MM5012 Business Strategy

INDIVIDUAL MIDTERM EXAM ESSAY

A Synthesis of Approaches to Develop Business Strategy: Case of Bank BJB

29111311 Haidir Afesina MBA Executive 46

MASTER OF BUSINESS ADMINISTRATION SCHOOL OF BUSINESS MANAGAMENT INSTITUTE TECHNOLOGY BANDUNG 2013

Abstract Competition is at the core of the success failure of firms. Every firm competing in an industry has its competitive strategy, whether explicit or implicit. Often, an industry has a number of firms pursuing several strategies. A brilliant strategy may put firm on the competitive map. However, only the right analytics along with solid execution will put the firm on the competition. Strategy is relating a company to its uncertainty environment. Thus development of business strategy of the company has to be based primarily on the results of the analysis of industrial structure. Therefore, to successfully deal with this uncertainty and to achieve strategic competitiveness and thrive, firms must be aware of and fully understand the different segments both of internal and external environment. Accordingly, the essay covered how firm should develop its business strategy by approaching its mindset and analytics steps along with the tools development and the implementation. The case of bank BJB is being used in order to evaluate its business strategy since its rebranding in 2010 from the Author experiences. The interesting area here is how the transformation of Bank BJB new image to be conventional bank with its rapid expansion but failed to deal with technology and unable to decide its strategic position. Thus Bank BJB need to find its competitive advantage in order to succeed its transformation.

1. Introduction Strategic thinking in company is everyone`s job. Every aspect of the firm plays a role in strategy (people, finances, production methods, customer and environment). The higher the level, the more important the job of strategic analysis becomes. In exploring the strategy, it is useful to begin by examining why it is important and what it contains. According to Porter (1980) strategy explains how firm will achieve superior performance in competition. It clearly stated that the strategy will decide the position of firm on the competitive map, so that it concern with delivering long term added value to the firm. The strategy itself can be considered at two levels: corporate and business. At the corporate level, it is the objectives, purposes or goals and the essential plans for achieving those goals. It involves a consideration of what business the company is in or should be in. At the business level, every firm has to manage its strategies in three main areas: 1. the external environment within the firm`s operates; 2. the firm`s internal resources; 3. the firm`s ability to add value. 1

Therefore, strategy is developed by a consideration of the resources of the firm in relation to its uncertainty environment and brings the added value as the prime purpose. To successfully deal with this uncertainty and to achieve strategic competitiveness and thrive, firms must be aware of and fully understand the different segments of the external and internal environment and the relation within (Ireland, Hoskisson and Hitt, 2011). Thus it is not simply a matter of taking strategic decision and then implementing it. It often takes a considerable time to make the decision itself and then another delay before it comes into effect. In addition, our judgment and values play an important role in determining the analysis (Lynch, 2012). Nevertheless, it could be speculative and may involve major assumptions and risks.

2. The Right Mindset In order to thrive in the business competition, any firm should find its competitive advantage. Competitive advantage is the heart of a firm`s performance in competitive markets. According to Porter (1980), instead of competing to be the best, companies can and should compete to be unique. In other word, it is all about value. Hence, company is competing on profits. Thus how the firm thinks about competition will define the choices it made about how the firm is going to compete. Crafting a company business strategy starts with its vision, mission and objectives. It involves seeking answer to certain critical question such as: what are the company values that differ from other competitor? Why it does competitive? How is the company surviving for the long term? Where does the company stand today? Though seemingly simple, however those questions lead to critical decision affecting the future of the company.

As a result, any firm should focus with earn higher returns, meet diverse needs of target customers and compete by innovation to achieve the uniqueness or added value. Also firm should not choose the same core competences as everyone else in the same industry. However, a core competence alone will rarely produce a sustainable competitive advantage. Essentially, developing a competitive strategy is developing a broad formula for how a business is going to compete, what its goals should be, and what policies will be needed to carry out those goals (Porter, 1980). Nevertheless, the right mind set of the people are important in order to have the right analytics, so that the implementation would be solid. Besides, business framework is set of logical relationship that really fundamental (Lynch, 2012). 2

3. The Right Analytics Having the right analytical techniques will help any firm to understand and influence its position in the market. Firms do not exist simply to survive in the marketplace but want to grow and prosper in a competitive environment. The essence of formulating a competitive strategy is relating a company to its environment. Although the relevant environment is very broad, encompassing social as well as economic forces, the key aspect of the firm's environment is the industry or industries in which it competes. Therefore, firms should undertake an analysis of their external and internal environment. Especially the external environment affects a firms strategic actions. It is challenging, complex and filled with uncertainty. Thus it influences firms as they seek strategic competitiveness and the earning of above-average returns, regardless of the industry they strive. To make it possible to map the strategic categories in the industry, identify and classify industry participants according to their competitive strategies (Henry, 2011). Then deep analysis to the structure of the industry in which competition takes place is needed. Porter (1980) stated that: Competing to be unique is a choice made against a specific and relevant set of rivals, and because the structure of industry determines how value it creates is shared.

Many times, the executives in any firms misunderstood on how to analyze and how to create the strategic formula. It demonstrated by the absence of synchronization from business strategy, business model to business plan. In fact, it is not an easy case to get the reliable information in order to answer the entire requirement in analytics tools. However, many executives tried to force the irrelevant information to their analytics tools and use it not according to its function. Therefore, the right analytics has an important role for any firms to understand its current position in the competition.

4. The Analytics Tools 4.1 External Analysis The external analysis helps firm to find its opportunities and threat in a competitive map. The external environment facing the firm consists of general environment, industry environment and competitor environment. Most industries have a variety of participants who compete based on different factors. The general environment analysis helps the firm to determine the strategic relevance of environmental changes and trends. The tools take several factors into 3

account i.e. PEST + PGD (Political/legal, Economic, Sociocultural, Technological, Physical, Global, and Demographic). It is very useful tool to analyze the external macro environment where the firm exist. On the other hand, the industry environment has a more direct effect on the firms strategic actions. Using Porter`s five forces model analysis help the company to determine the long run profitability in any given industry. This theory is based on the concept that there are five forces which determine the competitive intensity and attractiveness of a market. In addition it helps anticipate and exploit cultural change. The five forces are threat of new entrants, bargaining power of buyer, bargaining power of supplier, threat of substitute product or services, and rivalry among existing firms. Thus, the framework reveals the important differences among industries, how industries evolve and help companies find a unique position (figure 1).

A strategic group is a collection of firms following similar strategies along similar dimensions. Competitive rivalry is greater within a strategic group than between strategic groups. Competitor analysis observes a competitors strategy and major networks or alliances in which competitors participate. Therefore the firm should also identify and carefully monitor major actions taken by firms with performance below the industry norm.

4.2 Internal Analysis Internal analysis will explore the firm`s strength and weaknesses. It focuses on the inside of the firm. Firm has to analyze its internal organization in order to develop vision, pursue its mission, and select and implement its strategies. It helps firm to determine what it can do and what it might be able to do by examine unique resources, capabilities and competencies. Over time competitors can duplicate the benefits of any value creating strategy. Creating value is a requirement of the company to get attention and customer loyalty. According to Ireland, Hoskisson and Hitt (2011) firms create a value by innovatively bundling and leveraging the three foundations of competitive advantage (resources, capabilities and core competencies). It is also important to understand how activities within the firm create value for customers. One way to do this is to conduct a value chain analysis. Value chain analysis is based on the principles that firm exist to create value for their customers. It used to identify and evaluate the competitive potential of resources and capabilities (Ireland, Hoskisson and Hitt, 2011).In the analysis, the firms activities are divided into separate sets of activities that add value 4

(primary and support). The firm can more effectively evaluate its internal capabilities by identifying and examining each of these activities. Each value adding activity is considered to be a source of competitive advantage. It allows the firm to understand the parts of its operations that create value and those that do not.

4.3 Business Level Strategy Porter (1980) developed there generic strategies to help firm outperformed rivals within an industry and successfully position itself against the five forces. They are cost leadership, differentiation and focus. Sometimes the firm can successfully pursue more than one approach as its primary target. Thus it become the firm`s value added. Therefore Ireland, Hoskisson and Hitt (2011) added integrated cost leadership and integrated differentiation as another two level strategies (figure 2).

5. Implementation at Banking Industry The essay tried to analyze the transformation of Bank BJB based on the Author researh and experiences. Bank BJB is one of the Government-owned Commercial Bank of West Java and Banten in Indonesia, which has major clients such as individuals, employees, cooperatives, state owned enterprise, along with other institutions, both of government and private. Since its inception in 1961, Bank BJB has changed three times its name and logo (figure 3). In 2010, it is the new era of Bank BJB. It has rebranding to a conventional bank that served mass market and currently stands in the 14th position based on assets.

The Author argued that its vision to become the 10 largest bank and to have a good performance in Indonesia are not synchronize with the strategic decision that the bank had chosen. Regardless it has restructured its management, has a rapid expansion to outside West Java and also decided to go public (IPO). It seems late to put the emergence of IT system as first priority. Also is the inability to offer a clear differentiation with both of products and services. Thus it has no competitive advantage. The emergence of the internet has created both threats and opportunities for banking executives. Those who are able to leverage competitive benefits from the internet are confronted with significant business potential. In addition internet has fundamentally changed traditional relationships and services within the banking industry. Moreover, Bank BJB also has to focus with their targeted market on order to deliver the right products. In addition the image of bank BJB is still as regional bank which

served government employees/ PNS (figure 6). The analysis below will describe how BJB should evaluate its strategic position.

5.1. External Analysis 5.1.2 PEST Politics : Bank BJB still has strong relation and influence with the West Java Government, so that it is quiet hard to be independent for its strategic decision Economy : Small medium enterprise is a huge market. Also women is becoming a decision maker in any of family transaction. By focusing with middle low segmentation targeted women and expand its small medium enterprise segment to outside West Java, bank BJB would be able to have a strong position. Social Culture :Customers are becoming emotional buyers. Thus a strong customer relationship is very important to maintain its loyalty and also reach new customer. According to Bank BJB Brand Guideline (2010), it has to position the brand as high touch and high trust (figure 4). Technology : No internet banking and credit card. The lack of IT system both of internal and external impacted to its banking performance. IT development should be first priority in order to support the operational excellence so that customer would like to enjoy the facilities. While other competitor has offer this services. However, any such strategy must occur in the context of rules of the game for socially desirable competitive behavior, established by ethical standards and through public policy. The rules of the game cannot achieve their intended effect unless they anticipate correctly how businesses respond strategically to competitive threats and opportunities.

5.1.3 Porter`s Five Forces Industry structure, embodied in the five competitive forces, provides a way to think about how value is created and divided among existing and potential industry participants. Competitive strategy also examines the way in which a firm can compete more effectively to strengthen its market position. The value of the internet as a distribution channel is its ability to enhance interactions between the bank and its customers, as opposed to merely providing a means for touching base with customers. The better a bank can identify its customers and 6

know about them, the less it will depend on traditional marketing channels. Below is the analysis of how IT has becoming a competitive advantage in banking industry.

Threats of new entrants (High): Many financial even non-financial organizations can easily entry to bank industry competing in any banking products such as loan and investment. Many of them are able to create a website and offer easier transaction through its internet banking.

Bargaining power of Customer (High): Many people use bank services, such as mortgage, loan, investment, insurance and currency exchange. Internet has changing peoples life. Customers want everything to be fast and secure. Thus customer can easily obtain information through Internet, to compare prices, products and services. Interest rate and service charge is sensitive indicator for customer in bank industry, therefore customer is price sensitivity.

Bargaining power of Supplier (Low): Bank BJB is member of ATM bersama and Prima, so that its ATM card is accessible to lots of ATM machine with that logo. Bank BJB has no access with international network provider such as VISA, Master card, American Express. Its internal internet and machine equipments are using IBM. Lots of supplier such as HP or Assus in order to provide the banking machine facilities.

Threats of substitute product (High) Bank BJB inability to provide online internet banking made the transaction only available from ATM and teller such as money transfer and any payment activities. Using internet, customer can do its own transaction from third party company such as paypal and western union. It is much convenient and also, low cost and high efficiency to change the service to other organization.

The Rivalry among Existing Firms (High) Competition in banking industry is highly competitive. A satured market that competitiveness force bank to find other profit continuously. The technology developments force the bank to create a creative solution through its product and services in order to become the leader. \

The five forces defined that the banking industry with internet capability is highly competitive, regardless of its satured market, the profit remain dynamics. In addition the issue of whether internet banking can satisfy what customers want remains unanswered question. However, in this globalization era the internet can be leveraged to act as a competitive weapon in businesses, especially for bank BJB in order to stay competitive. Internet banking and traditional PC banking differ with respect to the application software resident on the user's computer and hence the requirement for ongoing software upgrades and distributions

5.2 Internal Analysis 5.2.1 Value Chain The primary activities are sales and marketing, operational activities in every branch (warehouse), customer service (after sales), while the support activities are procurement, human resources, infrastructure and general support. Primary activities and support activities are linked to each other (figure 5). Bank BJB has to see that the activities not just a cost, but also a step that has to add some increment value to the finished product or service. With the sorting activities in the value chain, in order to reduce operating costs to do the pattern of outsourcing. However, out sourcing can only be done in areas that do not create value or areas at a substantial disadvantage compared to competitors.

In contrast, BJB put its outsourcing as a sales promotion female and some as a customer service. It could be a problem as become customer service needs not only adequate product knowledge, but also as brand ambassador. Therefore the selective strategy has to be done as competitive advantage arises from the activities in a company`s value chain. A good business strategy presents a specific action plan to overcome a defined challenge. In order to perform different from competitor, Bank BJB has to meet different needs and/or same needs at lower cost as its value. Thus it has advantage to sustainable higher process and/or lower costs to compete on strategy. The value of the internet as a distribution channel is its ability to enhance interactions between the bank and its customers, as opposed to merely providing a means for touching base with customers. The better a bank can identify its customers and know about them, the less it will depend on traditional marketing channels. IT as support activities will contribute to the operational excellence.

5.2.2 Resource Based View

Categorized as tangible or intangible, resources can be defined as inputs into a firms production process, such as capital equipment, the skills of individual employees, patents, finances, and talented managers (Ireland, Hoskisson and Hitt, 2011). As a source of competitive advantage for a firm over its rivals, it should be met the four criteria; rare (capabilities that are not possessed by competitors), valuable (capabilities that help a firm neutralize threats or opportunities), costly to imitate capabilities (capabilities that other firms cannot easily develop), non-substitutable capabilities (capabilities that do not have strategic equivalents). From the tangible aspect (Organization), Bank BJB has a limited product portfolio that served in niche market. However, with its expansion strategy and IPO, it could grow its brand image. From the intangible aspects, the reputation of bank BJB within West Java and Banten is high, however it is still hard to convince public regarding its new status as conventional banking. The innovation on its IT system is still behind major competitor. Therefore, by going IPO and expand its branches outside West Java, there should be a large investment on its technology system. The combination of resources and capability can be seen in figure

5.3 Business Level Strategy The author argues that bank BJB has to maximize its Small Medium Enterprise loan products. Its competitor based on assets (BTPN, Danamon, Mega, and Bukopin), have not fully targeted in this segment. The differentiation should be taken how the product would be delivered. The amount of loan, easier transaction, and low rates should come into consideration. Then, targeted women as a potential market. The creativity how to attract women to invest, saving or choosing the service is becoming a unique project. The rise of middle up and also the position of woman as financial decision maker in a family should put into a deep consideration in order to have a competitive advantage. Bank BJB positioning statement of being high trust and high touch also need to reconsider, unless it start to invest on IT in order to improve the facilities also develop its human capital so that the service can be as its differentiator as well. Its new vision and mission should be aligned with its performance. Thus Bank BJB would be able to deliver a promise according to its new tagline bigger, better, stronger.

6. Conclusions First, it is important for any firm to have the right mindset in order to decide its competitive strategy. Second, the right analytics tool is needed in order to analyze its competitive map. 9

Both Porters five forces model and Resource based view may appear to be different, but they are actually complementary when integrated. From Porter`s five forces that define the industry structure and position approach helps a firm to understand its competitive environment while the resource-based view helps it to evaluate its ability to exploit strengths and respond to identified weaknesses. The SWOT analysis can be seen on figure 7. From the case of bank BJB, it is important to have a clear differentiation through its product and service. Also having a clear strategic position by choosing to its niche target market and become a superior.

7. Lessons Learned 1. Firms competitive strategy must depend on its environment, most importantly the environment of its industry 2. Firm can find competitive advantage based on cost, differentiation or focus 3. Firms has to be able to manage linkages within its value chain system in order to improve or develop its strategy 4. To create competitive strategy, the business level must analyze the positioning of business to maximize the value of the capabilities that distinguish it from its competitors

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References

Bank BJB Brand Guidilines (2010) Henry, Anthony E (2011), Understanding Strategic Management, 2nd Edition, Oxford University Press Ireland, R.D, Hoskisson, R.E, and Hitt, M.A (2011), The Management of Strategy; Concept & Cases, 9th Edition, South-Western Cengage Learning Porter, Michael E (1980), Competitive Strategy, Techniques for Analyzing Industries and Competitors, Free Press/Simon & Chuster Porter, Michael E (1985), Competitive Advantage, Creating and Sustaining Superior Performance, Free Press/Simon & Chuster Lynch, Richard (2012), Strategic Management, 6th Edition, Pearson

Appendix Figure 1. Porter`s Five Forces

Sources: Porter (1980)

Figure 2. Five Business Level Strategies

Sources: Ireland, Hoskisson and Hitt (2011)

Figure 3. Bank BJB Logo Trasnformation

Source: Bank BJB Brand Guideline (2010)

Figure 4. Bank BJB Positioning

Source: Bank BJB Brand Guideline (2010)

Table 1 Combination Criteria for Sustainable Competitive Advantage

Figure 5. Value Chain

Sources: Ireland, Hoskisson and Hitt (2011)

Figure 6. Bank BJB Image

Source: Author`s personal research through online questioners (2013)

Figure 7. SWOT of Bank BJB

Source: Author`s personal slide presentation Brand Audit of Bank BJB-(2013)