiveness.  According to  Kumaraguru  Mahadevan,  (2017)  conceptual  business process approach, called culture driven regeneration (CDR), it is  a tool  for  managing change.  Amir, Seyed (2014) states that  business  excellence  BE  as  holistic  capability  offers  an effective  solution  to  increase  organization  effectiveness. According to Bolboli (2014) there is a relation between BE and  culture  for  transforming  an  appropriate  culture  across  organization. Jason von Meding (2013) examines relationship between  stakeholder  management  and  culture  and  its  impact      to  organization  in  the  long  run.    Flamholtz  Eric  G  (2012) examine corporate culture, performance   as a main factor of organization effectiveness. Based on the research above, it can be formulated the hypothesis.H3: Corporate culture influence positively on organization effectiveness.

According to Mention, AL and Bontis (2013) in the long run,  organization  needs  human  capital  strategy  to  improve  workforce productivity in order to obtain  higher value added. To accomplish this undertaking, organization will need to invest resources to ensure that employee have the information, skill and competencies and understand human capital development that  would  enhance  employee  satisfaction.  Organization  can  reach  positive  results  by  inventing,  managing,  sharing  and  diffusing information and knowledge. Durrani, TS dan Forbes, SM  (2003)  states  that  organization  effectiveness  relates  to human capital investment and information technology which considers human development as an educated and qualified employee.  Vidotto,  Juarez  Domingos  (2017)  examines  the relation between human capital and organization effectiveness are  significant.    Cortés,  Enrique  Claver  (2015)  states knowledge as intangible factor is significant factor to reach value  and  organization  effectiveness.  Muhammad  Shahid Khan  (2018) describes human capital is significant factor for gaining competitive advantage and economic growth. Based on the research above, it can be formulated the hypothesis.H4: 

Human  capital  influence  positively  on  organization effectiveness.According to Islam, Talat and Tariq, Jawad (2018) examines employee  engagement  in  relational  derivative  study,  which  it    describes  positive  working  environment  and  competitive  advantage. The research study the relation between employee engagement and creativity which refers to extra-role behaviors. Anitha  J.  (2014)  states  that  self-expression  is  psychology condition for organization effectiveness. Baumruk, R (2004) describes   employee   engagement   is   a   strong   energy   for   measuring  organization.  In  general,  a  conducive  working  environment  influences  innovation  and  cooperation  among employee.  As  a  result  organization  become  effective  for focusing  on  goals,  stakeholder  satisfaction  and  connecting  with external stakeholders.  Based on the research above, it can be formulated the hypothesis.H5:  Employee  engagement  influence  positively  on organization effectiveness.According  to  Zhang,  Tanyu  (2014)  constructs  employee engagement as multidimensional and it can affect corporate culture  and  organization  effectiveness.  According  to  Kahn (2010)  who defined  employee at work as   the harnessing of organizational members” selves to their work roles, in personal engagement people employ and express themselves physically, cognitively and emotionally during role performances. Kahn deciding  whether  to  engage  in  the  workplace,  people  ask  how  meaningful  it  would  be  to  enter  into  this  performance.    Flamholtz  (2012)  points  out  that  culture  is  the  total  of  the collective  or  share  learning  of  the    group  as  it  develops  its  capacity to survive in its external environment and to manage  its own internal affairs. The study of corporate culture and how cognitive and non-cognitive factors interrelate and intertwine to influence behavior has been one of the most valuable for organization effectiveness. Based on the research above, it can be formulated the hypothesis.H6 : Corporate culture influence positively  on organization effectiveness  through    employee  engagement  as  mediating effect.According  Islam,  Talat  (2018)  employee  engagement is   multidimensional   construct   in   terms   psychology.   The   involvement  of employee  in  working place  is a reflection  of    human  existential,    whether  the  task  can  give    job satisfaction   and produce  a vigor, dedication  and absorption value. Moreover organization needs a competence employee which working with high creativity, productive and proactive. Thus employee engagement gives positive sentiment to crate novelty with high enthusiasm.  Baron, Angela (2011) measures human capital such as competency, qualification and creativity as intellectual and social capital for high performance which affect organization effectiveness. Ndinguri   (2012) states  that human capital is strategic factor  in production  as it represents the  cognitive  competencies,  skill,  relational  behavior  and  knowledge  of  individuals  that  enhance  productive  output  which  it  leads  to  organization  effectiveness.    Based  on  the research above, it can be formulated the hypothesis. H7:  Human  capital  influence  positively  on  organization effectiveness  through  employee  engagement  as  mediating effect.

Research design

The research is explorative to identify several factors to predict the causes and mechanism. It is also using design cross sectional with quantitative analysis, Sekaran,U., & Bougie, R. (2016). The endogenous variable is organization effectiveness. Exogenous variable is corporate culture and human capital and employee engagement as mediating variable. Data collecting techniques is using questioner with five points of likert scale such as 1 = strongly disagree and 5 very agree.Sample: Sample is part of population with its characteristic. The  method  non-probability  sampling/  non  random  sample  of  leader  and  staff  level  from  three  defense  industry.  First, PT Pindad Persero   351 consist of 100 leader and 251 staff. Second, PT Dirgantara Indonesia 434 personnel consist of 100 leader and 334 staff, Third, PT Pal Indonesia    260 personnel consist of 100 leader and 160 staff. The majority of respondent is generation Z, ages 18-30 years old in amount of 39, 8 %, generation Y ages 31-40 in amount of   34, 3% and generation X in ages 41-55 years old in amount of 25, 9%.Based on the analysis that has been done, the discussion of the hypothesis is conveyed as follows:

Structural Equation Model and Hypothesis

The full of SEM parameter λ (loading factor) measured by exogenous and endogenous model by Structural Equation

Modeling (LISREL) 8.80. The measurement is to identify the scale  of  indicator  from  each  construct  variable  this  analysis  measures t-value and structural coefficient structural, whether t  –value  >1,  96. As  a  result  t  –  value  from  parameter  and estimation describe in three diagram as follow;Based on three diagram above and model fit index have an  information    of  estimation  result    and  it  can  be  evaluated  causal  relation  and  its    influence    on  one  variable  to  other variable as follows:


Based  on  structural  model  diagram,  the  hypotheses  can be  answered  as  follows,  first,  corporate  culture  influence

                                    Structural Model (T Values)

positively to employee engagement. It indicates transformation of corporate culture can increase employee engagement.  The organization should adopt appropriate    clan, adhocracy, and hierarchy and market culture properly.  These dimension can improve job satisfaction, commitment, cohesively and ability to execute strategy. The amount of corporate culture contribution to  employee  engagement      is  26%.  Second,  human  capital influence  positively  to  employee  engagement.  It  indicates human   capital   development   relates   to   innovation,   while   organization should adopt good leadership, qualification and creativity among the employee.

The amount of human capital contribution to employee engagement is 38 %. Third, corporate culture  influence  positively  to  organization  effectiveness.  It indicates the collections of value, belief, attribute of corporate culture are the basis of organization effectiveness.  The amount of corporate culture contribution to organization effectiveness is  20%.  Fourth,  human  capital  influence  positively  to organization  effectiveness.  Human  capital  dimension    is important  for  all personnel level s, such as director, manager, line supervisor and technical staff,  in  order to  adapt,  adopt  and protect  knowledge in terms of  knowledge management.  The  amount  of  human  capital  to  organization  effectiveness is 34%. Fifth, employee engagement influence positively to organization  effectiveness.  It  indicates  the  improvement  of employee engagement program can contribute significantly to organization effectiveness.  This crucial asset give a positive impact to all personnel in terms of physically, cognitively and emotionally.  These  indicate  positive  working  environment  and  interrelationship  between  employee  and  it  follows  other  indicator.  The  amount  of  employee  engagement  contribution

to organization effectiveness is 54%.  Sixth, corporate culture influence  positively  to  organization    effectiveness  throe employee  engagement  as  mediating  effect,  this  hypotheses  is  a  novelty  compare  to  previous  research  and  the  results  is  employee engagement  can increase both  corporate culture and organization  effectiveness,  because positive  feeling among the  employee    can    boost  a  performance.  The  contribution  is  14%.  Seventh,  human  capital  influence  positively  to organization effectiveness through employee engagement as mediating effect, this hypotheses is also a novelty compare to previous research and the results is employee engagement can increase both human capital and organization effectiveness, because  positive  feeling  among  the  employee  can  boost  innovation and creativity. The contribution is 21%. 

The research  has shown that organization   effectiveness  of defense industry   need  to improve  a intangible  resources,  because  intangible  asset  is difficult to imitate. It relates to the character, qualification, competency, creativity, commitment, teamwork and psychology.  These asset can give positive impact to organization effectiveness. The centerpiece for transforming organization effectiveness is generation Y and Z as a strong point  for  developing  corporate  culture,  human  capital  and  employee  engagement.  There  are  several  recommendations  to  the  managerial  for  optimizing  leadership  and  managerial  aspects,  as  follows;  First,  Organization  Effectiveness. Maintaning  (flexiblelity  and  quality  of  product);  Improving (adaptation  in  every  situation).  Second,  Corporate  Culture. Maintaning (cohesiveness and teamwork); Improving (leader as administrator, mentor and facilitator, order, flexible and risk taker). Third, Human Capital. Maintaning (job competency, learning each other); Improving (leadership skill - visionary, inspiratory,  motivator.    Human  capital  development  program  should adapt new challenge.). Fourth, Employee Engagement. Maintaning  (good  relationship  among  co-worker,  collegeus and  leader);  Improving  (Clean  and  complete  working environment and infrastructure, compensation scheme, carreer path, transparent recruitment).


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