The Effect of External Environment and Low-Cost Strategy on Financial Performance of Banking in Indonesia

Abstract

The external environment is a challenge for the banking industry in Indonesia. The dynamic changes of the external environment influence the strategy and performance financial in the global competition of the banking sector in Indonesia. The objectives of this study are 1) to analyze the effect of the external environment on low-cost strategy of the banking in Indonesia, 2) to analyze the effect of low-cost strategy on financial performance of the banking in Indonesia, and 3) to analyze the effect of the external environment on the financial performance of banking in Indonesia. Surveys are conducted on 101 banks through a set of questionnaires, which are given to the bank and collected directly by the researcher as well as by post to the president director and director of the banks in Indonesia. Data that have been collected are analyzed by using linear structural relationship (LISREL) using structural equation models (SEM). The results of this study show three paths that influence the external environment, lowcost strategy, and the financial performance of banking in Indonesia. First, the external environment that consists of an environment has no significant influence on the low-cost strategy. Second, the low-cost strategy has a significant influence on financial performance, while the external environment that consists of the environment has a significant influence on financial performance. The results show that the banks need to develop a low-cost strategy to improve financial performance and increase awareness of the external environment that can influence bank performance. Therefore, it is important for decision-makers of the national banking sector to develop a strategy to enhance the profitability and competitiveness of banks given the current competition. Keywords—environmental, low-cost strategy, financial performance, banking