BUSINESS ENVIRONMENT AND COMPANY REPUTATION IN FORMULATING COMPETITIVE STRATEGY OF RURAL BANK IN WEST JAVA.

Author:Av, Rahajeng Widyasih
Position:Report - Abstract
 
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INTRODUCTION

Research Background

In terms of performance, in the period 2011-2015 there was an increase in banking performance in Indonesia, although unstable. In total, in the last 5 years the profit increased by IDR 30 trillion (39.36%) from IDR 75 trillion in 2011 to IDR 105 trillion in 2015. However, in 2015, there was a reduction in the number of rural banks from the previous year of 1,643 to 1,637 units. This reduction occurred due to the revocation of business license and merger. Meanwhile, the number of office networks increased by 44 offices from the previous year from 3,154 to 3,198 offices. Judging from the form of legal entity of ownership, most of the form of Limited Company with a number of 1,410 rural banks followed by the form of Regional Enterprise as much as 197 units and Cooperatives as many as 30 units (Banking Annual Report, 2015).

Meanwhile, Rural Bank plays a role in lending to micro, small and medium enterprises and can create jobs, as well as equal distribution of income and business opportunities in Indonesia. Rural Bank is established in Indonesia under the Regulation of the Financial Services Authority Number 20/POJK.03/2014 concerning Rural Bank issued in order to encourage national economic growth as well as to support dynamic business development with a strong national banking, including the healthy, strong, productive and competitive rural bank industry to serve the community, especially micro and small businesses.

Although it has a big role to boost the regional economy, the contribution of rural bank today is relatively small. Hadinoto & Retnadi (2007) stated that rural bank has not been widely known by the public and has not been utilized by the government to support the economic development in order to improve the welfare of the people especially in rural areas.

For local governments, rural bank is one of the efforts to increase the regional income. Meanwhile, the growth of asset, savings, deposit and lending rates from rural Banks of West Java and Banten provincial governments tend to increase, but the condition is not balanced by the stable growth of operating profit, which tends to fluctuate, thus indicating un-optimal performance.

The growth of asset, savings, deposit and lending rates from rural Banks of West Java and Banten provincial governments tend to increase, but the condition is not balanced by the stable growth of operating profit, which tends to fluctuate, thus indicating un- optimal performance.

Similarly, private-owned rural banks in general also experience un-optimal performance. The financial performance generally tends to improve, however it is not in line with the growth in the number of rural banks that show a declining trend year-on-year, both nationally and in West Java. This is due to the merger/consolidation and liquidation. From 2006 to 2015, the Deposit Insurance Agency (2016) notes that 69 rural banks were in process or completed liquidated, 24 of which are in West Java, 13 rural banks in West Sumatra and the remaining 32 are scattered in other provinces. In addition, based on Fit and Proper Test existing results that have been completed by December 2015, there are 13 alleged of irregularities consisting of seven Directors and six Executive Officers (Banking Annual Report 2015, OJK, page 107). In terms of numbers, the rural bank offices in West Java Province up to August of 2016 recorded 296 rural banks, of which 109 decreased (26.91%) from 2008. This percentage decline is much larger than the national decline, 136 rural banks (7.68%).

It is related to the population of West Java Province that continuous to increase, should be an opportunity for rural bank in West Java Province to improve its rural bank performance. As data from the Central Bureau of Statistics (2016), West Java Province is the province of Indonesia with the largest population of 43,227,100 inhabitants in 2010 which increased to about 47,379,389 inhabitants in 2016. This condition should provide opportunities for the growth of rural bank performance in West Java Province, considering the market share are residents or MSMEs in their region.

Another phenomenon revealed about the performance of rural banks in West Java is the growth of third party funds collecting gradually growing from 25.70% in 2009 to 8.10% in 2015 and 0.69% in August 2016.

That condition, presumably because of the competitive strategy has not been implemented properly. The three generic competitive strategies according to Porter in Wheelen et al. (2015) aimed to outperform other companies in an industry, that include overall cost leadership, differentiation and focus. Cost leadership is the ability of companies or business units to design produce and market the products more efficiently than its competitors. Differentiation is the company's ability to provide superior and unique value in terms of product quality, special features or after-sales service to buyers. Focus strategy is a company's ability to provide superior and unique value to a particular buyer group, a particular market segment and to a specific geographic market.

Besides have to compete with competitors in and outside of province, rural banks in West Java also have to compete with other public banks that are trying to get into the microcredit market and SMEs. The influx of newcomers as well as large public banks should be anticipated to determine the industry ability of a bank. Rural bank also faces direct competition with Bank Rakyat Indonesia as well as the cooperative who has similar segment that are micro customer, Small and Medium Enterprises (SMEs). While SMEs are potential opportunity because it proved to be able to survive in the past economic crisis than large businesses. In addition, the SME commonly found in the business field in Indonesia. But in general the rural bank does not have additional attributes in their products to enhance the competitiveness of its products. There are no innovative programs to attract customers either savers or borrowers, for example the attractive raffle prizes. In addition, rural bank also has not been optimal in the use and provision of information technology in supporting the customer service.

Another aspect relating to the un-optimized performance of rural bank in West Java is company reputation. Meanwhile, according to Fombrun (2001), to help companies establish a strong reputation that will have positive and profitable impacts, there are several key elements to note: credibility, reliability, trustworthiness and responsibility. While from the community side, it appears...

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