The Effect of Business Partnership and Competitive Strategy in Improving Rural Bankperformance in West

The Effect of Business Partnership and Competitive Strategy in Improving Rural Bank performance in West Java

AV Rahajeng Widyarsih1, Sucherly2 and Umi Kaltum3 1 Doctoral Program in Business Management, Faculty of Economic and Business, , Lecturer of Perbanas Institute , E-mail: [email protected] 2 Doctoral Program in Business Management, Faculty of Economic and Business, Padjadjaran University 3 Doctoral Program in Business Management, Faculty of Economic and Business, Padjadjaran University

Abstract: Although Rural Bank has a major role to boost the regional economy, but it’s contribution is still relatively small. Rural Bank has not been widely known by the public and has not been used by the government to support economic development in order to improve the welfare of the people, especially in rural areas. Although the development of the assets, the amount of savings, deposits and loans from the Rural Bank belonging to the Provincial Government of West Java and Banten is likely to increase, but not matched by a stable growth in operating income, which tend to fluctuate, so that shows the performance is not optimal. Similarly, private Rural Bank are generally also experienced performance that is not optimal. This study aimed to examine the effect of the partnership and competitive strategy toward the rural bank performance in West Java. Data were collected through questionnaires to 50 respondents and analyzed using PLS. The results showed that competitive strategy has a greater influence rather than business partnership on rural bank performance. Keywords: partnership, competitive strategy, Rural Bank Performance.

INTRODUCTION The existence of rural banks is very helpful for small enterprises, with a very easy and fast process becoming the solution for society. According to the Banking Practitioner Irianto (08/10), the function of rural bank is not just extend credit to micro entrepreneurs, small and medium enterprises, but also accept deposits from the public (Balance Sheet, October 13, 2012). The role played by rural bank in advancing the local economy is interested to be studied. Based on the study of Economic Review (2015), some efforts have been made by rural bank to be able to help people in

211 International Journal of Applied Business and Economic Research Rahajeng Widyarsih, Sucherly and Umi Kaltum the region to advance the economy, such as : stimulating public awareness of saving, giving credit to SMEs such as the home business industry, providing a forum for the distribution of product sales, training and counseling for SMEs to the transformation of knowledge and technology to improve product quality, and profits to transmit its success. When this is realized well and can be implemented together then definitely the micro economy in various regions will live and flourish. It’s not impossible, SMEs which is supported jointly by the rural bank and the government can sustain the national economy and reduce unemployment so that poverty can be decreased. Although it has a major role to boost the regional economy, but the contribution of rural bank is still relatively small. Hadinoto and Retnadi (2007, p. 115) state that the rural bank has not been widely known by the public and has not been used by the government to support economic development in order to improve the welfare of the people, especially in rural areas. Facts in 2015, in there was a decrease in the number of rural bankcompared to the previous year from 1,643 into 1,637 units. This reduction occurred due to the revocation of business licenses and mergers. Meanwhile, the number of branch network increased 44 offices from the previous year from 3,154 into 3,198 rural bank office. Judging from the legal form of ownership, mostly in the form of Limited Company (PT) as many as 1410 units, followed by the form of the Regional Company as many as 197 units and cooperatives as much as 30 units. (Banking Annual Report, 2015, the FSA: 105). For local government of West Java province, Rural bank is an effort to increase local revenue. Here is the data about rural bankperformance owned by Provincial Government of West Java and Banten:

Table 1 Performance of Rural Bank Owned by West Java and Banten Provincial Government (2009-2013) Year Rural Bank 2009 2010 2011 2012 2013 Performance Total Asset 595.640.379.000,00 756.538.025.000,00 888.944.404.436,00 1.075.801.909.616 1.238.853.159.933 Savings 160.690.707.000,00 195.762.733.000,00 251.397.033.924,00 283.659.230.971 424.772.833.550 Deposits 135.131.303.000,00 145.173.259.000,00 153.173.038.454,00 209.333.012.430 197.058.679.729 Credit 447.077.371.000,00 530.014.046.000,00 572.711.997.571,00 755.095.946.456 913.543.163.450 Proft/Loss 25.710.686.000,00 30.154.187.000,00 27.031.773.319,00 32.900.272.434 25.569.797.053 Source : West Java Provincial government (2014).

Table 1 reveals that the development of the asset, the amount of savings, deposits and loans from the rural bankowned by Provincial Government of West Java and Banten is likely to increase, but not matched by stable growth in operating income, which tend to fluctuate, that shows that the performance was not optimal. Similarly, private Rural Bank are generally also experienced performance that is not optimal. Where in general, the level of health or performance of the Bank is assessed with a qualitative approach by the Financial Services Authority (FSA), on various aspects namely the capital factor (30%), asset quality (30%), management (20%), profitability (10%) and liquidity (10%).

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The comparison of the performance of rural bank in West Java both government and private owned compared with national, are presented in the table below.

Table 2 Financial Performance of Rural Bank di West Java and National in Period of Periode 2008 - August 2016 2008 2009 2010 2011 2012 2013 2014 2015 Agt 2016 %%% %%% %%% JAWA BARAT LDR 79.29% 72.42% 73.43% 76.04% 74.11% 81.70% 76.32% 69.50% 69.32% BOPO 86.92% 87.01% 85.51% 85.79% 84.67% 83.65% 85.44% 87.24% 88.70% ROA 2.58% 2.75% 2.93% 2.73% 2.83% 2.88% 2.56% 2.20% 1.77% NPL 9.24% 8.68% 7.28% 6.46% 6.36% 5.69% 6.31% 7.49% 8.75% NASIONAL LDR 82.58% 79.61% 79.02% 78.54% 78.63% 84.26% 79.40% 76.70% 78.05% BOPO 82.82% 81.82% 80.97% 79.47% 77.77% 77.65% 80.30% 81.77% 82.07% ROA 2.62% 3.09% 3.16% 3.32% 3.46% 3.38% 2.99% 2.69% 2.61% NPL 9.88% 6.90% 6.12% 5.22% 4.75% 4.45% 4.76% 5.40% 6.54% Source: Financial Services Authority (FSA), (2016).

Data indicates that while rural bank’s financial performance generally tends to improve, but not in line with the growth in the number of which showed a downward trend from year to year, both nationally and in West Java. This is due to merger / consolidation and liquidation. From 2006 s.d 2015, the Deposit Insurance Agency (LPS, 2016) noted that there were 69 rural banks was in process and finished liquidated, 24 of which are located in West Java, 13 in West , and the remaining 32 are scattered in other provinces. The number of rural bank’s office in West Java province until August 2016 as many as 296 units, which dropped as much as 109 units (26.91%) compared t0 2008. The decline is far greater than the decline in the national rate that is amounted to 136 units (7.68 %). More can be seen in the following table:

Table 3 The Growth of Rural Bank Office in West Java Year 2012 2013 2014 2015 August 2016 West Java PT 240 235 233 233 233 PD 65 64 64 64 61 Kop 2 2 2 2 2 Jumlah 307 301 299 299 296 National PT 1391 1377 1382 1383 1376 PD 229 225 230 230 228 Kop 33 32 31 31 31 Jumlah 1653 1634 1643 1644 1635 Source : Financial Services Authority (FSA), (2016).

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If related to the population in West Java province that continues to increase, it should be an opportunity for rual banksin West Java province to improve their performance. Data from the Central Bureau of Statistics (2016), mentions the Province of West Java is the most populous in Indonesia, which is about 43.2271 million inhabitants in 2010 and in 2015 increased to 46,709,569 inhabitants. Supposedly it provides a growth opportunities for the performance of rural bank in West Java province, given its market share is the population or SMEs in the region. Another phenomenon revealed was third party fund that gradually experienced a slowing growth of 25.70% in 2009 to 8.10% in 2015 and 0.69% in August 2016. Another aspect is also decreased assets of rural bank in West Java Province. That condition, presumably because of 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, in which the three generic strategies 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 value and unique in terms of product quality, special features, or after-sales service to buyers. Focus strategy is a company’s ability to provide superior value and unique to a particular buyer group, a particular market segment, and to a specific geographic market. Besides have to compete with other rural banks 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 cooperationwho has similar segment that are micro customer, Small and Medium Enterprises (SMEs). While SMEs are potential opportunity because it proved 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 both savers or borrowers, for example the attractive raffle prizes. In addition, rural bank also not optimal in the use and provision of information technology in support of customer service. Another aspect related to non-optimal performance of rural bank in West Java is business partnerships with various stakeholders that is not yet close. Partnership refer to Cravens (2013), is an attempt to cooperate with stakeholders, strategic alliances which are used by many companies that compete worldwide. Partnership includes the vertical relationship that consists of relationships with suppliers and customers as well as horizontal consisting of lateral and internal partnerships. On the other hand, Wheelen et al. (2015) explains that the cooperative strategy used by companies to achieve competitive advantage in an industry by cooperate with other companies. Meanwhile, the observations show the lack of development of customer loyalty program as well as cooperation with the lateral, for example with the business association, or non-bank financial institutions. Based on this background, this study aimed to assess the effect of partnerships and competitive strategy on the performance of rural bank in West Java.

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LITERATURE REVIEW

Business Partnership According toHitt, Ireland, Hosskisson (2015), cooperation with other companies is a strategy to create value for customers who can not be created by the company alone. By using cooperative strategies companies are also trying to create a competitive advantage. The concept of partnership, according to Cravens (2013), is an attempt to cooperate with stakeholders, strategic alliances which are used by many companies that compete worldwide. Partnership includes the vertical relationship that consists of relationships with suppliers and customers as well as horizontal consisting of lateral and internal partnerships. Dissenting opinion expressed by Wheelen et al. (2015) the cooperative strategy used by companies to achieve competitive advantage in an industry by cooperate with other companies. There are two types of cooperative strategy that is collusion and strategic alliance. Strategic allianceas as partnership explained by Tsu-Wei Yu and Yung-Ming Shiu(2014, p.387) “Partnership refer to a strategic alliance established between independent companies which share common objectives. It holds in great account the interdependent relationship between companies and may attain goals otherwise unachievable by their individual efforts”. Clement, Clement, Joseph (2013) explain that partnership is coming together of two or more people in a contractual agreement with a common aim to established a business enterprise. Partnership has a goal as suggested by Grundey & Daugelaite (2009) which is most of the authors define partnership as a certain process targeted to implementation of common goals and mutual benefit. Wu, Lin, Chien, and Hung (2011, p.125) said that through partnership, the two parties may build trust, recognition, negotiation and cooperation to form an integrated operation system that can efficiently combine with limited internal resources to enhance competitiveness both. In this study, partnership is measured by dimensions of internal partnership, supplier partnership, customer partneship, and lateral pertnership.

Competitive Strategy There are several strategies to strengthen the position expressed by Hitt, Ireland, Hoskisson (2015) in which companies can choose five business strategy to build and maintain its strategic position against competitors, which include: cost leadership, differentiation, focused cost leadership, focused differentiation, and integrated cost leadership/differentiation. Parnell (2010, p.305-306) stated : “According to Porter’s (1980, 1985) framework, a business can pursue superior performance by either establishing a cost leadership position (i.e. low costs) or differentiating its offerings from those of its rivals. Either of these approaches may be accompanied by focusing efforts on a given market niche”. Banker, Mashruwala, Tripathy (2014, p.873) show that a firm following either a differentiation or a cost leadership strategy is in a better position to achieve superior performance. Kohansal (2013) suggests that the company’s strategy is to create a synergy of resources for value creation better than their competitors.

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In this study, competitive strategy is measured by dimensions of cost leadership strategy, differentiation strategy, and focus strategy.

Rural Bank Performance David (2013)shows some financial ratios to evaluate strategy that are Return on Investment (ROI), Return on Equity (ROE), Profit Margin, Market Share, Debt to Equity, Earnings per share, Sales growth, Assets growth. Aras, Aybars, Kutlu (2010) measured company performance by ROE, ROA, and ROS. In the banking industry, Al-Tamimi (2010) measured bank performance by ROA and ROE. Hahn & Powers (2010) use ROA to measure company performance.Karim, Ameen, andAyaz (2011) measure bank performance byFixed Assets Turn-over, Return on Invest, Return on Equity, Net Profit Margin, Operating Profit Margin, Return on Capital Employed (ROCE), andEarning per Share. In the banking industry, there is another banking performance measurement tools ever developed, that was CAMELS, which stands C= Capital Adequacy; A=Asset quality; M= Management; E=Earning; L=Liquidity and S=Sensitivity to Market Risk (Rose, and Hudgins, 2010). Avkiran & Cai (2014, p. 37), explain a CAMELS Model consisting of main model comprising of Capital Adequacy (C): Asset quality (A), Management Efficiency (M), Earning; (E), Liquidity (L), and Sensitivity to Market Risk (S). In this study, rural bank performance is measured by sales growth, profitability, market share, and CAMELS.

RESEARCH METHODOLOGY This study will examine the Rural Banks in West Java by using quantitative research approach. A quantitative approach emphasizes the numerical assessment of the phenomenon being studied. Quantitative research is more systematic, planned, structured, clear from the beginning until the end of the study. A quantitative approach is used to identify the entire concept of the objectives of the study (Malhotra, 2010). Research causality tests the truth / facts / principles of a knowledge that already exists in the rural bank in West Java. “Causalitas research is used to abtain evidence of the caused-and effect (causal) relationship” (Malhotra, 2010, p. 113). Time horizon of this study is cross section / one shot, means that any information or data obtained are the result of research conducted at one particular time, namely in 2017. The unit of analysis according tosekaran (2010, p.132) is the “unit of analysis refers to level aggregation of the data collected during the subsequent data analysis stage”. So that the unit of analysis in this study is the rural bank in West Java, with the observation unit, namely the management of rural bank in West Java Province. Data were taken from a sample of 50 respondents and analyzed using PLS.

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RESULT

Goodness of fit Model-Analysis of structural model (Inner Model)and measurement model (Inner Model) This section will discuss the result of hypothesis testing by using PartialLeast Square (PLS).The analysis of structural model(innermodel) show the links between latent variables. Inner model is evaluated by using Goodness of Fit Model (GoF), that show the difference betweenthe values of the observations result with the values predicted by the model. This test is indicated by the value of R Square on endogenous constructs and Predictionrelevance (Q square)or known as Stone-Geisser’s used to know the capability of prediction with blindfoldingprocedure. If the value obtained 0,02 (minor), 0,15 (medium) and 0,35 (large), and only used for the endogenous construct with reflective indicator.

Table 4 Test of Outerand Inner Model Variable R Square Cronbachs Alpha Composite Reliability Q square Rural Bank Performance 0,517 0,848 0,507 0,883 Business Partnership 0,866 0,386 0,890 Competitive Strategy 0,731 0,391 0,814 Source: Smart PLS 2.0.

Refer to Chin (1998), the value of R square amounted to 0.67 (strong), 0.33 (medium) and 0.19 (weak). The table shows that the value of R2of Rural Bank Performance as endogenousvariable is in a close to strong criteria(close to0,6 = strong, above moderate), and the value of Q squareis in a great criteria, so it can be concluded that the research model is supported by empirical condition or the model is fit.

MeasurementModel (outer model) Analysis of measurement model(outer model) show manifest variables (indicators) as with each latent variables. It is used a validity and reliability test to measure the latent variable and indicator in measuring dimension that is construct. It is can be explained by the value of Cronbachs Alphathat is to see the reliability of dimension in measuring variables.If the value of Cronbachs Alphabigger that 0.70 (Nunnaly, 1994), it show that the dimensions and indicators are reliable in measuring variables. The compositere liabilityand Cronbachs Alpha of variabels > 0,70, show that all of variables in the model estimated fulfill the criteria of discriminant validity. Then, it can be concluded that all of variables has a good reliability. The usage of Second Orderin the research model cause loading factorobtained can explain the relationship between latent variables-dimension and dimensions-indicators. The table below shows the result of measurement model for each dimension on indicators. The result of measurement model of dimensions by its indicators show that the indicators are valid which the value of t<2.01 (t table at � = 0.05)

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Table 5 Loading Factor of Laten Variable-Dimension-Indicator Variable-Dimension Indicator-Dimension � t-value Conclusion Business Partnership -> Internal Partner 0,709 9,820 Valid X11 <- Internal Partner 0,85 24,21 Valid X12 <- Internal Partner 0,86 30,37 Valid X13 <- Internal Partner 0,85 22,34 Valid Business Partnership -> Supplier Partner 0,704 13,479 Valid X21 <- Supplier Partner 0,93 57,11 Valid X22 <- Supplier Partner 0,89 43,77 Valid Business Partnership -> Cust Partner 0,764 14,598 Valid X31 <- Cust Partner 0,80 11,16 Valid X32 <- Cust Partner 0,79 10,58 Valid X33 <- Cust Partner 0,72 8,37 Valid X34 <- Cust Partner 0,70 8,22 Valid Business Partnership -> Lateral Partner 0,830 19,520 Valid X41 <- Lateral Partner 0,78 23,33 Valid X42 <- Lateral Partner 0,78 17,50 Valid X43 <- Lateral Partner 0,84 26,42 Valid X44 <- Lateral Partner 0,83 23,92 Valid Competitive Strg -> Cost Leadership Str 0,901 38,252 Valid X51 <- Cost Leadership Str 0,83 21,58 Valid X52 <- Cost Leadership Str 0,84 29,91 Valid Competitive Strg -> Diff Strg 0,812 23,647 Valid X61 <- Diff Strg 0,64 7,06 Valid X62 <- Diff Strg 0,71 3,91 Valid X63 <- Diff Strg 0,83 6,74 Valid Competitive Strg -> Focus 0,694 9,292 Valid X71 <- Focus 0,73 6,74 Valid X72 <- Focus 0,86 15,85 Valid Rural Bank Performance -> Sales Growth 0,950 75,630 Valid Y11 <- Sales Growth 0,91 24,48 Valid Y12 <- Sales Growth 0,44 2,26 Valid Rural Bank Performance -> Profit 0,940 82,571 Valid Y21 <- Profit 0,62 4,85 Valid Y22 <- Profit 0,91 38,38 Valid Rural Bank Performance -> Market Share 0,885 29,878 Valid Y31 <- Market Share 1,00 – Valid Rural bank Performance -> CAMEL 0,934 78,218 Valid Y41 <- CAMEL 0,72 4,28 Valid Y42 <- CAMEL 0,70 3,89 Valid Y43 <- CAMEL 0,74 10,89 Valid

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The result of measurement model of latent variables on their dimensions show to what extent the validity of dimensions in measuring latent variables. Following figure show the complete path diagram:

Figure 1: Complete Path Diagram of Research Model Note: BPR Performance = Rural Bank Performance

Structural Model Based on the research framework, then obtained a structural model as follow :

Y= 0.265X1+ 0.492X2 + �1 Which are : Y= Rural bank Performance X1= Business Partnership X2 = Competitive Strategy �i =Residual

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RESULTOF HYPOTHESES TESTING

The effect of business partnership and competitive strategy on rural bank performance in West Java Below is the result of hypothesrs testing both simultaneous and partially.

(a) Simultaneous Hypotheses testing Below is the result of simultaneous testing of hypotheses:

Table 6 Simultaneous Testing of Hypothesis Hypothesis R2 F Conclusion

Business partnershipand competitive strategy � 0.517 34.995* Hypothesis accepted Rural Bank performance

*significant at � = 0.05 (F table = 3.195).

Based on the table, it is known that within the degree of confidence of95% (a=0.05) simultaneously there is the influence of business partnership and competitive strategy on rural bank performance in West Javaamounted to 51.7%, whilethe rest of 48.3% is affected by other factor did not examined.

(b) Partial Hypotheses testing Below is the result of partial testing of hypotheses :

Table 7 Partial Testing of Hypothesis Hypothesis � t R2 Conclusion Business partnership � Rural bank performance 0,265 2,244 0,173 Hypothesis accepted Competitive strategy � Rural bank performance 0,492 2,933 0,344 Hypothesis accepted *significantat � = 0.05 (t table = 2.03).

The table show that partially, business partnership and competitive strategy influential significantly to rural bank performance, which is competitive strategy has a greater influence (34.4%).

RESEARCH FINDING Based on hypothesis testing result, will describe the Research Model Finding : The finding shows that Competitive Strategy is a dominant aspect in improving rural bank performance directly. Dimensions of the highest influence in reflecting the competitive strategy is cost leadership strategy, followed by differentiation strategy and focus strategy. While dimensionthat has greatest effect in reflecting partnership is supplier partnership, followed by lateral partnership, internal partnership, and customer

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Figure 2: Research Finding partnership. While of the variable of rural bank performance, CAMELS is the dimension that is most reflects the performance of rural bank, followed by sales growth, profitability, and market share. The results of this study illustrate that the improvement of rural bank performance in West Java, is more affected by how the management capable inimplementing cost leadership strategy. Cost leadership strategy is implemented by the creation of cost-efficiency and competitive cost of banking services than its competitors. The cost efficiency is mainly done by pressing the office operating costs. So these results illustrate that the creation of operational cost efficiency and competitive cost of banking services is the most influential aspect in improving the performance of rural bank. In improving the performance is also affected by how the management doing a differentiation strategy. This could be done by creating a quality product for its customers. The management also can create products that varied so that customers offered with the variety of products that appeal to suit its needs. Many variations of the product is the main attraction for customers because they can choose the product that suits their needs. Differentiation is also formed to create a different service than its competitors. Competitive service differentiation is also an attraction for customers, because it can provide an alternative in transaction according to their needs.

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In implementing a competitive strategy to improve the rural bank performance, the management also relies on the implementing offocus strategy mainly by creating products for specific market segments and products for specific geographic markets adjusting with target market of rural bank. The results of the study support the findings of previous studies in which Kaliappen & Hilman (2014), Teeratansirikool, Siengthai, Badir, Charoenngam (2012) and Daneshvar & Ramesh (2012) show the effect of competitive strategy to company performance. The results of this study also proves that business partnership has a significant effect in improving rural bank performance in West Java. Aspects of the most influential business partnership in improving the rural bank performance is supplier partnership, followed by lateral partnership, internal partnership, and customer partnership. Thus increasing the performance through increased business partnerships that is done by building a stronger partnerships with suppliers of and information technologyservices provider. Such partnerships provide greater leverage for being able to support the business processes and transaction banking in rural bank. Customers want a service that is fast, precise, and accurate, which it is affected by the information technology with fast and adequate facilities and infrastructure. In enhancing business partnerships to improve the rural bankperformance also supported by the efforts to strengthen the partnership with the lateral namely educational institutions, government / related institutions, business associations, as well as non-banking financial institutions. Besides internal partnerships also helped to boost the ruralbank performance with the implementation of synergy between the parts of the company, a solid partnership in providing services to customers, and collaboration in solving problems. In addition, there are another aspects of business partnerships contributed to the improved rural bank performance such as partnership with customers or clients by conductinga management of feedback from customers, cooperating with customer in developing customer loyalty programs, sharing information to increase the value of products, as well as the development program of customergathering to strengthen the relationship with customers. The results support the findings of Tsu-Wei Yu and Yung-Ming Shiu (2014) that the components of the partnership, communication strategies, approaches to conflict resolution, and market orientation associated with the performance of the partnership. Willingness to continue to work together increases the performance of the partnership. This finding also supports the findings of Clement, Clement, Joseph (2013) which showed that better partnership has implications on the overall performance of the firm. Similarly Ogbadu & Usman (2012), which revealed the existence of a direct relationship between customer relationship management with the bank’s profitability.

CONCLUSION AND RECOMMENDATION

Conclusion Business partnership and competitive strategy influential to rural bank performance ini West Java. Competitive strategy has a greater influence compared to business partnership in improving rural bank performance. So that the effort to improve the rural bak performance based on competitive strategy by implementing cost leadership strategy which is supported by the implementation of diffrentiation strategy and focus strategy.

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Recommendation The findings of this study can be used as a reference for further research by making these findings as part of the premise in developing the framework. In the future is expected from academician to be interested in doing research on rural bank from a different perspective in an effort to increase their performance. The results show that competitive strategy contributes the most in influencing rural bank performance. In addition, it is necessary to explore more aboutcost leadership strategyin the rural bank.

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