Icamess 2016

I
SBN:
978-
602-
73705-
0-0 J
akar
ta,I
ndones
ia
Apr
il30,
2016
I
CAMESS2016
I
nter
na onalConf
erenceonAccoun ng,
Management
,Ec
onomi
cs,andSoc
ialSc
ienc
es
ICAMESS2016
F
ULLARTI
CLE
Or
gani
zedby
©I
CAMESS2016
THE RELATIONSHIP BETWEEN SERVICE QUALITIES TOWARDS CUSTOMER
SATISFACTION AT PERTUBUHAN PELADANG NEGERI SELANGOR
Aida Nur Mohd Kodri

Faculty of Business & Management
University Teknologi MARA (UiTM)
78000 Alor Gajah, Melaka, Malaysia
Phone: 606-5582221; Fax: 606-5582100;
E-mail: aidanur@melaka.uitm.edu.my
Noor Haty Nor Azam, Nor Sabrena Norizan, Wan Nor Syazana Wan Hashim,
Mohd Azmil Mohd Yusof & Mohd Idham Md Razak
Faculty of Business & Management
Universiti Teknologi MARA (UiTM)
78000 Alor Gajah, Melaka
Phone: 606-5582166; Fax: 606-5582100; Email: noorhaty@melaka.uitm.edu.my,
norsabrena@melaka.uitm.edu.my, syazanahashim@melaka.uitm.edu.my,
mohdazmil@melaka.uitm.edu.my, iedham@melaka.uitm.edu.my
ABSTRACT
The level of customer service among counter staff has become one of the most troubling
issues in organization. The underlying model of SERVQUAL Parasuraman (1988) with five
dimensions was used by this particular research in order to evaluate the impact of service
quality provided by Pertubuhan Peladang Negeri Selangor on customer satisfaction in
Selangor area, Malaysia. The service qualities highlighted are reliability, assurance,
responsiveness, empathy and tangible. 100 sets of questionnaires have been distributed
randomly in the sample area. The results are expected to be significant.
Keywords: customer satisfaction, SERVQUAL
1.0 Introduction
Nowadays, customer satisfaction has been subject of great interest to organization

because customer is important stakeholders and the customer satisfaction is a priority to
management. To gain customer satisfaction, an organization should focuses on quality of
service that provided by an organization and in order to ensure good performances;
Pertubuhan Peladang Negeri Selangor cannot avoid the function of customer service. The
services provided to customer will reflect the organization’s image. Research has shown a
higher percentile of customers who retain certain organization services because of the good
services provided. This is supported by Arasli, Ekiz & Katircioglu (2008) service quality is
important aspect in satisfying and retaining customer in the service industry. In other
words, one of the factors that boost the market shares is by improving the quality of the
provided services. Service quality is an obligation for banks as well as the success of a
bank. Therefore, services should be the main concern for the management to run a business
well. Hence, this study will be conducted to examine the relationship between service
quality elements and customer satisfaction among customer at Pertubuhan Peladang Negeri
Selangor.
ICAMESS 2016 page 1
2.0 Literature Review
Customer satisfaction measures products or services provided by a company meet its

customers’ expectations. In a competitive marketplace where businesses compete for
customers, it is the company’s key performance indicator (KPI). Customer satisfaction is
the key to long-term business success (Kristensen, Dahlgaard and Kanji, 1992). Besides, it
also defined as global issue that affects all organizations, regardless of its size, whether it is
profit or non-profit, local or multinational. It is shown that companies that have more
satisfied customer will experience higher economic return (Au-Yeung, Gomez and Howell,
2003). Higher customer satisfaction leads to greater customer loyalty (Boulding, Kalra,
Staelin and Zeithaml, 1993) and this result of higher future revenue (Bolton, 1998).
Due to this, the organizations in the same market sector try to provide their products
and services with best quality in order to attract and retain their customers. A recent study
conducted by Levesque and McDougall (1996) confirmed and reinforced the idea that
unsatisfied customer service could lead to a drop in customers’ satisfaction and willingness
to recommend the service to friends and increase the probability of switching. Customer
satisfaction considered as the essence of success in today’s highly competitive world of
business. It is increasingly becoming a corporate goal as more and more companies strive
for quality in their products and services (Bitner and Hubbert, 1994).
Moreover, service quality viewed as a significant issue in the banking industry by

Stafford (1994). Since financial services are generally undifferentiated products, it becomes
imperative for banks to strive for improved quality of service to distinguish them from the
competition. Bowen and Hedges (1993) documented that improvement in quality of service
related to the expansion of shares in the market.
Gronroos (1982) suggested that the perceived quality of a given service is the result
of an evaluation process since consumer makes comparison between the services they
expect with perceptions of the services they receive. Hence, he concluded that the quality of
service is dependent on two variables: expected service and perceived service. Parasuraman
(1985) considered that a customer’s assessment of overall service quality depends on the
gap between the expected and perceived service.
Thus, the key to managing perceived service quality is to minimize this gap.
Zeithaml (1996) defined perceived service quality as the customers’ assessment of the
overall excellence of the service. Bolton and Drew (1991) described service quality as a
form of attitude that results from the comparison of expectations with performance. Berry
and Parasuraman (1991) pointed out that since customers are the “sole judge of service
quality”, an organisation can build strong reputation for quality service when it can
constantly meet customer service expectations.
In addition, approaches to the measurement of service quality have typically been a

simple comparison of the mean scores, extensive and detailed statistical model or more
recently market research questionnaire. The current measurement of perceived service
quality using the latter approach traced to the research of Parasuraman (1985). Based on an
exploratory research on four types of service firms, 10 determinants of service quality have
been determined and consistently ranked by customers the most important service quality.
The findings served as the foundation for researchers to develop an instrument of
measuring customers’ perceptions of service quality called SERVQUAL in 1988, which
ICAMESS 2016 page 2
was later refined in 1991.
In developing SERVQUAL, Parasuraman (1988) recast the 10 determinants into

five principal dimensions: tangibles, reliability, responsiveness, assurance and empathy.
Following his work, other researchers have adopted this model for measuring service
quality in various service industries. Among them is Blanchard (1993), Donnelly (1999),
Lassar (2000), Brysland and Curry (2001), Wisniewski (2001) and Kang (2002). Newman
(2001) has applied this model to measure the quality of service in the banking industry.
Parasuraman (1988) defined element of service quality as follow:
1. Tangibles – the appearance of physical artefacts and staff members connected

with the service (accommodation, equipment, staff uniforms and so on)
2. Reliability – the ability to deliver the promised service.
3. Responsiveness – the readiness of staff members to help in a pleasant and
effective way.
4. Assurance – knowledge and courtesy of employees and their ability to inspire
trust and confidence.
5. Empathy – caring individualized attention the firm provides to its customers.
Cronin and Taylor (1992) stated that the relationship between service quality and
customer satisfaction has a direct impact on customer’s loyalty as the universal
understanding that keeping a loyal base of customers is much profitable for a company than
attracting new clients. Not surprisingly, service quality and customer satisfaction are among
the most heavily studied concepts by managers.
According to Oliver (1980), customers judge that quality is low if performance does
not exceed expectations and quality increases as the performance exceed expectations.
Customers’ expectations serve as foundation to the quality of services, hence, if service
quality increased, the customer satisfaction will also increase.
Hypothesis 1 - Reliability
H1: There is a significant relationship between reliability and customer satisfaction.
` Hypothesis 2 - Assurance
H1: There is a significant relationship between assurance and customer satisfaction.
Hypothesis 3 - Responsiveness
H1: There is a significant relationship between responsiveness and customer satisfaction.
Hypothesis 4 - Empathy
H1: There is a significant relationship between empathy and customer satisfaction.
Hypothesis 5 - Tangible
H1: There is a significant relationship between tangible and customer satisfaction.
ICAMESS 2016 page 3

INDEPENDENT VARIABLES DEPENDENT VARIABLES
SERVICE QUALITY ELEMENTS
RRRELIABILITY
RESPONSEIVENES
S
CUSTOMER
ASSURANCE SATISFACTION
EMPATHY
TANGIBLES
Figure 1: Theoretical Framework was developed from SERVQUAL, Parasuraman (1998)
3.0 Methodology
Research Design
This research design that will be used in this study is correlational. According to
Sekaran and Bougie (2010) correlational research is conducted when the researcher wants
to describe the important variables related with the problem. Besides, this study will be
conducted to identify the relationship between SERVQUAL elements and customer
satisfaction on the established relationship.
The study will be conducted by distributing questionnaires to 100 respondents,
which will be selected by convenience approach. Besides, information from numerous
literature to understand the nature of customer’s satisfaction, perceived services quality, as
well as the relationship among these variables have been collected over a period. In this
research, primary data will be obtained by distributing questionnaires among customers at
Pertubuhan Peladang Negeri Selangor. The variables will be measured five (5) points of
Likert Scales: The seven (5) points are as stated below.
1 = Strongly Disagree
2 = Disagree
3 = Moderate
4 = Agree
5 = Strongly Agree
ICAMESS 2016 page 4

The respondents will be required to answer three sections. The questionnaire will be divided
into four sections, Section A, Section B, and Section C.
Section A – This section will be asked and identified the elements of service quality from
Parasuraman (1988).
Section B – This section will be identified the customer satisfaction.
Section C -. This section classifies the respondents according to the demographic profiles
such as gender, age, marital status, professional academic qualification and working
experience.
Validity of Instrument
According to Zamalia (2009), validity is the ability of a scale to measure what needs
to be measured. For the purpose of this study, the validity of instrument will be submitted
for face (field expertise) and content validity (academic expertise).
Reliability of Instrument
According to Zamalia Mahmud (2009), reliability refers to the degree the measures of
question are free from errors and lead to consistent results. In addition, reliability also
seeks the understanding of questions from respondents. Therefore, in checking the
reliability of the instruments, a pilot test will be conducted in order to see whether the
questionnaire is reliable or not. According to Sekaran (2010), the value of alpha level more
than 0.60 will result in the instrument being reliable for the research study purposes.
Once data collected, it is analysed and summarized in a readable and easily

interpretable form. The Statistical Package for the Social Science version 20 is used to
analyse the data. The results will be in form of reliability testing, frequency distribution and
Pearson Correlation. In addition, reliability is the extent to which a scale produces
consistent result if repeated measurements in characteristics. Cronbach Alpha is the method
to test the reliability of the data collected by the researcher.
5.0 Conclusion
In conclusion, all the result from this study is expected to be significant. The five
elements in service quality; reliability, assurance, responsive, empathy and tangible are
expected to have a significant relationship that will influence customer satisfaction among
customer in Pertubuhan Peladang Negeri Selangor.
ICAMESS 2016 page 5

REFERENCES
Aaker, D.A., R. Jacobson. (1994). Study shows brand-building pays off for stockholders.
Advertising Age 65(30): 18.
Au-Yeung, J., Vallejo Gomez, I. & Howell, P. (2003). Exchange of disfluency from
function words to content words with age in Spanish speakers who stutter. Journal of
Speech, Language and Hearing Research,46, 754-765.
Berry, L.L. and Parasuraman, A. (1991), Marketing Services: Competing Through Quality.
New York: The Free Press.
Bitner, M.J. and Hubbert, A.R. (1994). “Encounter satisfaction versus overall satisfaction
versus service quality: the consumer’s voice”, in Rust, R.T. and Oliver, R.L. (Eds),
Service Quality: New Directions in Theory and Practice, Sage Publications,
Thousand Oaks, CA.
Blanchard, O., S. Commander, and F. Coricelli. (1993). Unemployment and restructuring in

Eastern Europe. Mimeo, World Bank.
Bolton, Ruth N. and James H. Drew (1991), "A Longitudinal Analysis of the Impact of
Service Changes on Customer Attitudes," Journal of Marketing, 55 (1), 1991, 1-10.
Bolton R.N. (1998). "A Dynamic Model of the Duration of the Customer's Relationship
with a Continuous Service Provider: The Role of Satisfaction", Marketing Science,
Vol 17 No 1, pp. 45-65.
Boulding, W., Kalra, A., Staelin, R. and Zeithaml, V. (1993). “A dynamic process model of
service quality: form expectations to behavioral intentions”, Journal of Marketing
Research, Vol. 30, pp. 7-27.
Bowen, J. W. and Hedges, R. B. (1993). Increasing service quality in retail banking.

Journal of Retail Banking, 15 (3), 21-28.
Brysland, A. and Curry, A. (2001). Service improvements in public services using

SERVQUAL, Managing Service Quality, vol. 11, no. 6, pp. 389-401.
Cronin, J.J.Jr. and Taylor, S.A. (1992). ‘Measuring service quality: a reexamination and
extension’, Journal of Marketing, Vol. 56, July, pp. 55-68.
Donnelly, P. and Friedman, R. D. (1999). DNA database searches and the legal
consumption of the scientific evidence. Michigan Law Review 97, 931–984.
Gronroos, C. (1982), Strategic Management and Marketing in Service Sector, Marketing

Science Institute, Cambridge, MA.
Kang, G.D., James, J., and Alexandris, K. (2002). Measurement of internal service quality:
Application of the SERVQUAL battery to internal service quality, Managing
Service Quality, Vol.12, No.5, pp. 278-291.
ICAMESS 2016 page 6

Kristensen, K.; Dahlgaard, J.J. & Kanji, G.K. (1992). On measurement of customer
satisfaction, Total Quality Management, 3(2), 123-8.
Lassar, Walfried, Chris Manolis, and Robert D. Winsor (2000). “Service Quality
Perspective and Satisfaction in Private Banking,” Journal of Services Marketing,
Vol. 14, No. 3, 244-271.
Levesque, T., & McDougall, G.H.G. (1996). Determinants of customer satisfaction in retail
banking. International Journal of Bank Marketing, 12-20.
http://dx.doi.org/10.1108/02652329610151340
Newman, K. (2001). “Interrogating SERVQUAL a Critical Assessment of Service Quality

Measurement in a High Street Retails Bank,” International Journal of Bank
Marketing, 19, pp 126-139.
Oliver, Richard L. (1980). "A Cognitive Model of the Antecedents and Consequences of
Satisfaction Decisions." Journal of Marketing Research 17 (September): 460-469.
Parasuraman, A., Zeithaml, V.A. and Berry, L.L. (1988). "SERVQUAL: a multi-item scale
for measuring consumer perceptions of the service quality", Journal of Retailing ,
Vol. 64, No. 1, pp. 12- 40.
Sekaran U. (2003). Research Method for Business: A Skill Building Approach, John Wiley
and Sons Inc.
Stafford, M, (1994). “How customers perceive SQ”, Journal of Retail Banking; 17 (2), 29 –
38.
Wisniewski, M. (2001), "Using SERVQUAL to assess customer satisfaction with public

sector services", Managing Service Quality, Vol.11, No.6, pp. 380-388.
Zamalia Mahmud. (2009). Handbook of research methodology: a simplified version.

University Publication Centre (UPENA).
Zeithaml, V.A., Berry, L.L. and Parasuraman, A. (1996). ``The behavioral consequences of
service quality’’, Journal of Marketing, Vol. 60, April, pp. 31-46.
ICAMESS 2016 page 7

UNDERSTANDING TPB MODEL, AVAILABILITY, AND INFORMATION ON
CONSUMER PURCHASE INTENTION FOR HALAL FOOD
Andrian Haro
Faculty of Economy, State of Jakarta University
andrianharo@feunj.ac.id
ABSTRACT
The research investigates on five factors that affect the intention to purchase halal food which
are attitude, subjective norm, perceived behavioral control, availability, and information. A
survey was conducted with 150 graduate students in State of Jakarta University and multiple
regression analysis was used to test the relationships among the variables. It is found that
attitude was identifying as the main factor that influence the intention to purchase halal food
products. These results of the study give implication to firms competing in food industry that
should be taken into account in promoting their halal food products.
Keywords: Consumer behavior, TPB, purchase intention, availability, information, halal

food
INTRODUCTION
Many countries of some parts of Asia, Middle East, and North Africa have predominantly
Muslim populations. As we know, the number of Muslims population in the world is more
than 1.3 billion people, and trade in halal products is about 150 billion dollars (Teguh, 2013).
Indonesia has a population of 240 million people and 87% of the populations are Muslims
(Sukesti and Budiman, 2014). Therefore, Indonesia is potential market for halal products. The
halal concept (especially for foods) is truly from the farm to the table, and requires nutritious
items prepared from permissible ingredients in a clean and hygienic manner (Hanzaee and
Ramezani, 2011). Halal is an Islamic term which guides the Muslims that what is allowed to
them to practice in daily routine or every aspects of life and what is prohibited for them
which does not allowed to be practice in islamic society. The concept of Halal is not only
limited to food it is also practiced in each the aspects of Muslims’ life (Majid et al., 2015).
LPPOM (National Institution for the Supervision of Food, Medicine, and Cosmetic) and MUI
(Indonesian Ulama Council) are assigned as the main authority in halal certification. The
halal certification issued by MUI is benefits the manufacturers and food operators, as an
assurance that their food or products are halal compliant. Therefore, halal certification is
crucial in building consumers’ confidence in the halal food that they consume and could be
viewed as a powerful marketing tool (Khalek, 2015). According to the research of Alam and
Sayuti (2011) which using the theory of planned behavior model, it is found that behavior
factor positively influence the decision making to buy halal products in Malaysia. Jusmaliani
and Nasution (2009) said that there is another factor will influence the customer when they
have intention to buy halal food are availability and information. Based on the background
ICAMESS 2016 page 20

above, I interested to study the influence of TPB model, availability, and information on
consumer purchase intention for halal food.
LITERATURE REVIEW
Theory of Planned Behavior
Theory of Planned Behavior is a model used to predict the behavior of the consumer, where
the best predictor of behavior is intention (intention) of consumers (Lodorfos and Dennis,
2008). Factors that influence the intention (intention) in consumer behavior is the attitude,
subjective norm, and perceived behavioral control. Theory of planned behavior has been
widely used by researchers to explain consumer purchase intentions against halal food
product (Jusmaliani and Nasution, 2009; Khalek et al., 2015; Suki et al., 2013). Model theory
of planned behavior (TPB) proposed by Ajzen can be seen in Figure 1.
Figure 1. Theory of Planned Behavior (TPB) (Ajzen, 2002)
Attitude
The attitude is an expression of the feeling that comes from within the individual. These
expressions reflect whether a person is happy or not happy, likes or dislikes and agree or
disagree to an object (Golnaz et al., 2010). Three main components in the attitude of a person,
including affect, cognition and behavior (Ajzen, 2002). The first component is affect. This
component relates to the overall feeling or a person's emotional response to a product. How
much someone likes a product it will determine the attitude towards the product. The second
component is cognition. This component is a person's belief or knowledge about a product
and main characteristics of the product. The latter component is behavior. This component
relates to the tendency of a person to perform a certain action or behave in a certain way with
regard to its attitude towards a product. According to Weng and Khin (2016), attitudes toward
the halal food product means the direction or focus by the consumer to the product that is
based on interests and preferences for halal food. Thus, if the company wants to achieve an
optimal result is very important to understand what consumers like and dislike, or know and
do not know about the halal food products offered.
Subjective Norm
Subjective norm refers to perceived social pressure to perform or not perform certain
behaviors (Lin, 2007). In behaved, consumers can not be separated from the decision-making
activities. Decisions will be taken by a person done with consideration of itself and on the
basis of consideration of others that are considered important (Kordnaeij et al., 2013).
Decisions selected can fail to do if consideration of other people do not support. That is
because the influence of subjective norm opinions of others that are considered important in a
person's behavior (Aziz and Wahab, 2013). This is because to do something important,
usually one considers what the expectations of others (those nearby, community) against him.
Many acts of worship in Islam, for example, are designed to instill a community spirit (eg.
Friday and Eid prayers, Fasting, Hajj, Charity, and etc.) (Suki et al., 2014).
Perceived Behavioral Control
Perceived behavioral control is one's perception of the ease or difficulty to perform a

behavior (Chen, 2007). Perceived behavioral control is also a function of faith (belief). This
function is commonly called confidence control (control belief) that refers to a person's
perception of whether he has or does not have the capacity to behave (Hanzaee and
Ramezani, 2011). According to Alam and Sayuti (2011), perceived behavioral control is an
essential component in predicting the behavior of someone who showed confidence about the
presence or absence of the factors that facilitate or hinder to take into consideration before
purchasing halal food. In their study, a significant relationship came out to exist between
perceived behavioral control and the halal food purchasing intention.
Availability
The Muslim consumers are willing to purchase halal product if the product is available
(Rahim et al., 2013). Availability of halal food captures insight regarding the availability and
choice possibilities in halal food. The availability of halal food in the market is a significant
factor in the study of the religiosity aspect in consumer behaviour: determinants of halal meat
consumption by Jusmaliani and Nasution (2009).
Information
For awareness and knowledge sources, matters like “heard about that”, “used to hear”, “used
to read”, “discuss and tell” comes from personal and impersonal source of information (Teng
and Jusoh, 2013). Information about halal food assess whether there is sufficient information
on halal food and halal certificate (Jusmaliani and Nasution, 2009). The updates from the
halal authorities also important so that consumers can check the halal status every time the
hesitancy of halal status take place (Rahim et al., 2013).
Purchase Intention
Interest in the purchase is a person's tendency to take action with regard to his attitude toward
the purchase of a product (Kim and Chung, 2011). Sales of a company can be based on a
market survey on purchase intentions (purchase intention) consumers. According to Rezvani
et al. (2013), interest in the purchase can be regarded as a predictor of future purchase
decisions. Omar et al. (2012) suggested that the intention of purchasing a psychic activity that
arises because of feelings (affective) and the mind (cognitive) of the goods or services
desired. In other words, purchase intention can be interpreted as a happy attitude toward an
object that makes an individual trying to get the item by paying with cash or with sacrifice.
RESEARCH MODEL AND HYPOTHESES

The research model used in this study, shown in figure 2, is based on TPB. The intention of
halal food purchasing preceded the process before actual purchase. Attitude, subjective
norms, perceived behavioral control, availability, and information are postulated to have a
direct relationship with purchase intention. To examine the relationship between the
independent variables (attitude, subjective norm, perceived behavioral control, availability,
and information) and the dependent variable (purchase intention), five hypotheses were
developed. The directionality stated in each hypothesis is derived from the previous
researches which were conducted on the basis of TPB. Therefore, this study has to find out
whether there is a direct relationship between attitude, subjective norm, perceived behavioral
control, availability, information and purchase intention.
Attitude
H1
Subjective Norm
H2
Perceived
H3 Purchase
Behavioral Control
H4 Intention
Availability
H5
Information
Figure 2. A Schematic Diagram of The Conceptual Framework
Based on the figure above, there are five hypotheses that can be explained as below:
H1: There is a relationship between attitude and intention to purchase halal food products.
H2: There is a relationship between subjective norm and intention to purchase halal food
products.
H3: There is a relationship between perceived behavioral control and intention to purchase
halal food products.
H4: There is a relationship between availability and intention to purchase halal food products.
H5: There is a relationship between information and intention to purchase halal food products.
RESEARCH METHOD
The researcher has used a questionnaire to gather data for this study. Five independent
variables were used. A Likert point scale was used to gather the data. Total respondent in this
study is 150 graduate students. They are from Master of Management, Faculty of Economy,
State of Jakarta University. The data from these questionnaires were then analyzed using
SPSS 21.0 which uses multiple regression analysis.
RESULTS AND DISCUSSION
The demographic conditions that can be drawn from the number of 150 respondents are
males more than females about 90 people (60%) with most respondents ages between 23
years to 27 years as 88 people (58.7%), whereas marital status of unmarried respondents
reached 117 people (78%). The research sample most dominated from the respondents work
as private employees about 110 people (73.3%) with the largest income per month is Rp. 3
million up to Rp. 5 million as many as 60 people (40%).
Table 1: Descriptive Statistics on Understanding Halal Food
Mean Std. Deviation

Purchase Intention 3.8689 .69824
Attitude 3.8050 .62045
Subjective Norm 3.4956 .72325
Perceived Behavioral 3.8467 .58490
Control
Availability 3.5289 .71125
Information 4.2222 .57627
Respondents were asked to indicate their perceptions and agreement towards the statement in
the questionnaires by using the five point Likert Scale answers. The scale were ranged
between 1= strongly disagree to 5= strongly agree. Based on table 1 , the mean for intention
to purchase halal food was 3.86 (SD = 0.698), attitude was 3.80 (SD= 0.620), subjective
norm was 3.49 (SD= 0.723), perceived behavioral control was 3.84 (SD = 0.584), availability
was 3.52 (SD= 0.711), and information was 4.22 (SD= 0.576). Based on the above data, the
results indicate strongly agree that the information of halal food is very important things
when they intent to buy halal food. This condition also happens in the research of Jusmaliani
and Nasution (2009) in awareness and perception of muslim consumers on non-food halal
product. On table 2 indicates the test of construct’s validity and reliability of the study. The
factor analysis procedure has been used to analyze the validity of this study (the factor
loading < 0.5). The results shows there four valid items for attitude’s construct, three valid
items subjective norm’s construct, two valid items perceived behavioral control’s construct,
three valid items for availability’s construct, three valid items for information’s construct, and
three valid items for purchase intention’s construct. The Cronbach  0.6 is applied by this
research to show the reability. The results shows that all the constructs are reliable.
Table 2: Test of Construct’s Validity and Reliability
Construct Item Cronbach Alpha Factor Loading

Attitude AT1 0.916 0.879
AT2 0.925
AT3 0.890
AT4 0.893
Subjective Norm SN1 0.876 0.870
SN2 0.942
SN3
0.877
Perceived Behavioral Control PBC1 0.778 0.905
PBC2 0.905
Availability AV1 0.752 0.771

AV2 0.861
AV3 0.819
Information IN1 0.753 0.831
IN2 0.883
IN3
0.746
Purchase Intention PI1 0.925 0.931
PI2 0.939
PI3 0.927
Pearson’s Correlation Coefficients were run to examine the associations between independent
and dependent variables. Table 3 shows the relationship between the independent variables
(attitude, subjective norm, perceived behavioral control, availability, and information) and the
dependent variable is intention to purchase halal food. Based on the results, all the
independent variables have significant relationships with the dependent variables.
Correlations between the variables ranges from r=0.323 to r= 0.707 (p< .01).
Table 3: Pearson’s Correlation Coefficients on Understanding Halal Food
Perceived
Purchase Subjective Behavioral
Intention Attitude Norm Control Availability Information
Purchase
1.000
Intention
Attitude .707** 1.000
Subjective Norm .472** .530 1.000
Perceived
Behavioral .608** .470 .361 1.000
Control
Availability .493** .591 .438 .379 1.000
Information .323** .224 .310 .311 .119 1.000
Note: **p < 0.01; *p < 0.05
Table 4: Regression Analysis on Understanding Halal Food
Standardized
Coefficients
Variabels Beta
Attitude 0.477**
Subjective Norm 0.051
Perceived Behavioral Control 0.313**
Availability 0.059

Information 0.096
F-value 45.429**
R 0.782
R2 0.612
Adjusted R2 0.599
Note: **p < 0.01; *p < 0.05
In this research, regression analysis was used to analyze the attitude, subjective norm,
perceived behavioral control, availability, and information towards the intention to purchase
halal food. From table 4, there have a significant and positive relationship between the
attitude and perceived behavioral control as independent variables and purchase intention as
the dependent variable. The model summary table shows that R, regression of five
independent variables which are attitude, subjective norm, perceived behavioral control,
availability, and information factors is equal to 0.782. After inter-correlation R square (R2)
generated is 0.612. This means, around 61.2% of two independent variables be explained by
the dependent variable.
CONCLUSION
The research found that the attitude and perceived behavioral control have significant and
positive value on purchase intention. Meanwhile, subjective norm, availability, and
information have insignificant value on purchase intention. Based on the result show that
attitude was identifying as the main factor that influence the intention to purchase halal food
products. These results of the study give implication to firms competing in food industry that
should be taken into account in promoting their halal food products. It is intended not only to
guarantee that the product is halal but also good-quality.
REFERENCES
Ajzen, I. (2002). “Perceived Behavioral Control, Self-Efficacy, Locus of Control, and The
Theory of Planned Behavior”, Journal of Applied Social Psychology, No. 4, pp. 1-20.
Alam, Syed Shah and Sayuti, Nazura Mohamed. (2011). “Applying the Theory of Planned
Behavior (TPB) in Halal Food Purchasing”, International Journal of Commerce and
Management, Vol. 21, No. 1, pp. 8-20.
Aziz, Noreen Noor Abd and Wahab, Eta. (2013). Understanding of Halal Cosmetics
Products: TPB Model. http://eprints.uthm.edu.my/5797/1/5._Noreen_Noor_Abd.Aziz.pdf.
accessed on 27 January 2015.
Chen, M. (2007). “Consumer Attitudes and Purchase Intentions in Relation to Organic Foods
in Taiwan: Moderating Effects of Food-Related Personality Traits”, Food Quality and
Preference, Vol. 18, No. 7, pp. 1008-21.
Golnaz, R., Zainalabidin, M., Mad Nasir, S. and Eddie Chiew, F.C. (2010). “Non-Muslims’
Awareness of Halal Principles and Related Food Products in Malaysia”, International Food
Research Journal, Vol. 17, pp. 667-674.

Hanzaee, Kambiz Heidarzadeh and Ramezani, Mohammad Reza. (2011). “Intention to Halal
Products in The World Markets”, Interdisciplinary Journal of Research in Business, Vol. 1,
No. 5, pp.01-07.
Jusmaliani and Nasution, Hanny. (2009). “Religiosity Aspect in Consumer Behaviour:

Determinants of Halal Meat Consumption”, ASEAN Marketing Journal, Vol. 1, No. 2.
Khalek, Aiedah Abdul, Ismail, Sharifah Hayaati Syed, Ibrahim, Hairunnisa Mohamad.
(2015). “A Study on The Factors Influencing Young Muslims’ Behavioral Intention in
Consuming Halal Food in Malaysia”, Jurnal Syariah, Vol. 23, No. 1, pp. 79-102.
Kim, H. Y. and Chung, J. E. (2011). “Consumer Purchase Intention for Organic Personal
Care Products”, Journal of Consumer Marketing, Vol. 28, No. 1, pp. 40-47.
Lin, H. F. (2007). “Predicting Consumer Intentions to Shop Online: An Empirical Test of

Competing Theories”, Electronic Commerce Research and Applications, Vol. 6, pp. 433-442.
Lodorfos, G. N. and Dennis, J. (2008). “Consumers’ Intent: In The Organic Food Market”
Journal of Food Products Marketing, Vol. 14, No. 2, pp. 17-38.
Majid, Muhammad Bilal, Sabir, Irfan, and Ashraf, Tooba. (2015). “Consumer Purchase
Intention towards Halal Cosmetics & Personal Care Products in Pakistan”, Global Journal of
Research in Business & Management, Vol. 1, No. 1.
Omar, Khairi Mohamed, Mat, Nik Kamariah Nik, Imhemed, Gaboul Ahmed, Ali, Fatihya
Mahdi Ahamed. (2012). “The Direct Effects of Halal Product Actual Purchase Antecedents
among the International Muslim Consumers”, American Journal of Economics, pp. 87-92.
Rahim, Norafni Farlina, Shafii, Zurina, and Shahwan, Syahidawati. (2013). “Awareness and
Perception of Muslim Consumers on Non-Food Halal Product”, Journal of Social and
Development Sciences, Vol. 4, No. 10, pp. 478-487.
Rezvani, Samin, Muhammad Sabbir Rahman, and Goodarz Javadian Dehkordi. (2013).
“Consumers' Perceptual Differences in Buying Cosmetic Products: Malaysian Perspective”,
Middle-East Journal of Scientific Research, Vol. 16, No. 11, pp. 1488-1496.
Sukesti, Fatmasari and Budiman, Mamdukh. (2014). “The Influence Halal Label and
Personal Religiousity on Purchase Decision on Food Products in Indonesia”, International
Journal of Business, Economics and Law, Vol. 4, No. 1.
Suki, Norazah Mohd, Salleh, Abang Sulaiman Abang, and Suki, Norbayah Mohd. (2014).
“Measuring Muslim Consumers’ Decision to Patronize Halal Stores: Some Insights from
Malaysia”, Malaysian Journal of Business and Economics, Vol. 1, No. 2, pp. 77-87.
Teng, Phuah Kit and Jusoh, Wan Jamaliah Wan. (2013). Investigating Students Awareness
and Usage Intention Towards Halal Labelled Cosmetics and Personal Care Products in
Malaysia. Proceeding at 4th International Conference on Business and Economic Research
(4th ICBER 2013), Indonesia: Bandung.

Weng, Toong Foo and Khin, Aye Aye. (2016). “Green and Halal Foods of the Chicken Meat
Consumption in Attaining Consumer Food Safety in Malaysia”, Advances in Environmental
Biology, Vol. 10, No. 1, pp. 50-57.
Widodo, Teguh. (2013). “The Influence of Muslim Consumer’s Perception Toward Halal
Food Product on Attitude and Purchase Intention at Retail Stores”, Inovbiz, Vol. 1, No. 1, pp.
3-20.

EMPOWERMENT OF SMALL AND MEDIUM ENTERPRISES (SMEs)
(A Case Study In Medan North Sumatera)
Dr. Anton Atno Parluhutan Sinaga, SE, MS
Lecturer of the Faculty of Economics, University of Methodist Indonesia - Medan
ABSTRAK
Small and Medium Enterprises (SMEs) empowerment is the treatment given to powerless
SMES in order to make it powerful; in this case, it will eliminate or at least will lessen its
powerlessness and actualizes its potency and utilizes its opportunity. The objective of this
research was to find out some factors which influenced SMEs empowerment in Medan. The
research used descriptive quantitative approach. The data were gathered by using secondary
and primary data. The hypothesis was tested by using data samples, while Structural
Equation Modeling (SEM) was used for Statistical Inferential Method in analyzing the data.
The result of descriptive analysis showed that there were nine SMEs empowerment programs
which the mean score was under the threshold of 9; they were institutional empowerment,
local enterprice authority (LEA empowerment, space empowerment, increase in access to
financing sources, empowermenmt in production through the aid of selective business sector
as stimulant, marketing network development, human resources empowerment, and
monitoring and evaluation empowerment. Meanwhile, SMEs empowerment program,
stakeholder empowerment, and IT (Information and Technology) empowerment in 21
subdistricts of Medan had better inclination because they were more than the mean score
below the threshold of 9. The result of the research showed that institutional empowerment,
local enterprise authority empowerment, stakeholders empowerment, space empowerment,
increase in access to financing sources, empowerment in production through the aid of
selective business sector as stimulant, marketing network development, human resources
empowerment, IT empowerment, and monitoring and evaluation empowerment constitute ten
factors which had positive and significant influence on SMEs empowerment in Medan.
Keywords: Small and Medium Enterprise(SMEs) Empowerment
INTRODUCTION
Empowerment is a concept which is is used to cut off a vicious circle that connects the power
with the distibution of wealth. Underdevelopment and poverty in the process of development
are caused by imbalance in ownership or access to the sources of power. A long historical
process brings about the incidence of power dispowerment; that is, negating power in most of
the people; in cosequence, they will not have sufficient access to productive access which is
generally controlled by those who have power. In turn, economic backwardness can cause
them to be farther from power. This is what we usually call with vicious circle which runs
around without end. Therefore, empowerment is led to two directions: first, by releasing from
the trap of poverty and backwardness, and secondly, strenghtening the position of people in
the economic and powerful structure.

Empowerment constitutes an individual capacity which is compounded in people and
develops their empowerment. A community which members have physical and mental health,
and are educated and have power will, of course, have high empowerment. People
empowerment constitutes a basic element which enables them to survive, and, in a dynamic
sense, they can develop themselves and can get progress. Empowerment does not only include
the strengthening of an individual as the member of a community but also all levels.
Fostering moden cultural values like hard work, economical, transparency, responsibility, etc.,
are the principal part of the efforts of the empowerment itself. Referring to Kieffer in Suharto
(1997), what it means by empowerment in this research is focused on the informal sector,
particularly small and medium enterprises as a part of society that need the handling of its
managemebnt from the stakeholders related to the attempt to increase their human resources
quality which, in turn, will encourage the increase of business earnings/profit and will
eventually increae people welfare.
Referring to the theories and concepts of empowerment by some experts which have been
mentioned above, it can be said that Small and Medium Enterprises (SMEs) empowerment
constitutes a treatment which is given to powerless SMES in order that it becomes powerful in
which it will eliminate or at least lessen its weaknesses and actualizes its potency ad
opportunity. A powerful SMEs is an SMEs which has sufficient capital, broad access to
investors, raw materials, aspirant cconsumers, and other stakeholders, and has profound
competitiveness. In order to increase its capacity, SMEs needs trainings, assistance,
consultation, and business meetings (Kartawan, 2004). Hafsah (2004) points out that SMEs
empowerment has to consider any problems faced by SMEs (Urata, 2000; Soetrisno, 2008;
Syahza, 2004; Zimmerer & Scarborough, 2002; Lussier, 2002; and the result of observation
on the Problems of SMEs in Medan, 2012).
Law No. 20/2008 on SMEs states that SMEs empowerment constitutes any synergic attempt
by the Central Government, Local Government, Businesses, and people in the form of
growing climate and developing businesses in Small and Medium Enterprises in order to
make them able to grow and develop as powerful and independent enterprises. Some aspects
which have to be empowered according to Article 7 of Law No. 20/2008 include 1)
Financing, 2) Facility and Infrastructure, 3) Business Information, 4) Partnership, 5) Business
Permit, 6) Business Opportunity, 7) Promotion, and 8) Institutional Support. The principles
which have to be followed (excluded Micro Business) are 1) independent growth, sense of
togetherness, and entrepreneurship of Small and Medium Enterprises to work by their own
efforts, 2) the realization of transparency, accountability, and righteous public policies, 3)
local potency-based business development with market oriented according to the Competence
of Small and Medium Enterpriuises, 4) increasing competitiveness of Small and Medium
Enterprises, and 5) Organizing planning, implementation, and control integratedly.
Small and Medium Enterprise (SMEs) constitutes a part of the most strategic economic sector
which is related to people’s necessities of life and constitutes an mportant pillar on supporting
and generating the economic foundations in many countries around the world. Tambunan
(2003) points out that one of the characteristics of the dynamics and good performance of
economy with high growth rate in the Newly Industrilizing Countries (NICs) in East and
South East Asia (South Korea, Singapore, and Taiwan) is characterized by the performancce
of SMEs which is efficient and productive, has high level of competitiveness, has orientation
in export, and is responsive to the government policy in the development of private sector.
In the case of employment, SMEs of North Sumatera is below the regional concentration
index; that is, around 0.69 – 0.82 (Sulistyastuti, 2004), or is only able to employ 2-4 workers
per SMEs unit (the Cooperative Agency & SMEs, 2013). The same is true to the contribution
of SMEs of North Sumatera to Gross Domestic Regional Product (GDRP) and the export of
oil and gas). Although there is no certain figures of the amount of the contribution of SMEs of
North Sumatera to PDRB and the export of oil and gas, some exploratory literatures indicate
that the contribution of SMEs of North Sumatera to GDRP and the export on oil and gas is
still unsatisfactory or still dominated by big companies.
The SMEs Cooperative Agency in Medan (Sinaga, 2013) reveals that the proportion of SMEs
in Medan in generating the economy in Medan is bigger than the proportion of big companies
(46.12%) or almost as twice as the number of big companies in Medan.
Table. 1. Contribution of SMEs to GDRP of Medan

No. Business Field Medan
Total Amount Contribution
(Million) (%)
1 Agriculture 2.340.771,21 2,5
2 Excavation 2.910,46 0
3 Processing Industry 13.464.885,26 14,38
4 Electricity, Gas, and Drinking Water 1.579.106,41 1,69
5 Building Construction 9.830.513,95 10,5
6 Commerce, Hotel, and Restaurant 24.263.410,06 25,92
7 Transportation and Communication 17.804.019,19 19,02
8 Finance, Insurance, Business in Renting 14.142.262,49 15,11

Building, Land & Business Services
9 Services 10.182.878,36 10,88

Total 93.610.757,40 100
Big Business 60.20
SMEs 39.80
Table 1 above can explain that in the case of employment, until 2012, SMEs in Medan had
been successful in employing workers up to 96%, but in the case of the establishment of
PDRB, the contribution of SMEs in Medan was relatively low and even alarmed, only 39.8%
or higher than the contribution of big companies (60.2%), and under the contribution of
SMES to GDRP of North Sumatera Province (56%), and the contribution of SMEs to Gross
Domestic Product (GDP) of Indonesia (57.56%). This condition shows that besides SMEs
plays a strategic role in economy, it is full of and vulnerable to various problems. Therefore,
in order to make it always exist, comprehensive and sustainable empowerment should highly
be needed.
In reality, SMEs has a lot of contributions in the regional development. The principal
criticism on traditional/classic regional development in the past was its attention which was
focused on the inward investment, either from domestic investment or from foreign
investment. In the beginning, traditional regional policy lacked of giving its adequate
attention to some factors of indigenous development. Specifically, its attention was focused
on stimulating new companies so that small and enterprises were ignored.
As one of the economic pillars, SMEs empowerment in an urban area is much more important
that in rural areas. This is because an urban area becomes the place where most of the
economic activities in one area end up. An urban area even usually becomes the icon of the
National or Regional Economy (including Medan). ILO (International Labor Organization)
has reported that 60% of workers in urban areas of the developing countries are employed by
informal sectors and by the activities of small and medium enterprises (SMEs). It has also
been reported that the role of SMEs sector is very important because it is able to create
markets, develop commerce, manage natural resources, reduce poverty, create employment,
develop society, and support the families of SMEs participants themselves (Gasser, et.al, 2005
and Reddy et.al, 2002.
PROBLEM STATEMENT
Based on the inventory of the potency of various resources in Medan as it has been mentioned
above, formulation of the problems which was studied in this research was about the factors
which influenced SMES empowerment in Medan.
STUDY OBJECTIVE
Concerning the problems which have been formulated in this research, the objective of the
research was intended to find out some factors which influenced SMEs empowerment in
Medan.
RESEARCH METHOD
The research used descriptive quantitative method. The data were gathered by using primary
and secondary data and analyzed to test the hypothesis by using data samples. The Inferential
Statistical Method used in this research was Structural Equation Modeling (SEM). The
analysis of the research can be illustrated as follows:

The factors of SMEs Empowerment is written in the following equation:
X1= 1SMEsEm + e1
X2= 2SMEsEm + e2
X3= 3SMEsEm + e3
X4= 4SMEsEm + e4
X5= 5SMEsEm+ e5
X6= 6SMEsEm+ e6
X7= 7SMEsEm+ e7
X8= 8SMEsEm+ e8
X9= 9SMEsEm+ e9
X10= 10SMEsEm + e 10
Explanation :
X1 : Institutional empowerment;
X2 : Local enterprise authority (LEA) empowerment;
X3 : Stakeholders empowerment;
X4 : Space empowerment;
X5 : Increase in access to financing sources;
X6 : Empowerment in production through the aid of selective business
sectors as stimulant;
X7 : Marketing network development;
X8 : Human resources empowerment;
X9 : Information and technology empowerment;
X10 : Monitoring and evaluation empowerment;
SMEsEm : SMEs Empowerment

RESULT OF THE ANALYSIS AND DISCUSSION
The existing condition of SMES empowerment in the reseach was described by using ten
latent variables in swhich each latent variable was measured by using three variables of
indicator which was transformed in the form of question in the questionnaires. The result of
survey questionnaires in measuring the ten latent variables of SMEs empowerment in 21
subdistricts of Medan was described in Table 2 below:
Table 2.Descriptive Statistics of SMEs Empowerment in Medan

Total of Mean Deviation
No Latent Variables Manifestation Standard
Variables
1 Institutional empowerment 3 7.85 3.87
Local enterprise authority (LEA) 3
2 8.93 3.88
Empowerment
3 Stakeholders empowerment 3 9.01 3.57
4 Space empowerment 3 8.67 3.79
Increase in access to financing
5 3 8.75 3.79
sources
Empowerment in production
6 through the aid of selective business 3 8.61 3.88
sector as stimulant
7 Marketing network development 3 8.77 4.05
8 Human resources empowerment 3 8.75 3.88
Information and technology 3
9 9.07 3.94
empowerment
Monitoring and evaluation 3
10 8.50 3.91
empowerment
Table 2 above states that on the average, most of the SMEs empowerment program
implemented by the urban government in 21 subdistricts of Medan has bad inclination. This
can be seen that of the ten latent variables which haven been used to explain SMEs
empowerment in Medan, eight of them have mean scores below the threshold of 9; they are
institutional empowerment, LEA empowerment, space empowerment, increase in access to
financing sources, empowerment in production through the aid of selective business sector as
stimulant, marketing network empowerment, human resources empowerment, and monitoring
and evaluation empowerment. Meanwhile, SMEs empowerment program, stakehoders
empowerment, and information and technology empowerment in 21 subdistricts of Medan
have the incliation of getting better because they have higher mean scores than those below
the threshold of 9.
The hypothesis of the research shows that, ’institutional empowerment, local enterprise
authority empowerment, stakeholders empowerment, space empowerment, increase in access
to financing sources, empowerment in production through the aid of selective business sector
as stimulant, marketing network development, human resources empowerment, information

and technology empowerment, and monitoring and evaluation empowerment are the ten
factors which empower SMES in Medan.”
The result of CFA on the ten factors which influence SMEs empowerment in Medan is
indicated in AMOS Output as it can be seen in Picture 2 and Table 3 below:
Transformation of the Picture above into mathematics model:

X1= 1.00SMEsEm + 3.74……… (eqn 1)
X2= 0.92SMEsEm+ 0.06…………. (eqn 2)
X3= 0.84SMEsEm+ 4.51……… . (eqn 3)
X4= 0.89SMEsEm+ 5.51……… . (eqn 4)
X5= 0.90SMEsEm+ 5.1..………… (eqn 5)
X6= 1.00SMEsEm+ 2.28…....…… (eqn 6)
X7= 1.08SMEsEm+3.74………… (eqn 7)
X8= 0.97SMEsEm+ 4.07………… (eqn 8)
X9= 0.102SMEsEm + 3.30……… (eqn 9)
X10= 0.82SMEsEm + 7.09…...….. (eqn 10)
Tabel 3. Goodness of Fit Confirmatory Factor Analysis in Exogenous Construct of SMEs

Empowerment
Goodness of Fit Index Cut-off Value Model Result Explanation
Chi-Square 49.802 40.240 Good
Probabil 0.05 0.249 Good
Ity
CMIN/DF 2.00 1.150 Good
GFI 0.90 0.961 Good
TLI 0.95 0.996 Good
CFI 0.95 0.997 Good
RMSEA 0.08 0.027 Good
*)  df 355% = 49.802
2
Confirmatory factor analysis indicates that this model is accepted. The significance level of
the confirmatory factor analysis in exogenous construct is 0.249 which shows that zero
hypothesis which indicates that there is no difference between covarian matrix sample and

covarian matrix population is estimated that it can be rejected so that this model can be
accepted.
The coefficient regression value for each indicator will fulfill the requirement if Critical
Ratio value is above 1.96. Critical Ratio or CR is identical with t-count in regression analysis.
Therefore, CR which is higher than 1.96 indicates that these variables are significant at the
Significance level of 5% and constitutes the dimension of latent factors which are formed by
Regression weight exogenous construct from confirmatory factor analysis as it can be seen in
Table 4. This Table shows that loading factor of each indicator has indicated the level of
acceptance above 0.40. Hair et.al (1998) points out that the requirement for an indicator,
which is the dimension of a formed variable, is that when its loading factor is more than 0.4.
Based on this explanation, it can be said that the loading factor of each indicator can be
accepted and feasible to be analyzed.
Tabel 4. Regression Weights Confirmatory Factor Analysis in Exogenous Construct of SMEs

Empowerment
Estimate S.E. C.R. P
X6 <--- X 1.000
X5 <--- X .899 .058 15.469 0.000
X4 <--- X .889 .060 14.913 0.000
X3 <--- X .844 .055 15.401 0.000
X2 <--- X .916 .062 14.751 0.000
X1 <--- X .996 .056 17.897 0.000
X7 <--- X 1.034 .056 18.380 0.000
X8 <--- X .971 .056 17.295 0.000
X9 <--- X 1.016 .054 18.778 0.000
X10 <--- X .824 .064 12.886 0.000
DISCUSSION
In the concept of empowerment, Chambers (1997) points out that empowerment constitutes a
concept of economic development which summarizes social values. This concept reflects new
paradigm of development; that is, “people-centered participatory, empowering, and
sustainable.” The concept of empowerment generally not merely fulfills basic needs or
provides the mechanism for forestalling further process of impoverishment (safetynet) but
also constitutes an attempt to search for alternative toward the concepts of growth which
occurred in the past. This concept develops from the efforts of many experts and practitioners
to search for something which what Friedmann (1992) calls “alternative development which
needs inclusive democracy, appropriate economic growth, gender quality, and
intergenerational equity.”
The result of factor analysis conducted in this research justifies the feasibility of the ten
indicators above in confirming or explaining SMEs empowerment in Medan. This can be seen
from the CR value which is higher than the critical value at the Significance level of 5%
(1.96) and its p-value (P) is lower than α 5%. This justification simultaneously proves that the
hypothesis is accepted in this research which states that “institutional empowerment, local
enterprise authority empowerment, stakeholders empowerment, space empowerment, increase
in access to financing sources, empowerment in production through the aid of selective
business sector as stimulant, marketing network development, human resources
empowerment, information and technology empowerment, and monitoring and evaluation
empowerment are the ten factors of SMEs empowerment in Medan.” This hypothesis
justification is in accordance with the researches conducted by Muhammad (2004); Urata
(2000); Soetrisno (2008); Syahza (2004); Zimmerer & Scarborough (2002); Lussier (2002);
Riyanti (2008); and Mwobobia (2012).
The result of descriptive analysis conducted to the ten msanifestation variables above
describes SMEs empowerment in Medan. SMEs empowerment which has been done in 21
subdistricts of Medan still has bad inclination. This description emphasizes the concern with
low contribution of SMEs to the establishment of GDRP in Medan as it has been discussed
above.
The ten factors of SMEs empowerment in Medan are institutional empowerment, local
enterprise authority empowerment, stakeholders empowerment, space empowerment, increase
in access to financing sources, empowerment in production through the aid of selective
business sector as stimulant, marketing network development, human resources
empowerment, information and technology empowerment, and monitoriing asnd evalusation
empowerment; they emphasize on the process of providing the capacity for people to be
powerful, encouraging or motivating individuals to have the capacity or power in determining
choices in their life. It is further said that empowerment should be directed to underdeveloped
groups or society. Kieffer in Suharto (1997) concretely describes the social groups which
become the target of empowerment; that is, certain groups of people that undergo
discrimination in a society such as low economic class people, the needy, small and medium
enterprises, street vendors, minority ethnic groups, females, blue collars, and smallholders;
they are generally people who are powerless.”
In the context of society, empowerment constitutes an individual capacity which is integrated

in society and develops their power. A community that most of its members are physically
and mentally healthy, educated, and powerful will, of course, have high power. People’s
power constitutes a basic element which enables a society to survive, and in dynamic
meaning, it develops the self and achieves advancement. People’s power itself becomes the
source of what is called in the political insight as a national security. It means that when
people have profound economic capacity, it constitutes a part of a national economic security.
In this concept, the first attempt to empower people has to begin with creating an atmosphere
or climate which enables people’s potency to develop. Here, the departure point is the
recognition that every man and every society has their own potency which can be developed.
It means that there is no society that has no power; if they have no power, they will surely be
extinct. Empowerment is an attempt to develop the power itself by encouraging, motivating,
and generating the awareness of the potency he has and tries to develop it. Further, the
attempt is followed by strengthening the potency or power owned by the society itself. In this
context, positive measures should be needed besides merely creating favorable climate and
atmosphere. This strengthening includes real measures which are related to the availability of
various inputs and opening the access to various opportunities which make people more
powerful (Kartasasmita, 1996).
CONCLUSION
Based on the result of the research and discussion in this research, it can be concluded that:
1. There are eight programs of SMEs empowerment which has mean score below the
threshold of 9; they are institutional empowerment, LEA empowerment, space
empowerment, increase in access to financing sources, empowerment in production
through the aid of selective business sector as stimulant, marketing network
development, human resources empowerment, and monitoring and evaluation
empowerment; while SMEs empowerment program, stakeholders empowerment, and
IT (information and technology) empowerment in 21 subdistricts of Medan are
inclined to be better because they are higher than the mean scores below the threshold
of 9.
2. Institutional empowerment, local enterprise authority empowerment, stakeholders
empowerment, space empowerment, increase in access to financing sources,
empowerment in production through the aid of selective business sector as stimulant,
marketing network development, human resources empowerment, information and
technology empowerment, and monitoring and evaluation empowerment are the ten
factors which have positive and significant influence on SMEs empowerment in
Medan.
REFERENCES
Adiningsih, Sri, 2002. Regulasi Dalam Revitalisasi Usaha Kecil dan Menengah, UGM
Adjie, Mas Wedar, H. 2011. ’Konsep Ekonomi Lokal Perkotaan”. Sosialisasi Pengembangan Ekonomi
Lokal Perkotaan Se‐Provinsi Riau, 18 Juli 2011, Hotel Gtand Elite , Pekan Baru, Riau.
Anderson, J.C. and D.W. Gerbing, 1988. “Structural Equation Modeling in Practice : A Review and
Recommended Two-Step Approach”, Psycological Bulletin.103 (3) : 411-23.
Ardiana, I.D.K.R. dan Brahmayanti, I.A. Subaedi, 2010.”Kompetensi SDM UKM dan Pengaruhnya
Terhadap Kinerja UKM di Surabaya”. Jurnal Manajemen Dan Kewirausahaan, VOL.12, NO. 1,
hal. 42-55
Alters, Theo, and Van Mark, Ronald, 1986, The Regional Development Potensial of SMEs: A European
Perspective, Routledge.
Badan Pusat Statistik Indonesia, 2014, Indonesia dalam Angka, (berbagai tahun penerbitan, BPS Indonesa),
Jakarta.
Badan Pusat Statistik Sumatera Utara, 2014, Sumatera Utara dalam Angka, (berbagai tahun penerbitan,
BPS Sumnatera Utara), Medan.

Badan Pusat Statistik Kota Medan, 2014, MedanDalam Angka, (berbagai tahun penerbitan, BPS Kota
Medan), Medan.
Bappenas,2006, Panduan Nasional Revitalisasi Pengembangan Ekonomi Lokal. Deputi Bidang

Pengembangan Regional dan Otonomi Daerah. Jakarta.
Beck, et.al. 2005, “SMEs, Growth, and Poverty: Cross-Country Evidence”, JEL Classification: O1, O2,
L11, L25, March 2005, USA : World Bank.
Bentler PM, Chou C. 1987. “Practical Issues in Structural Modeling”. Sociological Methods and Research,
16.
Bijmolt, T. dan P.S. Zwart, 1994, “The Impact of Internal Factors on Export Success of Dutch Small and
Medium-Sized Firms”, Journal of Small Business Management, 32(2): 222-238.
Bond, Richard, Curran, Jahanna, Kirk Patrick, Lece, Norman, Francis, Paul. 2001. Integrated Impact
Assessment for Sustainable Development, A Case Study Approach. University of Manchester. UK
Brown, Donald. 1995. Poverty-Growth Dichotomy, dalam Üner Kirdar dan Leonard Silk (ed.). People:
From Impoverishment to Empowerment. New York University Press : New York.
Chambers, Robert. 1997. Pembangunan Desa Mulai dari Belakang. LP3ES: Jakarta.
Clarke, S. E. & Gaile, G. L. 1998 The Work of Cities, University of Minnesota Press: Minneapolis.
Daou, Alain and Karuranga, Egide, 2012. “Success of Smes in Emerging Economies: Propositions for
Future Research”, Québec (Québec) G1V 0A6, Canada : Laval University, FSA, Department
MNG.
DPLG 2006. National Urban Renewal Programme. Implementation Framework. Alexandra, Galeshewe,
Inanda KwaMashu, Khayelitsha Mitchell‘s Plain, Mdantsane, Motherwell. Cape Town: DPLG
Etemad, Hamid, and Wright, Richard, W. 2003, Internationalization of SMEs Toward a New Paradigm,
Small Business Economics: 20:1-4
Ferdinand, A.T., 2002, Structural Equation Modelling dalam Penelitian Manajemen, Badan Penerbit
Diponegoro, Semarang.
________________, 2005, Structural Equation Modeling, BP UNDIP, Semarang.
________________, 2006, Metode Penelitian Manajemen, BP UNDIP, Semarang.
Friedman, John & Weaver, Clyde. 1979. Territory & Function - The Evolution of Regional Planning.
Edward Arnold, London.
Frinces, Z. Heflin, 2010, Be An Entrepreneuer (Jadilah Seorang Wirausaha) Kajian Strategi

Pengembangan Kewirausahaan, Graha Ilmu, Yogyakarta.
Gasser, Ekonomi Lokal Dalam Situasi Pasca Krisis : Panduan Operasional, ILO : Martin, Saljono, Carmela,
Megilo, Reborto Di, Hayle, Alfredo Lazarte, 2005. Pembangunan Jakarta
Gibb, Lucio Carlos Freire, 2011, “Entrepreneurial Dynamics In Local Economic Development”,PhD
Thesis,Denmark.: Department of Development and Planning Aalborg University.
Giaoutzi, Maria, Peter Nijkamp and David J. Storey (1988), Small and Medium Size Enterprises and
Regional Development, Routledge, London.
Gujarati, D.1999. Essential of Econometrics, Second Edition, McGraw-Hill.Inc, London.

Ghozali, Imam, 2005, Aplikasi Analisis Multivariate dengan Program SPSS, Badan Penerbit Universitas
Diponegoro, Semarang.
Hafsah, Muhammad Jafar,. 2004. Upaya Pengembangan Usaha Kecil Dan Menengah (UKM). Infokop.
Hair, J. F., Jr., et. al. 1995, Multivariate Data Analysis with Reading, 4rd Edition, Prentice-Hall
International Inc., New Jersey.
Hariyoga, Himawan, 2007. ”Kebijakan Revitalisasi Pengembangan Ekonomi Lokal”, Workshop Nasional
dan Pameran Cluster Unggulan Jawa Tengah, Gedung Grhadhika Bhakti Praja, Semarang, 25-26
April 2007.
Hayter, Roger (2000), The Dinamic of Indusrial Location: The Factory, The Firm, and The Production
System, John Willey and Sons : New York.
Hoogland JJ and Boomsma A. 1998. “The Robustness Studies in Covariance Structure Modeling: An
Overview and a Meta Analysis”. Sociological Methods and Research 26 (3), 329-367.
Idris, Indra, 2007. “Pengembangan Ekonomi Lokal Daerah Perbatasan Melalui Pemberdayaan UKM”.
Pengkajian Produk Unggulan Dalam meningkatkan Ekspor UKM dan Pengembangan Ekonomi
Lokal, Jakarta : Deputi Pengkajian Sumberdaya UKMK, hal 1-6
James, Sara-Beth; Thomas W. Ilvento and Steven E. Hastings, 2002, “ The Effect of Local Economic
Development Policy on Employment Growth in Rural Counties in the Mid- Atlantic Region”,
FREC SP02-04, Newark : Department of Food and Resource Economics, University of Delaware
Jhingan, ML, 1998, Ekonomi Pembangunan dan Perencanaan, diterjemahkan oleh D.Guritno, Edisi ke
Tujuh, PT. Raja Grafindo Persada, Jakarta.
Karsidi, Ravik, 2007, “Pemberdayaan Masyarakat Untuk Usaha Kecil Dan Mikro (Pengalaman Empiris
di Wilayah Surakarta Jawa Tengah)”, Jurnal Penyuluhan IPB, , September 2007, Vol. 3 No. 2
Kartasasmita, G.1996. Pembangunan untuk Rakyat: Memadukan Pertumbuhan dan Pemerataan. CIDES,
Jakarta.
Kartawan, 2004, “Peran Perguruian Tinggi dalam Pemberdayaan Usaha Kecil”,disampaikan pada Bursa
Kredit bagi UKM, Kerjasama UNSIL Bank Indonesia Kantor Tasikmalaya
Kementerian Pekerjaan Umum Dirjen Cipta Karya, 2010. ” Urban Sektor Development Reform Project
(USRDP)” Proceeding Lokakarya LED untuk Kemandirian Ekonomi Daerah, Jakarta: 24 Februari
2010
Kim, Sung Tai. 1997. “The Role of Local Public Sectors in Regional Growth in Korea”, Asian Economic
Journal, Vol. 11 No. 21, 155-168.
Kimura, Fukunari, 2002, “Subcontracting and Performance of Small and Medium Firm in Japan”, Small
Business Economics 18: 163-175.
Kirdar, Uner dan Leonard Silk (ed.) 1995. People: from Impoverishment to Empowerment. New York
University Press, New York.
Kitson J, Martin R, Tayler P. 2004, “Regional Competitiveness : An Elusive Yet Key Concept”, Regional
Studies, 38 (9), pp. 991-999.
Lestari, Sri Hs, 2007. Kajian efektivitas model penumbuhan klaster bisnis ukm berbasis agribisnis”.
Pengkajian Produk Unggulan Dalam meningkatkan Ekspor UKM dan Pengembangan Ekonomi
Lokal, Jakarta : Deputi Pengkajian Sumberdaya UKMK, hal. 1-25

Liu, Hongxia & Fong, Michelle, 2010. “The Corporate Social Responsibility Orientation of Chinese Small
and Medium Enterprises”, Journal of Business Systems, Governance and Ethics, Vol 5 No. 3, P
33- 50
Lussier, Robert N, 2002, “Reasons Why Small Business Fail: And to Avoid Failure”, The Entrepreneourial
Executive, 1 (2) : 10 – 18.
Martin, Ravallion. 2001. Poverty Comparisons. World Bank. New York
Musakwa.W.2008. “Local Economic Development as a Poverty alleviation tool: A case on the urban
renewal KwaMashu”. Masters Dissertation, University of Kwazulu Natal.
Mwobobia, Fridah Muriungi , 2012. “Empowering of Small -Micro and Medium Enterprises (SMMEs): A
Case of Botswana” Business and Management Research, Vol. 1, No. 4; 2012, ISSN 1927-6001 E-
ISSN 1927-601X, p 88-98. Online Published: November 20, 2012, URL:
http://dx.doi.org/10.5430/bmr.v1n4p88, diunduh 03 April 2013.
Myrdal, G, 1957, Economic Theory and Underdevelopment Regions, London
Nair, Jayesh, 2007. “Practicalities around Black Economic Empowerment and Small and Medium
Enterprises in South Africa”, Desertasi, South Africa : University of Pretoria
Nasikun, 1996. Urbanisasi dan Kemiskinan di Dunia Ketiga. PT. Tiara Wacana.Yogyakarta.
Nazir, Moh. 2005. Desain Penelitian . Gramedia Pustaka Utama : Jakarta.
Onugu, Basil Anthony Ngwu, 2005. “Small and Medium Enterprises (SMES) in Nigeria: problems And
prospects”, Dissertation, Nigeria: St. Clements University
Piore M dan Sabel C. 1984. The Second Industrial Divide: Possibilities for Prosperity. Basic Book : New
York
Piper, Randy P. 1997, “The Performance Determinants of Small and Medium-Sized Manufacturing Firms”,
Disertasi Ph.D. tidak dipublikasikan, University of South Caroline.
________, 2008, Laporan Kegiatan Lokakarya Revitalisasi Pengembangan Ekonomi Lokal di Kota
Kendari. Direktorat Perkotaan dan Pedesaan. Jakarta.
Porter, Michael E. 1998, The New Economic of Competition, Harvard Business Review.
Pranoto, Sigit, 2008. “Analisis Indeks Keberlanjutan Industri Kecil dan Menengah di Kabupaten Bogor”,
Skripsi, Bogor : IPB
Ranis, G. 2004. Human Development and Economic Growth. Economic Growth Center Yale University,
Center Discussion Paper (887): 1-13.
Ravetz, J. 2000. City-Region 2020 Integrated planning for a sustainable environment. Earthscan
Publications Ltd. London.
Republik Indonesia, 1995. Undang-Undang No 9 Tahun 1995 Tentang Usaha Kecil.
_______________, 2008. Undang – Undang Republik Indonesia Nomor 20 Tahun 2008, tentang Usaha
Mikro, Kecil dan Menengah, Jakarta
Rivett-Carnac, K.2008. “Local Economic Development, Industrial Policy and Sustainable Development in
South Africa: A Critical Reflection on Three New Policy Frameworks”Thesis presented in partial
fulfilment of the requirements for the degree of M.Phil. (Sustainable Development Planning and
Management) at the University of Stellenbosch.
Riyanti, B.P.D., 2003. Kewirausahaan Dari Sudut Pandang Psikologi Kepribadian. Grasindo: Jakarta.

Roderic, G. Meppem, Tony. 1997. Planning for Sustainability as a Learning Concept. New England
Ecological Economic Group. Center for Water Policy Research. University of New England.
Armidale. Australia.
Rogerson, Robert J, 2003. Quality of Life, Place and Global City dalam Yuan, Lim Lan et.als (ed). Urban
Quality of Life. Critical Issues and Options. School of Building and Real Etate, National
University of Singapore
Santos, Analberto Paulino Manuel Dos, 2008. “Analysis of SMEs in Mozambique:the Impact of Training
on Firm Longevity”, Thesis, China : Meiho Institute Of Technology
Sarwono, Jonathan. 2006. Metode Penelitian Kuantitatif dan Kualitatif. Graha Ilmu: Yogyakarta
Sekaran U., 2002. Research Methods for Bussiness a skill Building Approach, Third Edition, New York :
John Willey & Sons, Inc.
Shaikh, Khalid Hussain; Ghumro, Ikhtiar Ahmed; Shah, Asif Ali; Shaikh, Faiz. M. & Afridi Tahira, 2012.
“Empowerment Of Women Through Small And Medium Enterprises (SMES) In Rural Sindh”
Asian Journal of Business and Management Sciences, Vol. 1 No. 4 [128-133]
Sirojuzilam dan Kasyful Mahalli, 2010. Regional : Pembangunan, Perencanaan dan Ekonomi, USU Press,
Medan.
Sriyana, Jaka, 2010. “Strategi Pengembangan Usaha Kecil dan Menengah (UKM) : Studi Kasus Kabupaten
Bantul”. Simposium Nasional 2010: Menuju Purworejo Dinamis dan Kreatif, hal. 79-103
Sudantoko, Djoko, 2011. “Strategi Pemberdayaan Usaha Skala Kecil Batik di Pekalongan”, Eksplanasi,
Vol.6 No.1 ( Maret 2011) 29 - 45
Suharto, Edi. 1997. Pembangunan, Kebijakan Sosial dan Pekerjaan Sosial: Spektrum Pemikiran. Lembaga
Studi Pembangunan-STKS: Bandung
Sukirno, Sadono, 2006, Ekonomi Pembangunan : Proses, Masalah, dan Dasar Kebijakan, Edisi Kedua,
Kencana Prenada Media Group, Jakarta.
Sulaeman, Suhendar, 2000. “Pengembangan Usaha Kecil Dan Menengah Dalam Menghadapi Pasar
Regional Dan Global”. Infokop, Tahun XX, hal 113-120
Supranto, J. 2000. Statistik Teori dan Aplikasi. Jakarta : Erlangga
Suryana, Yuyus dan Kartib Bayu, 2010, Kewirausahaan, Pendekatan Karakteristik Wirausahaan Sukses,
Kencana Prenada Media Group, Jakarta.
Sutrisno, Noer, 2004. “Posisi dan Peran Pembangunan UKM 2004-2009”, Infokop Nomor 25 Tahun XX
Syahza, Almasdi. 2004. ”Pengembangan Usaha Kecil Dan Menengah (UKM) Untuk Percepatan
Peningkatan Ekonomi Daerah di Kabupaten Indragiri Hulu Provinsi Riau”. Pusat Pengkajian
Koperasi dan Pemberdayaan Ekonomi Masyarakat, Universitas Riau, Pekan Baru.
Syed, et. al. 2012, “Impact Analysis of SMEs Sektor in Economic Development of Pakistan: A Case of
Sindh”, Journal of Asian Business Strategy, Vol. 2, No.2, pp. 44-53.
Tambunan, Tulus, 2000, Development of Small Scale Industries during the New Order Government in
Indonesia, Ashgate Publishing Ltd, England.
_____________, 2002, Usaha Kecil dan Menengah di Indonesia: Beberapa Isu Penting, Penerbit Salemba
Empat, Jakarta.

Tambunan, Togap dan Nasution Paruhuman, 2006. ”Peningkatan Daya Saing Usaha Kecil dan Menengah
Yang Berbasis Pengembangan Ekonomi Lokal”. Jurnal Pengkajian Koperasi dan UKM, Nomor 2
Tahun – I, hal 26-40
Taiwo A, Muritala; Ayodeji M, Awolaja and Yusuf A, Bako, 2012. “Impact of Small and Medium
Enterprises on Economic Growth and Development”, American Journal of Business and
Management Vol. 1, No. 1, 2012, 18–22
Tjokroamidjojo, Bintoro, 2003, Perencanaan Pembangunan, Cetakan ke-20, Toko Gunung Agung, Jakarta.
Todaro, M.P. 2003. Pembangunan Ekonomi di Dunia Ketiga, terjemahan, cetakan keempat, Ghalia,
Indonesia, Jakarta.
Tshabalala, D.B. & Rankhumise EM. Tshwane, 2010. “What Impact do Economic Issues Have on the
Survival of SMEs Entrepreneurs?” Repositioning African Business and Development for the 21st
Century Simon Sigué (Ed.)
Urata, Shujiro, 2001. Policy Recommendation for SME Promotion in the Republic of Indonesia, JICA,
Tokyo
Widyastutik, Mulyati, Heti, Putri, Eka Intan K., 2010. “Analisis Faktor-Faktor Yang Mempengaruhi
Pengembangan Klaster Umkm Alas Kaki Di Kota Bogor Yang Berdaya Saing”. Jurnal
Manajemen & Agribisnis, Vol. 7 No. 1. hal 16-17.
Wiyadi, 2009. “Pengukuran Indeks Daya Saing Industri Kecil Menengah (Ikm) Di Jawa Tengah”. Jurnal
Siasat Bisnis, Vol. 13 No. 1, Hal: 77–92
Zimmerer, TW dan Scarborough, NM, 1998, Essential of Entrepreneur and Small Business Management.
2th Edition, Prentice Hall.

Green Supply Chain Management Practices and Economic Performance in
Furniture Industry
Aries Susanty, Diana Puspitasari, Rachel Winarti
Department of Industrial Engineering, Diponegoro University
Central Java, Indonesia
ariessusanty@gmail.com; rachelwinarti@gmail.com
Abstract- This study has two purposes. The first purpose, this study aims to investigate the current situation regarding the
implementation of green supply chain management (GSCM) practices among enterprise furniture in Jepara, Central Java. The
second purpose, this study aims to explore the different effect of implementation of GSCM practices on Economic Performance.
This study utilized a one-way, two-way ANOVA and Tukey Test in order to test the differences effect of GSCM practice across
and within groups. Data was collected from 35 furniture enterprises, which can be grouped into enterprise in-house
manufacturing indoor (8 small enterprises, 5 medium enterprises and 4 large enterprises) and enterprise in-house manufacturing
outdoor (8 small enterprises, 6 medium enterprises, and 4 large enterprises). The result of measurement of GSCM practice from
35 furniture enterprises in Jepara indicated that there are two categories of implementation of GSCM practice, namely early
adopter and laggards. Then, the result of hypothesis testing indicated the implementation of GSCM practice which is included in
internal environmental management, green purchasing, and eco-design will be varied with three scales of the furniture enterprise;
whereas, the implementation of GSCM practice which is included in green purchasing will be varied with type of product
resulted. Thus, the economic performance of the furniture enterprise only varied with type of product resulted by the enterprises,
because the type of product resulted will influence the implementation of GSCM practice which in turn would affect the
economic performance of the enterprise..
Key words: GSCM Practices, furniture industry, two-way ANOVA, scale of enterprise, type of product resulted
1. Introduction
According to Simchi-Levi et al (2003), Supply Chain management is a set of methods used to

effectively coordinate suppliers, producers, depots, and stores, so that commodity is produced
and distributed in the correct quantities, to the correct locations, and at the correct time, in order
to reduce system costs while satisfying service level requirements (Simchi-Levi et al 2003).
Beyond this definition, with adding the “green” component, it refers to green supply chain
management (GSCM) which is defined as integrating environmental thinking into supply chain
management, including product design, material sourcing and selection, manufacturing process,
delivery of the final product to the consumers as well as end-of-life management of the product
after its useful life (Srivastava, 2007). Basically, the idea of GSCM is to eliminate or minimize
waste (energy, emissions, chemical /hazardous, solid wastes) along the supply chain (Hervani et
al, 2005). GSCM has emerged as an important new innovation that helps organizations develop
“win-win” strategies that achieve profit and market share objectives by lowering their
environmental risks and impacts, while raising their ecological efficiency (van Hock, 1999).
The larger businesses have been the pioneers in embracing the concept of GSCM and the
focus of numerous studies (Wycherley, 1999; Zhu, and Sarkis, 2004). In contrast, very few
studies, if any, have been carried out on small and medium-sized enterprises (SMEs). However,
the implementation of GSCM practices not only important for large enterprise, but also for
SMEs. It is because, although individually, SMEs may have limited impact on the environment,
but collectively, their impact is believed to be significant (Chiu et al., 1999). Besides that, Hemel
and Kramer (2002) found that SMEs do not perceive that greening the environment is their
responsibility and mentioned that there was no clear information regarding the environmental
benefits in the greening of their products as well as the environmental legislation and the
requirements. Approaches towards implementation of GSCM practice have been identified by
various researchers. Zhu and Sarkis (2006) are two or researcher that developed and tested a
measurement model for GSCM practice implementation. They found five underlying constructs

which show the dimensions of GSCM practices, i. e. internal environmental management (IEM),
green purchasing (GP), cooperation with customer (CC), eco-design (ECO), and investment
recovery (IR). Thus, the relationship between implementation of GSCM practice and
organizational performance for different organizations has been investigated by a numerous
authors, but the results have not been conclusive. Florida and Davison (2001), Geffen and
Rothenberg (2000), Handfield et al. (2002), Hervani et al. (2005), Zhu, et al (2004), Azevedo et
al. (2011), Large and Thomsen (2011), Chiou et al. (2006) and Chen et al. (2006) are some
researcher that discusses the relationship between implementation of GSCM practices and the
firm performance. Gil et al (2001), Montabon et al. (2007), Rao and Holt (2005) and Wong et al.
(2012) are some researchers that can prove a positive direct relationship between environmental
management practices such as internal and external GSCM with an organization’s economic
performance. The others have shown that GSCM practices can indirectly affect economic
performance in a positive manner through improved operational performance.
Related to the implementation of GSCM and their effect on the economic performance, this
study has two purposes. The first purpose of this study is to find out the current situation
regarding the implementation of GSCM practices among enterprise furniture in Jepara, Central
Java. The second purpose, this study aims to explore the differences of the effect of the
implementation of GSCM practices on economic performance. In this study, one-way and two-
way Analysis of Variance (ANOVA) and Tukey Test will be used to identify the differences of
implementation of GSCM practice (including IEM, GP, CC, ECO, and IR) and their effect to
economic performance among the size of the enterprise and the type product resulted. The study
is conducted in a number of enterprises furniture in Jepara context because there were some
problem related to the environment faced by the furniture industry and it seems that enterprises
in the furniture industry have to ensure that they implement the GSCM practice in their business.
In the downstream side, the furniture industry faces environmental problems of forestry practice
problem (e.g. illegal logging). In this case, the enterprises in the furniture industry can eliminate
the practice of illegal logging by increasing their use of certified timber from suppliers, but it is
not easy since they have limited knowledge of such certified and their relevance to the
sustainability of their business. In the midstream sides, the furniture industry faced with solid
waste generation problem. Furniture industry throws away an amount of wooden residue from
the manufacturing process. The types of residues vary according to types of manufacturing
process such as residues from sawmills, residues from plywood mills, and residues from wooden
furniture manufacturing (Barua et al, 2014). These untreated residues can cause many damages
both economic and environmental. So, treating this residue is important for the furniture industry
to overcome the problem related to solid waste generation. In this case, the furniture industry can
reuse and recycle the wood waste or use the wood waste as an energy or heat source. The
recycling of wood waste into usable products has been studied for many years (Clausen, 2000;
Khedari et al., 2004). Then, in the upstream sides, the furniture industry faced the distribution
problem. The enterprise and the customer rarely have the same location. The size of finished
product and the difficulty in handling make the furniture product have high transport cost.
Besides that, there is another issue when the enterprise distributes the final product to their
consumers, i.e. the choice of moda transportation and route of distribution. Furthermore, Jepara
is chosen as the study region because about 10% of the furniture made in Indonesia comes from
Jepara, which has about 12,000 furniture business units and processes an estimated 0.9 million
cubic meters of wood each year. The furniture industry accounts for about 26% of the district’s

economy. Annual exports of Jepara furniture in 2012 were valued at US$110 million (Purnomo
et al, 2014).
The paper is structured as follows. The paper is organized as follows. Section 2 will present
the research context and the main findings from the review of the previous work on
implementation of GSCM practices and its impact on economic performance, develop the main
hypothesis and conceptual model for tested. Section 3 will explain the methodological approach
and the development of the questionnaire. Section 4 will present the provisional findings from
this ongoing study and also discuss these findings and relate them to the theoretical background.
The last section or section 5 will present the main conclusions along with suggestions for further
research
2. Literature Review
2.1. Research context: SMEs furniture in Jepara
Furniture is among the four biggest non-oil and gas exports of Indonesia. The others are palm
oil, footwear and rubber. The majority of players in the Indonesian furniture industry is
composed of SMEs (about 95%) who contribute a significant amount to the national income
(Purnomo et al, 2013). One of the largest furniture manufacturing clusters in Indonesia is that of
Jepara in the central part of the island Java (van Geenhuizen, and Indarti, 2006). In 2011, at least
11,981 business units of furniture industries exist in the Jepara district (Achdiawan and
Puntodewo 2011). The furniture industry, which processes 0.9 million m 3 wood per year,
contributes about 26% of Jepara’s economy.
All business unit of furniture industry located in Jepara can be classified according to their
scale. There were 98% of the business unit of furniture are classified as small-scale enterprises,
1.9% are medium-scale, and 0.1% are large-scale (Purnomo et al 2011). According to Small &
Medium Enterprise Act 2008, small enterprises is a business that managed privately or by a
corporate entity, but is independent from and are not the subsidiary or branch office of a medium
or large enterprise. They have net assets of at least 50 million rupiah, and no more than 500
million rupiah (not including land or buildings), and they have annual sales of between 300
million and 2.5 billion rupiah. Medium enterprises are a business that have net assets of between
500 million and 10 billion rupiah (not including land or buildings), and have annual sales of
between 2.5 billion and 50 billion rupiah.
Beside classified into different scale, based on Prestvik’s (2009) study of the business unit of
furniture industry in Jepara, there were seven categories of business units: workshops, log parks,
sawmills, showrooms, warehouses, dry kilns and ironmongeries. Furniture workshops are then
further classified according to their types of production process: those that produce unfinished
items from unprocessed round wood; those that purchase components, pieces and sets and then
assemble them into a finished product; those that combine both these stages of furniture making;
and those that produce only parts of furniture (Prestvik 2009). Then, based on those that combine
all the stages of furniture making and those that produce only parts of furniture, in brief, furniture
workshops can be divided into in-house manufacturing and subcontracting manufacturing. In
house manufacturing done all the stage of production process of making furniture, from receipt
an order, until delivering the final product. At in-house manufacturing, the supply process starts
at the arrival of an order from a customer. Different with in-house manufacturing, in the
subcontracting manufacturing, enterprises just involve in the finishing of the final product, while

the production process itself has been done by the others craftsmen based on the orders from the
enterprises. These craftsmen usually have their specialty products to make, such as table, chair,
cupboards, and so forth. The relationship between the enterprises and the craftsmen are only for
short-term relationships, limited to the purchase of semi-finished product. Thus, based on type
of product resulted, most furniture workshop (in house manufacturing and subcontracting
manufacturing) produce indoor furniture (89.5%), 7.8 % produce outdoor furniture, and the
remaining produce carvings, handicraft and calligraphy (Melati et al, 2013). Indoor furniture
made of various furniture and equipment used to fulfil the function of a room in the house, such
as for a terrace, living room, family room, dining room, study room, bedroom, kitchen, library,
and others. Outdoor furniture (or garden furniture) manufactures furniture for outdoor use; but,
recently, this type of furniture is also used to produce furniture that will be used in the indoor as
on the terrace, living room, dining room, and others. Although the type of furniture produced is
similar, the motif and finishing process of outdoor and indoor furniture is definitely different and
it will be affect the waste of timber resulted.
2.2. Implementation of GSCM Practices
Literature review shows that various investigations have proposed different approaches to
implement GSCM practices. According to Murphy and Poist (2003), there is a lack of a unified
framework about implementation of green supply chain management practices. While some
studies such as Zhu and Sarkis (2004) have developed four areas of implementation of GSCM
practices, namely internal environmental management, external GSCM including dealing with
the purchasing of eco-friendly products and building relationships with customers and suppliers
to become more environmentally sound investment, recovery, and eco-design practices. These
four areas represent some of the main internal and external activities and functions within
organizational supply chain management. Others, such as Shang et al. (2010) and Walton et al.
(1998) claimed that the implementation of GSCM practice can be divided to eco design, green
manufacturing and packaging, environmental participation, green marketing, stock and suppliers.
Diabat and Govindan (2011) argued that implementation GSCM practices comprise of green
design, reducing energy consumption, reusing/recycling material and packaging, reverse logistics
and environmental collaboration in the supply chain. Bowen et al (2001) identified three types of
implementation of GSCM practice, namely greening the supply process, product-based green
supply, and advanced green supply. Wu et al (2013) claimed that the implementation of GSCM
practice can be divided into intra- and inter-organizational environmental practices. Intra-
organizational environmental practices, such as total quality environmental management, waste
management and environmental management systems are focusing on energy usage, material
consumption, emissions and waste in connection with in-house processes. Inter-organizational
environmental practices, such as design for the environment, life cycle analysis, green
distribution and reverse logistics are typically referred to as product stewardship programs which
emphasize alliances between suppliers and customers to mutually cope with cross-firm
environmental issue. Testa and Iraldo (2010) proposed that implementation of green practices
consists of the sale of excess inventory, sale of scrap and used material, environmental auditing
programs, commitment from senior managers and total quality environmental management.
Referring to four areas of implementation of GSCM practices developed by Zhu and Sarkis
(2004), the GSCM practices investigated in this study includes internal environmental

management (IEM), green purchasing (GP), cooperation with the customer (CC), eco-design
(ECO), and investment recovery (IR) dimensions.
2.3. Effect of Size of Enterprise and Type of Product Resulted to GSCM Practice and Economic
Performance
As the contingency theory of management accounting applies, it should also be noted the
implementation of various supply chain management practices may be influenced by contextual
factors such as enterprise size (the larger the size, the higher the level of SCM practice) (Jamal,
2011). In line with this statement, specifically, Zhu and Sarkis (2004) state that the size of
enterprise influences the practice of GSCM. So, in the implementation of GSCM practice, the
size of enterprises should be controlled because large enterprises typically have more available
resources and well developed GSCM practices. Zhu et al (2008) conducts a research to compare
the implementation levels of five GSCM practices among small-, medium- and large-sized
organizations in China. They found that medium- and large-sized organizations are more
advanced than their smaller-sized counterparts on most aspects, but not necessarily all, of these
GSCM practices. In line with Zhu et al (2008), Azevedo et al (2012) also found that large
enterprises present higher levels of implementation of eco-innovation practices and small
enterprises present lower levels. Not only size of the enterprises, the implementation of GSCM
practice also influence by the activities conducted by the enterprises. Most of the environmental
influence of any product or material is ‘locked’ into the product at the design stage of a product,
when materials and processes are selected and product environmental performance is largely
determined (Lewis and Gretsakis, 2001).
So based on the condition of the object of the research and the previous research, this study
proposes
H1. There is a difference in green supply chain management practice among scale of enterprise
of furniture industry in Jepara (small, medium, and large enterprise)
H2. There is a difference in green supply chain management practice among indoor and outdoor
furniture industry in Jepara
Thus, literature review shows that there is a lack of a clear relationship or even conflicting
findings between implementation of GSCM practice and the performance improvement, whether
it is environmental, economic, or operational performance. Specifically, whether the
implementation of GSCM practices can improve economic performance is still an open question
(Seuring and Muller 2008). Some researchers have found a lower cost and the positive effect on
value resulting from implementation of environmentally-friendly processes, such as Florida
(1996), Rao and Holt (2005), Gil et al (2001), Zhu and Sarkis (2004). Klassen and McLaughlin
(1996) showed that capability of organizations to minimize the negative environmental impacts
of their products and processes, recycle post-consumer waste and establish environmental
management systems are very likely to expand their markets or displace competitors that fail to
promote strong environmental performance. In this case, revenues can be positively impacted
when customers prefer the products of environmentally friendly firms (Winsemius and Guntram,
1992). Costs may also be reduced through proactively managing environmental regulations,
which may create barriers and first-mover advantages that are difficult for competitors to imitate
(Dean and Brown, 1995). Thus, according to Zhu and Sarkis (2004), implementation of GSCM
practices can cut the cost of materials purchasing and energy consumption, can reduce the cost of

waste treatment and discharge, and avoid a fine in the case of environmental accidents. A
sustainable approach can lead to internal cost saving, open new markets and to beneficial uses
for waste (Tsoulfas and Pappis, 2006). Other researchers suggested that economic performance is
not being reaped in short-term profitability and sales performance when GSCM practices are
implemented (Bowen et al. 2001). The researcher that found the negative effects of
implementation of GSCM practices and economic performance usually due to large investment
required for the implementation of GSCM practice such as using more expensive materials (Lin
2013).
The lack of a clear relationship or even conflicting findings between implementation of
GSCM practice and the performance improvement become the potential barrier for organizations
that intend to implement GSCM practices (Zhu et al. 2012). Then, based on the literature
examined, there is three plausible sources of that inconsistency (Laosirihongthong, 2013). First,
the type of green supply chain practices implemented can impact performance differently
(Azevedo et al., 2011). Secondly, there is a variety of performance measures in use and this
variation leads to the complex relationship between practices and outcomes (Zhu et al., 2012).
Lastly, implementing GSCM practices in different settings can result in different performance
outcomes (Koh et al., 2012).
So, based on the condition of the object of research, the effect of the size of the enterprise
and type product resulted in GSCM practice and the effect of implementing GSCM practices in
different settings on economic performance, this study propose
H3. There is a difference of economic performance that achieved from green supply chain
management practice among enterprise of furniture industry in Jepara based on their scale
of enterprise; it is because the scale of the enterprise will influence the implementation of
GSCM practice which in turn will affect economic performance of the enterprise.
management practice among enterprise of furniture industry in Jepara based on their type
of product resulted; it is because the type of product resulted will influence the
implementation of GSCM practice which in turn will affect economic performance of
the enterprise.
management practice among enterprise of furniture industry in Jepara based on their scale
of enterprises and their type of product resulted; it is because the scale of the enterprise
and the type of product resulted will influence the implementation of GSCM practice
which in turn will affect economic of the enterprise.
3. Method of Research
3.1. Sample and Data Collection
The data collection was administered through two steps:

1. Data collected for the pilot test. A pilot test was completed to test and refine the
questionnaire. The pilot test was conducted by giving the questionnaire to several owner-
manager of furniture enterprise in Jepara as a respondent. A total of 28 valid questionnaires
was collected in the pilot test. Based on the suggestions from respondents, minor
modifications were made to the questionnaire
2. Data collected for evaluating the implementation of GSCM practice and hypothesis testing.
The population frame of this study consists of enterprises engaging in furniture industry

located in Jepara, Central Java, Indonesia. The number of samples used in this study from
each of classification (small, medium, large, indoor and outdoor) is calculated by Cochran's
formula (Cochran, 1977). Overall, there were 35 furniture enterprises become a sample for
evaluating the implementation of GSCM practice in furniture enterprise, which was consisted
of 8 small enterprise-indoor, 8 small enterprise-outdoor, 5 medium enterprise-indoor, 6
medium enterprise-outdoor, 4 large enterprise-indoor, 4 large enterprise-outdoor. Then, the
data needed for evaluating the implementation of GSCM practice from the sample were
collected by questionnaire survey and also face-to-face interviews. Thirty-five questionnaires
were hand delivered to the owner-managers of enterprises and respondents completed the
questionnaire and returned them on the spot, with others, reminders have to send via email
one until two weeks after the initial delivery of the questionnaire. The questionnaire used in
this study consist of three sections. Section A or the first section of the questionnaire dealt
with general information concerning the identity of the enterprises such as the name of the
enterprise, the address of the enterprises, the name of the owner-manager of the enterprise,
and type of product resulted. Section B or the second section of questionnaire requested the
respondents to state the extent of GSCM practice have been conducted by the enterprise.
Section C or third section of the questionnaire requested the respondents to state the extent of
impact of GSCM practice to the economic performance of their enterprise. Then, face-to-face
interviews were also carried out to solicit further information for the purpose of the data
analysis. The interviews were conducted personally and lasted between one to two hours.
The amount of sample for hypothesis testing isn’t the same as the amount of sample for
evaluating the implementation of GSCM practice. It is because, for hypothesis testing with
one way and two way ANOVA, this study only used furniture enterprise that belong to early
adopter as a sample. Referring to Zhu et al 2011, there were two categories of
implementation of GSCM practices, namely early adopters and laggards. The furniture
enterprise was included early adopter, if the mean value of GSCM practice higher than mid-
level implementation score (3); whereas, the furniture enterprise was included laggards, if the
mean value of GSCM practice below than mid-level implementation score (3).
3.2. Instruments and Measures
Thirty-five items were selected to measure the implementation of GSCM practice and its
impact to the economic performance of the furniture enterprises. Out of this thirty-five items,
seven items were used to measure the implementation of internal environmental management
(IEM), 5 items were used to measure the implementation of green purchasing (GP), four items
were used to measure the implementation of cooperation with customer (CC), eight items were
used to measure the implementation of eco-design, six items were used to measure the
implementation of investment recovery (IR), and five items were used to measure economic
performance as an impact from implementation of GSCM practice (ECO). All of those items
used to measure implementation of GSCM practice were adapted from Zhu et al (2008) and Zhu
et al (2011) questionnaire about GSCM practice; whereas, all of those items used to measure
economic performance were adapted from several sources, i.e. Generation 4 Global Reporting
Initiative (G4 GRI) (GRI, 2013), Carter et al (2000), and Zhu et al (2013). In a measure of
implementation of GSCM practice, this study use 5-level Likert Scale, whereas 1 = not
considering it, 2 = planning to consider it, 3 = considering it currently, 4 = initiate
implementation, 5 = implementing successfully. This study also use 5-level Likert Scale to

measure economic performance, but with different meaning. In this case, 1= strongly disagree,
2=disagree, 3=neither agree nor disagree, 4=agree, and 5= strongly agree
4. Result and Discussion

4.1. Result of Measurement of GSCM Practice
The result of measurement of GSCM practice from 35 furniture enterprises can be seen in Table
1.
Table 1. Result of Implementation of GSCM Practice by Furniture Enterprise
Scale of
Name of enterprise Mean
Enterprise-
(use abbreviations value
No Type IEM GP CC ECO IR Category
to camouflage the of
Product
actual name) GSCM
Resulted
1 CV. MF 2.71 3.60 2.00 3.38 2.83 2.90 Laggards
2 PT. KDI Large- 3.86 2.40 1.50 4.50 2.67 2.99 Early Adopter
3 PT. MI Indoor (LI) 4.00 4.40 3.75 4.38 3.33 3.97 Early Adopter
4 PT. TJD 2.71 2.60 2.00 3.75 2.50 2.71 Laggards
5 CV. DJ 4.00 2.80 1.00 4.13 2.33 2.85 Early Adopter
Large-
6 CV. MA 2.14 2.60 2.00 3.25 2.83 2.56 Laggards
Outdoor
7 PT. KJF 4.43 3.40 3.00 4.50 3.33 3.73 Early Adopter
(BO)
8 CV. STF 4.86 3.80 3.50 4.88 3.00 4.01 Early Adopter
9 CV. JO 3.71 2.60 2.00 4.00 3.00 3.06 Early Adopter
10 PT. HEI 4.00 3.00 2.25 3.88 2.67 3.16 Early Adopter
Medium-
11 PT. EMI 4.29 3.60 3.00 4.63 2.67 3.64 Early Adopter
Indoor (MI)
12 CV. DENS 2.86 2.20 1.75 3.75 2.67 2.65 Laggards
13 PT. MA 2.57 2.60 1.50 3.50 3.50 2.73 Laggards
14 PT. BMP 4.57 3.60 3.50 4.50 3.67 3.97 Early Adopter
15 CV. KJ 4.57 3.60 3.50 4.63 2.17 3.69 Early Adopter
Medium-
16 CV. IP 3.86 4.20 2.75 3.88 3.83 3.70 Early Adopter
Outdoor
17 CV. ZAK 4.00 3.80 3.25 4.63 2.50 3.64 Early Adopter
(MO)
18 CV. QEE 3.57 2.20 2.25 3.38 2.67 2.81 Laggards
19 CV. NH 4.71 4.40 2.50 4.38 3.00 3.80 Early Adopter
20 VPJ 3.57 2.40 2.25 3.63 2.67 2.90 Early Adopter
21 PERB 3.71 2.40 2.25 3.38 2.67 2.88 Early Adopter
22 RIZM 3.29 2.00 1.75 3.38 2.50 2.58 Laggards
23 AUFUR Small- 2.29 1.60 1.25 3.00 1.67 1.96 Laggards
24 BBFUR Indoor (SI) 3.57 2.40 2.50 3.50 2.50 2.89 Early Adopter
25 PUTM 3.29 2.60 2.50 3.75 2.83 2.99 Early Adopter
26 INDC 4.43 2.80 2.25 3.50 2.50 3.10 Early Adopter
27 CHIFUR 2.00 2.00 1.75 3.63 3.33 2.54 Laggards
28 KREDG 3.71 3.40 1.75 3.63 3.17 3.13 Early Adopter
29 ALBAR 3.57 3.40 2.75 3.88 3.17 3.35 Early Adopter
30 KURJP 3.29 2.20 1.25 3.00 3.17 2.58 Laggards
Small-
31 ANKLAN 3.43 3.00 2.25 3.75 3.33 3.15 Early Adopter
Outdoor
32 JATBAR 2.71 1.80 1.25 3.13 3.17 2.41 Laggards
(SO)
33 JATKEM 3.29 2.60 1.50 3.25 3.00 2.73 Laggards
34 JATPRA 2.29 2.00 1.50 3.38 2.00 2.23 Laggards
35 SETJAT 2.71 2.20 1.25 3.63 2.67 2.49 Laggards

According to Table 1, there are two categories of implementation of GSCM practice, namely
early adopter and laggards. The first category, early adopter account for 60% of the study sample
(21 furniture enterprises). The second, laggards account for 40% of the study sample (14
furniture enterprise). Based on this condition, only 21 furniture enterprise that belongs to early
adopter become a sample for hypothesis testing with one way and two-way ANOVA and Tukey
Test.
4.2. Result of Hypothesis Testing
The result of hypothesis 1 testing can be seen in Table 2.
Table 2. The Result of Hypothesis 1 Testing with One-way ANOVA

Sum of df Mean F Sig.
Squares Square
IEM Between Groups 1.554 2.000 0.777 5.667 0.012
Within Groups 2.468 18.000 0.137
Total 4.022 20.000
GP Between Groups 2.658 2.000 1.329 3.863 0.040
Within Groups 6.192 18.000 0.344
Total 8.850 20.000
CC Between Groups 1.132 2.000 0.566 1.146 0.340
Within Groups 8.886 18.000 0.494
Total 10.018 20.000
ECO Between Groups 2.873 2.000 1.437 19.975 0.000
Within Groups 1.295 18.000 0.072
Total 4.168 20.000
IR Between Groups 0.033 2.000 0.016 0.078 0.925
Within Groups 3.762 18.000 0.209
Total 3.795 20.000
The p-values (Sig.) from the F-test in the ANOVA table is less than 0.05 for internal
environmental management (IEM), green purchasing (GP), and eco-design (ECO). The p-values
(Sig.) from the F-test in the ANOVA table is more than 0.05 for cooperation with the customer
(CC) and investment recovery (IR). This condition implies that hypothesis 1 only accepted for a
specific dimension of the implementation of GSCM practice. In this case, there is a significant
difference of the implementation of GSCM practices which is included in the internal
environmental management, green purchasing, and eco-design among three scales of enterprise
of furniture industry in Jepara (small, medium, and large). There is a no significant difference of
implementation of GSCM practices which is included in the cooperation with customer and the
investment recovery among three scales of enterprise of furniture industry in Jepara (small,
medium, and large). Thus, which of three scales having the difference in the implementation of
internal environmental management, green purchasing and eco-design could be identified by
Tukey Test (see Table 3)
Table 3. The Result of Hypothesis 1 Testing with Tukey Test
Mean
Difference Std.
Dependent Variable (I-J) Error Sig.
IEM Large Medium 0.01625 0.21109 0.997
Small 0.57000* 0.21109 0.037
Medium Large -0.01625 0.21109 0.997

Dependent Variable Mean Std. Sig.
Small Difference
0.55375* Error
0.18513 0.020
Small Large (I-J) *
-0.57000 0.21109 0.037
Medium -0.55375* 0.18513 0.020
GP Large Medium -0.24000 0.33437 0.756
Small 0.56000 0.33437 0.242
Medium Large 0.24000 0.33437 0.756
Small 0.80000* 0.29326 0.035
Small Large -0.56000 0.33437 0.242
Medium -0.80000* 0.29326 0.035
ECO Large Medium 0.16175 0.15289 0.551
Small 0.85050* 0.15289 0.000
Medium Large -0.16175 0.15289 0.551
Small 0.68875* 0.13409 0.000
Small Large -0.85050* 0.15289 0.000
Medium -0.68875* 0.13409 0.000
The result of Tukey Test showed the differences between each two scale of enterprise among
the three dimensions of the implementation of GSCM practice. For internal environmental
management, the p-values (Sig.) between large and medium is larger than 0.05, which help to
further verify there is no significant difference between both two different scales of furniture
enterprise in terms of implementing internal environmental management. On the contrary, the p-
values (Sig.) between small and medium, and between small and large are smaller than 0.05,
which is 0.037 and 0.020, implying that small and medium scale of furniture enterprise and small
and large scale of furniture enterprise have something different in adopting internal
environmental management. For green purchasing, the p-values (Sig.) smaller than 0.05 only for
small and medium scale of furniture enterprise (Sig= 0.035), implying that small and medium
scale of enterprise has something different in adopting green purchasing. Then, for eco-design,
the p-values (Sig.) between small and medium, and between small and large are smaller than
0.05, which is 0.000 and 0.000, implying that small and medium scale of furniture enterprise and
small and large scale of furniture enterprise have something different in adopting eco-design.
Table 4. The Result of Hypothesis 2 Testing with One-way ANOVA

Sum of Squares df Mean Square F Sig.
IEM Between Groups 0.511 1.000 0.511 2.768 0.113
Within Groups 3.510 19.000 0.185
Total 4.022 20.000
GP Between Groups 2.729 1.000 2.729 8.472 0.009
Within Groups 6.120 19.000 0.322
Total 8.850 20.000
CC Between Groups 0.409 1.000 0.409 0.809 0.380
Within Groups 9.609 19.000 0.506
Total 10.018 20.000
ECO Between Groups 0.601 1.000 0.601 3.199 0.090
Within Groups 3.567 19.000 0.188
Total 4.168 20.000
IR Between Groups 0.454 1.000 0.454 2.583 0.125
Within Groups 3.341 19.000 0.176
Total 3.795 20.000
The p-value (Sig.) from the F-test in the ANOVA table (see table 4) is less than 0.05 only for
green purchasing (GP). The p-values (Sig.) from the F-test in the ANOVA table is more than
0.05 for internal environmental management (IEM), cooperation with the customer (CC), eco-
design (ECO), and investment recovery (IR). This condition implies that hypothesis 2 only
accepted for implementation of GSCM practice which is included in green purchasing. In this
case, there is a significant difference of implementation of GSCM practices which is included in
green purchasing among two types of furniture enterprises in Jepara (furniture enterprise with
indoor product and furniture enterprise with outdoor product). Hypothesis 2 was rejected for the
other dimension of the implementation of GSCM practice.
Table 5. Result of Hypothesis 3, 4, and 5 Testing with one-way and two-way ANOVA
Source Type III Sum of Squares df Mean Square F Sig.
Corrected Model 3.790a 5 0.76 7.40 0.00
Intercept 84.09 1.00 84.09 821.18 0.00
Scale of Enterprises 0.61 2.00 0.31 2.99 0.08
Type of Product Resulted 2.40 1.00 2.40 23.39 0.00
Scale of Enterprises * Type of
0.27 2.00 0.14 1.33 0.29
Product Resulted
Error 1.54 15.00 0.10
Total 99.20 21.00
Corrected Total 5.33 20.00
a. R Squared = .712 (Adjusted R Squared = .615)
The p-values (Sig.) from the F-test in the ANOVA table (see Table 5) are less than 0.05 for
corrected model, intercept, and type of product resulted. The p-values (Sig.) from the F-test in
the ANOVA table are more than 0.05 for scale of enterprises, and for the interaction between the
scale of enterprises and the type of product resulted. This condition implies that hypothesis 3 and
hypothesis 5 are rejected, whereas, hypothesis 4 is accepted. It can be said that there is a strong
evidence that economic performance will be varied with type of product resulted by the
enterprises, because the type of product resulted will influence the implementation of GSCM
practice which in turn would affect the economic performance of the enterprise. However, this
study fails to prove that economic performance will be varied with the scale of the enterprises.
This study also fails to prove the presence of interaction between the scale of enterprises and the
type of product resulted would make a difference in economic performance of the enterprises.
5. Conclusion
Recently, furniture enterprises in Jepara faced some problem related to the environment. In
the downstream side, the furniture enterprise faces environmental problems of forestry practice
problem (e.g. illegal logging). In the midstream sides, the furniture enterprise faced with solid
waste generation problem. Furniture enterprise throws away an amount of wooden residue from
the manufacturing process. These untreated residues can cause many damages both economic
and environmental. Then, in the upstream sides, the furniture enterprise faced the distribution
problem. The enterprise and the customer rarely have the same location. The size of finished
product and the difficulty in handling make the furniture product have high transport cost. All of
this condition makes the furniture enterprise have to increase their environmental awareness by
implementing the GSCM practice in their business. Related to the implementation of GSCM
practices by furniture enterprises in Jepara and their effect to the enterprise performance, this
study has two purposes. The first purpose of this study is to find out the current situation
regarding the implementation of GSCM practices among enterprise furniture in Jepara, Central

Java. The second purpose, this study aims to explore the differences of the effect of the
implementation of GSCM practices on economic performance.
The result of measurement of GSCM practice from 35 furniture enterprises in Jepara indicated
that there are two categories of implementation of GSCM practice, namely early adopter and
laggards. The first category, early adopter account for 60% of the study sample (21 furniture
enterprises). The second, laggards account for 40% of the study sample (14 furniture enterprise).
Then, the result of hypothesis testing indicated the implementation of GSCM practice which is
included in the internal environmental management, green purchasing, and eco-design will be
varied with scales of the furniture enterprise (small, medium, and large); whereas, the
implementation of GSCM practice which is included in the green purchasing will be varied with
type of product resulted. Thus, the economic performance of the furniture enterprise only varied
with type of product resulted by the enterprises, because the type of product resulted will
influence the implementation of GSCM practice which in turn would affect the economic
performance of the enterprise.
This work is one of the few efforts to investigate GSCM practices in the furniture industry in
Indonesia. Thus, this investigation and its findings are still relatively exploratory. This is a cross
sectional study and the sample size used in this study is very limited, so the future study can also
include investigation of longitudinal relationships identified in this work and amplified sample
sizes of furniture enterprises from Jepara or from the other region of Indonesia which also
produce furniture such as Rembang, Blora, etc. In this case, longitudinal study can help to
identify long-term patterns of GSCM practice by the furniture enterprise and its impact to the
performance of the enterprise. Thus, the amplified of sample size from the other region of
Indonesia can help to generalize the result and provide room for comparative studies of GSCM
practice and its impact. In addition, future research should try to tease out various relationships,
including mediating and moderating relationships that may exist between various items and
factors used in this study.
6. Reference
Azevedo, S., Cudney, E. A., Grilo, A., Carvalho, H., & Cruz-Machado, V. (2012). The influence of eco-
innovation supply chain practices on business eco-efficiency. University of Beira Interior, Missouri
University of Science and Technology, Universidade Nova de Lisboa.
Azevedo, S., Cudney, E. A., Grilo, A., Carvalho, H., & Cruz-Machado, V. (2012). The influence of eco-
innovation supply chain practices on business eco-efficiency. University of Beira Interior, Missouri
University of Science and Technology, Universidade Nova de Lisboa.
Barua, A., Chowdhury, Md. A. T A., Mehidi, S. H., & Muhiuddin, H. M. (2014). Residue reduction and
reuse in wooden furniture manufacturing industry. International Journal of Scientific & Engineering
Research, 5(10), pp.291-301
Bowen, F., Cousins, P., Lamming, R., & Faruk, A. (2006). Horses for courses: explaining the gap
between the theory and practice of green supply. In Greening the supply chain (pp. 151-172).
Springer London
Bowen, F.E., Cousins, P.D., Lamming, R.C. & Faruk, A.C. (2001), Horse for courses: explaining the gap
between the theory and practice of green supply, Greener Management International, 35, 41-60.
Carter, C. R., Kale, R., & Grimm, C. M. (2000). Environmental purchasing and firm performance: an
empirical investigation. Transportation Research Part E: Logistics and Transportation
Review, 36(3), 219-228.
Chen, Y. S., Lai, S. B., & Wen, C. T. (2006). The influence of green innovation performance on corporate
advantage in Taiwan. Journal of business ethics, 67(4), 331-339.

Chiou, T. Y., Chan, H. K., Lettice, F., & Chung, S. H. (2011). The influence of greening the suppliers and
green innovation on environmental performance and competitive advantage in
Taiwan. Transportation Research Part E: Logistics and Transportation Review, 47(6), 822-836.
Clausen, C. A. (2000). CCA removal from treated wood using a dual remediation process. Waste
Management and Research, 18(5), 485-488.
Dean, T. J., & Brown, R. L. (1995). Pollution regulation as a barrier to new firm entry: Initial evidence
and implications for future research. Academy of Management Journal, 38(1), 288-303.
Diabat, A., & Govindan, K. (2011). An analysis of the drivers affecting the implementation of green
supply chain management. Resources, Conservation and Recycling, 55(6), 659-667.
Florida, R. (1996). Lean and green: the move to environmentally conscious manufacturing. California
management review, 39(1), 80-105.
Florida, R., & Davison, D. (2001). Gaining from green management: environmental management systems
inside and outside the factory. California Management Review, 43(3), 64-84.
Geffen, C., & Rothenberg, S. (2000). Sustainable development across firm boundaries: the critical role of
suppliers in environmental innovation. International Journal of Operations and Production
Management, 20(2), 166-186.
Gil, M. A., Jiménez, J. B., & Lorente, J. C. (2001). An analysis of environmental management,
organizational context and performance of Spanish hotels. Omega, 29(6), 457-471.
Gil, M. A., Jiménez, J. B., & Lorente, J. C. (2001). An analysis of environmental management,
organizational context and performance of Spanish hotels. Omega, 29(6), 457-471.
GRI (2013). An Introduction to G4. Global Reporting Initiative (GRI). Amsterdam: Netherlands
Handfield, R., Walton, S. V., Sroufe, R., & Melnyk, S. A. (2002). Applying environmental criteria to
supplier assessment: A study in the application of the Analytical Hierarchy Process. European
Journal of Operational Research, 141(1), 70-87.
Hervani, A. A., Helms, M. M., & Sarkis, J. (2005). Performance measurement for green supply chain
management. Benchmarking: An international journal, 12(4), 330-353.
Jamal, N. M. (2011). Management accounting and the implications of supply chain management
practices: an empirical study (Doctoral dissertation, University of Hull).
Khedari, J., Nankongnab, N., Hirunlabh, J., & Teekasap, S. (2004). New low-cost insulation
particleboards from mixture of durian peel and coconut coir. Building and environment, 39(1), 59-65.
Klassen, R. D., & McLaughlin, C. P. (1996). The impact of environmental management on firm
performance. Management science, 42(8), 1199-1214.
Koh, S. C. L., Gunasekaran, A., & Tseng, C. S. (2012). Cross-tier ripple and indirect effects of directives
WEEE and RoHS on greening a supply chain. International Journal of Production
Economics, 140(1), 305-317.
Laosirihongthong, T., Adebanjo, D., & Choon Tan, K. (2013). Green supply chain management practices
and performance. Industrial Management & Data Systems, 113(8), 1088-1109.
Large, R. O., & Thomsen, C. G. (2011). Drivers of green supply management performance: Evidence
from Germany. Journal of Purchasing and Supply Management, 17(3), 176-184.
Lewis, H., & Gertsakis, J. (2001). Design+ environment: a global guide to designing greener goods.
Greenleaf publishing.
Lin, R. J. (2013). Using fuzzy DEMATEL to evaluate the green supply chain management
practices. Journal of Cleaner Production, 40, 32-39.
Melati, Purnomo, H., and Shantiko, B. (2013). Making Research Work for Small-Scale Furniture Makers:
Action Research in the Jepara Furniture Industry. Indonesia. Bogor, Indonesia: CIFOR.
Montabon, F., Sroufe, R., & Narasimhan, R. (2007). An examination of corporate reporting,
environmental management practices and firm performance. Journal of operations
management, 25(5), 998-1014.
Murphy, P. R., & Poist, R. F. (2003). Green perspectives and practices: a “comparative logistics”
study. Supply chain management: an international journal, 8(2), 122-131.

Prestvik, A.S. 2009. Small-scale furniture producers in Jepara. Survey report. Annex 7, FVC Annual
Report 2010. CIFOR, Bogor, Indonesia.
Purnomo, H., Achdiawan, R., Melati, Irawati, R. H., Sulthon, Shantiko, B., & Wardell, A. (2014). Value-
chain dynamics: strengthening the institution of small-scale furniture producers to improve their value
addition. Forests, Trees and Livelihoods, 23(1-2), 87-101.
Purnomo, H., Irawati, R. H., Achdiawan, R., & Shantiko, B. (2013). Action research approach to
strengthening small-scale furniture producers in Indonesia through policy development.
In Commoners and the Changing Commons: Livelihoods, Environmental Security, and Shared
Knowledge, the Fourteenth Biennial Conference of the International Association for the Study of the
Commons, Japan, June 3-7, 2013.
Purnomo, H., Irawati, R. H., Fauzan, A. U., & Melati, M. (2011). Scenario-based actions to upgrade
small-scale furniture producers and their impacts on women in Central Java, Indonesia. International
Forestry Review, 13(2), 152-162.
Rao, P., & Holt, D. (2005). Do green supply chains lead to competitiveness and economic
performance? International Journal of Operations & Production Management, 25(9), 898-916.
Seuring, S., & Müller, M. (2008). From a literature review to a conceptual framework for sustainable
supply chain management. Journal of cleaner production, 16(15), 1699-1710.
Shang, K. C., Lu, C. S., & Li, S. (2010). A taxonomy of green supply chain management capability
among electronics-related manufacturing firms in Taiwan. Journal of environmental
management, 91(5), 1218-1226.
Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E. (2003). Designing and Managing the supply chain
Concepts, Strategies and Case studies. New York: McGraw-Hill Publishing.
Srivastava, S. K. (2007). Green supply‐chain management: a state‐of‐the‐art literature
review. International journal of management reviews, 9(1), 53-80.
Testa, F., & Iraldo, F. (2010). Shadows and lights of GSCM (Green Supply Chain Management):
determinants and effects of these practices based on a multi-national study. Journal of Cleaner
Production, 18(10), 953-962.
Tsoulfas, G. T., & Pappis, C. P. (2006). Environmental principles applicable to supply chains design and
operation. Journal of Cleaner Production, 14(18), 1593-1602.
Van Geenhuizen, M., & Indarti, N. (2006). Knowledge and Innovation in the Indonesian Artisanal
Furniture Industry.
Van Hoek, R. I. (1999). From reversed logistics to green supply chains. Supply Chain Management: An
International Journal, 4(3), 129-135.
Walton, S. V., Handfield, R. B., & Melnyk, S. A. (1998). The green supply chain: integrating suppliers
into environmental management processes. International journal of purchasing and materials
management, 34(1), 2-11
Winsemius, P., & Guntram, U. (1992). Responding to the environmental challenge. Business
Horizons, 35(2), 12-20.
Wong, C. W., Lai, K. H., Shang, K. C., Lu, C. S., & Leung, T. K. P. (2012). Green operations and the
moderating role of environmental management capability of suppliers on manufacturing firm
performance. International Journal of Production Economics, 140(1), 283-294.
Wu, T., Wu, Y. C. J., Chen, Y. J., & Goh, M. (2014). Aligning supply chain strategy with corporate
environmental strategy: A contingency approach. International Journal of Production
Economics, 147, 220-229.
Wycherley, I. (1999). Greening supply chains: the case of the Body Shop International. Business Strategy
and the Environment, 8(2), 120.
Zhu, Q., & Sarkis, J. (2004). Relationships between operational practices and performance among early
adopters of green supply chain management practices in Chinese manufacturing enterprises. Journal
of operations management, 22(3), 265-289.

Zhu, Q., & Sarkis, J. (2004). Relationships between operational practices and performance among early
adopters of green supply chain management practices in Chinese manufacturing enterprises. Journal
of operations management, 22(3), 265-289.
Zhu, Q., Geng, Y., Sarkis, J., & Lai, K. H. (2011). Evaluating green supply chain management among
Chinese manufacturers from the ecological modernization perspective. Transportation Research Part
E: Logistics and Transportation Review, 47(6), 808-821.
Zhu, Q., Sarkis, J., & Lai, K. H. (2008). Confirmation of a measurement model for green supply chain
management practices implementation. International journal of production economics, 111(2), 261-
273.
Zhu, Q., Sarkis, J., & Lai, K. H. (2008). Green supply chain management implications for “closing the
loop”. Transportation Research Part E: Logistics and Transportation Review, 44(1), 1-18.
Zhu, Q., Sarkis, J., & Lai, K. H. (2012). Examining the effects of green supply chain management
practices and their mediations on performance improvements. International journal of production
research, 50(5), 1377-1394
Zhu, Q., Sarkis, L., Lai, K., (2013). Institutional-based antecedents and performance outcomes of internal
and external green supply chain management practices. Journal of Purchasing Supply Management.
19(2), 106–117.

.
MODEL DEVELOPMENT ATTITUDE ENTREPRENEURSHIP EFFECT ON
THE PERFORMANCE OF BUSINESS ENTREPRENEURS CERAMIC
INDUSTRY PULUTAN DISTRICT MINAHASA
Bambang Hermanto
Fakultas Ekonomi Universitas Negeri Manado
bambangunima@yahoo.com
Robert Richard Winerungan
Fakultas Ekonomi Universitas Negeri Manado
robertwinerungan@gmail.com
Abstract: The purpose of this research is to identify and explore the characteristics of
entrepreneurs, potential container institutional economics, the characteristics of an
entrepreneurial attitude, business performance and produce a model of empowering
entrepreneurial attitude that can improve the performance of small industries ceramic
Pulutan in Minahasa. The results showed that the ceramic industry craftsmen Pulutan
according to the data of 2014 amounted to 305 people. Educational background which
is owned producers in general are primary school as much as 72% (219 people),
whereas for 21.6% Junior High School (66), High School 6% (18 people) and
education strata Diploma with only 0 , 4% (1). Medium body as a tool of economic
struggle craftsmen container is not available, and which exist only training center of
ceramic artisans. Craftsmen entrepreneurial attitude in general is still weak, this is
reflected in the achievement of an average score of 37.33% of all the characteristics of
an entrepreneurial attitude measurements as indicators. Similarly happened to the
business performance craftsmen 82% is still low and need further empowerment.
Keywords: Empowerment, an entrepreneurial attitude and business performance

INTRODUCTION
Small industrial sector has proved to be more flexible in a variety of unfavorable
economic conditions, such as the economic crisis. At the time of big industry out of
business, small industrial export oriented instead earn profit doubled, because the small
industries to use more raw materials (intermediate goods) from within the country, so as
not to burden the value of imports as it has been experienced by large businesses (Yustika
2003:113).
Besides the potential that has been mentioned above, there are still many problems
facing enterprises Small Industries and Crafts Household (IKKR) because of the nature of
its business is mostly still a transition. Some of the main problems that are often
encountered this effort include the problem of capital and marketing m, production
engineering, entrepreneurial attitude, raw materials, management and technology. In
addition to the obstacles facing this business is limited access to market information,
limited market reach, limited networks, and limited access to strategic business location.
The problem is actually a classic of existing businesses in general is still relatively
traditional or family businesses. The complexity of the problems that occur bias comes
from within (internal) or outside (external) IKKR effort. Those problems like network of
interconnected tertkait vicious circle between problems with one another (BPS Indonesia,
2007).
Development of SMEs in the industrial business in Sulawesi Utara (North Sulawesi)
has been directed to produce a superior product to the specifications of the characteristics
that have a sizeable market; great export value; have strong linkages both forward and
backward; to perform economically and efficiently, and to encourage the economic
growth of the people based on the ability of domestic technology.
Types of SME products produced during this time include: wooden furniture,
components of building materials of wood, traditional houses, fish preparations, various
regional specialties, coconut processing, wood carving, furniture from coconut wood,
various handicraft products including crafts ceramic industry, weaving Bentenan,
kerawang ikat and so forth. SMEs in the manufacturing sector have shown progress, but
this business is still faced with problems of internal and external, based on data obtained
from the Ministry of Industry SULUT (2008) to issue Internal include: human resources
involved in SMEs are many qualified reliable and professional, primarily in the field of
entrepreneurship, weak ability of SMEs to access and meet the demand of the market that
demands quality stability, the number of large orders, rapid and timely delivery, weak
ability of SMEs to access funding sources/capital.

Problems Other external facing small and medium industries (SMEs) is still limited
institutional effective marketing and other support facilities, yet the realization of the
commitment, consistency of policies and the spirit of integration of various parties /
decision and policy makers in the development of SMEs, has not been widespread
attitude of partiality to domestic consumers to prefer products in their own country, has
not been widespread support adequate infrastructure for production centers (Ministry of
Industry SULUT, 2008).
The phenomenon of small industrial issues in general in North Sulawesi also
necessarily describe a constellation of small industrial issues specifically in Minahasa
district. Small industrial sub-sectors in Minahasa regency consists of food and beverage
industry, wood furniture, textile and garment, metallic silver and ceramics industries. For
the ceramic industry in Minahasa District centered in the village of the District Pulutan
Romboken. The craft industry become the foundation of most people in the village to
support his family as the main job, because the industry has been occupied for
generations. But in its development this handicraft industry fails to demonstrate progress
seen from the quality of ceramic products produced both from a design and burning
techniques and business management, as a result these products are unable to compete
with other local products originating from the island of Java, for example, from Pleret
and from foreign countries, such as Chinese ceramics.
The results of the field observations became the subject matter of industrial
development of small ceramics for this lies in the lack of an entrepreneurial attitude
artisans as entrepreneurs, which is reflected in the ability of innovation to develop and
produce a unique product which is based on the local culture or who have a unique
selling point, for it is an entrepreneurial attitude this industry employers need to be
empowered so that business performance in producing these products in the future be
better able to compete with other local and foreign products. Therefore we need a model
of empowering entrepreneurial attitude of small ceramic industry entrepreneurs in order
to improve its business performance.
To become an entrepreneur based on the results of research in the United States
according B.N. Marbun (1993), should have the characteristics depicted in his character
as follows: confidence (trust / persistence, independence, personality steady, and
optimism), task-oriented and results (thirst for achievement, profit-oriented, diligent and
steadfast, determined hard working, motivated, energetic, full of initiative), a risk taker
(to take risks and like a challenge), leadership (able to lead, sociable and receive
suggestions and criticism), originality (innovative, creative, flexible, many sources,
versatile, and know a lot), and oriented to the future (foresight and perceptive).
Schumpeter (1934) in K. (2003) states that entrepreneurship is the driving force

behind economic growth, formulating new economic combination by (1) developing new
products; (2) developing new resources of materials; (3) accumulating capital resources;
(4) introducing new products and new production functions; and (5) reorganizing or
developing a new industry.
Faced with these problems required their empowerment efforts in order to improve the
performance of ceramic artisans. Suharto (2006) argues, empowerment is a process and a
goal. As an empowerment process is a series of activities to strengthen the powers or the
empowerment of vulnerable groups in society, including individuals who are having
problems. As a goal, the empowerment refers to the condition or results to be achieved by
a social change, which is empowered community, have power or have the knowledge and
ability in meeting their needs both economic and social, such as: have the confidence,
capable express their aspirations, have livelihoods, participate in social activities, and
independent in carrying out the tasks of life. The sense of empowerment as the goal is the
success indicator refers to empowerment as a process
Winarni (1998) revealed that the core of empowerment is three-fold, namely
development (enabling), strengthen the potential or power (empowering), and self-
sustainability. Starting from that opinion, means empowerment does not happen to people
who do not have the ability, but the people who have a limited amount of power, can be
developed to achieve independence. Because of the nature of empowerment is the
creation of an atmosphere or climate conditions that allow potential or developing
societies (enabling). The learning process is needed in order to empower the community
will take place gradually.
According to Ambar (2004) The stages include:

1. Stage awareness and behavior towards the formation of conscious behavior and care so
it feels require increased capacity themselves.
2. Phase transformation capabilities in the form of insight knowledge, competence and
skills in order to open horizons and give basic skills so that they can take a role in the
development.
3. Phase enhancement of intellectual ability, competence and skills, forming initiatives
and innovative capabilities to deliver on independence.
Employers in running the business should have knowledge of entrepreneurship.
Drucker (1999) suggests knowledge is information that can change something or
someone, as he can also lead to an act, or something that can make an individual or an
institution capable of performing a different action more effectively.
Being entrepreneurs needed some creativity and combining it with a variety of factors,
either in the form of capital resources and other physical resources combined with an

innovation that can produce something that has added value and beneficial to others and
could bring in revenue for its business (Banfe, 1991).
From the above, that in order to create something different values (innovation) takes
the element of time, a process involving the production factor to change anything
materials into finished products, bear the risk if it did not work and receive benefits as
well as providing the level of satisfaction if he succeeded. Because it takes hard work,
perseverance and continuous, as well as highly motivated to excel.
Based on the results of the study of entrepreneurship has a direct impact on business
performance, as described by Blaum et.al. (2001), that entrepreneurship is very positive
affect business growth. The nature of a person such as a kink in the face of problems,
proactive attitude and indulgence in work, general competencies such as membership of
the organization and the ability to see opportunities, special competence possessed as
industry expertise and technical skills, and motivation, as involved in vision, mission and
goals of growth and cell efficacy positive effect on the growth of the business (business
performance).
To measure business performance holistically by McDougall and Oviatt (1996) there
are two approaches, namely financial and non-financial. For the financial aspects can be
measured report an increase in sales volume, market share and return on investment while
nonfinancial can be measured by the level of customer satisfaction and length into
customers.
Mudrajad (2007) states that the performance is the result of which is influenced by the
structure and behavior of an industry where the usual result is identical to the amount of
market share or the amount of profit a company in an industry. Performance can also be
reflected through efficiencies, growth (including the expansion of the market),
employment, professional prestige, welfare personnel, as well as the pride of the group.
Performance in an industry can be observed through the value added (value added), the
productivity and efficiency of the industry.
2. RESEARCH METHODS
Paradigm to achieve the purpose of the research is done in stages, where for the first
year of use descriptive explorative and research and development (R & D) (Borg and
Gall: 1983), where the study year / first phase of the underlying year / second stage.
Implementation of this study follow the steps consisting of preliminary surveys, product
development, product testing, validation and dissemination / implementation.
The population in the study were all small businessmen ceramics industry in the
Village District of Romboken KabupatenMinahasa Pulutan totaling 305 people, while

using purposive sampling techniques Sampling Technique, taken as many as 40
businessmen Pulutan ceramic industry.
Data collection techniques captured using two types of instrument, namely
questionnaire (questionare) and guidelines for the interview (interview guide as well as
documents. Distribution of the questionnaire used to find complete information related to
the production model of the empowerment of small industrial entrepreneurs
entrepreneurial attitude ceramics influence on its business performance
Definition operationalization of variables: 1) The attitude of entrepreneurial
businessman ceramics (X) is the behavior of entrepreneurs who have strong
characteristics are reflected in the aspect of self-confidence, ability to read the
opportunities, technical ability, the ability to produce original, forward-thinking, and the
ability to take moderate risk. 2) Business performance (Y) is the work of industry
behavior, where results are measured on sales turnover, profit and number of workers
absorbed.
The data were analyzed descriptively netted in order to obtain accurate information in
determining the indicator variable for the benefit of the preparation of the draft model of
empowering entrepreneurial attitudes influence on business performance. The results
obtained were then used as the basis for the implementation of trials in the second year,
with a view to determine whether the empowerment of the entrepreneurial attitude to
impact business performance improvement.
A. Description of Research Area

Pulutan village located in the district Remboken, Minahasa district and is
approximately 5 km from tourist destinations that attract in Tondano Tondano lake and
can be reached about 90 minutes' drive from the city of Manado, at a distance of about 40
km. To reach the village predominantly worked as a pottery craftsman, you can skip the 3
overland through Tondano, Kawangkoan and Leilem village. Size Pulutan Village area of
247 hectares, with a population of 1052 inhabitants and, people mostly work as craftsmen
pottery (Development-Rural Pulutan 2014-2020).
B. Condition and Livelihood Education Level Population

In 2014 the education level conditions of villagers Pulutan totaling 1052 people. 10% (85
votes) No Elementary School, 40% (350 votes) finished elementary school, 24% (214
people) middle school First, 23% (198 people) High School, and 3% (28 people) are
graduates Diploma / Degree.

While the livelihood of the villagers Pulutan 44% (305 people) as potters, 25% (170
people) are farmers, 22% (150 people) became a laborer and 9% (60) Other Air
professions as civil servants, pensioners, military / Police and the Village. The main
profession as a craftsman and a second population are farmers due to the work of a
heritage that has been handed down, and further entrenched into local wisdom for
villagers Pulutan to be preserved until now.
C. Description Entrepreneur Small Industrial Ceramics

Employers who is also a craftsman ceramics industry Pulutan according to the data
of 2014 amounted to 305 people. Educational background in general is owned craftsmen
Elementary School as much as 72% (219 votes), while for Junior 21.6% (66 people),
High School 6% (18 people) and higher education with a Diploma strata only 0 , 4% (1).
The quality of resources is very low craftsman clearly influenced the development of
the ceramic industry Pulutan. This condition can be seen from the way they produce
goods ceramics tend to make imitation and reproduction of ideas creative entrepreneurs
in the vicinity. Ceramic products craftsmen generally produce tables, pots, pots, vases,
gici, a jug of water and household appliance products, sepperti pomo (furnace) as well as
art.
Of interim findings by investigators, potters Pulutan acquire the skills of 3 (three)
sources. First, the legacy of which has been obtained by craftsmen for generations and
has become a media training that continues until today. Second, through training, both
directly and informal, which comes from individuals or groups that are concerned about
the progress of the ceramic industry Pulutan. Third, formal training by Ceramic Training
Centre Pulutan, mentoring done by the Local Government Department of Industry and
Trade of either of the Centre, the Province of North Sulawesi, Minahasa regency as well
as from other institutions.
D. Container Economic Activity

The existence of these institutions actually are needed to serve the members and the
community of craftsmen in order to provide support for capital assistance in the form of
credit, as well as service other types, such as: provision of means of production for the
craftsmen, in the form of supply of raw material mixture of ceramic with competitive
prices as well for the purpose of promotion and product marketing entrepreneurs who
become members of the Cooperative.
To produce high quality ceramics craftsmen need support raw material supply
murahseperti: Kaolin, feldspar, dolomite and Talk should have to come from Java or
purchased. Provision of cheap raw materials should be coordinated by intermediary

institutions belonging to craftsmen, namely cooperatives. Because, if purchased by each
member would be more expensive and will lead to high economic costs for the craftsmen.
Because 30 percent of the mixture is a prerequisite for making fine ceramic with a
heating technique up to 1300 degrees. Besides, the availability of cooperative institutions
as a container craftsman when available would be able to assist and facilitate the interests
of craftsmen, such as: capital, helps the marketing and promotion of their products.
Availability of space reserved Cooperative promotion will certainly expand the market
and more exciting artisans and would enhance their welfare.
Other containers that still exist and are available Pulutan Ceramic Training Center, where
the establishment was initiated by the Government of Canada, through the Canadian
International Development Agency (CIDA). The existence of this training center is
expected to improve the skills of craftsmen ceramics / pottery became increasingly better.
Pulutan ceramic artisans have only produce quality grain is simple, but since the 2008
Canadian aid skills enhancement through training, craftsmen able to produce ceramics
with heating to 1300 degrees Celsius, while the pottery is only 700 degrees Celsius. With
technical guidance from expert craftsmen Canada fraction was able to produce a higher
quality ceramics and better economic value. But in its development expertise of ceramic
artisans have not been able to proceed because it is constrained raw materials and the
unavailability of the furnace with a large capacity. Finally potters in general until now
still producing low-quality ceramic products in the form of pottery. And if the craftsman
is able to utilize a touch of modern technology, craftsmen can produce high quality
ceramic products and selling value economically.
E. Characteristics of Entrepreneurship Attitude Craftsmen
Description of the results of research into the findings related to the characteristics of
entrepreneurial attitude indicator craftsmen as follows:
1. Aspects of Self-Confidence
Self-confidence is a blend of attitudes and beliefs in the face of tasks and jobs
(Soesarsono, 1988) .Rasa confidence ceramic artisans provide an overview of the
capabilities of self that is relative and dynamic, and determined by its ability to initiate,
implement and complete a job. the results showed that the level of confidence artisans
earn a score of 45% or category cukup.Perolehan scores give an idea, that the potters
pottery Pulutan in carrying out their work activities are always grounded in its ability to
complete the work in a systematic, planned, effective, and efficient. The confidence
shown by the craftsmen of perseverance, tranquility, excitement or enthusiasm, and the

preponderance working and completing work in the manufacture of various types of
ceramic products.
The nature of self-belief which is owned craftsmen realized in the form of a sense of
optimism, high spirits on their ability to act independently in the various problem
situations, so that business success can be achieved. The level of confidence craftsmen
above is related to the level of education you have, where 72% of craftsmen graduated
elementary school, which in turn affects the knowledge and skills in the manufacture of
ceramics, which is a manifestation of the idea, initiative, initiative, creativity,
perseverance, spirit work, and the excitement in the work.
Self-confidence is a strong force to improve the initiative and the work of someone.
Instead, each work produced will grow and increase confidence. Creativity, initiative,
excitement work, and perseverance will be a lot of push a person to achieve work that
gives inner satisfaction, which in turn will strengthen confidence. In turn, people who
have the confidence would have the ability to work alone in organizing, supervising, and
to achieve it ("the ability of a single man to organize a business him self and could Brun,
control, and embrace") (Soeparman Sumahamidjaja, 1997 )
In practice this attitude and confidence is an attitude and confidence to initiate, conduct
and complete the task or the job at hand. Therefore, confidence has a value of confidence,
optimism, individualistic, and lack of dependence. Someone who has the confidence tend
to have confidence in his ability to achieve success (Zimmerer, 1996)
2. Literacy Opportunity
Based on the research results in reading ability craftsmen opportunity to earn a score of
38% or there is the category still lemah.Seorang entrepreneurs should be able to see
opportunities in any condition. Opportunities are many situations favorable environment
for a business unit that is associated with important trends occurring among users of the
product (consumers), identifying a market segment that has not received attention,
changes in competition, changes in legislation which opens new avenues in trying ,
relationships with buyers and suppliers, the development of science and technology,
income level and education community .
Entrepreneur is the person who perceives an opportunity and creates an organization
to pursue it (Bygrave, 1994). These give the definition, that an entrepreneur should be
able to see opportunities and be able to create an organization that can take advantage of
the opportunities that ada.Makanya according to Peter Drucker (David Osborne, 1992) an
entrepreneur not seek risk, but they are looking for opportunities.
Successful entrepreneurs tend to focus their attention to the opportunities that
represents an unmet need or problem that requires solving (Yuyus Kartib Suryana &

Davis, 2014). An entrepreneur by Zimmerer (2008) must always looking for new
opportunities or find new ways to create opportunities (Always be on the lookout for new
opportunities).
3. Capability Engineering
Sukamdiyo and Alex Dasuki (1999) believes that to achieve business independence
required an ability to understand something both technically and analysis.
Results of research on these characteristics obtain a score of 44% or there is the
category of artisan techniques cukup.Kemampuan actualized in the work of craftsmen of
ceramics produced and reflected in the ability to design and also in conducting
combustion techniques. The design of the products produced ceramic craftsmen based on
the findings of researchers in the field is less strong unique among each craftsman, or
there is no difference, and what happens is mutually reproduce, as well as the less there is
a new creation. Being in combustion engineering capabilities for a whole new craftsmen
can perform burning ceramic products only up to 700 degrees Celsius warming, as a
result of the unavailability of the furnace with a large capacity, and provided only a small
furnace for burning of ceramics with small size design.
Availability of furnaces modern with a large capacity that has more heat than 1300
degrees Celsius is needed, because it will be able to burn raw clay into a product that is
more mature, more resilient and more attractive appearance, and the end result is very
natural, quality, without using paint materials. With the technical ability, the idea of a
more creative and innovative in form and a more modern design, craftsmen can produce
ceramic products is not limited to making pottery for everyday use, but also can be
produced ceramic products that can be used as decoration or property house
competitiveness, both for domestic and overseas markets.
The low quality of human resources owned by craftsmen and not providing a furnace
in a large capacity with a heat resistance of more than 1300 degrees Celsius, the difficulty
to gain access to capital from banks and rare expensive raw materials kaolin, clay,
feldspar or limestone and dolomite to be imported from Java, is certainly a problem that
needs solving in order to improve its business performance.
4. The ability to produce Original

The original product is the nature of the products produced entrepreneurs with no tail,
raw plagiarized without ideas or new ideas. Orisinilitas level ceramic products produced
by artisans there in enough category, with a score of 42% .Capaian category level is
reflected in the results of ceramic products of craftsmen, which made products among

craftsmen hardly have a significant degree of differentiation, or do not have a strong
uniqueness of each each product.
These findings indicate that the majority of artisans in the manufacture of products
imitating what they mutually made by other artisans. To the creativity of artisans Pulutan
ability still needs to be improved and addressed in order to create more original work of
each craftsman. Because the creativity of craftsmen is one of the prerequisites in creating
products that are the result of more innovative and competitive.
Original does not mean that an entirely new, but these products reflect the results of a
new combination or reintegration of the components that already exist, thus giving birth
to something new ones as a result of the creativity (Buchari Alma, 2008). Moderate
innovation is a practical application of creative ideas (Carol Kinsey Goman, 1991). The
nature of an Entrepreneurial originality demands creativity (Yuyus Kartib Suryana &
Davis, 2014).
Value innovative, creative and flexible is an element of originality someone for our
product. Harvard's Theodore Levitt (in Yuyus, 2014) explained that keinovasian and
more creativity leads to the concept of thinking and acting that is new (think new and
doing new), creativity is the ability to develop new ideas and to discover new ways of
looking at problems and opportunities , Medium Innovation is ability to apply creative
solutions to Reviews those problems and opportunities to Enhance or to enrich people's
life.
Creative ideas emerge when an entrepreneur to see something old and thinking
something different and new. Therefore, creativity is creating something that origin does
not exist. According to Everett E. Hagen (1962), features innovative creative personality,
include: openness to experiences. Creative imagination, confidence and content in one's
own evaluation, satisfaction in facing and attacking problems and resolvingconfusion or
inconsistency, has a duty or responsibility to Achieve and intelligence and energetic.
Sseorang original nature is the nature of entrepreneurs who not only follow the others,
but has her own opinion, there was the original idea, and the ability to implement
something.
Creativity is important for entrepreneurs in order to create competitive advantage and
at the same time maintaining the continuity of the company in maintaining its presence,
especially in the face of global challenges. That requires human resources capable of
creative and innovative value-added products and has the advantage over other products.
5. Oriented to the future

An entrepreneur according to Bygrave (1994) must have the ability to realize how the
vision of the future dreams of personal and business can be achieved. Vision of the future

is essentially a reflection of the commitment, competence and consistency. Orientation
craftsman business vision based on the findings were still weak, with no achievement
scores in the 31% category. This vision is reflected in the weakness of business
management who lack a mature perspective on the future of his business. Weak
perspective is certainly affect planning, strategy and measures of business related to
products that will dihasilkannnya. The principle of craftsmen based on the findings,
which are important products quickly sold, and can meet the needs of family life.
This mindset must be changed if the producers want the business to survive and
prosper. Entrepreneurs who have a vision perspective and a view to the future, where
manifestations are visible on the initiative and ability to work in creating something new
and different to that of today. Although the risk is going to happen, he will remain
steadfast heart to seek opportunities and will face challenges in the future. The views
entrepreneurs oriented to the future, usually always not satisfied with the initiative and
work there.
For that an entrepreneur must perspective, in the sense of having a future vision of
what to do next and that will be achieved. That is because businesses are established not
for a moment, but forever. So that into consideration continuity entrepreneur is far ahead
of his efforts that still exist (survive). For that an entrepreneur needs to prepare a
thorough planning and strategy, so that the business measures that will be implemented in
the future it failed and had to have the confidence to succeed optimism.
6. Take a moderate risk

Findings on the core characteristics possessed Pulutan ceramic artisans in the face of the risk
of its business is in the category of 24% (low) means that producers shy away from the big risk
for the running of the business. This is evidenced from ceramic products generated less creative
and innovative from the aspect of design, ornaments and burning techniques. Generally they have
had enough with the state of existing businesses, which is important quickly sold. , In the case as
an entrepreneur he should have consciousness, that they are working or trying should benefit and
not just settle for a life of their business can be run, with no growth. Because behind the great
risk, there is usually an opportunity for producers to obtain a large enough yield an entrepreneur
because it could not avoid the risk of his efforts.
An entrepreneur is a determinant of risk and not as a risk insurer. As stated Drucker quoted
David Osborne (1992), they were at when determining a decision, has been consciously
understand the risks that will be faced, in the sense that risk is already limited and measurable.
Then the possibility of the emergence of the risks minimized. In this case the application of
innovation is a creative effort to minimize possible risks and attempts to maintain its business in
order to remain sustainable (sustainable).
7. Business Performance Craftsmen.

Mudrajad (2007) states that the performance is the result of which is influenced by the
structure and behavior of the industry in which the results are usually identified with the amount
of profit. Medium according to Hank (1994) one of which can be observed in sales turnover, and
also can be measured by the amount of labor used (Davidson, 1991). To provide an overview of
business performance achievements craftsmen, researchers used indicators: on the amount of
sales turnover per month, profits and workforce. The results showed that the monthly sales
turnover potters 82% are in the range of USD 3,500,000.00 to Rp. 4,500,000.000 with gains
ranging between Rp. 1.500.000,00 until Rp.2.500.000 ,. Average 18% craftsmen were able to get
a sales turnover of over US $ 4,500,000.00 per month with gains ranging between Rp
3,000,000.00 to $ 4,000,000.00. On the other hand 78% potters have an average of one (1) labor
and equipment, and 22% were able to absorb over one (1) labor and equipment.
The advantage is still relatively small in most of the craftsmen as the impact of his sales turnover,
which is a manifestation of a more limited market by increasing competition among craftsmen
and the obligatory selection of ceramics, whether originating in the country (Kasongan, Dinoyo,
Pleret) and outside countries, such as China, Vietnam and others.
Based on the study findings, it was determined Entrepreneurship Empowerment Model
Attitude Influence on Business Performance Ceramics Industry Employers like the following
picture.
INTERNAL CONTAINERS
TRAINING CENTER FOR Feed back
CERAMIC
Fedd back
COACH EMPOWERMENT IMPROVMENT

UNIMA (IMPLEMENTATION) CRAFTSMEN
-Staf UNIMA -Training - ENTREPRENEURSHIP
(PLANNER) -Staf Deperindag -Development - PERFORMANCE BUSINESS
-Dikop-UMKM
RESULT
EXTERNAL CONTAINERS
DEPERINDAG ,BANKS , DINAS
KOP-SME
Feed back
Entrepreneurship Empowerment Model Attitude Effect on

Business Performance Small Industrial Ceramics Pulutan
(Bambang Hermanto, 2015) ICAMESS 2016 page 71
Description Model Implementation steps:
The first phase, which acts as a planner UNIMA represented researchers designed the
program and determine signs joint program of internally container potters and external
container for the benefit of the implementation process of empowering entrepreneurial
attitude craftsmen and business performance improvement;
The second phase, planners together with internal and external container determine the
implementor as agents reformer, whose members come from a team of experts who have
associated competency empowerment craftsmen. The reformer agent consisting of staff
Unima, Diperindag, Ceramic Training Center, Department of Cooperatives and SMEs
and banks. The task of the reformer agencies conduct training activities, guidance and
assistance in the processes and the performance of public attitudes kewirausahaaan
ceramic artisans associated in empowering creativity and innovation ability,
management, performance and institutional;
The third stage, the implementor intervene empowerment through training, coaching and
mentoring, with the aim of creating the repair and improvement of the entrepreneurial
attitude and performance of ceramic artisans Pulutan.
The fourth stage, the results that have been obtained from the activities necessary to have
a good feed back to the planners, internal and external container, implementor (agent
reformer) and the craftsmen for the benefit of reflection
CONCLUSIONS AND RECOMMENDATIONS

A. Conclusion
1. Craftsmen entrepreneurial attitude in general is still weak, as reflected in an average
performance score of 37.33% from the aspects to be indicators of the characteristics of an
entrepreneurial attitude, which is reflected in the ability to design and shape of the product is
generally about the same craftsmen.
2. Achievement of the performance of 82% potters in Pulutan show is still low, and need
treatment empowerment.
3. Availability of raw materials are abundant clay Pulutan not yet fully offset and
supported by the availability of qualified human resources, which can produce ceramic
products with unique features based on local wisdom to the ornament products and
capital support for craftsmen in sufficient numbers. The role of the institution as a
place that can help the business progress craftsmen, such as: Pulutan Ceramic Training
Center, College (UNIMA), the Ministry of Minahasa District and Province, banking is
not optimal in providing aid and assistance.
4. Generally Pulutan ceramic artisans in his position as employers do not yet have a
business license (Registration of Small Industries, AIS), TIN, and good financial

administration.
B. Suggestions
1. To improve the ability of producers to become entrepreneurs with character and have a good
performance and meet the challenges of future competition that still exist and sustained efforts,
the necessary assistance in terms of training, development of relevant institutions such as
universities and the Ministry in order to improve the knowledge and technical skills in the
manufacture of quality ceramic.
2. To generate ceramic products of high quality and competitiveness required additional
capital support for potters in the form of cheap credit from banks and partner agencies
for the benefit of purchasing raw materials and an increase in production capacity, and
reducing the entrapment retenir to the craftsmen.
3. Keep molded containers that become a tool of economic struggle craftsmen, such as
Craftsman Ceramics Cooperative, whose function provides the means of production
equipment needed craftsmen, such as: feldspar, kaolin, dolemit and others, as well as
the provision of the necessary infrastructure, such as the furnace in a large capacity
with heat resistance above 1300 degrees Celsius that can be used together.
Bibliography
Ambar Teguh Sulistiyani, 2004, Kemitraan dan Model-Model Pemberdayaan, Penerbit Gava
Media, Jakarta.
Benfe, Charlles. 1991. Entrepreneur From Zero to Zero. New York : Van Nostrand Reinhold.
Blaum, J. Robert, Edwin A. locke dan Ken G. Smith, J. 2001. A Multidimensiional Model Of
Venture Growth. Academic Management Journal.Vol. 44. No.2, 292-303.
Buchari Alma, 2008, Kewirausahaan, Menumbuhkan Jiwa kewirausahaan bagi Mahasiswa dan
Masyarakat Indonesia, Penerbit Alfabeta, Bandung
Bygrave, William D. 1994, The Portable MBA in Entrepreneurship. John Wiley & Sons. Inc.
New York.
Davidson,P,1991.Continued Entrepreneurship: Ability, Need and Opportunity as
Determinants of Small Firm Growth’, Journal of Business Venturing, Vol. 6, pp. 405-429.
Drucker, Peter, F. 1999. The New Realities. London Heineman Profesional Publishing Ltd.
Idrus, M. Syafii, 2003. Pengembangan Kewirausahaan (Entrepreneurship) dan Peran Perguruan
Tinggi Dalam Rangka Membangun Keunggulan Bersaing bangsa Indonesia. Paper
disampaikan pada Orasi Ilmiah Universitas Pendidikan nasional pada 17 Februari 2003.
Tidak Dipublikasikan.
Mudrajad Kuncoro. 2007. Ekonomika Industri Indonesia Menuju Negara Industri Baru. Penerbit
Andi ,Yokyakarta.
Marbun BN. 1993, Kekuatan dan Kelemahan Perusahaan Kecil, PT. Pustaka Binaman Pressindo,
Jakarta.
Miller, A., B. Willson, and M. Adams .1988. `Financial Performance Patterns of New Corporate
Ventures: An Alternative to Traditional Measures,’ Journal of Business Venturing, Vol 3,
no. 4, pp.287-299

Suharto, Edi, 2006. Membangun Masyarakat Memberdayakan Rakyat, Penerbit Refika Aditama.
Bandung.
Susarsono Wijandi, 1988. Pengantar Kewiraswastaan. Penerbit Sinar Baru. Bandung.
Suparman Sumahamidjaya, 1997. Membina Sikap Mental Wiraswasta. Penerbit Gunung Jati.
Jakarta.
Yuyun Wirasasmita, 1999. Pemikiran Kewirausahaan, Kreativitas, Inovasi, dan Kewirausahaan.
Bandung. Laboratorium Manajemen. Fakultas Ekonomi Unpad.
Yuyus Suryana dan Kartib Bayu, 2014, Kewirausahaan, Pendekatan Karakteristik
Kewirausahaan Sukses, Penerbit Kencana Prenadamedia Group, Jakarta.
Zimmerer, Thomas W., Norman Scarborough., 1996. Entrepreunership The New Venture
Formation. Prentice-Hall International, Inc.

Strategic Management Process to Achieve Surabaya Green City Master Plan
Bayu Rizky Aditya
Burapha University and Brawijaya University
Abstract
The strategic management of Surabaya City Government in achieving green city master plan
drove the city to become a million-park city and awarded as environmentally sustainable city.
This study attempted to analyze the strategic management process of Surabaya City Government
by using qualitative research with interview three key informants in Surabaya Development
Planning Board and analyze the development planning documents. The result showed the
utilization of Information and Technology to bridging the communication between community
and government, allowed the government to run the programs in harmony and appropriate to the
needs of people. It also involved the lowest level of community groups to actively participate in
formulation, implementation, evaluation and control to the programs. The practical weakness of
this study was the absence of public response related to strategic management process and the
researcher suggested the next research should get results from those people who are affected by
the programs.
Keywords: Strategic management, public management, environmental management, people

participation, green city.

Introduction
Currently, Indonesian development activities is increasing and potentially contain the risk
of pollution and environmental damage. The increasing of global warming is also resulted in
climate change thereby contributing to the environmental degradation. This condition resulting in
threaten to the survival of human life. While the Constitution of the Republic of Indonesia of
1945 stated that good and healthy environment is fundamental right for every Indonesian citizen
(Indonesian Act number 32, 2009). Therefore, state, government, and all of the stakeholders are
required to undertake environmental protection and management properly based on the principle
of state responsibility, justice, environmentally friendly, and sustainable development.
According to Indonesian Act number 32 (2004), the granting autonomy to the region is
directed to accelerate the realization of public welfare through service improvement,
empowerment and community participation. So, local government must be able to organize and
manage its own affairs and the interests of people, especially in environmental protection and
management.
In order to realize the Vision as the “City of Service and Smart Trade, Humanized,
Dignified and Environmental Perspective”, then Surabaya City Government create a green city
master plan. Green city was conceived as an answer that emphasizes aspects of environmental
sustainability considerations in solving the urban problems (Murota and Ito, 1996).
By using green city master plan, Surabaya City Government has been directing the city
with various excellent projects to be the leading position in environment preservation and create
Surabaya to become a million-park city. It has been proving by the national and international
awards given to the Surabaya City, such as: Adipura (Indonesian highest award as the cleanest
city), Adiwiyata (Indonesian highest award for environmentally friendly school), Kalpataru
(Indonesian award for person who successful in preserving environment) for many years
simultaneously, Energy Globe Award 2005, Green Apple Award 2007, ASEAN Environment
Sustainable City, Indonesia Green Region Award 2011, Smart City Award 2011 (Surabaya City
Government, 2015).
An organization will be running directionally if it has a goal to be achieved. In
achieving its goals, good organization definitely has a plan. A clear planning is one of the critical
successful factors of an organization to achieve its intended purpose. It also makes the
organization more effective and efficient to achieve the objective as expected. And certainly, any
successful organizations has a set of procedures for making decisions to achieve its objective or
this called strategic management (Bateman & Snell, 1999; Pearce & Robinson, 2007; David,
2007; Coulter, 2013; Wheelen, Hunger, Hoffman, & Bamfoed, 2015). The achievement of
Surabaya City Government in environmental protection and management in accordance with
Çınar & Karcıoğlu (2013) which argue that an organization will be survive for a long time if it
managed professionally with strategic management.
Furthermore, the strategic management model which use and develop by Surabaya City
Government might be one of most effective model to be use by other regions to become more
effective in managing a green city. It will be use as the concept for other regions to adopt and
adjust in accordance with the characteristics of each regions and also accelerate the development
of other regions more effectively and efficiently to achieve local and state goals. As describe by
Lynn (2006, p.1) effective management of public organizations-departments, agencies, bureaus,
and offices- is vital to the success of government programs, policies, and regimes, and perhaps
even of democracy itself.

Literature Review
The utilization of strategy is not only used by the business, it also used in public or
private organization, formal and informal organization (Levicki, 1999). Strategy made by at least
one strategist who takes responsibility for the successful formulation and implementation (White,
2004). Public sector organizations are facing market dynamics with the emergence of the global
economy, advances in technology, increase of societal demands, and the need to provide more
social services with fewer resources (Nutt & Backoff, 1993; Mclnerney & Barrows, 2002). To
the continued viability and effectiveness of governments, the public sector transfer private sector
concepts, such as strategic management (Bryson, 1998; Gecíková & Papcunová 2014).
Strategic management includes environmental scanning (both external and internal),
strategy formulation (strategic or long-range planning), strategy implementation, and evaluation
and control (David, 2007; Dess et al, 2010; Gecíková & Papcunová, 2014; Wheelen et al, 2015).
Effective management of public organization is vital to the success of government programs,
policies, and regimes, and perhaps even of democracy itself (Lynn, 2006, p.1). Strategy is one of
strategic management tool used in local government to address issues related to the quality of life
of local people (Gecíková & Papcunová, 2014).
Bryson (1998) argue that strategic thought and action are increasingly important to the
continued viability and effectiveness of governments, public agencies and non-profit
organizations of all sorts. He added that without strategic planning it is unlikely that these
organizations will be able to meet successfully the numerous challenges that face them.
According to Gecíková & Papcunová (2014) strategy is one of strategic management tool used in
local government to address issues related to the quality of life of local people. And the decisions
are usually general and long-term.
Green City is used as a central issue in an attempt to save the environment from global
warming. It is emphasize on aspects of environmental sustainability considerations in solving
urban problems (Wikantiyoso & Tutuko, 2013). Green city concept was conceived as an answer
that emphasizes aspects of environmental sustainability considerations in solving the urban
problems (Murota and Ito, 1996). It arrange urban space to put green space as an assets,
potential, and long-term investment of city to has economic values, ecological, educational, and
aesthetic as an important part of the city (Widigdo & Canadarma, 2010).
With green city concept, the city is providing green area for healthy lifestyles such as,
bicycle route, pedestrian area, physical exercise, opportunities to socialize, connections to place
and nature, enjoyment and fun, (Beatley, 2012; Brüel, 2012). There are 8 elements of green city,
there are: Green planning and design, Green community, Green open space, Green water, Green
waste, Green energy, Green transportation, Green building (Aditya, 2016).
Methodology
This study is a qualitative study and provides a clear and accurate description of the
circumstances, the situation, and the conditions of the strategic management process of Surabaya
City Government in achieving Green City Master Plan. The data was collected by interviews
with three key informants in Development Planning Board (BAPPEKO) of Surabaya City
Government. They are Head of General and Staffing, Head of Environment and Spatial Affairs,
and Head of Physic and Infrastructure Affairs in BAPPEKO of Surabaya City Government.
BAPPEKO of Surabaya City Government also give development planning documents as
secondary data to support the findings of this study.

Result
To achieve the fourth Mission of current MTDP, then form Surabaya Green City Master
Plan. It is a combination between livable city and sustainable city or sustainable development
concept. The concept of livable city is the city which described as having a comfortable
atmosphere as residence or place to make some activities viewed from various aspects, both
physical (urban facilities, infrastructures, land use, etc.) and non-physical (social relations,
economic activities, etc.) While for sustainable city or sustainable development concept is the
construction to meet the needs of the present without doubt of the ability of future generations to
meet their own needs.
Surabaya Green City Master Plan consist 8 elements, there are: (1) Green planning and
design is set the Regional Spatial Plan (RSP) of Surabaya City which has 30% green open space
of the total area, 20% provided by the public and 10% provided by private; (2) Green open space
is the city will expand and optimize green open space; (3) By Green building, the city
determinate infrastructures and green buildings development policy, and organize Green
Building Award;(4) In Green transport, the city plan for Mass Rapid Transport in the form of
monorail and tram, and provide a network of non-motor vehicle; (5) For Green society the
government will develop facilitator and environmental cadres, organize Free Waste event, and
Surabaya Green and Clean; (6) In Green waste, the government will built recycling centers and
composting houses, develop Benowo landfill by using “trash-to-energy” technology; (7) Green
water will be realized by develop a clean and drinking water network, wastewater network and
urban domestic garbage management; and (8) Green energy will be conducted by developing an
alternative energy like solar cell in public infrastructure, construction of cogeneration power
source in the industry.
To realize Surabaya Green City Master Plan, the strategic management conducted by
Surabaya City Government consists of environmental scanning, strategy formulation, strategy
implementation, and evaluation and control. In the case of scanning external environment, it
contain scanning opportunities and threats, and strength and weakness for scanning internal
environment. However, the environmental scanning conducted by BAPPEKO of Surabaya is not
only based on SWOT analysis. Besides using SWOT analysis, it was found that Surabaya City
Government also do netting to the people aspiration via E-Musrenbang. By E-Musrenbang
people in Neighborhood Association level can check their proposal from beginning to the end of
process.
The strategy formulation to achieve Surabaya Green City Master Plan is the process of
investigation, analysis, and decision making to achieve the goal. It includes defining mission,
specifying achievable objectives, crafting strategies and setting policy guidelines. It purpose to
develop a long-range planning that will assist Surabaya City Government in achieving Surabaya
Green City Master Plan. It contain mission, objectives, strategies, and policies. To realize the
formulation, then the strategy implementation process put strategies and policies into action
through the development of programs and budgets. Programs is an activities needed to
accomplish a plan and budgets is a cost of the programs in Surabaya Green City Master Plan.
The last process is evaluation and control. It is a process of in which Surabaya City
Government activities and performance results are monitored so that actual performance can be
compared with desired performance. However, it is also, people who have proposed proposal via
E-Musrenbang can perform control at all times related to measures the policy taken by the
government. Even in the implementation of Surabaya Green City Master Plan program in the
field, the community can monitor even evaluation through Surabaya Media Center (E-

Sapawarga, Surabaya.go.id, Twitter, Facebook, Email, and Call Center / SMS) provided by
Surabaya City Government.
Figure 1. The strategic management process of Surabaya City Government in achieving Green
City Master Plan. By using IT, the community is actively involved in every process to achieve
Green City Master Plan.
Discussion & Conclusion
Discuss the strengths and contribution of research to theory and practice. Limitations and
future research directions with conclusion.
In strategic management process in public sector, Surabaya City Government show that
the communication between service provider and service recipient is the key element to make an
appropriate policy. The utilization of IT as a media to bridge the communication between both of
them, make the government running effective and efficient. The practical weakness of this study
was the absence of public response related to strategic management process carried out by the
Surabaya City Government in achieving green city master plan. The researcher suggested the
next research should get results from those people who are affected by the programs.
The utilization of Information & Technology (IT) as a media make connection between
service providers and service recipient (government and society) running in harmony, the
policies taken is more responsive and appropriate to the need of people. The utilization of IT as a
media make the lowest level of community groups is also actively participating. The existence of
BAPPEKO who has the responsibility to takes the successful formulation and evaluation and can
described as a strategist in Surabaya City Government organization.
Reference
Aditya, B. R. (2016). An analysis of strategic management process of Surabaya City
Government to achieve green city master plan (Unpublished master's thesis). Burapha
University, Chonburi, Thailand.
Bateman, T. S., & Snell, S. A. (1999). Management: Building competitive advantage (4th ed.).
Boston: Irwin/McGraw-Hill.
Beatley, T. (2012). Introduction: Why Study European Cities?. In Green Cities of Europe (pp. 1-
28). Island Press/Center for Resource Economics.
Brüel, M. (2012). Copenhagen, Denmark: Green City amid the Finger Metropolis. In Green
Cities of Europe (pp. 83-108). Island Press/Center for Resource Economics.
Bryson, J. M. (1988). A strategic planning process for public and non-profit organizations. Long
range planning, 21(1), 73-81.
Coulter, M. (2013). Strategic management in action (6th ed.). United State: Pearson Education.
Çınar, O., & Karcıoğlu, F. (2013). The Relationship between Strategic Management,
Institutionalization and Human Resource Management: A Survey Study with Family
Businesses Located in the Northeast Anatolia Sub Economic Region of
Turkey. Procedia-Social and Behavioral Sciences, 99, 835-842.
David, F. R. (2007). Strategic management: Concept and cases (11th ed.). United States:
Pearson Prentice Hall.
Dess, G. G., Lumpkin, G. T., & Eisner, A. B. (2010). Strategic management: Creating
competitive advantages (5th ed.). Singapore: McGRAW-HILL.
Gecíková, I., & Papcunová, V. (2014). Using of strategic management tools in conditions of
local self-government in Slovakia. Procedia-Social and Behavioral Sciences, 110, 969-
978.
Indonesia, R. (2004). Indonesian Act number 32 of 2004 on Local Government. Retrieved from
Ministry of Law and Human Rights of the Republic of Indonesia website:
http://peraturan.go.id/uu/nomor-32-tahun-2004.html
Indonesia, R. (2009). Indonesian Act number 32 of 2009 on Protection and Environmental
Management. Retrieved from Ministry of Law and Human Rights of the Republic of
Indonesia website: http://peraturan.go.id/uu/nomor-32-tahun-2009.html
Levicki, C. (1999). The interactive strategy workout: Analyze and develop the fitness of your
business (2nd ed.). Great Britain: Financial Times Prentice Hall.
Lynn, L. E. (2006). Public management: Old and new. United States: Routledge.
McInerney, R. & Barrows, D. (2002). Management tools for creating government
responsiveness: The liquor control board of Ontario as a context for creating change. The
innovation journal: The Public Sector Innovation Journal, 7(3), article 10. Retrieved from
http://www.innovation.cc/volumes-issues/vol7-iss3_leadership.htm
Murota, Y., & Ito, K. (1996). Global warming and developing countries: The possibility of a
solution by accelerating development. Energy Policy, 24(12), 1061-1077.
Nutt, P. C., & Backoff, R. W. (1993). Transforming public organization with strategic
management and strategic leadership. Journal of Management, 19(2), 299-347. doi:
10.1177/014920639301900206
Pearce, J. A., & Robinson, R. B. (2007). Strategic management: Formulation, implementation,
and control (10th ed.). New York, US: Irwin/McGraw-Hill.
Surabaya. (2015). Profile of Surabaya City. Retrieved October 11, 2015, from
http://www.surabaya.go.id/berita/8224-profil-of-surabaya
Widigdo, W., & Canadarma, I. K. (2010). Surabaya sebagai kota taman atau “green city”.
Retrieved from Universitas Kristen Petra website:
http://repository.petra.ac.id/15196/1/Surabaya_menjadi_Kota_Taman_atau.pdf
Wikantiyoso, R., & Tutuko, P. (2013). Planning Review: Green City Design Approach for
Global Warming Anticipatory. International Review for Spatial Planning and
Sustainable Development, 1(3), 4-18.

Wheelen, T. L., Hunger, J. D., Hoffman, A. N., & Bamfoed, C. E. (2015). Strategic management
and business policy: Globalization, innovation, and sustainability (14th ed.). United
States: Pearson Education.
White, C. (2004). Strategic management. China: Palgrave Macmillan.

Liquidity Risk Impact on Systemic Risk in Indonesian Banking :
An Effort to Maintain Stability of the Financial System
Alfiana
Widyatama University
alfiana.dra@widyatama.ac.id
Abstract
Liquidity risk is the most relevant type of risk that should be monitored and mitigated during each
systemic phase (Blancer et al., 2013), that is, liquidity risk should positively correlate to systemic risk,
as Gonzales and Hermosillo (1999) and Edison (2003) studied. Nonetheless, liquidity risk negatively
correlated to systemic risk in Indonesian Banking,. This study aimed at determining liquidity risk
impact on systemic risk and direction relationship by using regression analysis in the present of/
absence of one month lag. This study applied Explorative Research methodology with study type of
verification research and secondary data. As a conclusion, liquidity risk negatively correlate and
positively correlateto systemic risk by 6 % and 12.2 %, respectively. The paper expectedly contributes
to bankers and central bank in managing liquidity risk in order to reduce systemic risk.
Keywords : Liquidity risk, Systemic risk, Banking
1.Introduction
1.1 Background of the Study
One of financial risks is liquidity ratio. This risk can lead to bank collapse (Gonzalez and
Hermosillo, 1999) It is one of possible sources of financial instability (Hauben, et al 2004; Schinasi,
2005), a risk type which one should keep an eye on and exert efforts to reduce at its each phase
(Blancher, et al., 2013), and is one of microprudential indicators, which monitor financial stability to
measure a potential emerging risk pressure, specifically, crisis-inducing systemic disruption (Evan, et
al., 2000; Bank Indonesia, 2007).
Figure 1: Liquidity Risk

Source: Indonesia Banking Statistic (2007-2014)
Loan-to-deposit ratio (LDR) per June 2013 represented Liquidity Ratio in Indonesian
banking, showing a fluctuating increased trend of Liquidity Ratio. LDR above 80% indicated shortage
in liquidity, resulting in an increased liquidity risk in Indonesian banking.
ICAMESS 2016 page 8

In one hand, increasingly dynamic, diverse, and complex innovated financial products
brought about various options in collecting and distributing fund in the financial system. In another
hand, the product brought about various source triggering an elevated instability in financial system as
well. As a consequence, it is more challenging to remedy instability in the financial system.
Stability in financial system is an important precondition requirement for economic growth.
Under instable and inefficient financial system, fund allocation does not run optimally, so doesn't
implementation of the savings and loans (intermediation function) in the financial system. Stability in
financial system or finance involves efforts to avoid financial crisis (MacFarlene, 1999), which is
categorised as "systemic" if multiple banks fail simultaneously or if failure of one bank spread as
contagion to other banks, resulting in failure of multiple banks (Acharya, 2009). Račickas and
Vasiliauskaitė (2010) suggested financial crisis classification in which banking crisis was one of
financial crises by financial crisis source. Deltuvaite (2013) seconded their suggestion by defining
banking crisis as a consequence of systemic risk in banking sector through one or multiple propagation
channels.
Laeven and Valencia (2012) mapped countries, one of which was Indonesia, under systemic
banking crises 1970-2011. Indonesia showed higher output loss, increase in public debt, monetary
expansion, fiscal cost, peak liquidity, liquidity support, and peak NPLs and longer crisis period than
average developing countries and average countries under banking crisis (Laeven and Valencia, 2012).
They were accompanied with the highest fiscal cost, 8th debt rank and 16th output loss of 137 countries
under banking crises 1970-2011 (Laeven and Valencia, 2012). They indicated that systemic banking
crisis in Indonesia was more severe than in other countries. Danareksa Research Institute's Banking
Pressure Index (BPI) and the Bank Indonesia's Financial Stability Index (FSI) corroborated Laeven
and Valencia (2012). The former detected the odds of banking crisis with threshold 0.5 and the latter
— 2, as shown by Figure 2 and 3, pointing out similarity along with 1997-2008 crisis.
FSI published once in 6 months, more often than BPI, so that public got recent information
about financial stability condition in Indonesia.
Figure 2: Banking Pressure Index Figure 3: Financial Stability Index

Indonesia, 1997-2009 Indonesia, 1996-2009
Source: Ministry of Finance 2010 Source: Ministry of Finance 2010
According to a former finance minister Chatib Basri, Indonesian crisis happened in 2013,
an information of which was tightly controlled to avoid. In Figure 4, the crisis was marked with yellow
color, signifying financial system disruption under alert level.
ICAMESS 2016 page 9

Figure 4: Financial Stability Index
Source: Gunadi, Taruna dan Harun (2014)
Given recurrent and vast effects the systemic banking crisis induced against stability in
Indonesian financial system, factors bringing about systemic banking crisis should be investigated and
systemic risk research should be enhanced.
Buhler and Prokopchuk (2010) discussed the importance of systemic risk in the banking
sector in comparison with other sectors and concluded that seven out of eight cases of systemic risk in
the banking sector were significantly larger than other economic sectors (Automobiles & Parts, Basic
Material, Consumer Services, Food & Beverage, Healthcare, Industrial, Insurance-Personal &
Household,Technology). Systemic risk was also significantly higher in the banking sector than
insurance, construction, and food sectors (Muns and Bijlsma, 2011).
Previous studies by Gonzales and Hermosillo (1999) and Edison (2003) showed that liquidity
risk positively correlated to systemic risk.
1.2 Purpose and Benefit

The purpose is to determine impact of an increase in liquidity risk on systemic risk and its
direction relationship in Indonesian banking by using 6 systematic risk proxies (Alfiana et al., 2015a)
— (1) proxy of credit reduction, (2) proxy of asset reduction, (3) proxy of credit growth, (4) proxy of
asset growth, (5) proxy of ratio of credit-to-asset reduction, (6) proxy of ratio of slowdown in credit-to-
asset growth in the presence / absence of one-month lag . The expected benefits of this study is to
provide feedback to the society, researchers, bankers, and central bank regarding (1) which proxies are
significant as proxies of systemic risk; (2) the impact of liquidity risk on systemic risk, in the absence
of the Financial System Safety regulation to anticipate banking crisis with systemic impact.
2. Literature review
2.1 Liquidity risk
Bank Indonesia (2011) defined liquidity risk as "risks arises on account of bank's inability to
meet its matured obligations with its funding sources from cash flows and / or from high-quality
pledgable liquid assets in the absence of disruption in the bank financial activities and condition." The
purpose of monitoring liquidity risk is to minimize the possibility of the bank's inability in obtaining
cash flow funding sources.

2.2 Systemic risk
One should know in assessing systemic risk that systemic risk is (1) difficult to define (IMF,
2009), (2) difficult to measure (IMF, 2009, (3) not uniformly defined (Schuler, 2002), (4) not clearly
defined (Kaufman and Scott, 2003), (5) ambiguous (Kaufman and Scott.2003), not owing widely
accepted definition yet (Billio et al., 2012), allowing it to have various proxies, so do terms in systemic
risk field. Synonyms of term "systemic risk" in previous literatures are (1) banking crisis (Demirguc
Kunt dan Detragiache, 1998); (2) Systemic financial crisis (Acharya 2009); (3) Systemic banking risk
(Gramlich,et al., 2010:); (4) Systemic banking crisis (Muns and Bijlsma, 2001; laeven and Velencia,
2012; Oet, et al., 2013; Hosni, 2014). (5) Systemic banking risk (Li, Wang, and He, 2013; Kane, 2002;
Acharya, 2009:, Busuioc - Witowschi and Cuza, 2010:1)
Systemic risk was a potential harmful contingency of a sudden event or events, resulting in
powerful unfavourable and inevitable result to the real economy (G10, 2001; IMF & FSB, 2009;
Acharya et al., 2010a; Bini Smaghi, 2009; Adrian & Brunermeir, 2008 & 2011) and sparking:
1. a loss of economic value or trust in and accompanying increments in uncertainly around a
reasonable piece of the adequately strong financial system (G10 , 2001; Mishkin, 1995)
2. a broad failure, demonstrated by co-movement (correlation) among most or each one of the
components (Kaufman and Scot, 2003), incapacitating and interfering with intermediation
ability of the entire financial system (Adrian and Brunermeir, 2008 & 2011; IMF and FSB,
2009), and happened in all over system, rather than failure in individual components or
sections (Kaufman and Scot, 2003);
3. freezing up of capital markets (Acharya, et al., 2009a; Acharya et al., 2009a in Eujffinger,
2009)
4. an institutional distress or stress on an crucial element of the financial sector, including:
a) vital financial institutions — either big or smaller ones (Acharya, et al., 2010a) —
systematically encountering a huge challenges in punctually repaying contracts (Laeven
and Valencia, 2008)
b) undercapitalized financial system as a whole (Engle et al., 2012),
c) state corporates and financial sectors under a large scale of defaults (Laeven and
Valencia, 2008), which widely spread (Adrian and Brunermeir, 2008 & 2009) and
decrease credit readiness for use (Bini Smaghi, 2009)
Meanwhile, the powerful unfavourable consequences include:
1. disturbed information in financial markets (Mishkin, 1995), which were incapable to
adequately funnel funds to those with the most profitable venture opportunities (Mishkin,
1995);
2. concomitant depressed asset prices, such as stock and real estate price, close behind a sudden
increase before the crisis (Laeven and Valencia, 2008);
3. marked increases in real interest rates (Laeven and Valencia, 2008) and a deceleration or
inversion in capital flows (Laeven and Valencia, 2008);
4. potentially and significantly shrinking the supply of such intermediated capital and credit
readiness for use (Adrian and Brunermeir, 2008 & 2009; Acharya et al., 2009a in Eujffinger,
2009) that likely incline financial establishments becoming undercapitalized (Engle et al.,
2012) or even depleted (Laeven and Valencia, 2008)
5. firmly raising of non-performing loans (Laeven and Valencia, 2008);

6. a high correlation and bunching of bank failure in one or more nations or across the world
(Kaufman and Scot, 2003).
From the definitions abovementioned, it can be concluded that systemic risk is a disruptive
event, which abruptly distort information in the financial system, decrease the level of trust / certainty,
and make the participants of the financial system to be unable to perform the intermediation function
— distribute and collect funds / credits / capitals / assets — in the most effective and efficient way or
the supply / availability of funds / credits / capitals / assets diminishes so as to potentially adversely
affect the real economy or inflict financial loss in the real economy.
2.3 Correlation between Liquidity Risk and Systemic Risk
Bank collapse is partly brought about by the liquidity risk conditions (Gonzales and
Hermosillo, 1999a: 37), which is one of the possible sources of financial instability (Hauben, Kakes
and Schinasi, 2004.19; Schinasi, 2005: 6). Instability is systemic risk (Kaufman and Scott, 2003: 371;
Adrian and Brunermeir 2008, 2011: 1; ECB 2010: 138; and Billio et al., 2012: 537). Blanchard et al.
(2013.8) suggest that liquidity risk was categorized as the risk type, which must be monitored and
reduced at each phase of systemic risk. Evan et al. (2000: 4) and Bank Indonesia (2007: 10 & 14)
monitored financial stability for measuring the risk pressure that would arise, specifically, systemic
disruption that will give birth to a crisis. Indicators used included macroprudential and macroeconomic
indicators. Monitoring macroprudential indicator revealed the potential liquidity risk.
3 RESEARCH METHOD
This applied explorative verification research method by using regression and secondary data.
Data and proxies of systematic risk and liquidity risk were collected from the Indonesian banking
industry from December 2007 - November 2014. The object of this study is the systemic risk arising
from liquidity risk. Research period spanned from 2007 to 2014.
3.1 Correlation model between systematic and liquidity risks
SYSTEMIC RISK = f (LIQUIDITY RISK) ………. (1)
SYSTEMIC RISK = bo + b1 (LIQUIDITY RISK ) ….….... (2)
Where,:
n (∑ LIQUIDITY RISK SYSTEMIC RISK) – (∑ LIQUIDITY RISK) (∑SYSTEMIC RISK)

b1= ---------------------------------------------------------------------------------------------------- .. (3)
n (∑ LIQUIDITY RISK2) – (∑ LIQUIDITY RISK)2
∑ SYSTEMIC RISK – b1 (∑ LIQUIDITY RISK)

b0 = --------------------------------------------------------------- ……… (4)
n
Korelasi (r)
The correlation model is as follow:
n (∑ LIQUIDITY RISK SYSTEMIC RISK) – (∑ LIQUIDITY RISK) (∑SISTEMIC RISK)

r = -------------------------------------------------------------------------------------------------- .. (5)
(n (∑ LIQUIDITY RISK2) – (∑ LIQUIDITY RISK)2 )½ (n (∑ SYSTEMIC RISK2) – (∑ SYSTEMIC RISK)2) ½

Determinant Coefficient (R)
R = r2 …..… (6)
3.2.Proxy Systemic Risk
Credit Reduction = CREDIT t+1 - CREDIT t ….. (7)
Asset Reduction = ASSET t+1 - ASSET t .…. (8)
CREDIT t+1 - CREDIT t

Credit Growth = ---------------------------------- ….. (9)
CREDIT t
ASSET t+1 - ASSET t

Asset Growth = -------------------------------- …. (10)
ASSET t

Rasio of Credit to Asset Reduction = -------------------------------- … (11)
ASSET t+1 - ASSET t

---------------------------------
Ratio of CREDIT t
Slowdown in = ----------------------------------- ….(12)
Credit to Asset Growth ASSET t+1 - ASSET t
------------------------------
ASSETt
Sources : Alfiana et al (2015)
3.3 Liquidity Risk Proxy
Credit Total
Risk Liquidity = ---------------------------------- ………. (13)
Deposit Total
Sources : Evans, Leone, Gill dan Hilbers (2000,4), Bank Indonesia (2007,14)
3.4 Population and Sample

Sampling method applied census for all 119 Indonesian commercial banks.
3.5 Data Collection Technique

Collecting secondary data used bibliographical study, including research reports, text
journals, newspapers, proceedings, www.bi.go.id, and www.ojk.go.id.

4 DISCUSSION
Table 1 presented liquidity risk impact on systemic risk in the Indonesian banking in the
presence/ absence of 1-month lag by using 6 proxies of systemic risk.
Table 1: Impact, Significanse and Equation Model between Liquidy Risk and Systemic Risk
Ratio of Ratio of
Proxy Sistemic Credit Asset Credit Asset Credit to Slowdown in
Risk Reduction Reduction Growth Growth Asset Credit to
Reduction Asset Growth
R 0.084 0.066 0.015 0.002 0.060 0.062
Regression sig 0.000 0.018 0.508 0.452 0.023 0.021
in absence -83,267.81 -127.006.48 0.023 0.002 23,16 45,54
of one bo 0.016 -1.796 1.205 0.0903 2.511 2.528
month lag
143.939,21 212.843.25 -0.008 0.012 -26.52 -52.54
bi
3,378 2.413 -0.353 0.3146 -2.305 -.2.339
R 0.0771 0.0847 0.001 0.030 0.082 0.083
Regression sig 0.002 0.001 0.517 0.079 0.008 0.008
in present -79.134,12 -189.709,45 0.021 -0.021 26.931 52.45
of one bo -2.267 -2.738 1.164 -1.004 2.909 2,899
month lag
138.829.66 290.982,06 -0.007 0.042 -31.256 -61.23
bi
3.184 3.361 -0.325 1.588 -2702 -2.710
Sources : Calculation by Authors
Applying regression in the absence of 1-month lag, liquidity risk insignificantly impact on
systemic risk by using proxy of credit reduction and proxy of asset reduction. Credit risk significantly
negatively impacted on systemic risk by using proxy of ratio of credit to asset reduction and ratio of
slowdown in credit-to-asset growth at α = 5%. Credit risk significantly positively impacted on
systemic risk by using proxy of credit reduction and proxy of asset reduction at α = 5%. It was in
accordance with Gonzalez and Hermosillo (1999) and Edison (2003) pointing out that liquidity risk
positively correlated with systemic risk. Liquidity risk positively and negatively impacted on systemic
risk at 6-6.2% and 6.6-12.2%, respectively.
Applying regression in the presence of 1-month lag, liquidity risk insignificantly impacted
on systemic risk by using proxy of slowdown in credit growth and proxy of slowdown in asset growth.
Credit risk significantly negatively impacted on systemic risk by using proxy of ratio of credit to asset
reduction and ratio of slowdown in credit-to-asset growth at α = 5%. Credit risk significantly
positively impacted on systemic risk by using proxy of credit reduction and proxy of asset reduction at
α = 5%. It was in accordance with Gonzalez and Hermosillo (1999) and Edison (2003) pointing out
that liquidity risk positively correlated with systemic risk. Liquidity risk positively and negatively
impacted on systemic risk at 8.2-8.3% and 11.1-12.2%, respectively.
Liquidity risk slightly negatively and positively impacted on systemic risk at 6 and 12,2,
respectively, in the presence and absence of 1-month absence. Nevertheless, there were more
influential variables on systemic risk. First, 11 proxies indicating liquidity risk (Bank Indonesia, 2011);
second, various influential indicators/ variables on systemic risk.

Evan et al, (2000) aggregated macroprudential and macroeconomic indicators and argued
that macro-prudential indicators reduced systemic risk impact. Aggregated macroprudential indicator
consisted of capital adequacy, asset quality (lending institution, borrowing entity), management
soundness, earning and profitability, liquidity, sensitivity to market risk, and market-based indicator.
Concurrently, macroeconomic indicator consisted of economic growth (aggregate growth rates,
sectoral slumps), balance of payment, inflation, interest and exchange rates, contagion effects, and
other factor. Capital adequacy effect was only one of sources instability financial or systemic risk. But
Evan et al.’s paper has several limitations: first, it was only monitoring and assessing the condition of
banking financial soundness, while there were many institutions in the financial system; second. Evan
et al. had not included market and infrastructure as influential factors on systemic risk.
Sundrarajan et al (2002) stated that core and encouraged indicators were influential factors
on financial performance.. They were accompanied with deposit-taking institutions, other financial
corporation, non-financial corporation, households, and market (market liquidity and real estate
market), but not infrastructure.
Hauben et al (2004) and Schinasi (2005) pointed out that two factors — endogenous and
exogenous risks — influenced financial system performance. Endogenous risk was further broken into
(1) institution-based; (2) market-based; and (3) infrastructure-based risks. Exogenous risk consisted of
(1) macroeconomic disturbances (economic environment risk, policy imbalances) and (2) event risk
(natural disaster, political event, large business failures). Institution-based risk consisted of (a)
financial risks (credit, market, liquidity, interest, currency risks); (b) operational risk; (c) weaknesses in
information technology; (d) legal/ integrity risk; (e) reputation risk; (f) business strategy risk; (g)
concentration risk; and (h) Capital Adequacy Risk. Market-based risk consisted of (a) counterparty
risk; (b) asset price misalignment; (c) run on markets (credit, liquidity); and (d) contagion.
Infrastructure-based consisted of (a) clearance, payment and settlement system risks; (b) infrastructure
fragilities (legal, regulatory, accounting, supervisory); (c) collapse of confidence leading to runs; (d)
domino effect. Capital adequacy risk was only one source of risk to financial instability.
Morttinen et al (2005) suggested internal, external, and contagion factors for
macroprudential indicator. Internal factors consisted of (1) profitability, balance sheet quality, and
capital adequacy (income composition, cost composition, efficiency, profitability indicators, balance
sheet coverage, asset composition, liability composition, off-balance sheet items, capital adequacy,
asset quality, flow of provisions); (2) Demand and supply (competitive) condition; (3) Risk
Concentration (credit growth and structural concentration, composition of other assets, liquidity risk,
exposure of EU 15 to new EU member countries, exposures towards emerging and developing
countries, and market risk exposure); (4) Market assessment of risk. External factors consisted of (1)
financial fragility; (2) asset price developments; and (3) Cyclical and monetary conditions. Contagion
factors consisted of interbank market. Morttinen et al considered contagion was important, therefore a
separate factor in macroprudential indicator. According to Morttinen et al., contagion was a small part
of macroprudential indicators and it brought about a reasonable small impact on systemic risk.
In accordance with Evan (2000), Hauben et al (2004), and Schinasi (2005), Morttinen et al
(2005) suggested identification factor for systemic risk sources. Therefore, the lower Liquidity Risk
influence on systemic risk is reasonable.
Alfiana and Alfiana et al. revealed several findings. First, credit risk influenced systemic
risk in Indonesian Banking System by -14.88 % to 5.3 %, depending on proxies of systemic risk and
data in the presence/ absence of one-month lag (Alfiana et al, 2015a). Second, , bank run influenced
systemic risk in Indonesian Banking by -9.7 % to 87.6 %, depending on proxies of systemic risk and
data in the presence/ absence of one-month lag (Alfiana et al, 2015b). Third, , interest rate, inflation
and exchange rate, which were influential factors on systemic risk, had negative and positive

relationships with systemic risk by 7.77 % - 24.22 % (Alfiana, 2015d d). Fourth, contagion influenced
systemic risk in Indonesian Banking by -10.64 % to + 4.389 %, depending on proxies of systemic risk
and data in the presence/ absence of one-month lag (Alfiana , 2015c). Fifth, market risk influenced
systemic risk in Indonesian Banking by 8.8 % to 16.2 %, depending on proxies of systemic risk and
data in the presence/ absence one-month lag (Alfiana 2015e). Sixth, capital adecuacy risk influenced
systemic risk in Indonesian Banking by 13.4 % with negative and positive relationship by 10.9 %.
(Alfiana,2016)
The result also showed insignificant result by using proxy of slowdown in credit growth and
proxy of asset reduction in both the presence and absence of 1-month lag.
5. Conclusion and Suggestion

Liquidity risk includes endogenous risk of financial institutions. If the financial institutions
experience liquidity risk, it will directly or indirectly and more or less affect the instability of the
financial system, which is a systemic risk (IMF, 2009). Hence, liquidity risk should positively correlate
to systemic risk. However, both negatively correlate by using (1) ratio of credit reduction; (2) ratio of
slowdown in credit and asset growth in the presence/ absence of 1-month lag.
Liquidity risk negatively and positively impacted on Indonesian banking in 2007-2014 at
6% and 12.2%, respectively.
Limitations of this study were (1) simple methodology by merely using linear regression;
(2) ratio of credit and deposit only from Bank Indonesia's Statistics, not from all banks, while total
movement of liquidity risk poorly reflected movement of the credit risk of individual banks.
It is expected that this study will contribute to bankers and the Central Bank in managing
liquidity risk in order to diminish systematic risk in the absence of the Financial System Protection Net
law in Indonesia to anticipate impact on systemic banking crisis.
Further research is recommended to use other factors expected to affect systemic risk, either
endogenous risk (institutions, markets and financial infrastructure) or exogenous risks (macroeconomic
disruption and risk of incident). Those can be investigated in further research, because liquidity risk is
negatively and positively impacted on Indonesian only at 6% and 12.2%, respectively.
References
Acharya, V.V. 2009. A Theory of Systemic Risk and Design of Prudential Bank Regulation. Journal of
Financial Stability, Vol. 5(3), p. 224-255.
Acharya, V.V., Pedersen, L. Philippon, T., Richardson, M. 2009a. Regulating Systemic Risk. In
Restoring Financial Stability: How to Repair a Failed System, John Wiley & Sons, 2009.
416 p.
Acharya, V.V., Pedersen, L.H., Philippon, T., Richardson, M. 2010a. A Tax on Systemic Risk. New
York University Stern School of Business Working paper, p. 1-40
Adrian, T., Brunnermeier, M.K. (2008). CoVaR , working paper Staff Report Federal Reserve Bank of
New York, No. 348 Sept
Adrian, T. and M. K. Brunnermeier 2009a. CoVaR. Paper dipresentasikan pada CEPR/ESI 13 th
Annual Conference on ‘Financial Supervision in an Uncertain World’ pada 25-26
September 2009 in Venice. Staff Report 348, Federal Reserve Bank of New York.

Adrian, T., Brunnermeier, M.K. 2009b. CoVaR working paper Staff Report Federal Reserve Bank of
New York, No. 348 Revised August 2009
Adrian, T., Brunnermeier, M.K. (2011) CoVaR. NBER Working Papers No. 17454, National Bureau
of Economic Research.
Alfiana., Sule, Sutisna, Masyita (2015a), Credit Risk Influence on Systemic Risk in Indonesia Banking
System, Proceedings of 4th International Conference on Management, Finance and
Entrepreneurship ICMFE-2015, ISSN 2311-6269, April 2015, Medan Indonesia
Alfiana., Sule, Sutisna, Masyita (2015b), A Bank run influence on Systemic Risk in Indonesian
Banking”, Proceeding on 7th International Conference on Economics and Social Science
ISSN 2307-7549 16-17 May 2015 Penang, Malaysia.
Alfiana (2015 c), Contagion and Systemic Risks : The Case of Indonesian Banking, The Global
Advanced Research Conference on Management and Business Studies (GARCOMBS)
14-15 Oktober 2015, Bali Indonesia
.Alfiana (2015d ), Systemic risk via exogenous risk of macroeconomic in Indonesia banking 2007-
2014, working paper January, Unpublished.
Alfiana (2015, e) Dampak risiko Pasar terhadap risiko sistemik pada Perekonomian Indonesia,
working paper, Unpublished
Alfiana (2016), Capital Adecuacy Risk and Systemic Risk : An Effort to An
ticipate Banking Crisis with Systemic Risk, 13 th International Annual Symposium on
Management, March 18-20 th 2016 at. Ho Chi Minh City Vietnam.
Bank Indonesia. 2007,Stabilitas Sistem Keuangan, Apa, Mengapa, dan Bagaimana? Bank Indonesia
Jakarta.
Bank Indonesia. 2011a, Surat Edaran Bank Indonesia No. 13/23/DPNP perihal penilaian tingkat
kesehatan bank umum, 25 Oktober dan lampiran 1.
Bank Indonesia 2011b, Surat Edaran Bank Indonesia No. 13/23/DPNP perihal penilaian tingkat
kesehatan bank umum, 25 Oktober dan lampiran I.1a
Basri, Chatib. 2014. Tahun lalu sebenarnya RI terjadi Krisis, www.finance.detik.com 25 November
2014
Billio, M., Getmansky, M., Lo, A.W., Pelizzon, L. .2012.. Econometric Measures of Connectedness
and Systemic Risk in the Finance and Insurance Sectors. Journal of Financial Economics,
Vol. 104 (3), p. 535-559.
Bini S.L. 2009. Macro-prudential Supervision. Speech delivered at the CEPR/ESI 13th Annual
Conference on ‘Financial Supervision in an Uncertain World’ on 25-26 September 2009 in
Venice Bank for International Settlements (BIS). 1994. 64th Annual Report. Basel,
Switzerland: BIS.
Blancer, N., Mitra, S., Morsy, H., Otani, A., Severo, T. dan Valderrama, L. 2013 Systemic Risk
Monitoring (“SysMo”) Toolkit, A User Guide, IMF working paper WP/13/168, July
Buhler, W., and Prokopczuk.Marcel. 2010. Systemic risk: is the banking sector special? SSRN
1612683.2010, papers ssrn.com
Busuioc-Witowschi, I.R., Cuza, A.I. 2010. Theories about the Financial Crises. Studies and Scientific
Researches, Economic Edition, No. 15, 2010
Deltuvaite, V. 2013. A Framework for Systemic Risk Management Decision Making Simulation in the
Banking Sector. Summary of Doctoral Dissertation Social Sciences, Management (O3S)

Demirguc-Kunt, A., Detragiache, E. 1998. The Determinants of Banking Crises in Developing and
Developed Countries. IMF staff Papers. Vol. 45 No. 1, March. .
Departemen Keuangan Republik Indonesia, 2010, Buku Putih Upaya Pemerintah dalam Pencegahan
dan Penanganan Krisis, Tim Asistensi Sosialisasi Kebijakan Pencegahan dan Penanganan
Krisis Sistem Keuangan
Edison, Hali J. 2003, Do Indicator of financial crises work? An evaluation of an early warning
system, International Finance Discussion Paper Number 675, Board of Governors of the
Federal Reserve System. July
Eijffinger,C.W. Sylvester .2009. Defining and Measuring Systemic Risk, The European Parliament’s
Committee on Economic and Monetary Affairs.
Engle, Robert., Jondeau, Eric., Rockinger, Michael., 2012. Systemic Risk in Europe, Swiss Finance
Institute, Research Paper Series No. 12-45
European Central Bank (ECB). 2010a. Financial Stability Review. June, 2010, p. 225.
European Central Bank (ECB) .2010b.. Financial Stability Review. December, 2010, p. 210.
Evan, O., Leone, Alfredo M., Gill, Mahinder., Hilbers, Paul. 2000, Macroprudential Indicators of
Financial System Soundness IMF Occasional Paper no. 192, April.
Gramlich, D., Miller, G.L., Oet, M.V., Ong, S.J. 2010. Early Warning Systems for Systemic Banking
Risk: Critical Review and Modeling Implications. Banks and Bank Systems, Vol. 5 (2), p.
199-211.
Group of ten (G10), (2001). Report on Consolidation in Financial Sector. Chapter III, p.126 IMF
2001. ISBN 929131-611-3
Gonzalez Brenda., Hermosillo. 1999a. Developing Indicators to Provide Early Warnings of Banking
Crises. Finance&Development, June 1999
Gonzalez Brenda., Hermosillo. 1999b. Determinants of Ex-Ante Banking System Distress : A Macro-
Micro Empirical Exploration of Some Recent Episodes, IMF Working Paper WP/99/ 33
Gunadi,Iman., Taruna, Aditya Anta., Harun, Cicilia Anggadewi.2014. Penggunaan Indeks Stabilitas
Keuangan (ISSK) dalam Pelaksanaan Surveilans Makroprudensial. Bank Indonesia
Research Paper. Kajian Stabilitas Keuangan no. 22, Maret
Hauben, Aerdt. Kakes,Jan. Schinasi,Garry. 2004. Toward a Framework for Safeguarding Financial
Stability. IMF Working Paper WP/04/01. June
Hosni, Khaoula. 2014. Early Warning Indicators for Systemic Banking Crises. Journal of Business
studies Quarterly, Vol. 5 Number 4 p. 222-244.
International Monetary Fund (IMF). 2009. Responding the Financial Crisis and Measuring Systemic
Risk Global Financial Stability Report, Apr09
Kane, E.J. 2002. Resolving Systemic Financial Crises Efficiently. Pacific-Basin Finance Journal, Vol.
10, p. 217-226.
Kaufman, George G. 1995. Comment on Systemic Risk. In Research in Financial Services: Banking,
Financial Markets, and Systemic Risk, vol. 7, edited by George G. Kaufman, 47–52.
Greenwich, Conn.: JAI.
Kaufman, G. G. and K. E. Scott. 2003. What Is Systemic Risk, And Do Bank Regulators Retard Or
Contribute To It?. The Independent Review, V. Vii, N. 3, Winter 2003, Issn 1086-1653,128
Laeven, L., Valencia, F. 2008. Systemic Banking Crises: A New Database IMF Working Paper 08/224,
September, p. 80.

Laeven, L., Valencia, F. 2012. Systemic Banking Crises Database: An Update. IMF Working Paper
WP/12/163, June.
Li, Shouwei, Wang, Mingliang. He, Jianmim 2013, Prediction of Banking Systemic risk on Support
Verctor Machine. Hindawi Publishing Corporation, Matematical problem in Engineering,
Volume 2012, article ID 136030.
Macfarlane, I.J .1999, The Stability of the Financial System, Reserve Bank of Australia Bulletin,
August
Miskhin., F. 1995. “Comment on Systemic Risk”. In Research in Financial Services: Banking,
Financial Markets, and Systemic Risk, vol. 7, edited by George Kaufman, 31–45.
Greenwich, Conn.: JAI.
Morttinen, Leena., Poloni., Paolo., Sandars, Patrick dan Vesala, Jukka. 2005, Analysing banking sector
conditions, How to use macro-prudential indicators. Occasional Paper Series no. 26 April,
European Central Bank.
Muns, Sander., Bijlsma, Michiel., 2010, Systemic risk across sectors, Are bank different? CPM
Discussion Paper 175 CPB Netherlands Bureau for Economic Policy Analysis. ISBN 978-
90-5833-504-3
Oet, Mikhail V., Bianco, T., Gramlich, D., Ong, Stephen J. 2013, SAFE : An early warning system for
systemic Banking risk. Journal of Banking & Finance , November 2013 p. 4510-4533
Racickas, Evaldas., Vasiliauskaite, Asta., 2012. Classification of Financial Crises and their
Occurrence Frequency in Global Financial Market . ISSN 1392-3110 ,Socialiniai tyrimai/
Social Research 2012 Nr 4(29), 32-44
Schinasi, Garry J. 2005. Preserving Financial Stability, Economic Issues 36, International Monetary
Fund
Schuler, M. 2002. The Threat Of Systemic Risk In Banking – Evidence For Europe. Center For
European Economic Research (ZEW). German
Sundararajan,V., Enoch.Charles., San Jose, Armida., Hilbers,Paul., Krueger, Russell., Moretti,
Marina., dan Slack.,Graham., 2002, Financial Soundness Indicators : Analytical Aspects
and Country Practices, IMF Occasional Paper

THE STUDY ON THE MARKETING MIX DEVELOPMENT
STRATEGY ANALYSIS OF CREATIVE INDUSTRY SME-
BASED IN DEPOK WEST JAVA.
Bernadin Dwi M1, Dahlia Pinem2
1(Faculty of Economics UPN “Veteran” Jakarta )
2
(Faculty of Economics UPN “Veteran” Jakarta)
bernadindwim@yahoo.com
pinem_dahlia@yahoo.com
ABSTRACT
The study on the Marketing Mix Development Strategy Analysis of Creative Industry
SME-Based in Depok West Java aimed to analysis the marketing strategy in the effort to
develop the creative industry SME performance. The methods used in this study were :
at first, the qualitative and quantitative descriptive analysis; the second, conducting
direct interview and the questionnaire filling by the creative economic industry actors;
the third, SWOT analysis. The study results by the SWOT analysis method from the
IFAS assessment was 2,87 and EFAS was 1,94. So, the position from the SWOT
diagram was Growth, namely using the SO (Strength Opportunities) strategy by
improving the marketing mix performance by the more attractive product quality
improvement, appropriate brand selection, utilizing the modern technology for the
promotion activity (on line selling), actively participating regional or international
exhibition to promote the products resulted.
Keywords: Creative Economic Industry, Marketing Mix Strategy, SWOT
I. INTRODUCTION
The creative industry is one of the business fields having real contribution to the economics
and being able to create the work employment, also arising many new business chances for the
actors in this case are SMEs. As the illustration, it has the GDB (Gross Domestic Product) of
104,787 trillion rupiah namely 5,67% from the National GDB.
While the Creative Industry in Depok City West Java has given the real contribution and
tended to increase from year to year, namely on 2011 Rp.2.124.771,51 on 2012 Rp.2.381.641,83
and on 2013 Rp.2.727.987,34 increasing from 12% to be 14,5 % this increase is still optimist to be
able to be continually stimulated by the active contribution from 3 creative industry actors, namely
government, intellectual and businessmen.
In Indonesia, if referring to the legislation in force, the term used is the Creative
Economics, namely skills, and individual interest to create the creative and individual creation
with economical value and affect on the Indonesian community prosperity ( Instruction of
President Number 6 of 2009 Concerning the Creative Economics Development).
The Creative Industry Mapping Study which has been conducted by the Department of
Trade of Republic of Indonesia on 2008, adopted the creative industry definition from UK DCMS
Task Force 1998 so that the creative industry in Indonesia can be defined as : “The industry
coming from the creativity, skills, as well as individual interest use to create the prosperity and as
well as the work employment by the creation and use of creative and individual creation powers”.
Based on the definition, the Department of Trade in the study grouped and set 14 economic
activities categorized as the Creative Industry.

Table 1.
Types of Creative Industry in Indonesia
No. Type of Note

Industry
Kreat
1 Advertisement The creative activity related to the advertisement product and creation,
if among others are market research, advertisement communication planning,
outdoor advertisement, advertisement material production, ,public relation
campaign, advertisement presentation at the printed and electronic medias.
2 Architecture The creative activity related to the building blue print and production
information, among others : garden architecture, city planning, construction
cost planning, inherited building conservation, auction documentation, etc.
3 Art and Antique The creative activity related to the creation and trade, work, antiques and
market jewellery by auction, gallery, shops, supermarket and internet.
4 Craft The creative activity related to the creation and distribution of the handicraft
made of : jewellery, accessories, goldsmith, silver, stone, glass, porcelain,
fabric, marble, limestone and iron.
5 Design The creative activity related to the graphical design creation, product,
industry, packaging, and company identity consultation.
6 Fashion Design The creative activity related to the cloth design creation, footwear design
and other model accessories design, mode cloth production and its
accessories, consultation of fashion product line, as well as fashion product
distribution.
7 Video, Movie and The creative activity related to the production creation of video, movie and
Photography photography service, as well as the video and movie record distribution.
Including the scrip writing, movie dubbing, cinematography, and movie
exhibition.
8 Interactive Games The creative activity related to the creation, production and distribution of
computer game and video as the entertainment, ability and education
9 Music The creative activity related to the creation, production, and retail of sound
records, record copy right, music promotion, lyric writer, song or music
writer, music show, and music composition.
10 Performing Arts The creative activity related to the business related to the content
development, show production, ballet show, traditional dances,
contemporary dances, drama, traditional music, theatre music, opera as well
as ethnic music.
11 Publication & The creative activity related to the content writing and publication of book,
Printing journal, newspaper, magazine, tabloid and digital content as well as the news
office activity.
12 Computer and The creative activity related to the information technology development
Software Services including the computer services, software development, system integration,
design and analysis system, software and hardware architecture design as
well as portal design.
13 Television and The creative activity related to the creation business, production and
radio packaging, broadcasting as well as television and radio transmission.
14 Research and The creative activity related to the innovative business offering the science
Development and technology invention as well as science and technology application for
the product improvement and new product creation, new process, new
material, new tools, new method and new technology which can meet the
market demand.
Source : Department of Trade RI

The creative industry-based Small Medium and Micro Effort (SME) is one of the business
groups placing the innovation and creation as the motor driver for the activities. With various
limitations and challenges, SMEs today has grown into a creative industry with a diverse product
based on the character and potential of each region (batik in Yogyakarta area, ikat in Klaten and
NTT, transistor radio in Temanggung, edamame soybeans in Jember). Local products have now
grown and have a strong competitiveness in the global market.
It is a reality that until now the creative industry business- based is still faced with many
challenges. According to Ratih Kusumaning Esti & Dinie Suryani (2008), some of these
challenges are: First, the regulation. Until now, there have been no detailed rules concerning the
copyright protection of creative industry actors. Second, the capital. The creative industries are
less being attracted by the banking sector because of no guarantees. Until now there is no
guarantee institution for the industry to obtain the financing from banks. Third, marketing
management such as price and quality. The quality of the creative industries is often inconsistent
such as the packaging based on the quality standards. Imprecision in fulfilling orders, especially in
large quantities and in a short time are also the obstacles. This is because most creative industry
actors do still not optimally pay attention to the marketing role which is less considered by
management.
II. LITERATURE STUDY
Referring to some pervious studies on the creative industry development policies given by
local government in common, these are yet conducted optimally. The study conducted by Togar
M.Simatupang et.al. state that various policies given are constrained by may factors, among other,
supporting infrastructure, sustainable development program and law enforcement as the
government task, the intellectual role in giving the theory education and the capital owner role for
the intensity as the financier.
Furthermore, the research by Hesti Pusparini stated that in order to obtain optimal results in
the creative industry development, it is necessary for the collaboration of 3 (three) actors who play
the active role namely the governments, intellectuals actors and the businessmen.
The Creative Economy study conducted by the United Nations Conference of Trade and
Development (UNCTAD) in 2010, further elaborated as the following:
a. Encouraging the increasing incomes, job creation and export earnings while promoting
the social awareness, cultural diversity, and human resource development
b. Including the social, economic and cultural development of technology. Intellectual
property rights and tourism
c. A knowledge-based set of economic activity with the development dimension and cross-
sector linkages at the micro and macro economic level as a whole
d. A choice of development strategy requiring the cross-ministerial action and innovative as
well multi-disciplinary policy in the heart of the creative economy in the creative industries
Alvin Toffler (1980) in his theory conducted the economic civilization wave distribution
into three waves; the first wave is known as the agricultural economy wave, the second wave is the
industrial economy wave, the third is the information economy, the fourth is known as the creative
economy wave oriented to the ideas and creative ideas.
The creative economy and creative industry concepts start to be used as the footstool of the
economy pillar expected to strengthen the economy. Through the Ministry of Trade of the
Republic of Indonesia, Dr. Mari Elka Pangestu in 2006 launched the Power Design Indonesia
Program in its ranks, a government program expected to improve the Indonesian product
competitiveness in the domestic market as well as the global markets. The program continued with
the introduction in 2009 through the Presidential Decree No. 06/2009 as the Indonesian Creative
Year by President Susilo Bambang Yudhoyono marked with the Creative Exhibition activities
involving 14 creative industry sub-sectors, namely:
The Collaboration of 3 (three) actors in the Creative Industries, known as the TRIPLE
HELIX will work together in supporting the creative industry activities based on their respective
roles.
Figure 1. Triple Helix Pyramid

Source: Department of Trade RI
1. The Intellectual (Academic) Role: as an agent of spreading the ideas and applying the science,
art, and technology, as well as creating the value for the creative industry development related to
the new activity creation which has the bargaining power to the market and creative human
formation. In his work a.1 prepares a curriculum has the orientation to the creative industries and
provides direction instructive.
2. The businessman: as an entrepreneur, investor and creator of new technology as well as the
creative industry customers. The roles include the product creator and creative service, new
markets which can absorb the products and services produced. Other role is forming the
communities and creative entrepreneur. The business can be based on the manufacturing, services,
retail and distribution, agriculture, mineral, financial, information, real estate, transportation and
utilities such as electricity, water.
3. The Government Roles: meant by the government is the central government, provincial
government and district / city governments. The roles are, first, as the facilitator and advocacy
giving the encouragement and stimulation so that ideas can develop. Second, as the regulator
which produces the regulation so as to create a space and a favourable climate. The government
involvement in the creative industry development is necessary by the good local autonomy
development, the law and regulation enforcement, by the good governance principles
(participation, law enforcement, transparency, supervision) The Creative industry progress is
influenced by its location (synonymous to the decentralization), tolerance (the creative mindset
synonymous to the democracy)
A. Study Goals
Analyzing the most appropriate marketing strategy for the SME creative industy
development by using SWOT analysis technique by conducting the internal analysis (Strength,
Weaknesses) and external analysis (Opportunities, Threat).in Depok West Java.
B. Study Benefits
For the City Government of Depok, this study results can be used as the guidance to
develop the creative industry in Depok, West Java.
III. STUDY METHOD
SWOT Analysis
“According to Kotler Philip (2008) the SWOT analysis is the evaluation form considering
the strength, weakness, chance and threat in the company”.

According to Rangkuti (2008) SWOT analysis is to compare between the external factors,
namely the opportunities and threats with the internal factors, namely the strength and
weaknesses.
Figure 4 Study Flow Chart
SME Creative Industry Primary, SWOT Analysis

mapping UMKM - IFAS
(Type , number)
Secondary Data
Analysis - EFAS
UMKM
SME CREATIVE 1. Scientific Journal

INDUSTRY-BASED
DEVELOPMENT IN 2. Creative Industry
DEPOK WEST JAVA Development
manual
Mapping and Primary. Triple Helix Roles
Secondary Data - Government
Problem Analysis
analysis of SME - Intellectuals
- Businessmen
The design of this study uses a qualitative descriptive method. The qualitative descriptive
method is used to collect the information about the current real condition / ongoing one. The
main purpose of using this method is to define the nature of an ongoing condition when the
research is in progress and check the causes of a certain symptom (Travers, 1978, 1976 Gay in
Sevilla, Consuelo G., 1993). While the qualitative method aims to produce the data and
information from the study or observed object (Moleong, Lexy mJ., 20010.).
In this study, both methods are used to map or describe the SMEs’ characteristics in particular in
the creative industry field. Furthermore, the data are analyzed, discussed and presented based on
the discussion topics.
The data used in this study are primary and secondary data. The primary data were obtained by
the structured interviews using the questionnaires from the selected persons, namely, the SMEs’
staffs Depok, the SME board and the actors involved in SMEs. As for the secondary data, they
are obtained from the written sources with the relevant topics, annual reports, research results,
journals and books related to the substance of the study. The data sources are the Department of
SME Depok BAPPEDA Depok, West Java and from the Internet.
2. The data collection Methods
a. Interview
The interview aims to get a clear description from the executives in each unit concerning the
business processes in each unit, the problems with the existing system.
b. Questionnaires
Distributing questionnaires aim to get the current conditions of the existing information
systems in all work units, here it is asked the information about the information system used /
never used, how the data processing running is, the condition of possessed hardware, the
network conditions in each unit, HR having the computer capability and a variety of other
things which have the correlation.
c. Literature Study
The literature study aims to get the clear description of the creative industry development
plans in Depok, West Java.
d. Direct observation
The researchers observe directly at several institutions in Depok, West Java in implementing
the business processes and transactions as well as the service to the community.
3. Sample Determination
a. Population and sample
The population in this research is the creative industrial SMEs in Depok, West Java, the
data recorded in the data center of SME Depok, West Java is to 170 SMEs.
b. Samples

The respondent sample selection is conducted randomly taken based on the stratified random
sampling technique. The number of samples is set by the quota of 20% proportionally by 34
respondents.
IV. RESULTS AND DISCUSSION

SWOT Analysis
The internal analysis is conducted to make the IFAS (Internal Factory Analysis Summary) matrix
and to make the EFAS (External Factory Analysis Summary). After knowing the value results
from the IFAS and EFAS matrixes, so it can be positioned the company from the values of IFAS
and EFAS matrixes at the SWOT Analysis.
1. Internal Analysis
a. Strength: Affordable Sales prices, Product Quality , Good and Variety innovation , Having
Fixed consumers ,Strong raw materials.
b. Weaknesses : Limited Capital , Less use the social media , Limited Intellectual role ,
Difficulty in obtaining the raw materials , Less understanding on the marketing theory , Not
yet maximal employees ,Less maximal government support
Table 3 IFAS (Internal Factory Analysis Summary)
No Internal strategy factors Weight Rate Weight x Rate

STRENGTHS
1 Affordable Sales prices 0.148 4.0 0.591
2 Product Quality 0.102 2.8 0.280
3 Good and Variety innovation 0.108 2.9 0.314
4 Having Fixed consumers 0.110 3.0 0.325
5 Strong raw materials. 0.108 2.9 0.314
Sub Total 0.575 1.825
WEAKNESSES
1 Limited Capital 0.041 1.1 0.046
2 Less use the social media
0.039 1.1 0.042
3 Limited Intellectual role 0.107 2.9 0.309
4 Difficulty in obtaining the raw materials 0.074 2.0 0.150
5 Less understanding on the marketing theory 0.109 3.0 0.320
Not yet maximal employees

6 0.058 1.6 0.092
Sub Total 0.428 0.959
Total 1.00 2.78
2. External Analysis
a. Opportunities : Modern technology use ,Joining Events,Cooperate with Academics
,Depok City Government support ,New product development
b. Threats : Fluctuating raw material price, the increasing employee salary,More creative
and innovative competitor promotion ,The increasing Fuel price, Imported product
competition
Table 4 EFAS (External Factory Analysis Summary)
No Internal strategy factors Weight Rate Weight x Rate
OPPORTUNITIES

1 Modern technology use as the promotion 0.075 1.0 0.075
media
2 Joining Events 0.110 1.5 0.162
3 Cooperate with Academics 0.233 3.1 0.722
4 Depok City Government support 0.160 2.1 0.342

Sub Total 0.578 1.300
THREATS
1 Fluctuating raw material price 0.133 1.8 0.234
2 More creative and innovative competitor 0.139 1.9 0.257

promotion
3 The increasing employee salary 0.075 1.0 0.075
4 Imported product competition 0.075 1.0 0.075
Sub Total 0.422 0.642

Total 1.00 1.942
Processed Data Sources

SWOT Analysis Diagram
From the IFAS (Internal Factory Analysis Summary) table and EFAS (External Factory
Analysis Summary) table, it is obtained the value of each factor, among others are:
a. The Strength factor : 1.83
b. The weakness factor : 0.96
c. The opportunities factor : 1.30
d. The threat factor : 0.64
Based on the calculation results above, that the strength value is higher tan the weakness
value namely 1,83 – 0,96 =(+) 0.87 and the opportunity value is higher than the threat one
namely 1,30 – 0,64 =(+)0.66, so it can be seen from the following SOWT Diagram.
Figure 3
Opportunity SWOT Diagram
Weakness 0.96 1.83 Weakness
1
I. Growth
II. Turn around (0.87;0.66)
IV. Divine 0.64 II. Diversification
Threats

SWOT Diagram
In the graph above diagram, it can be explained that the creative industries in Depok, West Java is in a
growth area which must conduct the development strategy by increasing the triple helix role in their
respective functions as the following.
1. The intellectual group, has the role to explore the marketing mix performance potential among
others to provide the guidance and direction of educational product development, more attractive
brand, more intensive distribution and more aggressive promotion.
2. The government, in this case, is the government of Depok has an important role to create the
supporting business climate to facilitate the creative industry development through the assistance
for institutional strengthening, soft loans through the state banks, the organized creative industry
exhibition on a regular basis as the effort to form a creative industrial product image which is
typical of Depok City; facilitate the participation of SMEs in any exhibitions nationally and
internationally; Develop the creative industry clusters to facilitate the assistance and can also be
directed as a creative economic product bags in answering the market demand.
3. The Businessman can optimize the creative economy potential by building the partnerships by
giving the capital resource for SMEs.
Table 6 SWOT Matrix of Creative Industry
Strength(S) Weaknesses(W)
1) Affordable Sales prices 1) Limited Capital
IFAS 2) Product Quality 2) Less use the social media
3) Good and Variety 3) Limited Intellectual role
innovation 4) Difficulty in obtaining the raw
4) Having Fixed consumers materials
5) Strong raw materials. 5) Less understanding on the
marketing theory
6) Not yet maximal employees
7) Less maximal government,
intellectual and businessman
support
Opportunities(O) Strategy SO Strategy WO

1.EFAS
Modern technology use as 1. Increasing the product 1. Making website and other links as
the on line sales promotion excellence such as the strong the promotion medias.
2. Joining events, both raw materials, more variety 2. Looking for the business partners
domestic and international innovation. so that can develop the business.
3. Increasing the Triple helix 2. Joining events, both domestic 3. Online Selling
role. and international to promote 4. Enhance advertisement promotion
4. Development their products.
kinerja bauran pemasaran link to all of Indonesia areas as the
3. Increasing the Triple helix effort to reach the goals.
performance collaboration. 5. Looking for the supports from the
4. Utilizing the marketing mix government so that it gives more
strategy attention to the craft industry and
re-active the existing group.

Threat (T) Strategy ST Strategy WT
1) Fluctuating raw material 1. Increasing the product quality 1. Conducting the skill training to
price 2. Maintaining the relatively increase the employee skills.
2) More creative and cheap price compared to other 2. Conducting the raw material stock
innovative competitor competitors. so that it will reduce the
promotion 3. Increasing the cooperation of transportation costs.
3) The increasing , the the group and the government 3. Looking for the relation with
increasing employee salary as well as the collectors. related parties such as the
4) Imported product 4. Making the products in big government so that will know the
competition scale so that it will save the product from other countries.
production cost. 4. Looking for the fund lending or
making any cooperation with the
investors.
From the table above, the appropriate strategy at the creative industry is the SO strategy namely it is used
the strength and use the opportunity at the industry, namely by:
1. Increasing the product excellence such as the strong raw materials, more variety innovation.
2. Joining events, both domestic and international to promote their products.
3. Increasing the Triple helix performance collaboration (government, intellectual and businessman).
4. Utilizing the marketing mix strategy
V. CONCLUSION
From the results conducted at the SWOT (Strength, Weakness, Opportunities, Threat) analysis, it is
obtained the following:
1. From the study results at the IFAS (Internal Strategic Factor Analysis Summary) table, the
weighting score is 2,78 and for the EFAS (External Strategic Factor Analysis Summary) table, the
weighting score is 1,94. Based on the analysis results of the industry internal and external factors as
well as the SWOT diagram, it is obtained that the main strategy in the creative industry is the
strategy of Growth, where the creative industry can increase the marketing mix performance (
product excellence, quality owned and promotion utilization which develops better.
2. From the SWOT analysis, the strategy used is the SO strategy model namely the strategy using
Strength as utilizing the Opportunities owned by the creative industry, namely increasing the
marketing mix performance by the strong raw materials, more variety innovation; Joining events,
both domestic and international to promote their products; increasing the cooperation with the
intellectuals, and government in their respective roles.
3. The creative industry SME must see the existing opportunities, so that they can maintain the
strength owned as well as must be able to utilize the existing opportunity potential.

REFERENCES
[1] Anak Agung Istri Putra W, et.al, Resistensi Perempuan Bali pada sector industry kreatif di desa Pakse bali, Scientific Journal
of Department of Letter, University of Udayana, 2012.
[2] Bambang Yudi Ariadi, Metode Pengembangan Industri Kreatif Komoditi Pertanian, University of Muhamadiyah Malang,
UMM Journal, 7th ed., 2011
[3] BayuNurseto, Pengembangan Strategi Industri Kreatif Dalam Menghadapi Persaingan, University of Muhamadiyah
Surakarta, UMS Journal, 2012
[4] Consuelo G et.al, 1993, Pengantar Metode Penelitian, University of Indonesia Publisher, Translation of Alimuddin Tuwu , UI-
PRESS.
[5] Dias satria et al, Strategi Pengembangan Industri Kreatif untuk meningkatkan Daya Saing Pelaku Ekonomi Lokal, Faculty of
Economics, UNIBRAW, 2011
[6] Freddy Rangkuti, Analisis SWOT Tehnik Membedah Kasus Bisnis, PT Gramedia Pustaka Utama Publisher Jakarta, 2002
[7] Freddy Rangkuti, Riset Pemasaran, PT Gramedia Pustaka Utama Jakarta Publisher, , STIE IBII, 2001
[8] Hesti Pusparini, Strategi Pengembangan Industri Kreatif di Sumatera Barat,Perencanaan Pembangunan, Post-Graduate
Program University of Andalas, Padang, 2011
[9] H.Eddy Yusuf, Peluang Pasar Industri Kreatif, Harian Pikiran rakyat, January 15th, 2009
[10] Hardani Widhastuti et.al, Model Pengembangan Kinerja UKM Berbasis Industri Kreatif, Projection Psychology Journal, 7th
ed, UNDIP, 2012
[11] Jullie Carr, Creative Industries, Creative Workers, and tehe creative economy : A Review of selected recent literature.,
Scottush Government Social research, 2009
[12] Muhamad Adam Jerusalem, Perancangan Industri Kreatif Bidang Fashion dengan pendekatan Benchmarking pada
Queenslands Creative Industry, , PTBB Faculty of Engineering UNY, 2009
[13] Mark Deuze, Covergence culture in the creative industries, International Journal of cultural studies, SAG Publications, Los
Angeles < London, New delhi ang Singapore, vol 10, 2007
[14] Nicholas Garnham, An Analysis of Implication of the “Creative Industry” approach to arts and media policy making in the
United Kingdom, International Journal of Cultural Picy, vol 11, No 1, 2005
[15] Ratih Kusumaning Esti, Dinie Suryani, Potret Industri Kreatif Indonesia, 2008
[16] Togar M Simatupang et.al, Analisis Kebijakan Pengembangan Industri Kreatif di Bandung, Business School Journal, ITB,
vol 8, 2008
[17] Puguh SetyoNugroho, Analisis Perkembangan Industri Kreatif di Indonesia, FEUNS Journal,
[18] http://id.wikipedia.org/wiki

THE EFFECT OF LOCUS OF CONTROL, TRUST AND WORK ETHICS TO
ORGANIZATIONAL COMMITMENT OF THE GOVERNMENT EMPLOYEES
IN THE DISTRICT OF MINAHASA, NORTH SULAWESI, INDONESIA
Bertha Ireni Mundung

Faculty of Economics, State University of Manado
ABSTRACT
Organizational commitment is a psychological ties of employees at organizations that
characterized by the presence of trust and strong acceptance to the objectives and values of the
organization, having the willingness to work on the achievement of the interest of the
organization, and strong desire to maintain the position as member of the organization. The low
organizational commitment reflects a lack of responsibility in carrying out duties. The purpose of
this study was to obtain information about the influence of the locus of control, trust and work
ethics on organizational commitment. This study was conducted on the government employees in
the district of Minahasa, using survey methods, through hypothesis testing approach to the
analysis of multiple linier regression. In this study determined that 90 employees were later
taken into the sample is simple random sampling.The results showed that: (1) locus of control
had a positive influence on organizational commitment (2) trust had a positive influence on
organizational commitment, (3) work ethics had a positive influence on organizational
commitment and (4) locus of control, trust and work ethics had a positive influence
simultaneously on organizational commitment.
Keywords: Organizational Commitment, Locus of Control, Trust, Work Ethics

INTRODUCTION
Commitment is a psychological bond of employees in an organization characterized by:
strong belief and acceptance of goals and values of organization; have will to pursue the
achievement of the organization’s interest; have a strong desire to maintain the position as a
member of organization. Lack of commitment reflects the lack of individual responsibility in
performing their duties. Questioning the same commitment is the same as questioning the
responsibility, thus, the size of an employee’s commitment in this regard related to delegation of
authority. In this concept, leaders are faced with a commitment to entrust the duties and
responsibilities to subordinates. Instead, subordinates need to have a commitment to improve the
self competence.
Mowday in Sopiah (2008) states there are three aspects of the commitment include: 1)
Affective commitment, which is associated with the desire to be bound by the organization.
Individuals settling in the organization because of the desire itself. 2) Continuance commitment,
is a commitment based on the rational needs. In other words, this commitment is formed on the
basis of profit and loss, considered to what must be sacrificed when it will settle on an
organization. 3) Normative Commitment, is a commitment that is based on the norms that exist
within the employee, containing the individual beliefs of the responsibilities of the organization.
He felt compelled to endure because of loyalty.
Gibson et. al (2006) states locus of control, a personality characteristic that describes
people who see the control of their lives as coming from inside themselves as internalizers.
People who believe that their lives are controlled by external factors are externalizers. Employee
commitment to the organization influenced by the trust where it is necessary to build trust
between management and employees with the mutual trust between members of the organization
will create favorable conditions for the exchange of information and advice without fear.
According to Sharafat Khan (http://teorionline.wordpress.com/2010/02/04/komitmen-
organisasi/#more-174), the trust between management and employees may be created by: (1)
Provide time and resources sufficient for the employee in completing work; (2) Provide adequate
training for employment needs; (3) Respect differences of opinion and differences in the success
achieved by employee; (4) Provide access to sufficient information.
Other factors that also affect attitudes towards organizational change is work ethics. One
could argue that employees who strongly supports work ethos is more committed to the
organization and subsequently more likely to make changes where such changes do not have the
potential to change the basic values and goals of the organization and is considered beneficial to
the organization, compared to employees who are not support work ethos and not committed to
their organizations were subsequently less likely to make a change.
Leaders need to create employees trust and appreciate the capabilities of the employees
so the commitment to the organization is more higher. Employee trust can be caused by: (1)
delegate important tasks to employee; (2) explore suggestions and ideas from employees; (3)
expand the tasks and build networks between departments; (4) provide instructions for the
completion of the task with a good job.
According to Colquitt, determinants of organizational commitment of employees, are also
work ethos. According to Sinamo, every human being has a spirit / soul of success, that is pure
motivation to achieve and enjoy success. This is the spirit that transformed into a typical
behavior such as hard work, discipline, conscientious, diligent, integrity, rational, responsible
and others through confidence, commitment and appreciation of certain work paradigm.
Indonesia has always had long struggled with the problem of corruption, “rubber time”, the

origin of work, chaotic and other negative predicate. Unlike the situation in Japan, which makes
work as something very precious, and work quality are important values that based on religious
spirituality (http://www.linkpdf.com/ebook-viewer.php?url=http://respository.usu.ac.id).
The problem now is employees get a lot critics from society, due to the efforts of
employees working as a reliable human resource evidently can not be said to be successful, it is
because a lot of moral issues employees of a petty clerk to the officials of the structural and
functional including the problem of corruption. The linkage with the issue is taken very seriously
in which employees do not come to work or enter the timeliness, lack of discipline in handling
the job, and the system of staffing that is not in accordance with the educational background, so
the blame and many other issues related to rules has been established. Bad habits is the case also
in PNS, such as just reading newspapers (not related to work), playing games, and go to
shopping center or mall during business hours, as well as add a holiday that has been set y the
government, is include to a group of underemployment, because according to simple calculation,
an average of every civil servant must work not less than 7 hours per day within 5 working days
per week. The habits of civil servants do not take advantage of the effective working time also
contained in SKPDs in Minahasa district, although research has not been done accurately, but
still limited observations in the field. From observations also indicate abuse of work time that
should be spent effectively and efficiently.
The objectives of this research are: 1) to determine the effect of the locus of control on
organizational commitment, 2) to determine the effect of the trust on organizational commitment,
3) to determine the effect of the work ethics on organizational commitment, and 4) to determine
the effect of the locus of control, trust and work ethics on organizational commitment.
LITERATURE REVIEW
Locus of Control and Organizational Commitment
Locus of control is an individual attitude towards the role of self-control in action,
making decisions, strive to achieve success in work.
Commitment shows confidence and strong support to the values and goals (goal) that can
be achieved by the organization (Mowdey et al, 1982). Organizational commitment is an
encouragement from inside the individual to do something in order to support the success of
society together in accordance with the objectives and prioritize the interest of organization than
the interest from him/herself. For individual with high organizational commitment,
organizational objectives are important. In contrast, for individual or those with low
organizational commitment will have a low attention to the achievement of organizational goals,
and trying to fulfill personal interests. Luthans (2006) defines organizational commitment as: a)
A strong desire to remain a member of particular organization. A strong desire to retain a
member of a particular organization, b) a willingness to exert high levels of effort on behalf of
the organization. A strong will to try to maintain the organization’s name, c) definite belief in,
and acceptance of, the values and goals of the organization. Confidence and acceptance of the
values and goals of the organization.
Newstrom and Davis (2002) stated that organizational commitment is the degree to which
an employee identifies with the organization and wants to continue actively participating in it.
A government employee who has locus of control was able to act on their own, can take a
decision in the exercise of its responsibilities, can take the initiative in working, able to solve
problems on their own in order to achieve a successful work with such employees as it has

maintained its commitment to the organization. In general worker/employee who have desire and
feeling to keep working on the organization or company and tried in various efforts not to move
elsewhere or insist on settling the organization. For that, a person can be said to have committed
the organization when the individual in this case the employee works in a way to know,
understand and comprehend what will be done; such as: how employees work together to
maintain, improve and enhance the commitment of his organization.
Based on description above, can be presumed that there is a direct positive influence of
locus of control on organizational commitment.
Trust and Organizational Commitment

In the reality of everyday life, including the lives of government organizations, trust is
indispensable. According to Colquitt, Lepine, and Wesson (2011), trust is a willingness to rely
on an authority based on positive rewards for action and attention authority. Robbins and Judge
(2007) mentions five key dimensions of the concept of trust that can be used as indicators to
measure trust, namely: (1) integrity (integrity), refers to the honesty and truth; (2) competence
(competence), linked to the knowledge and skills of technical and interpersonal skills of the
individual, (3) consistency (consistency), associated with the reliability, the ability to predict and
individual assessments precise in handling the situation, (4) loyalty (loyalty), the desire to protect
and save others; and (5) openness (openness).
The fifth dimension is of capital importance for a person to be trusted. When a leader as
authority that all the organization has integrity, competence, consistency, loyalty and openness
that leader worthy to be trusted. When these conditions are well established and solid, then the
employees as members of the organization will not have trouble at all to build organizational
commitment.
Richard M. Steers in Sri Kuntjoro defining organizational commitment as a sense of
identification (belief in the values of the organization), engagement (the willingness to do my
best for the sake of the organization) and loyalty (desire to remain a member of the organization
in question) are expressed by a employees of the organization. While Mathis and Jackson in
Sopiah (2008) defines the organizational commitment as the degree to which employees believe
and to accept the goals of the organization and will stay or not will leave the organization.
In the context of government offices, need to be developed and maintained a culture of
trust because it is essential in order to build organizational commitment. Because of the trust the
leadership of the members / employees will lead to a sense of responsibility, solidarity and sense
of belonging of all its members. With the trust will also bring innovative ideas to improve the
quality of organizational commitment of employees. Organizational commitment employee in
question is include loyalty to the organization, involvement in work and the identification of the
values and objectives.
Based on the above it is conceivable that there is a direct effect of positive trust on
organizational commitment.
Work Ethics and Organizational Commitment

Organizational commitment of employees is determined by the work ethic. Therefore, the
work ethic is one of the factors that should be owned by the government officials in performing
their duties and responsibilities in providing services to the public.
In carrying out the tasks necessary to have the determination and ability to obey, execute,
and practice something that is adhered with full awareness and responsibility. People who have a

high work ethic, certainly has / have a vision far ahead, a strong motive to achieve the goal, has a
high innovative, creative, adaptive, work hard, work systematically, responsible, disciplined,
confident that will deliver services both to those who will be served.
Employees who have an attitude that can evoke the spirit of the work is oriented to the
job that matches the skills possessed also entrusted to do, and to respect the time in work so it
can do so with earnest, diligent and responsible in their work will form a strong commitment ,
Organizational commitment employee in question is include loyalty to the organization,
involvement in work and the identification of the values and objectives. Thus employees who
have a high work ethic will have organizational commitment. Based on the above it is
conceivable that there is a direct effect of the positive work ethics on organizational
commitment.
Based on the theoretical studies above, then developed a model which is reflected in the
constellation frame as below:
Locus of
Control
(X1)
Trust Organizational
(X2) Commitment
(Y)
Work Ethics
(X3)
Figure 1. Constellation Models Framework
Hypothesis
Based on a review of existing theory, the hypothesis proposed in this study was
formulated as follows:
H1: There is an influence of locus of control on organizational commitment.
H2: There is an influence of trust on organizational commitment.
H3: There is an influence of work ethics on organizational commitment.
H4: There is an influence of locus of control, trust and work ethics simultaneously on
organizational commitment.
METHODOLOGY
Research was conducted on employees in the office of the Provincial Government of
North Sulawesi's Minahasa regency. The study population was all the Regional Employees who
are at Minahasa regency administration are scattered in 36 work units called Work Unit (SKPD)
Minahasa North Sulawesi. An employee who is an employee of the group III with the number of
employees 1150 people. Techniques used in the sampling process is simple random sampling
(simple random sampling). By using Slovin formula is obtained sample of 92 people.
Data was collected through quantitative field studies using the instrument. Instrument
prepared in accordance with the indicators of each variable. The instrument used in this study
provided the answer is Very Often, Often, Quite Often, Rare, and Never. Alternative answers
given weight / value of 5, 4, 3, 2, 1.
Organizational commitment is a feeling in Minahasa government employees who have
keiginan to keep working and trying to efforts not to move work to other places. With the
indicator as follows: 1) commitment affektif indicators: an emotional bond, a sense of full
responsibility, defending the feeling of organizations working place, a sense of full serious in
accepting assignments. 2) commitment to the normative indicator of taste owes to the boss, there
is an obligation to continue to assist the work, feelings of shame when moving to another place,
their self-esteem. 3) commitment kontinuans with indicator calculation calculative not to move
work to other places, feelings of self-interest when tasks, not sincere to the orders of the
organization, which is reflected in the results of measurement in the form of scores obtained
through a set of questionnaire answers.
Locus of control adalah keyakinan atau kepercayaan seseorang pegawai (bawahan) di
pemerintahan Kabupaten Minahasa terhadap peran control diri dalam bertindak, mengambil
keputusan, berupaya untuk mencapai keberhasilan dalam bekerja. Dengan ini indikator-
indikatornya : 1) cara bertindak, 2) cara mengambil keputusan, 3) inisiatif dalam bekerja, 4)
upaya untuk memecahkan masalah, 5) upaya untuk mencapai keberhasilan kerja.
Employee trust is optimal readiness of office workers in SKPD on the basis of positive
action against the authority of the agencies and action leader / supervisor. With the indicators: 1)
integrity, 2) consistency, 3) the ability of the leadership, 4) loyalty leadership, 5) the openness of
the leadership.
The work ethic is the assessment of employee attitudes and commitment to the
implementation of the work in a responsible manner in which the habits of the employees
(subordinate) office in government Minahasa in their work which is reflected in the form of
grades or scores obtained respondents regarding: 1) the spirit of the work, 2) work orientation, 3)
appreciate the time, 4) work hard, 5) work in earnest, 6) work diligently, 7) work with
responsibility.
The data analysis technique used in this research is multiple linear regression, to
determine the influence of independent variables on the dependent variable. Multiple regression
analysis technique involves a dependent variable and two or more independent variables
(Maholtra, 2005). Multiple regression equation can be expressed as follows (Maholtra, 2005):
Y = a + b1X1 + b2X2 + b3X3 + ... + bkXk + e
In this study, the independent variables (X) is Locus of Control (X1), Trust (X2) and
Work Ethics (X2) while the dependent variable (Y) is the Organizational Commitment. Thus, the
multiple regression equations used in this study can be stated as follows:
Y = a + b1X1 + b2X2 + b3X3 + e
Hypothesis testing is done with a confidence level of 5% with degrees of freedom (degree
of freedom) / df = (k-1) and (nk). Drawing conclusions on the results of hypothesis testing was
performed using the t test and F test with SPSS.
t test performed to show whether the independent variables (independent variables)
partial effect on the dependent variable (dependent variable. According to Imam Ghozali (2005),
to test the hypothesis can be done by a quick look. By way of a quick look, criteria for decision-
making is if the t value is greater than 2 (in absolute value), then Ho can be rejected at the 5%
confidence level or, in other words the alternative hypothesis (Ha) is accepted.
F test performed to show whether the independent variables (independent variables)
simultaneous effect on the dependent variable (dependent variable). According to Imam Ghozali
(2005), to test the hypothesis can be done by a quick look. By way of a quick look, criteria for
decision making is when the calculated F value is greater than 4 then Ho can be rejected at the
5% confidence level or in other words the alternative hypothesis (Ha) is accepted.
RESULT AND DISCUSSION

Results of multiple regression analysis using the t test and F test showed that Locus of
Control, Trust and Work Ethics has significant influence partially or simultaneously on
organizational commitment. At t test obtained t value and significance probability of each
independent variable (X). The probability of each indicate a value less than 0.05. Probability
smaller than 0.05 indicate that the Locus of Control, Trust and Work Ethics partially affect the
organizational commitment. Hypothesis testing is done by using a quick look. By using quick
look, the t value of each independent variable is greater than 2, so the H1, H2 and H3 accepted. T
value and significance probability of each independent variable can be seen in Table 1 below.
Table 1. t Value and Significance of Variables

Variable t-hit Sig. Description
Locus of Control 5,012 0,000 Significant
Trust 6,872 0,000 Significant
Work ethic 6,346 0,000 Significant
In the F test, obtained calculated F value of 56.187 with a significance probability of

0.000. Probability is much smaller than 0.05 indicate that the Locus of Control, Trust and Work
Ethics simultaneously affect the organizational commitment. Hypothesis testing is done by using
a quick look. By using quick look, F count = 56.187 is greater than 4, so H4 is received. F count
and the probability of significance can be seen in table 2 below.
Table 2. F Value and Significance

Counted F Sig Description
56,187 0,000 significance
The Effect of Locus of Control on Organizational Commitment

The result of first hypothesis test, shows that Locus of Control has direct influence
positively to organizational commitment. Thus, Locus of Control is an important factor in
improving employee commitment to the organization.
The result are consistent with the result of research from Spreitzer (1995), which
examines the relationship of Locus of Control, by empowering employees. Where from the

research developed more trust (kepercayaan) variable and commitment. The addition of trust
variable is based on the results of research that has been done by Thorlakson and Murray (1996)
while the addition of a variable on the basis of trust based on Gomez and Rosen (2001) research.
From the results of their research, found that organizational commitment is affected by the locus
of control.
Also referring to Julian Rotter in Kreitner & Kinicki theory, an expert on social learning
theory. Reveal that Locus of Control is a personality variable, which are defined as belief or
individual trust, the least able to control the destiny itself. Individuals who have the confidence
that the fate or events in life are under control of himself, said the individual has an internal
locus of control.
While individual who have the confidence that the environmental gain control of the fate
or events that occur in life of the individual is said to have an external locus of control.
The result of empirical evidence, this finding indicates locus of control variable is one of
the most important variables and variables directly affect the organizational commitment. Locus
of control is an individual person’s attitude towards the role of self-control in action, make
decisions, and strive to achieve the success in work.
Based on the path of coefficient calculation locus of control influence on organizational
commitment, the results obtained path coefficient of 0,197. In this study, thitung value to the
influence of locus of control variable to the organizational commitment variable of 2,124 >ttabel is
1,99, it can be concluded that there is a direct effect of locus of control on organizational
commitment.
In Minahasa North Sulawesi Province Government offices, an employee who has locus of
control may be acting alone, can make decisions in carrying out its responsibilities, the initiative
in works, able to solve problems on their own in order to achieve a successful work with such
employees can be said to maintain its commitment to the organization. The feeling of the staff
who have the desire to continue working in Minahasa North Sulawesi Province Government will
strive to efforts not to move work elsewhere. Therefore, the staff has the effect of locus of
control on organizational commitment because in this case the employee works in a way to
know, understand and comprehend what will be done; such as: how employees work together to
maintain, improve and enhance the commitment of his/her organization.
The Effect of Trust on Organizational Commitment

Hypothesis testing results show that the positive effect on the confidence of
organizational commitment. Thus trust is an important variable in improving organizational
commitment. This result can be the same as the research conducted by Lincoln & Kalleberg
(1990), Mowdey, Porter, & Steers (1982), Mueller, Boyer, Price, & Iverson (1994), and
Williams & Hazer (1986) about the organization's commitment to prove that trust is an
antecedent of organizational commitment. These results indicate that organizational commitment
is causally dipengaruh by the trust. Also the results of research on the influence of Kursad
confidence in the commitment of the organization, where the results showed that confidence
positive and significant impact on organizational commitment.
The link between trust and commitment described by Luthans, that by building trust in
accordance with the principles in the granting of authority within an organization can encourage
members to develop ideas quickly, willing to take risks and innovate, so as to improve the
organization's commitment.

In line with the opinion of Luthans, Ivancevich which explains that trust is a very
important characteristic of members of a group, the trust must appear in a group to build
commitment high.For encourage the formation of trust between managers and members, can be
developed through good communication between them.
Results of the empirical substantiation of these findings indicates confidence variables
are variables that are very important and influential to variable organizational commitment.
Employees in the office of the Provincial Government of North Sulawesi's Minahasa regency
have a desire to rely on the leadership that is based on the trust factor in an organization, so trust
is very important to build organizational commitment. In addition, trust the leadership of
employees in Government offices Minahasa North Sulawesi will lead to a sense of responsibility,
solidarity and sense of belonging of all its members. Trust also will bring innovative ideas to
improve the quality of organizational commitment as described in integrative model of
organizational behavior. Organizational commitment in this case looks are influenced by the
presence of an employee trust between leaders and employees, so that loyalty to the organization,
involvement in work and the identification of the values and objectives influenced the
confidence in the government institutions.
The Effect of Work Ethic on Organizational Commitment

Hypothesis testing results show that the work ethic positive effect on organizational
commitment. Thus the work ethic is an important factor in improving employee commitment to
the organization.
Results of this study were consistent with the work ethic and its influence on
organizational commitment, job satisfaction and the variables of individuals and organizations
have received much attention in the literature (eg, Abbousi, 1990; Aldag & Brief, 1975; Beutell
& Brenner, 1986; Blood 1969; Elizur et al, 1991; Furham & Rajamanicam, 1992; Jones, 1997,
Kidron, 1978; Oliver, 1990, Putti et al, 1989; Wayne, 1989; Yavas et al, 1990). But the work
ethic relationship of attitudes on organizational change has not been adequately addressed in the
literature.
These results are consistent with Organizational Integrative Model of Behavior, which in
the model, ethos (ethics) working as part of the mechanism of the individual (individual
mechanisms) directly affects the individual results (individual outcomes) organizational
commitment (Organizational Commitment). And also the opinion from Robbins & Judge; There
separate dimensions of organizational commitment: 1) Affective commitment, 2) continuance
commitment, 3) normative commitment. Of the three dimensions that can be observed from this
construct, for the normative commitment is an employee relationship of obligation with moral or
ethical reasons.
Results of empirical evidence, this finding indicates variable work ethic is one of the
most important variables and variables directly affect the organizational commitment. Work
ethic leaders and staff that is how they have the attitudes and perspectives expressed to the fullest
through the behavior of its work through the spirit of his work, is oriented to the job that matches
the skills possessed also entrusted to do, and to respect the time in work so it can do really good,
diligent and responsible.
Organizational commitment in Minahasa District Government Office North Sulawesi
such as loyalty to the organization, involvement in work and the identification of values and
purpose can be seen from how they work in this thing is work ethic.

LIMITATION OF RESEARCH
Results of this study, it was realized that it does not escape from the weaknesses due to
limitations. The limitations that could occur in this study include:
1. The method used is only using quantitative methods through survey techniques, with data
collection using questionnaires, so do not rule out the possibility that the data obtained is not
getting more in-depth information.
2. The results are only limited to the employee population that is affordable and does not hold a
class III structural and functional positions in Minahasa regency administration.
3. The variable is the reference research is only limited to three variables that affect
organizational commitment is locus of control, trust and work ethic. To be sure there are many
other variables that can affect the organization's commitment in the government offices in
Minahasa.
CONCLUSION AND IMPLICATION

Based on the results and discussion can be concluded as follows:
1. Locus of control directly effect on organizational commitment positively. This means that a
good locus of control can increase employees organizational commitment. Coversely, if the
locus of control low, then the employee organizational commitment will decrease.
2. There is trust effect on organizational commitment. It means high trust can increase employee
commitment to the organization. Conversely, if the employee trust is low, then the
organizational commitment of employees will decrease.
3. There are work ethic influence on organizational commitment. That is the work ethic of
employees who can increase organizational commitment of employees. Conversely, if the
work ethic is low, then the organizational commitment of employees decreased.
4. There is an effect of the locus of control, trust and work ethics simultaneously on
organizational commitment. That is a high the locus of control, trust and work ethic of
employees can increase employee commitment to the organization.
Implications of this research are:
1. A strong locus of control, where about being able to control themselves in act, it can take a
decision in the exercise of its responsibilities and take the initiative in work, also able to solve
problems on their own to achieve success in work will affect the realization of employee
commitment to the organization is stronger.
2. An increase in trust in the integrity of the conduct of honesty, consistency between words and
deeds, competence, loyalty and openness between honesty
3. Having a high work ethic will behave and have a perspective which is expressed through its
behavior through working spirit, cherish the time in work so it can do its work in earnest to
result in increased employee commitment to the organization.
BIBLIOGRAPHY
Andre, Rae. “Organizational Behavior An Introduction to Your Life in Organizations.”
Singapore: Pearson Prentice Hall, 2008.
Arikunto, Suharsimi. “Prosedur Penelitian: Suatu Pendekatan Praktek.” Jakarta: Bhima
Aksara,2004.
Augusty, Ferdinan. “Struktural Equation modeling dalam Penelitian Managemen.” Semarang,
FE Undip, 2001.
Asifudin, Ahmad J. “Etos Kerja Islami” (Surakarta: Muhamadiyah University Press. 2004.

Campbell. “Statistical Tables for the Design of Clinical Trials, Blackwell. ”Scientific
Publication, 1987.
Cochran .”Teknik Penarikan Sampel.” Universitas Indonesia, 1991.
Colquitt, LePine, Wesson. “Organizational Behavior, Improving Performance and Comimitment
in the workplace.” McGraw-Hill Irwin, 2011.
Dessler, Gary. “Management. Leading People And Organizations in The 21st Centur.” United
States Of America: Prentice Hall International, Inc.,2001
Donald, Cooper et al “Business Research Methods.” Singapore. McGraw-Hill International,
Tenth Edition, 2008.
David,Clutterbuck.“The Power of Employment.” San Fransisco: Hogan Page Publisher, 1999.
______, and Susan Kemaghan.“Power Empowerment, Release The Hidden Talents Of Your
Employees.” London: Kogan Page Limited, 1995.
Donohue, William T,O. and Kyle E.Ferguson. Hanbook of Profesional Ethics for Psycologist
,USA: Sage Publications.Inc. 2003.
Draft, Richard L. “Organization Theory and Design” Sixth Edition (New York: South Westem
College Publishing, 1998.
Forguson. “Statistika Terapan Untuk Penelitian.” Bandung: Alpabeta, 1997.
Fred, Kerlinger. “Foundation of Behavioral research.” (Boston: Holt Rinehartmand Winston
Inc.Al, 1973.
Furnham, Andrian.“The Psychology of Behaviour at Work The Individual in The .” New York:
Routledge Press Inc., 2006.
Gaspersz Vincent. Total Quality Management. Jakarta: Penerbit PT,Gramedia Pustaka Utama,
2001, p.231.
Gibson J,ames L., John M. Ivanceivich, James H. Donnelly. Organizations Behavior, Structure,
Proceses.”Kuala Lumpur: McGrawHill.2006.
Greenberg, Jerald and Robert A. Baron.“Behavior in Organizations.” New Jersey: Pearson
Prentice Hall, 2008.
Harriman, Philip L.. “Pedoman Untuk Mengetahui Istilah Pshikologi,” Terjemahan
M.W.Husodo. Jakarta: Restu Agung, 1995.
Heinz Weihrich and Harold Koontz. Management a Global Perspective Philippines, McGraw
Hill, 2005.
Jones, Gareth R. “Organizational Theory: Text and Cases.” Third Edition New York: Prentice
Hall International, Inc, 2001.
Ken, Blanchard, John P. Carlos dan Alan Randolph., “Pemberdayaan Bukan Perubahan
Sekejap.” Batam Center: Interaksara, PO.Box 238, 2004.
Khasanah,Uswatun. “Etos kerja: Sarana Manajemen Prestasi.” Yogjakarta: Hanum
Group,2004.
Koentjoroningrat. “Rintangan-Rintangan Mental Dalam Pembangunan Ekonomi“ Jakarta:
LIPI,1980.
Kreitner, Kinicki. “Organizational Behavior: Key Concepts, Skills & Best Practices” ,Ninth
Edition. New York: McGraw-Hill/Irwin,2010.
Kursad Yilmaz, The Relationship Between Organizasional Trust an Organizational Commitment
in Turkish Primary Schools. Journal of applied sciences, 8 (12), 2008.
Luthans. “Organizational Behavior.” Terjemahan, Edisi Sepuluh, Andi, Yogya, 2006.
Lussier, Robert N. Ph.D. “Human Relation in Organizations, Seventh Edition.”New York:
McGraw-Hill/Irwin, 2008.

Machell,Terence R. and James R. Larson, Jr. “People in Organizations: An Introduction to
Organizational Behavior.” Singapore: McGraw-Hill Book Co.,1970.
McShane and Mary Ann Von Glinow. ”Organizational Behavior: Emerging Knowledge and
Practice for the Real World”fifth edition. New York : McGraw-Hill Companies,2010.
M Jennifer, George and Gareth R. Jones, Understanding and Managing Organizational
Behavior. New Jersey: Pearson Education, Inc,2005.
Meyer, Jhon P, Natalie J Allen, and Catherine A Smith. “Commitment to Organizations and
Occupation: Extention and Test of Three- Component Conceptuallization”: Journal of
Applied Psychology. 1993.
Mubyarto, dkk.,”EtosKerjadanKohesiSosial.”Yogyakarta: P3PK, 1991.
Muchinsky, Paul M.“Psychology Applied to work: An Introdustin to Industrial and
Organizational Psychology.”California: Thomson Wadsworth, 2006.
Nawawi, Hadari. “Manajemen Strategik Organisasi Non Profit Bidang
Pemerintahan.”Yogyakarta: Gajah Mada University. Press.2003.
Nelson, Bob,101 Cara Untuk Menjadikan Karyawan Bersemangat. Jakarta: Karisma Publishing
Group, 2007.
Newstrom,John W. and Keith Davis. “Organizational Behavior.” New York: McGraw-
Hill,2002.
N.J,Allen & Meyer, J.P., “The Measurement and Antecedents of Affective, Continuance, and
Normative Commitment to Organization”. Journal of Occupational Psychology,1990.
Prijono,Onny S. dan A.M.M.Pranarka. “Pemberdayaan Konsep, Kebijakan dan Implementasi.“
Jakarta: Centre For Strategic and International Studies, 1996.
P. Stephen. Robbins.,“Essentials of Organizational Behavior”. New Jersey: Prentice Hall, 2000.
R.C., Mayer, Davis, J.H., dan Schoorman, F.D. “An Integrative Model of Organizational Trust.”
Academy of Management Review,1995.
Ridwan dan Engkos Achmad Kuncoro. “Analisis Jalur”. Bandung Alfabeta, 2008.
R.B,Dunham, Grube, J.A., & Castaneda, M.B. “Organizational Commitment: The Utility of an
Integrative Definition.” Journal of Applied Psychology. 1994.
R.C, Herrenkohl, Judson, G.T., dan Heffner, J.A. “Defining and Measuring Employee
Empowerment,.” The Journal of Applied Behavioral Science,35:3;1999.
R.T, Mowday, Porter, L.W., & Steers, R.M. Employee-Organization Linkages:The Psychology
of Commitment, Absenteeism, and Turnover. New York: Academic Press.1982.
Rokhman, Wahibur Jr. “Paradigma Baru Manajemen Sumber Daya Manusia, Pemberdayaan
dan Komitmen: Upaya Mencapai Kesuksesan Organisasi Dalam Menghadapi
Persaingan Global .”Yogyakarta: Amara Books, 2002.
Robins ,Stephen P. and Timothy A. Judge. “Organizational Behavior.” New Jersey. Pearson
Education, Inc, Upper River, 2007.
Robbins,Stephen P. and Mary Coulter.“Management” Tenth Edition. New Jersey: Prentice Hall,
2009.
Rotter, J.,.“Generalized expectancies for internal versus external control of reinforcements.”
Psychological Monographs, 80, Whole No. 609.1966.
Schermenhorn, John R. Jr., James G. Hunt, and Richard N. Osborn. “Organizational Behavior,”
Eleventh Edition.” United States: John Wiley & Sons, Inc., 2011.
Sinamo Jansen,. 8 Etos Kerja Profesional, Jakarta; Institut Darma Mahardika, Grafika, 2011.
Singarimbun Masridan Sofian Effendi (ed). Metode Penelitian Survey. Jakarta: Pustaka LP3S
Indonesia, 1995.

Sopiah. Perilaku Organisasi, Yogyakarta, Andi. 2008.
Steers, R, “Efektivitas Organisasi,” Erlangga, 1985.
Stone,Raymon J. “Human Resources Management” (Milton: John Wiley & Sons Australia,
2005.
Steven L. McShane and Mary Ann Von Glinow. ”Organizational Behavior” Fourth edition.
New York : McGraw-Hill Companies, 2008.
Sugiyono.“Statistika Untuk Penelitian.” Bandung: Alvabeta, 2009.
Tan Victor, S.L. “Changing Your Corporate Cuture”. (Singapore: Times Books International),
2002.
Thomas, dkk. “Locus of Control at Work: A Meta-Analysis”. Journal of Organizational
Behavior. Vol. 27, 1057–1087.2006.
Undang-Undang No. 43 Tahun 1999 “Tentang Pokok-pokok Kepegawaian,” Bab 2 pasal 3 ayat
1.
Wibowo.,”Manajemen Perubahan,” PT Raja Grafindo Persada. Jakarta, 2011.
Yilmaz, Kursad. “The Relationship Between Organizasional Trust an Organizational
Commitment in Turkish Primary Schools.” Journal of applied sciences, 8 (12), 2008.
Zainudin Sri Kuntjoro, Komitmen Organisasi.2002 (On-Line) Available http://www. E-
psikologi.com. (12 Mei 2012).
http://www.posindonesia.co.id/2007/etos.pdf (diakses 24 Agustus 2012).
http://all-about-theory.blogspot.com/2010/03/komitmen-organisasional..oleh..-Sihnu.. Bagus
(diakses 15 Mei 2012).
http://suniscome.50webs.com/32%20Konsep%20Pemberdayaan%20Partisipasi%20Kelembagaa
n.pdf (diakses 23 Februari 2012).
http://www.portalhr.com/kolom/2id47.html...Locus of Control dalam Menyikapi Sukses dan
Gagal..Oleh:S.Brotosumarto. (diakses 5 Oktober 2011).
http://alaulawy.blogspot.com/2011/02/komitmen-kerja-personalia.html (diakses 23 Maret 2012).
http://teorionline.wordpress.com/2010/02/04/komitmen-organisasi/#more-174 (diakses 13
Oktober 2012).
http://eprints.umm.ac.id/937/1/HUBUNGAN_ANTARA_ETOS_KERJA_DENGAN_KOMITM
EN_ORGANISASI_KARYAWAN. pdf (diakses 20 Maret2012).

The Effect of Service Quality and Customer Satisfaction as the Intervening Variable
toward Customer Loyalty of PT X, Surabaya
Charly Hongdiyanto
Ciputra University, Surabaya
Abstract
As the competition getting tighter every day, so does the challenge faced by company in
daily basis. Not only to survive the harsh condition but also try to win it. One of the ways
to win the competition is to have a satisfied customer. By having a satisfied customer, in
the long run can lead to customer loyalty. This is the main goals for the company, has a
loyal customers besides generating profit. As a distributor for chemical products, PT X
which located in Surabaya must perform an excellent service to its customer to gain
customer satisfaction and loyalty. The goal for this research is to find the effect of Service
Quality (X) toward Customer Loyalty (Z) using Customer Satisfaction (Y) as the
intervening variable. The sample are 50 customers choose for certain specification. Path
analysis used to analyse the data using SPSS 22.0. The result of this study found that
Service Quality and Customer Satisfaction have a significant effect toward Customer
Loyalty, but Customer Satisfaction is not a good intervening variable in between Service
Quality and Customer Satisfaction.
Keywords: Service Quality, Customer Satisfaction, Customer Loyalty
In recent years competition in industrial business is more and more difficult, it

makes many companies offer many products with various contents. Having said so,
customer satisfaction is also very important because if the customer did not satisfy with
the company who serve them, they automatically will not repurchase again. Therefore,
company should maintain the current customers and their loyalty. PT. “X” was
established on 1984 in Surabaya, this company running on field of chemical as a
distributor. The markets of this company mostly are factory which needs chemical as
treatment for the machine.
Loyalty is important for company, because without loyalty automatically the
company will not running well, so it can be assumed that there is a direct relationship
between customer satisfaction and customer loyalty. In other words, a satisfied customer
can lead to loyal customer. Study by Khodabakhsh and Gorgani (2010) indicate that
105
satisfied customer can lead to their loyalty. In the future, loyal customers can also help
the organization by predicting the regular sale therefore increase the benefit for the
organization (Farhad et al, 2013). Other similar opinion also shared by Talat et al (2012),
they believe that facing fierce competition and limited resources, company should shift it
target market orientation from finding new customer to retaining existing customers. Due
to this shift of focus, customer loyalty is even crucial for the company.
Actually, customer satisfaction happens when customer consume the product;
either good or service, they are satisfied. It means that that level of satisfaction meet or
exceed the expectation. In recent time when they are plenty of companies selling the
similar product; satisfied customer become a crucial point for the company to be
considered for. This term is also crucial for the firm because based on Taylor et al,
research (2004) mention that customer satisfaction has a direct relationship toward loyalty
that some of the companies thought to be one of most important things to be achieved.
The same idea was argued by Homburg et al, (2008), in which they mentioned that when
customer satisfied, it can lead to loyalty and continuous profitability in the long run.
Looking from other perspective, company should also consider to expand the market to
new brand or several of product of repeat business (Cronin et al, 2000).
Many researchers have made their study to link the inter-correlation
between two variables writer has been discussing about, customer satisfaction and
customer loyalty. Research by Abdullah et al (2000) in the other hand tries to identify
moderators and/or mediators of between those variables. Bowen and Chen (2001) believe
that one of the ways to win a competition among competitors is to provide better service
compare to others. They believe that quality of a service has a strong relationship toward
customer satisfaction. The conclusion is that service quality is determined by many
factors, perception of the customer is one of the factors. By saying that, response from the
customers should be taken into consideration as input for the company to formulate its
marketing tools.
The term customer satisfaction is a tool to measure whether the product (good or
service) consumed by client meet or exceeds the previous expectation. It means
expectation of a customer is being fulfilled. In other words, it as the feeling of satisfaction
post utilization of purchasing and consuming a product (Zahir and Ilham, 2013). A
product is considered satisfactory if after the consumption, the customer expectation is
full filed. A customer claimed to be satisfied when the sum of total enjoyment is more
than the expectation (Choi and Chu, 2001). Kotler (2008) also defined customer
satisfaction as a feeling of happiness or unhappiness after the consumption of a product
and then compare it with the previous expectation. Feeling of dissatisfaction will occur
when the expectation exceeds the actual performance. If a company can measure the level
of its customer satisfaction, a more suitable and better service can be provided to them.
Talking about payment used by the customer to purchase the product, if the payment is
equivalent or below the rational expectation (feeling or reaction), then, according to
Maleki and Darabi (2008) this is called a customer satisfaction.
In the recent situation on which the level of competitive is extremely high,
company is fighting with other companies to win the competition or maintain the
customer. By saying this, a satisfied customer if crucial for the company and become an
106
important factor in the formulation of business strategy. To simplify the term, the basic
goal of a company is to create a satisfied customer. In the perfect competition condition
in which all the firms are selling an identical product, all the firms are price takers (they
cannot control the price), all the firms has a small market share and the customer have
adequate information for the product/company, a satisfied customer is very important.
The level of satisfaction will determine the number of demand that will affect the
company sales. (Sabbir, 2012).
Customer satisfaction is an essential factor to every enterprise in order to give a
good image to their customers’ mind, which could create customer loyalty. Once they are
dissatisfied with the company who serve them as a whole they will turn their attention to
another enterprise. Therefore, the enterprise will suffer from a big loss. Satisfaction is a
function of perceived performance and expectations. The consumer dissatisfaction, if the
performance fails to achieve the expected performance. And, the consumer will be
satisfied if the performance matches the expectations. If the performance exceeds
expectations, the customer is highly satisfied. If a customer is highly satisfied, they are
not only have a feeling of attached to the product, but also for the brand. This will
resulting in a good campaign for the company presence and financial aspect. Highly
satisfied customer are tends to promote the benefit of consuming that brand to others too.
Having said the importance of customer satisfaction, we should also know what
factor can contribute to this positive behaviour. Service quality is among others factors
has an effect on customer satisfaction. Research by Tjahjono (2009), indicated that by
implementing a good service in a company will boost customer satisfaction.
Service quality also has a strong relationship toward customer loyalty, this is
proved by the research made by Darmansyah (2008). He claimed that in his research,
there is a significant strong effect from service quality toward customer loyalty. Felix et
al (2013) also found that service quality has a significant relationship to customer loyalty
using customer satisfaction as the variable. In their research, customer loyalty will
increase with a good service quality. Understanding quality aspect of a service is not
necessary happened upon the first impression in the perception of a consumer (Crosby et
al, 2003). Focus on the next purchase is more important for the company because this
buying behaviour will determine repeat attitude that in the long run will beneficial.
After the birth of the concept of customer loyalty decades ago, this concept has
been popular used in many fields of business industry. Loyalty is occurring when a
customer decided to stick on the preference of the same product/brand/store even though
many options available to choose from (Shankar, Smith and Rangaswamy, 2013).
Customer loyalty is very important for the company, hence there is a strong relationship
between customer loyalty and its profit (Zeithaml, 2000) and as we know, the main goal
of a company is to gain profit.
In recent days, changing of almost everything has happened every time. In
economic term, there is also shifting from conventional approach to contemporary
approach. What had been focusing on customer satisfaction, cost reduction, market share
and market research, now turn into customer loyalty, customer retention, zero defections
and lifelong customers (Felix and Hotman, 2014).
107
Method
Research Design
This research is conclusive research which has a hypothesis and made to help
companies to take a decision in evaluating and choosing the best alternative in facing a
problem and to be a better company in introducing products and giving services to
customers. This research made by survey. The object is the customers of PT. X in
Surabaya.
The hypothesis of this research are:
H1: Service Quality has significant influence on Customer Satisfaction
H2: Service Quality has significant influence on Customer Loyalty
H3: Customer Satisfaction has significant influence on Customer Loyalty
Type and Data Resources

This is a quantitative research. According to Creswell (2014) quantitative research
is an approach for testing objective theories by examining the relationship among
variables. The variables then can be measured, processed, and analysed using statistical
procedures.
Population and Samples

Population is the entire object being researched while sample is a part of the
population that is going to be researched, viewed as a representation of a population but
not the population itself (Sunyoto, 2013). A population generalization area which
contains object/subject that have quantity and characteristic that determined by the
author. Population that used in this research are customers of PT. “X” in Surabaya, the
number is 138 customers. Those 138 customers are the population of this research.
According to Sangadji & Sopiah (2010) Sample is part of the number and
characteristics possessed by the population. A sample taken from the population should
be truly representative. The sampling technique that the researcher uses is purposive
sampling. From the population, there are only 50 customers used as the sample whom
have been purchased and used the product of PT. X in Surabaya for machine maintenance
in 1 year period prior to this research.
Data Analysis Technique
108
The samples used in this research are respondents who are the customers of PT.
X. The distribution of questioner to 50 respondents is expected to represent the ideal
population by this research. With this number, it is expected to be able to give a
description of the customers’ response toward quality of service and customer satisfaction
that could be influencing the loyalty.
The sample taking technique used in this research is by applying a method of non-
probability sampling, that population members chosen to be samples are based on the
researcher’s decision, and the chosen samples must be able to comprehend the given
questioners. In this research, the researcher is using a Likert scale for the questionnaire.
According to Siregar (2011), Likert scale is a scale that can be used to measure behavior,
opinions, and someone’s perception about an object or phenomenon. This research will
use 5 stages of Linkert scale. Ranging from 1 (Very Disagree) to 5 (Very Agree).
According to Arikunto (2010) validity is a measure that indicates the level of
validity of a test, measuring what is being measured and the results according to the
criteria. The validity test uses a Pearson correlation scale. When the value of the Sig. (2-
tailed) less than 0.05 then the item is valid with a confidence level of 95 % (Kuncoro,
2013). Reliability refers to the level of consistency or stability in the values of the scores
that an instrument elicits (Franzen, 2013). To measure reliability is using Cronbach alpha.
According to Siregar (2011), the criteria of a research instrument that reliable using
Cronbach alpha is when the reliability coefficient is > 0.6, and not reliable when the
reliability coefficient is < 0.6.
Figure 1. Path Analysis Equation
Service Quality (X) Pzx
Pyx Customer Loyalty

Customer (Z)
Satisfaction
(Y) Pzy
Y = Pyx . X + ε1
Z = Pzx . X + Pzy . Y + ε2
Here:
109
Pyx = Effect of X to Y X = Independent Variable
Pzx = Effect of X to Z Z = Dependent Variable
Pzy = Effect of Y to Z Y = Intervening Variable
ε1, ε2 = Error (Other Variables)
According to Retherford in Sunyoto (2012), technique that is used for analysing

the causal relationships that occur in multiple regressions when the independent variables
affect the dependent variable directly and indirectly is path analysis. To do the path
analysis test, there are several assumptions that must be fulfilled, which are the normality
test and outlier test (Riduwan and Sunarto, 2011).
To analyze the data gathered from the questionnaires with 50 respondents, this
research uses SPSS Program version 22. The results of the questionnaire are tested by
using validity and reliability test. All of the variables in this research are valid and
reliable because all the value of the Sig. (2-tailed) is less than 0.05 and the value of the
Cronbach alpha > 0.6.
Result
Table 1. Analysis of Hypothesis Test
Path Path Coefficient Standard t Value Probability

Error
Customer
Satisfaction (Y)  0,6673 0,0856 7,875 0,0000
Service Quality (X)
Customer Loyalty
(Z)  Service 0,4357 0,1001 5,057 0,0000
Quality (X)
Customer Loyalty
(Z)  Customer 0,5786 0,1459 5,546 0,0000
Satisfaction (Y)
Source: Data processing with SPSS 22.0 program
Based on the Table 1, the equations are as follows:

1. Y = 0.6673 X
2. Z = 0.4357 X + 0.5786 Y
110
The Effect of Service Quality and Customer Satisfaction as the Intervening Variable… 111
Discussion
The table shows that there is a significant effect of Service Quality (X) to Customer
Satisfaction (Y) is 0,6673. It means that there is a strong relationship between Variable X and
Y. As for the conclusion, first hypothesis is accepted; Service Quality has significant
influence on Customer Satisfaction. This result is similar to the research by Tjahjono (2009),
indicated that by implementing a good service in a company will boost customer satisfaction.
For the third hypothesis, the significant effect of Customer Satisfaction (Y) toward
Customer Loyalty (Z) is 0,5786, this hypothesis also accepted; Customer Satisfaction (Y) has
a significant effect on Customer Loyalty (Z). The same result also came from research made
by Panjaitan (2011). He found that there is a positive relationship between those two
variables, (Y) and (Z); customer satisfaction and customer loyalty.
Meanwhile, the value of indirect path of Service Quality (X) toward Customer
Loyalty (Z) using Customer Satisfaction (Y) as the intervening variable can be calculated by
finding the total path correlation; 0,6673 X 0, 5786 = 0,3861. By comparing the indirect path
coefficient (0,3861) is smaller than direct path coefficient (0,5786), it means that customer
satisfaction is not performing well as the intervening variable between service quality toward
customer loyalty. By this finding, customer satisfaction can be ignored as an intervening
variable within the relationship between service quality and customer loyalty. It is suggested
that company should focus on direct variable to perform an excellent service quality to
achieve customer loyalty.
There are some of recommendation from the author and some of the customers of PT.
“X”:
1. PT. “X” should sustain the quality of the service so this company will not lose its
customers.
2. PT. “X” can improve the quality of the service that already exists in the business world; it
will give sales force more confidence in giving explanations to the customers. Besides
that, with better quality automatically increases the number of customers and increase the
income of the company, in other words, increase the level of loyalty.
3. Even though customer satisfaction is not a perfect intervening variable in between service
quality and customer loyalty, it can be assigned as an individual factor. Nevertheless,
satisfied customer is a happy customer.
References
Abdullah, M., A. Al-Nasser, and N. Husain. (2000). Evaluating functional relationship
between image, customer satisfaction and customer loyalty using general maximum
entropy. Total Quality Management. 11 (4), pp. 5-6
Arikunto, S. (2010). Manajemen Penelitian. Jakarta: Rineka Cipta.
Bowe JT and Chen SL. (2001). The relationship between customer loyalty and customer
satisfaction. International Journal of Contemporary Hospitality Management. Vol 12
No 5.3
Creswell, J. (2014). Research Design: qualitative, quantitative, and mixed methods
approaches. London: SAGE Publications, Inc.
111
Cronin J. Jospeh, Michael K, Brady and G. Thomas M. Hult. (2000). Assessing the effect of
quality, value and customer satisfaction on consumer behavioural intention in service
environment. Journal of Retailing. Vol 76, pp. 193-218.
Crosby, L. B., DeVito, R., and Pearson, J. M. (2003). Manage your customers’ perception of
quality. Review of Business. 24, pp. 18-38
Choi, T. and Chu, R. (2001). Determining of hotel guests’ satisfaction and repeat patronage
in Hong Kong hotel industry. International Journal of Hospitality Management. 20,
pp. 227-297.
Darmansyah, Iksan. (2008). Debtor loyalty in loan portfolio as impact of total quality service
implementation. Jurnal Bisnis dan Manajemen. Vol 9, No 1, pp. 28-38
Homburg, C. Jensen, O., Krohmer, H. (2008). Configurations of marketing and sales:
taxonomy. Journal of Marketing. 72, pp. 133-154.
Farhad Rahmati, Ali Falahati, Babak Jamshedynavid. (2013). The study impact of internal
marketing on customer loyalty (case study: Iran insurance company – Kermanshah
province). International Research Journal of Applied and Basic Sciences. 4 (8), pp.
2018-2025
Feliks Anggia Binsar Kristian P., Hotman Panjaitan. (2014). Analysis of customer loyalty
through total quality service, customer relationship management and customer
satisfaction. International Journal of Evaluation and Research in Education. Vol 3,
No 3, pp. 142-151
Feliks, Anggia BKP., Hotman Panjaitan, Sigit Sardjono. (2013). The effect of total quality
service and private university image toward satisfaction and university student
loyalty. Proceeding, Public Reform for Good Government Governance, A4-PFM
Conference, Surabaya. Pp. 265-272.
Franzen, M. D. (2013). Reliability and Validity in Neuropsychological Assessment. New
York: Springer Science & Business Media.
Khodabakhsh, Gorgani F. (2010). The effect of internal marketing on customer satisfaction in
Iran Insurance companies in different areas of Teham. MA Thesis, Alameh
Tabatabaee University, Accounting and Management.
Kotler, P. (2008). Marketing Management, 13th ed., Prentice-Hall, Upper Saddle River, NJ.
Kuncoro, M. (2013). Metode Riset untuk Bisnis & Ekonomi Bagaimana Meneliti dan Menulis
Tesis? Jakarta: Erlangga.
Maleki A, Darabi M. (2008). Different customer satisfaction measurement methods. Monthly
Journal: Automobile Engineering in Affiliated Industries. 1st year, 3, pp. 27-32
Panjaitan, Hotman. (2011). The effect of service marketing strategies and service quality to
customer satisfaction and its impact on consumer loyalty at PT. Star Finance east
java, Proceeding, Simposium Riset Ekonomi V – 6 October 2011, pp. m57-m66
Riduwan, & Sunarto, H. (2011). Pengantar Statistika untuk Penelitian Pendidikan, Sosial,
Ekonomi, Komunikasi, dan Bisnis. Bandung: Alfabeta.
Sangadji, E. M., & Sopiah. (2010). Metodologi Penelitian - Pendekatan Praktis dalam
Penelitian. Yogyakarta: ANDI.
112
Sabbir Rahman, Muhammad. (2012). Service quality, corporate image and customer’s
satisfaction towards customers’ perception: an exploratory study on telecom
customers in Bangladesh. Business Intelligence Journal. Vol 5 No 1, pp. 56-63
Shankar, V., Smith, A. K., and Rangaswamy, A. (2003). Customer satisfaction and loyalty in
online and offline encounters. International Journal of Research in Marketing. 20(2),
pp. 153-175.
Siregar, I. S. (2011). Statistika Deskriptif untuk Penelitian Dilengkapi Perhitungan Manual
dan Aplikasi SPSS Versi 17. Jakarta: Rajagrafindo Persada.
Sunyoto, D. (2012). Riset Bisnis dengan Analisis Jalur SPSS. Yogyakarta: Gava Media.
Sunyoto, D. (2013). Metode dan Instrumen Penelitian Ekonomi dan Bisnis. Yogyakarta:
CAPS (Center for Academic Publishing Service).
Talat M. Kiyani, Moh Raza U. K. Niazi, Riffat A. Rizvi, Imran Khan. (2012). The
relationship between brand trust, customer satisfaction and customer loyalty (evidence
from automobile sector of Pakistan. Interdisciplinary Journal of Contemporary
Research in Business. Vol 4, No 1, pp. 489-502
Taylor, S., Celuch, K., and Goodwin, S. (2004). The important of brand equity to customer
loyalty. Journal of Product and Brand Management. 13(4), pp. 217-227.
Tjahjono, Hendro. (2009). Effect of total quality service towards expectations, perceived
value, satisfaction and image as well as the impact on student complaints ad loyalty
on private universities in east java. Dissertation, Postgraduate, UNTAG, Surabaya
Zahir Osman, Ilham Sentosa. (2013). A study of mediating effect of trust on customer
satisfaction and customer loyalty relationship in Malaysian rural tourism. European
Journal of Tourism Research. 6(2), pp. 192-206.
Zeithaml, V. A. (2002). Service quality, profitability, and the economic worth of customers:
what we know and what we don’t know. Journal of the Academy of Marketing
Science. 28(1), pp. 67-85
113
THE ANALYSIS OF COMPANY PERFORMANCE AND
SALES GROWTH TO THE DIVIDEND POLICY AT THE
COMPANY GO PUBLIC IN INDONESIA STOCK EXCHANGE
IN 2013
Dahlia Pinem1, Bernadin Dwi2
1((Faculty of Economics UPN “Veteran” Jakarta )
2
((Faculty of Economics UPN “Veteran” Jakarta)
pinem_dahlia@yahoo.com
Abstract : This study was conducted to examine the effect of variable Return On Equity, Return On Assets
and Sales Growth of the Dividend Policy at the company go public in Indonesia Stock Exchange in 2013. The
population in this study Go Public companies listed on the Indonesia Stock Exchange in 2013. The data was
obtained from the company's financial statements are published. It is obtained a total sample of 44 companies.
The analysis technique used is multiple linear regression and hypothesis testing using the F test and t test
statistics with a confidence level of 5%. The results showed that Return On Equity, Sales Growth and Return On
Assets simultaneously affect the dividend policy. The coefficient of determination (R2) in this study for 0233,
which means 23.3% Dividend policy can be explained by the variance of Return on Equity, Sales Growth,
Return on Assets and the remaining 76.7% is explained by other variables that are not used in this study. Then
partially, variable Sales Growth and Return on assets negatively affect dividend policy, while the return on
equity has no effect on Dividend Policy
Keywords Return On Equity, Return On Assets , Sales Growth, Dividend Policy
I. INTRODUCTION
The Capital Market is a facility and infrastructure where there is a transaction between the sellers and
buyers to get the capital for the share and long term or middle term company loans. The share is the security to
invest in long term sold traded in the share market on going at the Stock exchange and commonly the
shareholders get the profits as the dividend. One of the company aims is to increase the shareholders’ welfare by
increasing the company value. The more increasing economic development as well as the strict cross-companies
competition stimulates the managers to be able to act efficiently and effectively in managing the company. To
be able to keep running the business, each company requires the funds. The funds can be obtained from the
investors.
In common, the investors have the main goal to increase his or her welfare. The investors’ main goal in
investment is to get the return as the dividend yield or capital gain. The Capital gain is the profit capital
obtained from the different between the share purchase price and selling price. The amount of total distributed
dividend depends on the amount of profit obtained and the dividend policy set by the company.
The dividend policy is the decision whether the profit obtained by the company will be distributed to the
shareholders as the dividend or will be undistributed in the form of profit undivided for the future investment
financing. The company in determining the dividend policy must consider the factors affecting the dividend
policy. The dividend policy determination is very important because it can affect on the company performance,
the company value and the company share price. The Dividend Signalling Theory explains that the information
concerning the distributed dividend is the future company signal for the investors. The dividend change signal
can be seen from the company share price reaction measured using the return on share. The dividend
announcement can have the information content if it gives the significant abnormal return to the market, and
vice versa. According to the dividend signalling theory, the dividend increase will make the positive market
reaction if the market interprets that the dividend is considered as the strong signal about the good company,
also the other way around if the market reaction is negative if there is dividend decrease, then it is considered as
the less good signal about the company prospect in the future.
It is not easy to determine the dividend policy, because it can affect on the company performance,
company value and company share price. The company dividend policy is described at the company dividend
payout ratio (DPR) namely the profit percentage shared in the form of cash dividend, meaning that the amount

of DPR will affect on the shareholders’ investment decision and on the other side, will affect on the company
financial condition. Thus, in determining the dividend policy, the company should consider some factors
affecting it so that it can maximize the company value.
This study aims to analyze the effect of Return On Equity , Return On Assets and Sales Growth to the
dividend policy. The Return On Equity according to the study [1] affect insignificantly on the dividend policy.
Different to the study conducted by [2] Return On Equity affects positively on the dividend policy and the study
conducted by Mehta(2012) that the Return On Equity affects negatively significant to the dividend policy.
The Sales Growth according to the study [3] affect insignificantly to the dividend policy. Different to the
studies by penelitian [4] the Sales Growth affects negatively significant to the dividend policy. The Return On
Assets according to the study by[5] affects significantly on the dividend policy while the studies by Harianja
et.al ( 2013), [1] do not affect significantly on the dividend policy.
Based on the background and some different results showing the phenomena as well as the gap research,
so the problem formulation in this study is as the following.
a. Whether the Return On Equity affects on the dividend Policy.
b. Whether the Return On Assets affects on the dividend Policy.
c. Whether the Sales Growth affects on the dividend policy.
It is necessary for the optimal dividend policy namely there is a balance between the current dividend and the
future growth which will maximize the share price as the financial management goal.
The following will be described in short some of the dividend policy theories, among others are:
a. Irrelevant Dividend Theory
This theory is stated [6] stating that:
The dividend policy is irrelevant because it does not affect on the share price or company capital
fund. According to [6], the share price is set by the business profit and its business risk. [6] makes
the assumption that there is no income tax of the dividend, there is no share sale and purchase
transaction cost and also there is symmetric information between the shareholders and
management.
According to [6] states that:

Based on this assumption, the shareholders will indifference between the undistributed dividend
or profit because the shareholders can sell the share in certain portion to the cash as the cash
dividend return. On the other way, if the company shares the dividend though the shareholders do
not need the cash, so the shareholders can buy the share as the cash placement accepted from the
cash dividend.
II. LITERATURE STUDY
2.1 Signal theory
The dividend increase is often followed by the share price increase. If the paid dividend is high, so the
share price tends to high. The other way around, if the paid dividend is small so the company share
price is also small.
According [7] state that:
The dividend increase is often a “signal” to the investors that the company management predicts a good
return in the future. A dividend decrease or dividend increase under the normal (common) is believed
by the investors as the signal that the company future is less bright.
2.2 Agency Theory
[6] State the agency theory explaining the relation between the ownership separation and company
control. Because there is separation between the owner party and management party, it may give the
agency problem. The Agency problem can be between the manager and shareholders or between the
creditors and the shareholders.
According [8] explain that:

Other potential conflict in a big company is between the shareholders and creditors. The creditors
have the right for some of the profit and company assets especially in the bankruptcy case. While, the
shareholders have the company control mostly determining the company profitability and risk.
2.3 Dividend
The dividend is some of the profit shared to the shareholders. The dividend actually is the indirect
communication to the shareholders on the profitability level achieved by the company. The dividend
can be used by the investors as the estimator tool concerning the company achievement in the future
because the dividend delivers the future management hopes [9].
2.4 Dividend Policy Calculation
The Dividend policy used in this study is using the Dividend Payout Ratio (DPR) namely the ‘ratio
describing the amount of dividend proportion shared to the company net income’[3].
According [8] state that the ‘dividend payout ratio determining the amount of profit shared in the
cash dividend form and undistributed profit as the funding source’.
Dividend Per Share Dividend
DPR = =
Earning Per Share Net Income
2.5 Profitability Ratio
According [11] state that the ‘profitability ratio is the ratio to assess the company ability in looking for
the profit or return in certain period’.
According[6] explains that:
The ability ratio in obtaining the company profit depends on the profit and capital counted. We know
the type of company profit with various levels, starting from the gross profit, business profit, profit
before tax and interest, the taxable profit and company net profit. Also the model used is very various
in the utterance, such as business / operational capital, loan capital, self capital or overall capital. In
order that this profitability has the meaning, so the profit ratio with the capital must be adjusted to
where the profit and capital designated.
2.6 Growth Ratio
According [6] stated:

The growth ratio basically is to know the amount of company growth achievements at a certain time. In
determining this growth ratio, it is distinguished between the nominal and actual growth. The nominal
growth means not to pay attention to the inflation element, while the actual growth has isolated the
inflation so that can be known in certain about the company actual.
2.7 Hypothesis Development
Effect of Return On Equity To the Dividend Policy

The Return On Equity is a company's ability to earn a net profit seen from the use of equity. The higher
this ratio, the better the company condition.
'When companies with increasing return on equity, it can increase the dividend payout [3].
This is supported by research conducted [3] which states that the Return On Equity positively and
significantly affect on the dividend policy. Based on the description, it can be formulated the following
hypothesis:
H1: Return On Equity affects significantly on the Dividend Policy.
Effect of Return On Assets to the Dividend Policy
One of the profitability indicators is measured by using ROA (Return on Assets). Companies having
the profits tend to pay a larger portion of profits as the dividends. [6] The profitability affects positively
on the dividend policy because of the ability to generate profits and the dividend will be shared if the
Company makes a profit. This is supported by research conducted [4] states that the profitability has
significant effects on the dividend policy.
Based on the description, it can be formulated the following hypothesis:
H2: Return on Assets significantly affects on the Dividend Policy.

Effect of Sales Growth on the Dividend Policy
The Growth ratio is a ratio measuring the amount of company's ability to maintain its economic
position in the industry and economic growth in general from year to year. One of the measures used to
measure the growth is the Sales Growth showing the percentage increase in sales the current year
compared to the previous year. The larger the sales growth, the better. The faster the growth, the
greater the funds needed to finance the company.
'Large companies with a high growth rate is not maximized in providing the dividend income for the
shareholders, it is possible that the available funds are used to increase the total assets for the benefit of
the company's operations' [4].
This is supported by researches conducted [12], [4] which state that the sales growth has significant
negative effect on the dividend policy. Based on the description, it can be formulated the following
hypothesis:
H3: Sales Growth significantly affects on the Dividend Policy.
2.8 Research Framework
Based on what has been stated previously, this study relates to the effect of Return on Equity, Sales
Growth and Return On Assets to the Dividend Policy. It can be illustrated with the following
framework:
Return On Equity(X1)
Return On Assets (X2) Dividend Policy (Y1)
Sales Growth (X3)
Figure 1 Study Framework
III. Reserch Method
1. Operational Definition
a. The Independent Variable

1) Return On Equity (X1)
Return On Equity is the ratio or comparison between the net return and the total of capital. The
Return On Equity is stated in decimal unit with the ratio scale.
2) Return on Assets ( ROA ) is measured by the income after tax comparison to the total assets.
3) Sales Growth (X3)
The Sales Growth is the ratio showing the increase percentage of the sales during the current year
compared to the previous year. The Sales Growth is stated in decimal unit with the ratio scale.
b. Dependent Variable
The dependent Variable in this study is the Dividend policy with the metering using Dividend Payout
Ratio (DPR). The Dividend Payout Ratio measures the amount of dividend proportion shared to the
company net income. The Dividend Payout Ratio is stated in decimal unit with ratio scale.
a. Dependent Variable
The dependent variable in this study is the Dividend policy measured by using the Dividend Payout
Ratio (DPR).
The population to be used as this research object is the Company Go Public listed on the Indonesian Stock
Exchange (BEI) in 2013.

2. Samples
The sampling method is conducted by using the purposive sampling method,

The companies as the samples in this study:
a. The Go Public companies listed on the Indonesian Stock Exchange (BEI) and publish the annual financial
statements (annual report) which have been audited in 2013.
b. The Go Public companies distributing the dividends in 2013.
c. The Go Public companies with the growth rates characterized by positive growth in 2013.
d. The Go Public companies issuing the financial statements in rupiah.
3. Data Types
The data used in this research is secondary data as the data containing the annual financial report
(annual report) as well as see the financial performance summary of all companies listed on the Stock Exchange
with the observation period in 2013.
4. Data source
The data used in this study are from the annual financial statements audited and the work summary of the
company's financial statements in 2013 listed on the Stock Exchange published and can be obtained by
accessing the official website of the Indonesian Stock Exchange (BEI), which is www.idx. co.id
Data collection
In this study, the data collection methods used are:
a. Research Library
b. Documentation
IV. RESULTS AND DISCUSSION
1. Descriptive Statistics
Based on the data processing results using SPSS (Statistical Product and Service Solution) version 20.0, it is
obtained on the following calculation:
Table 1 Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
ROE 44 ,0320 ,3090 ,171432 ,0717046
Sales Growth 44 ,0010 ,5400 ,174773 ,1310797
ROA 44 ,0190 ,8720 ,241725 ,2451543
DPR 44 ,0530 ,8350 ,370864 ,1911001
Valid N (list wise) 44
a. Dependent Variable: DPR
Data Source: Output SPSS 20.0, processed data
Based on table 1, the descriptive statistic result is known that the number of Company samples (N) is 44
companies, with the observation time is 1 year. Out of 44 sample of ho public companies in 2013, it is obtained
the mean ratio of Dividend Payout Ratio (DPR) of 0.37086. The lowest DPR value is 0.053 and the highest DPR
value is 0.835. while the DPR standard deviation is 0.191100.
The Return On Equity (ROE) variable shows that the mean of ROE is 0.17143. the lowest ROE value is
0.032 and the highest ROE value is 0.309. while the ROE standard deviation is 0.071705. The Return On Asets
( ROA ) variable shows the mean of ROA of,241725. The lowest ROA value is,0190 and the highest ROA
value is 8720. The Sales Growth variable used shows that the mean of Growth Sales is 0.17477. The lowest
Sales Growth value is 0.001 and the highest Sales Growth value is 0.540.

2. Asumsi Klasik
Tabel 2 Classical Assumption Test
Test Result Description Analysis
Normality Histogram is in formof bell and diagram of normal p- Normal distributed data
plot describing the points around the distributing lines
Heterokedasticity Regression Standardized Predicated Value distribution There is no heteroskedasticity
Multicollinierity VIF < 10 There is no Multicollinierity
Linearity Print out Scatter Plot does not form certain Pattern Linearity assumption is met
Source : Processed data
Simultaneous Test (Uji F)

The simultaneous test or F test shows whether all of the independent variables inputted in the model,
namely Return On Equity (ROE), Return On Assets ( ROA ) and Sales Growth have the effect simultaneously
on the dependent variable namely the Dividend Policy(DPR). The following is the simultaneous test result:
Table 3 . Anova
Model Sum 0f df Mean F Sig

Squares Square
1 Regression 0,450 3 0,150 5,350 0,003b

Residual 1,121 40 0,028
Total 1,570 43

a. Dependent Variable: DPR
b. Predictors: (Constant), ROE , ROA, GROWTH
Based on the simultaneous test (F test), it shows that the F value is 5.350 with the significance level of
0.003. because the significance level is 0.003 < 0.05 so it can be concluded that the Ho is rejected Ha 1 is
accepted, meaning that the Return On Equity, Sales Growth and Return on Assets simultaneously affect on the
Dividend Policy.
Partial Test (t test)

The partial test or t test shows how the effect of one independent variable individually will explain the
dependent variable variation. The following is the partial test results ( t test ):
Table 4 Coefficientsa
Model Un-standardized Standardized t Sig.

Coefficients Coefficients
B std .Error Beta
( Constant) 0,446 0,074 6,058 0,000

ROE 0,605 0,375 0,227 1,612 0,115
ROA -,253 0,104 -324 -2,422 0,020
Sales Growth -,672 0,206 -0,461 -3,268 0,002

Based on the table above, it can be concluded that the hypothesis test of each independent variable to the
dependent variable is as the following:
a. The effect of Return on Equity partially to the Multiple Regression Analysis.
The significance value of the Return on Equity (ROE) variable is 0.115, the significant value is
greater than 0.05 (0.115 > 0.05), this shows that the Return on Equity does not affect on the Dividend
Policy.
b. The effect of Return on Assets ( ROA ) partially to the Dividend Policy.
The significance value of the ROA is 0.020, the significant value is greater than 0.05 (0.020 < 0.05),
this shows that the Return on Assets affect on the Dividend Policy
c. The effect of Sales Growth partially to the Dividend Policy.

The significance value of the Growth Sales variable is 0.002, the significant value is smaller than 0.05
(0.002 < 0.05), this shows that the Sales Growth affects in the Dividend Policy.
Tabel 5 Recapitulationof Multiple Regression AnalysisResult

Variable Regression Coefisient T Sig
(B)
ROE ( X1) 0,605 1,612 0,115
ROA( X2) -0,253 -2,422 0,020
Sales Growth ( X3) -0,672 -3,268 0,002
Constanta = 0,446 R Square = 0,286 R = 0,535
Adjusted R Square = 0, 233
F Siqnificance = 0,003
Based on table above, the determination coefficient used is adjusted R2 namely is 0.233. meaning that the
Return On Equity, Sales Growth and Return on Assets inputted to the model can only explain the variation of
the Dividend Policy of 0.233 or 23,3% and the residue is.76,7% explained by other variable used in this study
model.
Discussion
This study aims to know the effect of the Return On Equity (ROE), Sales Growth and the Return on
Assets to the Dividend Policy to the 44 companies listed in the Indonesian Stock (BEI) in 2013.
Based on the first hypothesis test, it can be seen that the F significance value is 0.003, meaning that the
Return On Equity (ROE), Sales Growth and Return on Assets ( ROA ) simultaneously affect on the dividend
policy.
Based on the determination coefficient test, it can be known that the adjusted R2 value is 0. ,233 or
23,3%. Meaning that the Return On Equity (ROE), Sales Growth and Return On Assets ( ROA ) only have the
ability of 23,3% in giving the necessary information to predict the Dividend Policy variation and the residue of
76,7% is explained by other variables which are not used in this study model.
Based on the second hypothesis test, it can be seen that the regression coefficient is 0.605 with the
significance is 0.115, meaning that the Return On Equity (ROE) has no effect on the Dividend Policy. It is
informed that the ROE is not a consideration in making investment decisions for the investors. The investors do
not pay attention to the distributed profit use decisions and the company's own capital in the dividend payments.
Based on the third hypothesis test, it can be seen that the regression coefficient is -0672 with the significance is
0.002, meaning that Sales Growth has a negative effect on the Dividend Policy. If the Sales Growth increases by
one then the Dividend Policy will decline by 0672 assuming that the X1 variable and X2 variable remain. This
shows that the Sales Growth can be considered by the investor in the dividend payments due to the higher Sales
Growth indicates that the company does not utilize the sales as well and effectively, because the higher the Sales
Growth, the greater the need for the necessary funds for the company financing so that the distributed dividend
is low.
Based on the fourth hypothesis test, it can be seen that the regression coefficient is -0253 with the
significance is 0.020, meaning that the Return On Assets (ROA) has an affect on the Dividend Policy. It informs
that ROA is the consideration by the investors in making investment decisions.
.
V. CONCLUSION
Based on the data analysis and hypothesis testing results of the Return On Equity, Sales Growth and
Return On Assets to the Dividend Policy in 2013, it can be concluded the following:
a. From this study result that the Return On Equity (ROE) variable has no effect on the Dividend Policy
(DPR). It is informed that the investor does not consider the distributed profit use decision and the company's
own capital in the investment decision-making, namely the decisions on the dividend payments.
b. From this study result that the Sales Growth variable negatively affects on the Dividend Policy (DPR).
That is, the faster the company growth, the greater the need for the necessary funds to finance the company, so
that distributed dividends is low.
c. From this study result that the Return On assets variable negatively affects on the Dividend Policy
(DPR). That is, the greater the company Assets, the greater the need for the necessary funds to finance the
company, so that distributed dividend is low.

d. This study has several limitations, among others are it only uses the financial statement data with only
one year observations, so the results are better advised to use a longer time duration to help the investors and
companies in the future in making more precise and accurate decisions.
REFERENCES
[1] Maskiyah, I &Wahjudi, E 2013, ‘Determinan dividend payout ratiopada perusahaan pertambangan yang terdaftar di BEI periode
2008-2012’,Management Science Journal vol.1, no.4, July 2013, p.996-1009.
[2] Arshad, Z, Akram, Y, Amjad, M &Usman, M 2013, ‘Ownership structure and dividend policy’, Interdisciplinary Journal of
Contemporary Research In Business, vol.5, no.3, July 2013, p.378-401.
[3] Santoso, HD & Prastiwi, A 2012, ‘Analisis faktor-faktor yang mempengaruhi kebijakan dividen’, Diponegoro Journal of
Accounting, vol.1, no.1, 2012, p.1-12.
[4] Ritha, H&Koestiyanto, E 2013, ‘Faktor-faktor yang mempengaruhidividend payout ratio (DPR)’, Management and Business E-
Journal vol.1, no.1, October 2013, p.1-15.
[5] . Marietta, U&Sampurno, D 2013, ‘Analisis pengaruh cash ratio, return on assets, growth, firm size, Debt to equity ratioterhadap
dividend payout ratio: (studi pada perusahaan manufaktur yang terdaftar di Bursa Efek Indonesia tahun 2008-2011)’,
DiponegoroJournal of Management,ISSN (Online): 2337-3792, vol.2, no.3, 2013, p.1-11.
[6] Sitanggang, JP 2013a, Manajemen keuangan perusahaan lanjutan, Mitra Wacana Media, Jakarta.
[7] Sjahrial, D 2010, Manajemen keuangan, Edisi 4, Mitra Wacana Media, Jakarta
[8] Harjito, DA & Martono 2013, Manajemen keuangan, Ekonisia, Yogyakarta
[9] Halim, A 2005, Analisis investasi, Salemba Empat, Jakarta
[10] Murhadi, WR 2013, Analisis laporan keuangan, proyeksi dan valuasi saham, Salemba Empat, Jakarta.
[11] Kasmir 2014, Analisis laporan keuangan, PT. RajaGrafindo Persada, Jakarta.
[12] Haryetti&Ekayanti, RA 2012, ‘Pengaruh profitabilitas, investment opportunity setdan pertumbuhan perusahaan terhadap kebijakan
dividen pada perusahaan LQ-45 yang terdaftar di BEI’, Economics Journal, vol. 20, no.3, September 2012, p.1-18.

EFFECT OF PROFITABILITY, LIQUIDITY AND ASSETS
STRUCTURE ON THE COMPANY DEBT POLICY
Desmintari, Fitriyetty
desmintari@yahoo.com1 fitriyetty_61@yahoo.com2
Faculty of Economics and Business UPN “Veteran” Jakarta
__________________________________________________________________________________
_________
Abstact: This paper examines effect of profitability, liquidity, and assets structure on the debt policy in
companies categorized within retail trade sector listed on the Indonesia Stock Exchange over period of 2011-
2014. As many as 22 companies being taken as population of this study. Using secondary data obtained from the
companies’ annual financial report that has been audited and published, and after applying selection criteria, a
set of sample consisted of 12 companies is determined, with total of 48 observations. We employ multiple linear
regression analysis and hypothesis test using t-statistic and F-statistic with 5% level of significant. The result
indicates that profitability and liqudity have significant negative effect on debt policy. While other variable,
assets structure, has no significant effect to debt policy. This study is expected to be useful for companies
planning to raise funding externally through debt policy to take notice of other factors having effects to the debt
policy, so that the decision taken will be more appropriate and effective.
Keywords: Profitability, Liquidity, Assets Structure
1. INTRODUCTION
The sources of company funding may be derived from its internal as well as external. External funding
sources usually in the form of loans or by issuing shares and bonds, while internal funding sources may come
from owners' equity and or retained earnings (Haruman, 2008). Financing policies applied in a company are
aimed to maximize the prosperity of the company itself. Debt policy is included in external source company
funding policies, that the determination is related to capital structure as the debt is one of the compositions in the
capital structure (Narita, 2012).
The pecking order will firstly issues securities as the safest way. Steps of issuing securities will start from
theory stated that companies prefer to have internal funding, if external funding is required, a company the
issuance of bonds, and then bonds that can be converted into own capital, and finally the issuance of new shares
(Brealey & Myers, p.500 in Husnan & Pudjiastuti, 2006). In a company there can be problems of agency (agency
theory) between the company's management as the manager (agent) and the capital owners or shareholders
(principal). The problem occurs due to the separation of the ownership function and the management function of
the company that cause difference of interest between management and shareholders. Debt policy can be an
option to address the agency problem. A company that implement debt policy as one of the funding strategies in
the operation activities should remain alert to the risk that may arise such as the risk of bankruptcy, where the
company that issues debt certainly bear the risk when the debt reach the due date. If the company is unable to
pay debts to its creditors, on that condition the company may be forced to declare bankruptcy (Brealey et al.
2008, p. 27).
Various researches have been conducted regarding the Debt Policy and the results were quite inconsistent,
among which the research of Narita (2012), which stated that the profitability has significant negative effect on
debt policy and liquidity has significant negative effect on debt policy. Ramlal (2009), stated that profitability
does not significantly influence the debt policy and liquidity has significant negative effect on debt policy.
Indriani & Widyarti (2013), stated that the profitability has significant negative effect on the debt to equity ratio
and liquidity has no significant effect on the debt to equity ratio. Hardiningsih and Oktaviani (2012), stated that
the profitability has significant positive effect on debt policy and assets structure has significant positive effect
on debt policy. Yuliarti (2013), stated that the profitability has significant positive effect on debt policy and the
assets structure has no significant effect on the debt policy.

2. LITERATURE REVIEW
Agency Theory
Problems of the relationship between agents and principals will arise because of interest difference of
respective parties (Sitanggang 2012, p. 9). A trigger of this agency conflict is when a company have a very large
free cash flow (Syahrial, 2012, p. 5). At the moment a company have a large cash flow, there is a chance
management side will use it for their own interests, therefore the debt policy is possible to minimize the cash
flow available. This makes debt policy to be an option to minimize the agency conflict within the company.
Pecking Order Theory
The pecking order theory explains that companies prefer internal funding, if external funds are needed,
companies will issue debt first and only issuing equity as a last resort. The pecking order emerged since the
issuance of the debt is not overly considered as a bad sign by investors compared to the issuance of equity
(Brealey et al, 2008. Pg. 25). If a company does require external funding, according to this theory, a funding
policy through debt issuance is the best option. The amount of debt being issued in accordance with the needs of
external funds by the company.
Funding Decision
The funding decision is a decision that could indicate the source of the funds distributed to finance
company assets (Sitanggang, 2012, p. 4). Companies may choose or decide to merge internal and external
corporate funding in accordance with the desired composition of the companies.
Debt Policy
Debt is the obligation of the debtor (borrower) to implement something to creditor (lender) in a certain
period of time (Nafarin 2013, p. 342). Debt has several types, it can be classified as short-term debt and long-
term debt, which has the characteristic differences between each type. The use of debt by company depending on
the requirements, agreements, and problems faced by the company itself.
Debt policy categorized in external company funding policy. The determination of this debt policy with
regard to capital structure as debt is one of the compositions in the capital structure (Narita, 2012). Debt policy is
a funding decision through external source intended to fund the company’s assets and operational activities in
order to enable company to improve performance and profits. To find out the portion of financing debt as well as
the company’s ability to meet its obligations can be done through financial ratio.
Profitability
One of the most important goals of the establishment of company is to gain profit. To measure the
company’s ability to gain profit can be done by using profitability ratio. This is the ratio to evaluate the ability of
a company to gain profit in a certain period of time (Kasmir, 2014, p. 114). Profitability is a depiction to measure
a company’s ability to profit from the various capabilities of the company in terms of sales, assets and capital.
The higher the profitability ratio, the higher profit gained by the company.
Liquidity
A debt will be related to the due date. The due date is when the debt must be repaid or the return of
certain sums of funds to creditor as the funder. The fund is the amount of money that previously lent by the
creditor to company in need. Liquidity is an aspect that shows the company’s ability to meet the obligations that
must be met (Narita, 2012).
Assets Structure
Assets are properties or resources owned by company, either in a given time or a certain period
(Cashmere, 2014, p. 39). Assets structure is an aspect related to the company’s resources that describe the
composition of each type of asset, such as current assets, fixed assets and others in a total assets owned by the
company. It also to assess the kind of asset that dominates out of the total assets owned by the company which
can be used as security.
2.1. Hypothesis Development

The Influence of Profitability on Debt Policy
Profitability is a depiction of the way to measure a company's ability to gain profits out of its various
capabilities such as in terms of sales, assets and capital. A company with high profitability will have and use

small debts (Brigham & Houston, 2011, p. 189). A company with high level of profitability will earn high
profits. This will also increase the retained profits. And in turn, in financing the operational activities, company
can optimize this internal sourced fund and that will lower the company's intention to issue debt. On the other
hand, if a company has low level of profitability, there will be a tendency the company requires additional funds
for the profits are insufficient. This will increase the chance for the company to issue debts for financing its
activities. Previous researches, such as Soesetio (2008), Steven & Lina (2011), Narita (2012), Susilawati et al.
(2012), Yuniarti (2013), and Indriani & Widyarti (2013) consistently stated that profitability has significant
negative effect on debt policy or debt to equity ratio. From the explanation above, the formulation of the first
hypothesis is:
H1: Profitability has significant negative effect on debt policy
The Influence of Liquidity on Debt Policy

A company with high level of liquidity, means that the company is able to immediately repay its debts
(Narita, 2012). When a company has a high level of liquidity, it can be said that the company has the ability to
always pay off its debts. This ability is a good thing when the company wants to have external funding through
debt, because the company will won the trust of creditors. A high liquidity level of the debtor company will
reduce the risk of loss of the creditors that could arise because the funds can not be returned. On the other hand,
if the liquidity level is low, it shows the lack of ability of company to pay off its debts before the due date, which
will decline the trust of creditors to provide funds for the company, making it difficult to get such external
funding through debt. Previous researches, such as Narita (2012) stated that liquidity significantly influence debt
policy. While the research of Indriani & Widyarti (2013) stated that liquidity positively effect debt to equity
ratio. From the explanation above, the formulation of the second hypothesis is:
H2: Liquidity have significant positive effect on Debt Policy
The Influence of Assets Structure on Debt Policy

Companies that the assets are sufficient to be used as security for loans tend to be pretty much using debt
(Brigham & Houston, 2011, p. 188). If assets structure of a company are dominated by assets that can be used as
a security, such as fixed assets, it will be good at the time of debt agreement or applying for funds from the
creditors. This is because one of the factors of creditors' trust to provide loan funds to a company is the
availability of security for the funds, where the security can be in the form of fixed assets. On the other hand, if
the assets of a company are less able to be security for loans, the company will find it difficult to get funds from
creditors. Previous researches, such as research Steven & Lina (2011), Hardiningsih & Oktaviani (2012) and
Susilawati et al. (2012) stated that the Assets Structure has significant positive effect on Debt Policy. From the
explanation above, the formulation of the third hypothesis is:
H3: Assets Structure have positive significant effect on Debt Policy
3. METHODOLOGY
Dependent Variable
Debt policy is measured by Debt to Equity Ratio (DER) using data scale of total debt ratio toward total
equity by decimal data unit. Reason for the use of (DER) is to know the amount of funds provided by creditor
and company, so that it can be figured out how big the role of debt in financing the assets of a company. It is
formulated as follows:
Total Debt
DER =
Total Equity
Independent Variables
Profitability

Profitability is measured by Return on Assets (ROA) using data scale of profit ratio after tax toward total
assets of the company by decimal data units. Reason for the use of (ROA) is to know the rate of return from the
use of company assets. It is formulated as follows:
Earning After Tax

ROA =
Total Assets
Liquidity
Liquidity is measured by Current Ratio (CR) using data scale of current assets ratio toward current
liabilities by decimal data units. Reason for the use of (CR) is to know the company's ability to pay for the short-
term obligations or in other words to find out how liquid a company is. It is formulated as follows:
Current Assets
CR =
Current Liabilities
Assets Structure
Assets structure (AST) measured by the ratio of fixed assets toward total assets of a company by decimal
data units (Susilawati et al, 2012). Reason for the use of (AST) is to know the composition of fixed assets'
amount of all assets owned by a company that can be used as security. It is formulated as follows:
3.1. Population and Sample

The sample used in this research is companies classified in retail trade sector listed in Indonesian Stock
Exchange (BEI). Sample determination technique in this study uses purposive sampling that is a sampling
technique based on certain required criteria related to the research topic. The criteria are as follows:
a. Companies categorized in retail trade sector which are listed in the Indonesian Stock Exchange during the
period of 2011-2014.
b. Companies that successively consistent reporting the annual financial statements on 31 December during the
period of 2011-2014 in full set which can be accessed through the official websites.
c. Companies categorized in retail trade sector that provide complete data needed for the research on each of
their annual financial statements.
d. Companies categorized in retail trade sector which recorded a positive return consistently in their financial
statements in the period of 2011-2014.
3.2. Analysis Method

In this research, the regression model used is multiple linear regression analysis. The use of multiple
linear regression analysis is to examine the influence of the independent variables (profitability, liquidity and
assets structure) toward the dependent variable (Debt Policy) in companies categorized in retail trade sector
listed in Indonesian Stock Exchange during the period of 2011- 2014. The multiple linear regression analysis
equation expressed in the following forms:
DER = α – β 1ROA + β 2CR + β 3AST + ε
Explanation:
DER = Debt Policy (Y)
ROA = Profitability (X1)
CR = Liquidity (X2)
AST = Assets Structure (X3)
α = Constants
β1, β2, β3 = The regression coefficient for each independent variable
ε = Error
4. EMPIRICAL RESULTS
Data Analysis
The sample used in this study is companies categorized in retail trade sector listed in Indonesian Stock
Exchange (BEI) during the period of 2011-2014. Selection of the samples used in this research based on
predetermined criteria as described in following table:
Table 1. Criteria-based Sample Selection

No Research Sample Criteria Total
Companies categorized in retail trade sector listed in Indonesia Stock Exchange
1 22
during period of 2011-2014
Companies inconsistently reporting its annual financial report to Indonesia
2 (4)
Stock Exchange during 2011-2014 in a row
Number of companies suffering loss or has no positive gains on its financial
3 (5)
report during 2011-2014
Number of companies unable to provide required data completely on each of
4 (1)
its annual financial report
Number of companies being taken as sample 12
Number of year 4
Number of total sample during research period 48
Based on the criteria selection established by purposive sampling method, as many as 12 companies are selected
to be sampled in this study in the observation period of 2011-2014 or (4 years), so that the total overall sample is
48 samples.
Table 2. Descriptive Statistics

Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
Debt Policy 48 .1777 3.6540 1.454990 1.1274107
Profitability 48 .0053 .2237 .071408 .0484631
Liquidity 48 .6821 9.0361 2.300990 1.7862954
Asset Structure 48 .0132 .5558 .236375 .1272570
Valid N (listwise) 48
Source: Secondary data, processed
Based on the above table it can be seen that the number of samples used in this research are 48 samples.
Table 2 shown the average Debt Policy of retail trade companies listed in Indonesian Stock Exchange during the
period of 2011 to 2014 was 1.4549. That meant, the average of retail trade companies listed in Indonesian Stock
Exchange used a larger proportion of funds from external sources in the form of debt compared to internal
sources funds in the form of capital for the operational activities of companies. It can be said that the average of
retail trade companies registered in Indonesian Stock Exchange were highly dependent on loans. Debt Policy
minimum value were of 0.1777, while the maximum value were of 3.6540.
The profitability average of the retail trade companies listed in Indonesian Stock Exchange during the
period of 2011-2014 amounted to 0.0714 or 7.14%. That meant, the average retail trade companies listed in
Indonesian Stock Exchange has been good enough in generating profits. This was because the positive value of
profitability indicated that companies does not lose and by the value of 0.0714 or 7.14%, it can be said that the
average retail trade companies listed in Indonesian Stock Exchange could optimize the assets owned to gain
profits and that optimization assets use has a contribution of 7.14% of the total net profit earned by the
companies. Profitability minimum value of 0.0053 or 0:53% and maximum value of 0.2237 or 22.37%.
Average liquidity in retail trade companies listed in Indonesian Stock Exchange during the period of
2011-2014 amounted to 2.3009. That meant, the average retail trade companies listed in Indonesian Stock
Exchange has good liquidity because that amount of current assets were 2 times the amount of current debt, so it
can be said that companies were able to pay off the debts at the time of billing or the due date for assets the
companies can cover the amount of the debt on the due date. Liquidity minimum value were of 0.6821, while the
maximum value were of 9.0631.
The average assets structure of retail trade companies listed in Indonesian Stock Exchange during the
period of 2011-2014 amounted to 0.2363 or 23.63%. That meant, retail trade companies listed in Indonesian
Stock Exchange in the period 2011-2014, on average, in terms of the assets structure were not dominated by
fixed assets as the proportion of total fixed assets amounted to 23.63% of total assets owned by companies. The
minimum value of 0.0132 or 1.32% and the maximum value of 0.5558 or 55.58.
Classical Assumptions Test

Normality Test
Figure 1. Normality Test Result (P-Plot Chart)
Based on figure above, the P-P Plot chart analysis test results shown that the distribution pattern was
normal or normal data because the dots represent the data used in this research spread around the diagonal line
and following the direction of the diagonal line. It can be said that the regression model met the normality
assumption.
Table 3. Normality Test Result

One-Sample Kolmogorov-Smirnov Test
Unstandardized
Residual
N 48
a,b Mean 0E-7
Normal Parameters
Std. Deviation .78635019
Absolute .085
Most Extreme Differences Positive .085
Negative -.077
Kolmogorov-Smirnov Z .592
Asymp. Sig. (2-tailed) .875
a. Test distribution is Normal.
b. Calculated from data.

Based on the above table, the One Sample Kolmogorov Smirnov test result shown the Kolmogorov
Smirnov value of 0.592 with significance level of dependent and independent variables more than 0.05 (0.875>
0.05). From the normality test result above can be concluded that the data are normally distributed, the
distribution model of this research found to comply with the normality assumptions.
Multicollinearity Test
.
Table 4. Multicollinearity Test Result

Coefficientsa
Collinearity Statistics
Model
Tolerance VIF
1 (Constant)
Profitability .747 1.338
Liquidity .706 1.416
Assets Structure .934 1.071
a. Dependent Variable: Debt Policy
Based on the above table, multicollinearity test result shown each independent variable that consists of
profitability, liquidity, and assets structure has a value of Variance Inflation Factor (VIF) ≤ 10 and Tolerance
value ≥ 0.10. It can be said that there were no multicollinearity symptoms or problems, which means there were
no relationship between the independent variables.
Autocorrelation Test
Table 5. Autocorrelation Test Result
Model Summaryb
Model Durbin-Watson
1 .777
a. Predictors: (Constant), Assets Structure, Profitability,
Liquidity
b. Dependent Variable: Debt Policy
Based on Table 5 above, autocorrelation test result shown the DW value 0.777, where the value is in
between -2 ≤ 0.777 ≤ +2. It can be said that the regression model is free of autocorrelation problem.
Heteroscedasticity Test

Figure 2. Heteoscedasticity Test Result (Scatterplot chart)
Based on Figure 2 above, scatterplot chart test result shown that there were no heteroscedasticity because
of no clear pattern, the dots also spread above and below the 0 number on Y axis. Based on the figure above
there is no specific pattern, like existing dots to form certain regular patterns (wavy, widened then narrowed), it
indicated that there were no heteroscedasticity.
Hypothesis Test
Simultaneous Test (F-test)
Table 6. Simultaneous Test (F-test) Result
ANOVAa
Model F Sig.
1 Regression 15.482 .000b
Residual
Total
b. Predictors: (Constant), Asset Structure, Profitability,
Liquidity
Based on the above table, the result of simultaneous test (F) indicated that the Fcount value 15.482 with a
significance level of 0.000. With significance level of 5% or 0.05 where the amount of variable-1 (df1) is 4-1 =
3, and df2 (n-k-1) is 48-3-1 = 44, (n = number of samples and k = number of independent variables), then
obtained Ftable by 2.82. Because the value of Fcount > Ftable is 15.482 > 2.82 with a significance level of 0,000
smaller than the significance level (α) of 5% or 0.05, then H0 rejected and Ha accepted, so it can be concluded
that Profitability, Liquidity and Assets Structure simultaneously has a significant influence on Debt Policy.
Determination Coefficient Test (R²)

Table 7. Determination Coeficient (R2) Test Result
Model Summaryb
Adjusted Std. Error of the
Model R R Square
R Square Estimate
1 .717a .514 .48 .812716
a. Predictors: (Constant), Asset Structure, Profitability, Liquidity
b. Dependent Variable: Debt Policy
Based on the above table, the determination coefficient test result shown the value of Adjusted R Square
0.48. It was concluded that 48% of the Debt Policy variable can be explained by the independent variables
consisted of Profitability, Liquidity and Assets Structure. While the remaining 52% (100% - 48%) were
explained by variables or other factors outside of the examined variables in this research, such as Managerial
Ownership, Institutional Ownership, dividend policy, company size, and Free Cash Flow.
Partial Test (t-test)

Table 8. Partial Test (t-test) Result
Coefficientsa
Model T Sig.
1 (Constant) 8.594 .000
Profitability -2.485 .017
Liquidity -4.273 .000
Asset Structure -1.085 .284
Based on t-test result table above, noted that profitability has t count -2.485 (in tcount minus sign is not
considered, just as a sign of the influence direction) while t table 1.6802 so that t count > ttable (2.485 > 1.6802),
whereas the significance level of the profitability variable were of 0,017 less than 0.05 significance level of or
(0.017 <0.05). Based on the test result in this research, it shown that the first hypothesis (H1) in this research was
accepted. It can be concluded that Profitability has significant negative effect on Debt Policy. The results of this
research supported the researches of Soesetio (2008), Steven & Lina (2011), Narita (2012), Susilawati et al
(2012), Yuniarti (2013), and Indriani & Widyarti (2013).
On the liquidity variable t count value -4.273 (in tcount minus sign is not considered, just as a sign of the
influence direction) while t table 1.6802 so that t count > ttable (4.273 > 1.6802), whereas the significance level of the
Liquidity variable 0,000 less than the significance level 0 05 or (0.000 <0.05). Based on the test result in this
research, it indicated that the second hypothesis (H2) in this research was rejected. It can be concluded that
Liquidity has significant negative effect on Debt Policy. The results of this research did not support the research
of Indriani & Widyarti (2013) which stated that liquidity has positive effect on Debt Policy and the test results
were not consistent with the hypothesis made.
On Asset Structure variable t count value -1.085 (in tcount minus sign is not considered, just as a sign of the
influence direction) while t table 1.6802 so that tcount > ttable (1.085 <1.6802), whereas the significance level of
assets structure variable 0.284 greater than 0.05 significance level or (0.284> 0.05). Based on the test result in
this research, it indicated that the third hypothesis (H 3) in this research was rejected. It can be concluded that
assets structure did not significantly influence the Debt Policy. The results of this study did not support the
researches of Steven & Lina (2011), Hardiningsih & Oktaviani (2012), and Susilawati et al (2012) that
consistently stated the Assets Structure has significant positive effect on Debt Policy.
5. CONCLUSIONS
a. In this research, Profitability has significant influence toward Debt Policy with negative
relationship direction. The result of the test affirmed the first hypothesis stated that the rise of
profitability level will allow the company to lower the desire to commit funding through debt
policy. Thus the initial hypothesis formed in this research were proved.
b. In this research, Liquidity have significant influence toward Debt Policy with negative relationship
direction. Result of the research rejected the second hypothesis stated that companies with high
level of liquidity tended to implement debt policy more, because when liquidity is high there will
be a guarantee that the companies can pay off their debts. This will make the companies to gain the
trust of creditors to lend funds in the form of debts. Thus, the initial hypothesis formed in this
research were not proven.

c. In this research the assets structure has no significant effect on Debt Policy. Result of the research
rejected the third hypothesis stated that large assets structure of companies or dominated by fixed
assets to make the implementation of debt policy to be great as well. Thus, the initial hypothesis
formed in this research was not proven.

REFERENCES
Ardiyos 2010, Kamus besar akuntansi Inggris – Indonesia, Citra Harta Prima, Jakarta.
Brealey, Myers & Marcus, Dasar–dasar manajemen keuangan, 2nd edition, Erlangga, Jakarta.
Brigham & Houston 2011, Dasar-dasar manajemen keuangan, 11th edition Book 2, Salemba Empat,
Jakarta.
Bursa Efek Indonesia, Laporan keuangan tahunan, accessed on March 23rd, 2015,
http://www.idx.co.id/beranda/perusahaantercatat/laporankeuangandantahunan.aspx
Ghozali, I 2011, Aplikasi analisis multivariate dengan program IBM SPSS 19, 5th edition, Badan
Penerbit Universitas Diponegoro, Semarang.
Hardiningsih, P & Oktaviani, RM 2012, ‘Determinan kebijakan hutang (dalam agency theory dan
pecking order theory)’, Jurnal Dinamika Akuntansi, Keuangan dan Perbankan, vol. 1, no. 1, pp.
11-24.
Haruman, T 2008, ‘Pengaruh struktur kepemilikan terhadap keputusan pendanaan (perspektif agency
theory)’, National Conference on Management Research.
Horne, JCV & Wachowicz, JMJR 2005, Fundamental of financial management, 12th Book 1, Salemba
Empat, Jakarta.
Husnan, S & Pudjiastuti, E 2006, Dasar-dasar manajemen keuangan, 5th edition, UPP STIM YKPN,
Yogyakarta.
Ikatan Akuntan Indonesia 2014, Pernyataan standar akuntansi keuangan, Jakarta
Indriani, A & Widyarti, ET 2013, ‘Penentu-penentu struktur modal perusahaan yang sahamnya masuk
Jakarta Islamic Index’, Jurnal Dinamika Manajemen, vol. 4, no.1, pp. 59-68.
Kasmir 2014, Analisis laporan keuangan, Rajawali Pers, Jakarta.
Nafarin, M 2013, Penganggaran perusahaan, 3rd edition, Salemba Empat, Jakarta.
Narita, RM 2012, ‘Analisis kebijakan hutang’, Accounting Analysis Journal, vol. 1, no.2, pp. 1-6.
Putri, IF & Nasir, M 2006, ‘Analisis persamaan simultan kepemilikan manajerial, kepemilikan
institusional, risiko, kebijakan hutang dan kebijakan dividen dalam perspektif teori keagenan’,
Simposium Nasional Akuntansi 9, Padang, pp. 1-25.
Ramlall, I 2009, ‘Determinants of capital structure among non-quoted Mauritian firms under specify
of leverage: looking for a modified pecking order theory’, International Research Journal of
Finance and Economics, pp. 83-92.
Santoso, S 2010, Statistik parametrik, PT Elex Media Komputindo, Jakarta.
Sarlija, N & Harc, M 2012, ‘The impact of liquidityon the capital structure: a case study of Croatian
firms’, Business Systems Research, Vol. 3, No. 1, pp. 30-36.
Sartono, A 2010, Manajemen keuangan teori dan aplikasi, 4th Edition, BPFE-Yogyakarta.
Sitanggang, JP 2012, Manajemen keuangan perusahaan, Mitra Wacana Media, Jakarta.

Sjahrial, D 2012, Pengantar manajemen keuangan, Edisi Keempat, Mitra Wacana Media, Jakarta.
Soesetio, Y 2008, ‘Kepemilikan manajerial dan institusional, kebijakan dividen, ukuran perusahaan,
struktur aktiva, dan profitabilitas terhadap kebijakan hutang’, Jurnal Keuangan dan Perbankan,
vol. 12, no. 3, pp. 384-398.
Steven & Lina 2011, ‘Faktor-faktor yang mempengaruhi kebijakan hutang perusahaan manufaktur’,
Jurnal Bisnis dan Akuntansi, vol. 13, no. 3, pp. 163-181.
Susilawati, CDK, Agustina, L & Tin, S 2012, ‘Faktor-faktor yang mempengaruhi kebijakan utang
perusahaan manufaktur yang terdaftar di bursa efek indonesia’, Jurnal Keuangan dan
Perbankan, vol. 16, no. 2, pp. 178-187.
Universitas UPN “Veteran” Jakarta 2014, ‘Pedoman penulisan karya ilmiah bagi dosen dan
mahasiswa’, Lembaga Penelitian dan Pemberdayaan Masyarakat, Jakarta.
Yuniarti, AMD 2013, ‘Pengaruh kepemilikan manajerial, dividen, profitabilitas dan struktur aset
terhadap kebijakan hutang, Accounting Analysis Journal, vol. 2, no. 4, hlm. 447-454.

Good Public Governance and the Effect on Performance Improvement
Dewi Fitriyani1), Misni Erwati2, Eko Prasetyo)3)

1)
Faculty of Economics and Business Universitas Jambi
dewi.fiyan@yahoo.co.id
2)3)
Faculty of Economics and Business Universitas Jambi
Abstract
Good governance is a paradigm of thinking and action directing, controlling public affairs in accordance with
the values specified and required as a feature in the administration of an organization. The application of the
principles of good public governance require that organizations adhere to the rules, mechanisms and provisions
have been made to guarantee better use of organizational resources effectively and efficiently and ultimately
improve organizational performance. Therefore, this research aims to analyze the effect of good public
governance to performance improvement in Agency/Office of integrated licensing servicesin district/city of
Jambi Province. The implementation of good public governance was measured based on general guidelines by
Komite Nasional Kebijakan Governance. The performance was measured by economic, efficiency and
effectiveness.the data obtained from in-depth interviews, questionnaires and documentation. Statistical test
result showed the effect the implementation of good public governance on performance improvement in
integrated licensing services agencies in Jambi Province.
Keywords: Good Governance, Public Sector Organization, Performance, Agency/Office of Integrated Licensing
Services.
I. INTRODUCTION
The globalization touches on every facet of life, including the economy and
development. Globalization requires a change of moving towards a more effective and
efficient. To face globalization, the Indonesian government made various changes and fixes,
one of them is to apply the principles of governance in the public sector or government
Organization.
The importance of good governance has become a rising phenomenon in Indonesia aft
er the 1998 Asian Financial Crisis, where the central government issued a commitment to be f
ree of corruption, collusion, and nepotism (Mardiasmo et al., 2008). Public demands a
change in the governance of the public that is considered rife with corruption, collusion and
nepotism became imperative for the government to implement good public governance. With
the good public governance can be expected that both creation of a bureaucratic system and
improving the quality of public services. Good public governance is also an important thing
to support the creation of good governance. Given the element of good governance involves
not only the business world countries through good corporate governance and society.
Public organizations are managed well or have applied good governance indicates that
an organization be managed as a system and not by person as the organizers. In the
management of the system will be based on the rules, mechanisms and provisions have been
made, and can guarantee better use of organizational resources effectively and efficiently.
Adjustment of the organizational conditions have not be in accordance with the
principles of good public governance can improve organizational performance. This is due to
the improvement and repair in every line of the organization in order to achieve outputs in
accordance with the principles of good public governance. Good public governance have 5
(five) right principles, which are democracy, transparency, accountability, a culture of law
and fairness.
To assess the success of an organization's activities and the implementation of the
goals and objectives that have been set for realizing the vision and mission of the
organization, the government needs to do performance measurement. Performance

measurement is also important to assess the accountability of the organization to produce
better public services.
Agency/Office Integrated Licen-sing Services (BPPT) is a public organization that
provides licensing services to communities in need. BPPT establishment constituted with the
intention of the government to improve the quality of service to the community as listed in
the Letter of the Coordinating Minister for Development Supervision and Administrative
Reform No. 56/MK.WASPAN/6/1998 on the Real Steps to Fix in accordance with the Public
Service Reform Aspiration and Affirmed in Presidential Instruction No. .1 1995 on Repair
and improvement of Quality of Government Personnel Services to the Community. Followed
by the issuance of Minister Regulation No. 24 Year 2006 on Guidelines for the
Implementation of One Stop Services and Regulation No. 20 Year 2008 on Guidelines for the
Organization and Work Unit Licensing Services One Stop.
BPPT is expected to provide public services, especially in the field of licensing. BPPT
establishment is expected to drive economic growth through increased investment by giving
greater attention to the role of micro, small and medium enterprises, realize the public service
that is fast, inexpensive, transparent, and certainly affordable as well as improving the rights
of communities to public services. In support of the government system that meets the
principles of good public governance, the government has issued Law No. 32 of 2004 on
local government.
Good governance is required as a feature in the administration of organization mainly
public sector organization. The application of good public governance makes an organization
become more efficient, effective, systematic and purposeful including BPPT. The application
of good public governance at BPPT can improve performance and community satisfaction.
The increased performance of public sector organizations is the embodiment of good public
governance demonstrated by the implementation of good governance and responsible.
Therefore, the application of good public governance are not only able to improve the
performance capacity of BPPT, but also can improve the quality of service to the community.
Good service quality can satisfy the public.
Implementation of good governance is a necessity that supports reform of public
organizations and improve the quality of service to the community. Local governments that
implement good governance can increase the performance in the management of the
organization. Several studies of good governance in public sector organizations find that local
governments are implementing good governance to improve its performance in the public
service better. The practice of good governance in Solok District and Wonosobo succeeded in
creating a public service system that is cleaner and accountable (Jasin et al. (2006). The
successful implementation of good governance in Solok brings improved performance in
local government (Zulaikha and Ardiati, 2006). Studies Ichsan et al (2013) also found that the
effect of the application of good governance in public sector organizations to organizational
performance, especially for transparency and akuntabitas in Depok City Government.
Likewise in Malang, implementation of good governance, improve the performance of public
service organizations (Nubatonis et al., 2014), and is supported by Rachmawati et al. (2015)
which shows the effect of good governance on the quality of public service delivery to the
Provincial Government in Indonesia. Therefore, this study aimed to analyze the relationship
between the application of good public governance to the improved performance of each
agency/office services integrated licensing districts/cities in Jambi Province.
LITERATURE REVIEW
The concept of governance refers to a process of policy-making and the process by
the policy is implemented in both the state (government), the private sector, and civil society
in the planning and implementation of policies (Kurniawan, 2007). Sedarmayanti (2007)

specifies governance includes Three domain that state, private sectors, and society.
Governance in the public sector is known as good public governance. Public governance is
the ways in which stakeholders interact with each other in order to influence the outcomes of
public policies.
Good governance is a paradigm of thinking and action. Good governance can be
defined as an act or behavior directing, controling public affairs in accordance with the values
specified. Bovaird and Löffler (2003) defines good governance as the negotiation by all the
stakeholders in issue (or area) of improved public policy outcomes and agreed governance
principle, which are both implemented and regularly evaluated by all stakeholders.
Good governance is required as a feature in the administration of an organization that
deal directly with the public. Organizations that implement good governance must adjust to
the conditions to meet the eligibility criteria of good governance. Daniri (2008) in the KNKG
(2010) explains that there are several characteristics in the practice of good governance. First,
the practice of good governance must give space to the outside of state officials to play an
optimal role to allow for synergies between them. Second, the practice of good governance
embodied the values that make the state officials, businesses, and society in general can be
more effective work in the welfare of the people.Third, the practice of good governance is the
practice of state officials are clean and free from corruption and oriented to the public
interest.
Good public governance has a great influence on the overall good governance both in
the organization of the country itself, and in various aspects of community life, including the
implementation of good corporate governance in the business world. To support the
implementation of good public governance, in 2010 the National Committe on Governance
published a code of Good Public Governance (KNKG). In his speech, Mangindaan in the
KNKG (2010) says that good public governance is a system or rules of conduct related to the
management of the authority by the organizers of the state in carrying out its duties in a
responsible and accountable.
IFAC dan CIFPA (2014) explains that the fundamental function of good governance
in the public sector is to ensure that entities achieve their intended outcomes while acting in
the public interest at all times. Acting in the public interest requires: A. Behaving with
integrity, demonstrating strong commitment to ethical values, and respecting the rule of law.
B. Ensuring openness and comprehensive stakeholder engagement. Further IFAC and CIPFA
states that achieving good governance in the public sector also requires effective
arrangements for: C. Defining outcomes in terms of sustainable economic, social, and
environmental benefits. D. Determining the interventions necessary to optimize the
achievement of the intended outcomes. E. Developing the entity’s capacity, including the
capability of its leadership and the individuals within it. F. Managing risks and performance
through robust internal control and strong public financial management. G. Implementing
good practices in transparency, reporting, and audit, to deliver effective accountability.
Good public governance have 5 (five) right principles, which are democracy,
transparency, accountability, a culture of law and fairness.
1. Democracy contain participation, recognition of the differences of opinion and the
realization of common interests. The principle of democracy must be applied both in the
selection process and been selected as the organizer of the state and in the state
administration.
2. Transparency contain elements of disclosure (disclosure) and the provision of adequate
information and easily accessible to stakeholders. The principle of transparency does not
reduce the obligation of state institutions as well as state penyelenggaa to keep the
interest of the state in accordance with the legislation in force and shall refuse to provide

information relating to the safety of the state, the rights of personal and professional
secrecy.
3. Accountability contain elements of clarity of function in the organization and how to
account for them. To that end, each state officials must perform their duties honestly and
measured in accordance with the provisions of the legislation and public policies and
regulations, and prevent abuse of authority.
4. Cultural contain elements of law enforcement (law enforcement expressly
indiscriminately and observance of the law by a community based awareness. To that
end, every state agency and state officials are obliged to establish legal systems and
cultures in a sustainable manner both in the process of preparation and adoption of laws -
udangan and public policy as well as in the implementation and accountability.
5. Fairness and equity contain elements of fairness and honesty so that the implementation
can be realized similar treatment to stakeholders responsibly. Fairness and equality is
needed so that stakeholders and the public become more obey the law and avoid any
conflict of interest.
Public sector organizations are organizations that use public funds to provide and
providing public goods and services. According to Bastian (2010) in practice, the definition
of public sector organizations in Indonesia is an organization that uses public funds. The
success of public sector organizations can be seen from the legitimacy and public support for
the organization. Mahmudi (2010) states that the public will judge the success of public
sector organizations through the organization's ability to provide public services cheap and
quality.
Every organization in the journey did a lot of activity or activities undertaken to
support programs that have been planned in advance. The achievement of a goal reflected in
the performance of activities of an organization. According Mahmudi (2010) performance is
a multidimensional construct that includes many factors that influence it. To assess the
success of an organization then the organization needs to measure its performance.
Robertson (2002) in Mahmudi (2010) states that the performance measurement is a
process of assessing the progress of work towards the achievement of goals and objectives
that have been determined, including information on the efficiency of resource use in
producing goods and services, quality of goods and services, comparison of the results of
activities targets, and the effectiveness of the measures in achieving the objectives. BPKP
(2000) in the Mahsun (2009) stated scope of public sector performance measurement should
include a policy (policy), planning and budgeting, quality (quality), effectiveness (economy),
fairness (equity), and accountability (accountability).
Performance measurement of public sector organizations can use the technique of
value for money. Mahmudi (2010) states that value for money has a sense of appreciation of
the value of money. Value for money or also known as performance audits measure
performance based on the size of the economy, efficiency and effectiveness. Economics deals
with the measurement of how frugal expenditure made. Efficiency relates to a measurement
of how right the way used to compare the input to the output. Effectiveness relates to the
measurement of how well the achievement of targets by comparing the results targeted by the
realization.
Implementation of good governance is a necessity that supports reform of public
organizations and improve the quality of service to the community. Regions that implement
good governance can increase the performance in the management of the organization. Local
governments that implement good governance to improve its performance in the public
service better. Good governance can improve leadership, management and supervision so as
to improve the performance of organizations in the public sector that is more economical,
effective and efficient.

Jasin, et al. (2006) explains that the practice of good governance are implemented in
real created a system of government that is more clean and accountable system of public
service better and even in some areas to improve the welfare of employees, for example,
Solok District and Wonosobo already been implementing good governance included in the
licensing service. Zulaikha and Ardiati (2006) describes the successful implementation of
good public governance in Solok regency brings improved performance for local
governments and increased public satisfaction with quality of services. Ichsan et al. (2013)
shows the implementation of good governance in Depok City Government making it more
transparent and accountable so as to improve their performance. In Malang, the
implementation of good governance principles to improve organizational performance
(Nubatonis et a., 2014). Further Rachmawati et al (2015) shows the influence of good
governance at the provincial government's performance in the quality of public services.Thus
this study hypothesized that good public governance have an impact on the performance of
public sector organizations.
RESEARCH METHODE
Research Subject
The subject in this study consisted of 6 (six) Agency/Office Integrated Licensing
Service (BPPT), which is considered to represent BPPT Distric/Municipality in Jambi
Province, namely in Jambi City, East Tanjung Jabung district, Batang Hari, Sarolangun,
Bungo, and Kerinci.
Types and Sources of Data
The type of data studied are primary data and secondary data. Primary data in this study
were obtained from in-depth interviews and questionnaires from respondents. Secondary data
as compliance data such as documents, print media, internet, policies and regulations related
to the implementation of good public governance.
Operational Definition and Measurement of Variables
a. Good public governance (GPG) is a system or certain rules of behavior associated with the
management of authority by the organizers of the state in carrying out its duties in a
responsible and accountable (Mangindaan in KNKG 2010). Application of GPG is known
from the application of the principles of GPG, which are democracy, transparency,
accountability, legal culture, and fairness and equality.
b. Performance is an overview of the level of achievement of the implementation of an
activity/program/policy in achieving the goals, objectives, mission and vision of the
organization as stated in the strategic planning of an organization (Mahsun, 2009).
Performance was measured using the techniques of value for money. There are several
techniques used in the measurement of value for money is the level of economy, efficiency
and effectiveness levels were measured by a questionnaire.
Population and Sample
The population in this study were employees at each Agency/Office Integrated
Licensing Service (BPPT). The sampling technique is simple random act by determining the
number of samples using the following formula Slovin.
n = N
1 + N.e2
which is:
n = number of samples
N = number of population
e = percentage of sampling error

In calculating the sample size, this study uses the error value by 10%, in order to obtain a
sample of the following:
Table 1. List of Total Population and Sample
No BPPT Kabupaten/Kota Number of Population Number of Samples
1 Kota Jambi 63 39
2 Kabupaten Batanghari 38 28
3 Kabupaten Tanjungjabung Timur 24 20
4 Kabupaten Kerinci 37 27
5 Kabupaten Bungo 42 30
6 Kabupaten Sarolangun 45 31
Total 249 175
Method of Collecting Data

In this study the methods used to collect the data are:
a. Documentation, in the form of reports, policies or regulations related to good public
governance.
b. Interviews, namely two-way communication face to face with respondents / informants
to explore in-depth information related to good public governance.
c. The survey, conducted by distributing questionnaires to get the opinion of the individual
satisfaction of the public about good public governance.
d. Triangulation, which is a data collection techniques that combine a variety of data
collection techniques and data sources that already exist.
Data Analysis Tools.

a. Checklist. To determine the application of the principles of good public governance is
based on general guidelines for good public governance (GPG) published by the National
Committee on Governance in 2010. The elements of the check list measured dichotomy
(D) is a score of 1 (one) if yes and scores 0 (zero) if not for a total maximum weight
percentage score is 100. the number of weighted score is calculated by the formula:
GPG = n x 100%
k
which is:
n = number of elements of the application of the principles of good corporate governance
implemented
k = the number of all elements of the application of the principle of GPG that may be
implemented
Based on the results of the index number of the known weight of the application of
good public governance in their respective agency / office services integrated license with the
following criteria:
Table 2. Weights Application of Good Public Governance
Total Percentage Weight Criteria
1 Above 85 to 100 Very Good
2 Above 75 to 85 Good
3 Above 60 to 75 Enough
4 Above 50 to 60 Less Good
5 Under 50 Not Good

b. Validity Test and Reliability Test
Validity test used to measure not a legitimate or valid questionnaires. A questionnaire
considered valid if the questions on the questionnaire were able to reveal something that will
be measured by the questionnaire. Test the validity of the data to measure the scores of each
item with the total score. While the reliability test is done to look at the reliability of the
questionnaire. A questionnaire will be said to be reliable if someone answers the statement is
consistent over time.Testing reliability test will be using Cronbach's alpha. A questionnaire
can be said to be reliable if the Cronbach's alpha values greater than 0.60 (Nunnaly, 1960 in
Ghozali, 2011).
c. Correlation Test
Correlation test was conducted to determine the relationship between the application
of good public governance on performance. Correlation in this study using Pearson Product
Moment Correlation. The correlation coefficient ranges from -1 to +1. The correlation
coefficient stronger if approached 1 and weaker if the correlation coefficient approaching the
number 0. The application of good public governance have an impact on performance when
the correlation value is smaller than the significance level of alpha value of 0.05.
RESEARCH RESULT
Description of Respondents
The collection of data to measure the performance is done by spreading the
questionnaire to employees at BPPT ie 175 samples, but which returned 154 questionnaires
and can be processed as many as 141 questionnaires. Here are the details of questionnaires.
Table 3. The Details of Questionnaires
No BPPT at Regency/City Number of Number of The number of The number of
questionnaires questionnaires questionnaires questionnaires
distributed returned that could not that can be
be processed processed
1 Kota Jambi 39 35 5 30
2 Kabupaten Batanghari 28 22 0 22
3 Kabupaten 20 20 0 20
Tanjungjabung Timur
4 Kabupaten Kerinci 27 27 3 19
5 Kabupaten Bungo 30 30 2 28
6 Kabupaten Sarolangun 31 25 3 22
Total 175 154 13 141
The Results of Validity Test and Reliability Test

In this study, the validity of the test was done by bivariate correlation between the
respective indicator scores with a total score of the construct. Results of statistical processing
show the entire questionnaire bivariate correlation has a significance level of less than 0.05
alpha so that the instrument can be said to be valid. Reliability testing using Cronbach
alpha.Reliability test results show the value of the instrument is reliable with Cronbach's
alpha of 0.888.
The application of Good Public Governance (GPG) in the Integrated Licensing Service
Agency (BPPT) in Jambi Province.
The application of the principles of good public governance is measured based on
general guidelines for good public governance (GPG) published by KNKG in 2010 and
obtained an index score for each BPPT as follows:
Table 4. GPG Application Index at BPPT in Jambi Province
No BPPT Score
1. Kantor Pelayanan Perizinan Terpadu Kabupaten 81,48

Tanjung Jabung Timur
2. Badan Penanaman Modal dan Pelayanan Perizinan 81,48
Terpadu Kabupaten Batanghari
Terpadu Kota Jambi
4. Badan Pelayanan Perizinan Terpadu Satu Pintu 77,78
Kabupaten Sarolangun
5. Badan Penanaman Modal Daerah dan Pelayanan 81,48
Perizinan Terpadu Kabupaten Bungo
Terpadu Satu Pintu Kabupaten Kerinci
The above table shows that the application of the Good Public Governance in the
Integrated Licensing Service Agency (BPPT) in Jambi province held up well with a score of
75 - 85. The application of the principle of GPG (principle of democracy, the principles of
transparency, the principle of legal cultures, the principle of accountability and the principles
of equality and fairness) implemented by Integrated Licensing Service Agency in the
District/Municipality in Jambi Province can be described as follows:
The Principle of the Democracy
Principle of democracy contains elements of community participation. Integrated Licensing
Service Agency (BPPT) in District / Municipality in Jambi Province realize participation
through suggestions and criticisms expressed by the community through complaint boxes as
well as directly. Suggestions and criticism from the public received consideration in the
decision to BPPT quality improvement.
The Principle of Transparency
The principle of transparency contains elements of disclosure (disclosure) and that there is
adequate and easily accessible. Implementation of the principle of transparency implemented
by publishing licensing policy that has been taken as openly as the terms, procedures,
licensing fees and the old settlement. However, in the preparation of the draft licensing policy
not involve the public directly. In the preparation of the policy, the government in this case
BPPT in coordination with local authorities and the Regional Representatives Council
(DPRD).
The principle of Accountability
The principle of accountability contain elements of clarity of function in the organization and
how to account for them. Elements clarity of functions within the organization in BPPT listed
in Local Regulation or Regulation Mayor/Regent governing organizational structure with job
descriptions are detailed and clear. In maintaining accountability does not allow employees to
receive gifts of any kind which may give rise to a conflict of interest. A form of
accountability BPPT each year is done by creating performance accountability report
(LAKIP) to the local government. BPPT preparing financial reports and audited by the
Supreme Audit Agency (BPK).
The Principles of Law Culture
The principle of legal culture contains elements of strict enforcement indiscriminately and
complying with the law. Law enforcement leaders and staff to BPPT applied according to the
rules and regulations, both in the form of violation of rules, no discipline and abuse of
authority.
The Principle of Equality and Fairness
The principle of equality and fairness contain elements of fairness and honesty. Fairness and
honesty can be realized in the form of equal treatment on the community.BPPT seeks to
provide the service with the interests of the public and give the same treatment to the public

in obtaining a license. But in the licensing services often fail to meet the standard work time
has been set. This is due to the necessary cooperation with the relevant technical agencies and
check to the field that takes time.
Good Public Governance (GPG) Relationship to the Performance on the Integrated
Licensing Service Agency (BPPT) in Jambi Province
The application of good public governance is essential in improving the performance
of organizations in the public sector. In this study, the test to determine the relationship
between the application of good public governance on performance is done using the Product
Moment correlation test. Using Product Moment Correlation test showed a correlation value
0.854 at a significance level of 0.031. Correlation values 0,854 sowed a correlation
application of good public governance have a strong relationship. Correlation has a
significance value less than 0.05 alpha so that the statistical test showed that good public
governance have a relationship and affect the performance of BPPT.
BPPT which apply good public governance and has a higher index scores had better
performance in terms of economy, effectiveness and efficiency. BPPT which apply good
public governance and has a higher index scores had better performance in terms of
economy, effectiveness and efficiency. These findings support previous studies (Jensen et al.,
2006; Zulaikha and Ardiati 2006; Ichsan et al., 2013; Nubatonis et al., 2014; Rachmawati et
al., 2015) which shows there is a relationship and influence on organizational performance in
the public sector. Public sector organizations that implement good public governance can
improve organizational performance, especially in the quality of service to the community.
CONCLUSION
Implementation of Good Public Governance in the Integrated Licensing Service Agency
(BPPT) in Jambi Province is measured based on general guidelines for good public
governance (GPG) published by the National Committee on Governance in 2010 obtained a
score of 75-85 with good criterion. The application of good public governance can affect the
performance improvement BPPT in providing quality services to the public which is more
economical, effective and efficient. Implementation of good public governance need to be
supported by an increase in human resources services and additional facilities at the
Agency/Office of Licensing Services (BPPT) by District / City in the province of Jambi.
This study has limitations including the implementation of good public governance is
measured by using a self checklist so expect future studies using other methods. Furthermore,
value for Money method used to measure the performance of public sector organizations was
conducted using questionnaires, subsequent studies suggested to use quantitative data such as
financial data.
REFERENCES
Bastian, Indra. (2010) Akuntansi Sektor Publik: Suatu Pengantar. Jakarta, Indonesia:
Erlangga.
Bovaird, Tony and Löffler, Elke. (2003). Evaluating the Quality of Public Governance:
Indicators, Models and Methodologies. International Review of Administrative Sciences,
Vol.69.
Ichsan, Taufikul., Nugroho, Herbirowo., and Friya PS., Yusep. (2013). Peran Akuntan dalam
Mewujudkan Good Governance pada Organisasi Sektor Publik dan Pengaruhnya
terhadap Kinerja Organisasi. Epigram, Vol.10 No.1.
International Federation of Accountants (IFAC) and Chartered Institute of Public Finance and
Accountancy (CIPFA). (2014). International Framework: Good Governance in the Public
Sector.

Jasin, Mochammad, Aida Ratna Zulaikha, Luthfi Ganni Sukardi, Dian Patria, dan Dian
Ariati. (2006). Pelaksanaan Tata Kelola Pemerintahan yang Baik. Jakarta, Indonesia:
Komisi Pemberantasan Korupsi.
Komite Nasional Kebijakan Governance. ( 2010) Pedoman Umum Good Public Governance.
Jakarta.
Kurniawan, Teguh. (2007). Mewujudkan Good Governance di Era Otonomi Daerah:
Perspektif UU No.22 Tahun 1999 dan UU No.32 Tahun 2004. Proceedings the First
Accounting Conference, Depok.
Mahmudi. (2007). Manajemen Kinerja Sektor Publik. Yogyakarta, Indonesia: UPP STIM
YKPN.
Mahsun, Mohamad. (2009). Pengukuran Kinerja Sektor Publik.. Yogyakarta, Indonesia:
BPFE.
Mardiasmo, Diaswati., Barnes, Paul H., and Sakurai, Yuka. (2008). Implementation of Good
Governance by Regional Governments in Indonesia: The Challenges. In Brown, K.,
Mandel., M., Furneaux C., and Beach, S., Eds. Proceedings Twelfth Annual Conference
of International Research Society for Public Management, Brisbane.
Nubatonis, Sondil E., Rusmiwati, Sugeng., and Suwasono Son. (2014). Implementasi Prinsip-
prinsip Good Governance dalam Meningkatkan Kinerja Organisasi Pelayanan Publik.
JISIP, Vol. 3 No.1.
Rachmawati, Yunaita., Susanto, Dwi., and Yusuf, Dian Anggraeni. (2015). Pengaruh Good
Governance terhadap Kualitas Pemberian Layanan Publik. Paradigma, Vol.12 No.12.
Sedarmayanti. (2007). Good Governance (Kepemerintahan yang Baik) dan Good Corporate
Governance (Tata Kelola Perusahaan yang Baik). Bandung, Indonesia: Mandar Maju.
Tomuka, Shinta. (2013). Penerapan Prinsip-prinsip Good Governance dalam Pelayanan
Publik di Kecamatan Girian Kota Bitung (Studi tentang Pelayanan Akte Jual Beli).
Jurnal Politico, Vol. 1 No.3.
Zulaikha, Aida Ratna dan Niken Ariati. (2006). Mengukur Keberhasilan Kabupaten Solok
dalam Pelaksanaan Tata Pemerintahan yang Baik. Jakarta, Indonesia: Komisi
Pemberantasan Korupsi.

THE EFFECT OF ENTREPRENEURSHIP AND COMMITMENT TO THE EFFECTIVENESS
OF EMPLOYEE IN MINISTRY OF INDUSTRY
DEWI SUSITA
Hania Aminah
Fakultas Ekonomi Universitas Negeri Jakarta
ABSTRACT
The aim of this research is to study the causal relationship between entrepreneurship
and commitment with effectiveness. Survey was conducted in 189 sample of employees
selected randomly. Data has been analyzed by path analysis. The results of this research,
explained above: (1) there was a positive and significant direct effect of entrepreneurship to
effectiveness of employee in ministry of industry, (2) there was a positive and significant
direct effect of commitment is affected directly by effectiveness of employee in ministry of
industry, (3) there was a positive and significant direct effect of entrepreneurship is affected
directly by commitment of employee in ministry of industry
Keywords : entrepreneurship, commitment, and effectiveness.

BACKGROUND
The background of this research is to face of environmental challenges unique

complex and volatile, an organization of government organizations should use effective
public management and efficient, because it must remain accountable to the public.
Especially to face of the Asean Economic Community, it is necessary to improve employee
effectiveness, so that the Indonesian people are able to benefit optimally from the
implementation of MEAs at the end of 2015.
According Tjahajana, A (2013: 3) In that era there will be a single market, production
base, which in these conditions will occur free of good, free flow of services, free of
employment, free of capital and free of skilled labor. It is necessary for an employee who has
a high work effectiveness. This was confirmed by Griffin (2007: 6) and Corado (2004: 135),
which says that problem public organizations one of which is the result of internal barriers,
such as HR. In this case the employees of the Ministry of Industry.
The main theories are referred to in this study include advanced by John Howard
(2001), which says that: "effectiveness is a state where of a tools, methods, and resources are
use in Appropriate Manner to Achieve the goals intended. And according to Griffin (2007: 6)
"Effectiveness is making the right decision and succesfully implementing them".
Susita, D (2013), found that the effectiveness of employees in Ministry of Industry is
jointly influenced by other than an entrepreneurial attitude is also influenced by the
personality, job satisfaction and commitment.
Say J.B in Osborne and Gaebler (2000), argues that the effectiveness of the work is
influenced by an entrepreneurial attitude. Likewise McClelland, Zimmerer, Drucker, in
Suryana (2001) says that the effectiveness of the work have a relationship with the
characteristics of an entrepreneurial attitude.
An entrepreneurial attitude should be owned by every individual in the organization,
although a public organization, it is supported by the opinion of Cohen, S, Eimicke.W,
Heikkila, T, (2011). Entrepreneurial attitude consists of two words, attitudes and
entrepreneurship.
Attitude by Gibson (2009) as follows: An attitude is a positive or negative feeling or
mental state of readiness, and organized learned through experience, that exerts a specific
influence on a person's response to people, objects and situations.
While the "Entrepreneurship is the process of creating something new with value by
devoting the Necessary time and effort, assuming the Accompanying financial, psychic, and
social risk, and receiving the the resulting rewards of monetary and personal satisfaction and
independence."
In addition to the entrepreneurial attitude, employee commitment in achieving
organizational objectives, should also be improved in order to obtain optimal results.
According Newstrom (2002: 211): "Organizational commitment is the degree to roomates an
employee Identifies with the organization and wants to continue Actively participating in it".
That is, the level of employee engagement towards the organization.
Barringer Research and Bleedorn, found that the tendency of entrepreneurship to
contribute to the commitment of a person in the organization. This is also supported by the

results of research Grath (2002). Research-Kyoo Baek Joo (2012) also reflects the influence
of proactive personality to the commitments, as well as Wang, M.J (2002).
Based on some opinions, this research was conducting to reveal whether an
entrepreneurial attitude, and commitment could affect the effectiveness of employees
Ministry of Industry. In particular formulation of the problem as follows: 1) Is there any
direct influence entrepreneurial attitudes toward the effectiveness of employees? 2) Is there
any direct influence on the effectiveness of employee commitment? 3) Is there any direct
influence Entrepreneurship attitudes towards employees' commitment?
METHODS
The method used in this research is survey method with quantitative research
approach. This type of survey research focuses on disclosure of causal relationships between
variables. The dependent variable in this study is the effectiveness of employees and
independent variables are an entrepreneurial attitude and commitment of employees. The
analysis technique used to examine the causal relationship is a path analysis (path analysis).
Data used to capture the effectiveness of employees with a questionnaire that has been
prepared based on the indicators of each variable to the direct superior (echelon three). While
the entrepreneurial attitude and commitment, collected by questionnaire has been prepared
based on the indicators of each variable to employees echelon IV as respondents.
The population in this study was all employees of the Ministry of Industry echelon
IV, totaling 385 people. Samples were taken 189 people by using simple random sampling
technique. Test the validity of an instrument to measure the effectiveness of the work, an
entrepreneurial attitude, and commitment, using statistical product moment. The reliability
test was using Cronbach Alpha. Analysis of the data used in this research is descriptive and
inferential analysis. Descriptive analysis presents the data characteristics of each variable in
the form of presentation of the data, the size of the central and dissemination of data.
Inferential analysis using path analysis, tools used for analysis using the program application
package specifically designed for statistical purposes such as Excel and SPSS 17 program.
RESULTS
The result of the calculation of the 189 samples was found that the average score of
the effectiveness of employees is 121.23. Mode value for effectiveness was 124.00 with a
median of 122.00 and a standard deviation of 14.47. Found as many as 59 people (31.22%)
employees who have the effectiveness of the group's average. 35 (18.52%) the effectiveness
of its employees are above average, and as many as 95 people (50.26%) of employees work
effectiveness are under average.
The average value score entrepreneurial attitude of employees was 145.76. Mode
value to the entrepreneurial attitude is 144.00 with a median of 145.00 and a standard
deviation of 9.27. Found as many as 59 people (31.22%) of employees who are
entrepreneurial attitude on average this group, 77 (47.09%) employees who are
entrepreneurial attitude is above average, and as many as 53 people (28.04%) employee
entrepreneurial attitude is under the average.
The result of the calculation of the 189 samples was found that the average score of
the effectiveness of employees is 121.23. Mode value for effectiveness was 124.00 with a
median of 122.00 and a standard deviation of 14.47. Found as many as 59 people (31.22%)
employees who have the effectiveness of the group's average. 35 (18.52%) the effectiveness

of its employees are above average, and as many as 95 people (50.26%) of employees work
effectiveness are under average.
The average value score entrepreneurial attitude of employees was 145.76. Mode
value to the entrepreneurial attitude is 144.00 with a median of 145.00 and a standard
deviation of 9.27. Found as many as 59 people (31.22%) of employees who are
entrepreneurial attitude on average this group, 77 (47.09%) employees who are
entrepreneurial attitude is above average, and as many as 53 people (28.04% ) employee
entrepreneurial attitude is under the average.
From the calculation result data to create a model for the regression equation between
the effectiveness of the work with an entrepreneurial attitude obtained by simple linear
regression equation is Y = 18.75 + 0,70X1. While the correlation between the effectiveness
of the entrepreneurial attitude of 0.450 and highly significant.
From the results of calculations for the preparation of the data regression model
between the effectiveness of the commitments obtained by simple linear regression equation
is Y = 40.74 + 0,63X2. While the correlation between the effectiveness of the commitments
0.603 and highly significant.
From the results of calculations for the preparation of the data regression model
between commitment with an entrepreneurial attitude with commitment regression equation
is = 22.44 + 0,72X1 and very significant.
Results of testing the path coefficient that describes causal relationships between
variables empirical research X1 and X2 to Y, can be shown in Figure 1
PYε1 = 0,772 pyε2 = 0,734

0,780
P31 = 0,138
T31 = 2,167
X1 X2 X3
P21 = 0,274 P32 = 0,347
T21 = 4,331 T32 = 4,954
Figure 1. Empirical Model causal relationship Inter variables X and Y.
Causal relationship model Empirical studies have shown that the path coefficient between
entrepreneurial attitude variable (X1), and commitment (X2), towards effectiveness (Y) is
significant. This means that the theoretical causal model in accordance with the empirical
model, thus it can be concluded that the entrepreneurial attitude of employees and employee
commitment to a positive direct impact on the effectiveness of employees. Model path

analysis also showed a positive direct influence between entrepreneurial attitudes toward
commitment.
DISCUSSIONS
The first hypothesis testing results show that the direct effect of entrepreneurial attitudes
(X1) on the effectiveness of the work (Y), the value of py1 path coefficient = 0.138, it is
demonstrating that the entrepreneurial attitude is very positive direct impact on the effectiveness of
employees Ministry of Industry.
It has a meaning that if employees have an entrepreneurial attitude will lead to increasing
the effectiveness of its work. Effectiveness of the work is related to the concept of doing the job
properly, so that the effectiveness is the foundation of success. If we associate with an entrepreneurial
attitude, which is an attitude of the employees related to the attitude of innovative thinking, flexible
thinking, firm establishment, confident, influencing others, like the challenge, responsive to change,
the tendency to take decisions and trends taking advantage of opportunities, a positive attitude , which
can facilitate in carrying out the work in achieving organizational goals.
Entrepreneurial attitudes derived from the French language, according to Kao (1995: 624-
634) means, trying. Associated with the public sector according to Osborne and Gaebler (2000), that
mentioned a person who behaved: a) prefers to produce, b) change the profits into benefits for the
public. This is supported by the opinion of Anoraga, who say the entrepreneurial attitude should not
be for an entrepreneur, but for each individual, such as: 1) own ideals and trying to realize these
ideals, 2) dare to risk / high-challenge, 3) willing and hard-working, 4) have high morale and are not
easily discouraged, 5) have a strong sense of confidence, 6) have the skills to lead / influence others,
and 7) has a high creativity.
The attitude of the above need to possess an employee, in order to increase the effectiveness
of its performance. This is consistent with the findings of this study. Previous entrepreneurial attitude
we associate with entrepreneurs, was not only for entrepreneurs, but also necessary for every
individual, including civil servants. In his general entrepreneurial work to earn profits in the form of
financial, but employees of public agencies working to get other benefits, such as self-satisfaction.
Every individual who has an entrepreneurial attitude, would be satisfied if the work carried obtain
optimal results.
The study's findings are also consistent with research findings and Stevenson & Jarillo
Quinn (1990: 17-27) which says that the entrepreneurial attitude into the power of all components of
the organization, from top management to operational actors. Means that every individual in the
organization should have an entrepreneurial attitude.
One entrepreneurial attitude is to think of innovative and flexible is an attitude that must be
possessed of employees related to how employees can receive new ideas to improve ways of working,
and always put out new ideas in the works, as well as easy to adjust to the change, so that employees
become effective in work, and facilitate the organization in achieving optimal goal.
And the firm establishment of confidence in the work are of paramount importance. This is
reflected in the attitude of maintaining the ideas of creativity and maintaining the principles of
effective work in the achievement of organizational goals. Influencing others is an attitude that has an
art in itself, and it is difficult to do. So also like the challenge of working a courageous stand, which at
one time was needed to work. Although the Ministry of Industry has had the SOP in any do the job,
but the steps in achieving these goals, not necessarily exactly the same as the one on paper. For that
sometimes employees need to have an attitude of courage in taking decisions, where decisions are
taken at the end of it does not conflict with the ultimate goal of the organization.

The findings above in accordance with the results of Robinson, Stimpson, Huefner & Hunt
(2003: 1-24), entitled Entrepreneurial Attitudes: What Are Their Sources ?, saying that the
entrepreneurial attitude affect the personality and work effectiveness. It means every employee who
has an entrepreneurial attitude, a tendency to have high effectiveness.
The test results show that the second hypothesis is very significant commitment and a
positive direct impact on the effectiveness of work with a value of p y4 = 0.347. This means that if
employees are committed to the organization, then the effectiveness of his work will increase.
Commitment is one's desire to keep working and take sides and participate to the
organization. The commitment showed some desire among others: continued to work in the
organization, actively involved in the organization, contribute to the success of the organization, can
be consistent with the objectives and vision of the organization, keep working in the organization, and
be responsible for the organization. Given that desire, causing the employee to carry out the work
assigned to him well. So that its effectiveness increased, and organizations obtain optimal results.
The effectiveness of employees will be increased, with the commitment of employees, this
is in accordance with the opinion of Hersey, Blanchard, Mitchell and Larson, who said that their
commitment to a high of an individual, means the engagement of her against the organization
continues to be high, so that the effectiveness of its work to be good.
The commitment of an employee other than loyal to the boss also loyal to the organization.
So the higher one's commitment, the optimal performance of the organization. Loyal to the visible
organization of the adjustments made to the employees of the main objectives of the organization. So
that employees are willing to support and be consistent in completing the tasks assigned to him.
In addition to achieving the goals of the organization, employees are also trying to maintain
the good name of the organization, and run the organization's work rules. In accordance with the
existing activities in an organization that has always guided by the rules, so that with the commitment
of these employees be the trigger factor for increasing the effectiveness of the work. This finding is
consistent with the opinion of Cohen (1993), who found that the commitment affects the effectiveness
of the work.
The third hypothesis testing results show that the entrepreneurial attitude positive direct effect
on employee commitment Ministry of Industry, at p 21 = 0.274. This shows that if employees have an
entrepreneurial attitude, then the employee commitment to the organization will increase.
This finding is consistent theory advanced by research Brouwer, Maria T and Weber (2002),
who argued that a person's tendency entrepreneurial attitude can lead to involvement and tendency to
the organization (committed), thus contributing to the performance of the organization.
Entrepreneurial attitude describes the attitude that belongs to someone, one of which is
always confident with the principles thereof, will seek to be faithful to the achievement of its
organizational objectives. Although always felt responsive and ready to innovate and change, but still
within the corridor defined rules of the organization. It also supports the idea of Francis, M Team
(2011), which says that the entrepreneurial attitude affect the effectiveness of the work and
achievement of organizational goals.
The findings of this research are also in accordance with the opinion of Suryana, who found
that the creative and innovative process is only done by
people who have an entrepreneurial attitude, among others, those who are confident
(confident, optimistic, and full commitment).
Employee commitment to the organization, as seen from the involvement of employees in
the achievement of organizational goals. One needs to possess employees to get involved in these
achievements are please tasks given job, and seek collaboration with colleagues in overcoming the

existing problems in the job, and be open to feedback and criticism positively to improve the
effectiveness of the work.
Loyalty to colleagues, both in helping the completion of work and the provision of
necessary information colleagues, are very helpful in facilitating the achievement of organizational
goals. Besides maintaining the good name organisasai to constantly adjust to the goals of the
organization, will help achieve effectiveness.
The foregoing is inseparable from the role of leadership. Support and leadership style
greatly affects the feelings of employees. Likewise, the equipment and the working conditions of the
room.
In addition to the leadership of the support and cooperation among colleagues also dictates
a sense of excitement in the work. Because interactions encountered at work, will determine its weight
is not the job done. This can be achieved if each employee can respect and appreciate and understand
the needs between colleagues during the finishing work.
CONCLUSIONS
Based on the results of research and discussion can be concluded: the entrepreneurial attitude
of employees directly positive effect on the effectiveness of employees. That is, the entrepreneurial
attitude which belongs to the employees will improve the effectiveness of employees Ministry of
Industry. Commitment of the employee has direct positive effect on the effectiveness of employees.
That is, a commitment which belongs to the employees will improve the effectiveness of employees
Ministry of Industry. Meanwhile the entrepreneurial attitude of employee has directly positive effect
on employee commitment. Thus, employees who have an entrepreneurial attitude will improve the
effectiveness of employees Ministry of Industry.
Results showed, in general it can be concluded that the variation in the effectiveness of employees
Ministry of Industry is positively influenced by the variation of an entrepreneurial attitude, and
commitment. Based on the research results, discussion and conclusions that have been described
previously, the recommendations can be put forward, especially for employees and managers can be
noticed that the importance to improve the entrepreneurial attitude of employees, and the commitment
continuously with certain programs, because the effect on enhancing the effectiveness of the work
employees.
REFERRENCES
Akehurst, G & Comeche, J.M & Comeche, J. M & Galindo, M,A, Job satisfaction and commitment in
the entrepreneurial SME, Small Business Economics, volume 31, 2009
Baek-Kyoo Joo, The Effects of Organizational Learning Culture, Perceived Job Complexity, and
Proactive Personality on Organizational Commitment and Intrinsic Motivation, Journal of
Leadership & Organizational Studies, vol 16 no 1 48-60, Minnesota, bjoo(at)winona.edu,
Baker College, 2009
Baba, Vishwanath V.; Tourigny, Louise; Wang, Xiaoyun; Liu, Weimin, Proactive Personality and
Work Performance in China: The Moderating Effects of Emotional Exhaustion and
Perceived Safety Climate, Canadian Journal of Administrative Sciences, 2009

Barzelay, The New Public Management: Improving Research and
Policy Dialogue The Aaron Wildavsky Forum for Public policy, 2001
Blaum., et al, A Multidimensional model of Venture growth, Academic management Journal, vol 44.
No2, 2001,
Clugston, M.. The mediating effects of multidimensional commitment on job satisfaction and intent to
leave. Journal of Organizational Behavior, 2000
Cynthia ward Harckey, Personality, Organizational Commitmen, and Job search Behavior: A Field
Study, PhD diss., University of Tennessee, 2012. Http://trace.tennessee.edu/utk_graddis,300
Ekonugroho, M.W, Analisis Pengaruh Kepuasan Kerja dan Motivasi Kerja terhadap Produktivitas
Kerja Pegawai Sekretariat Jendral Departemen Energi dan Sumber Daya Mineral, Jakarta:
Kementrian Perindustrian, 2010.
Fancis et al, The Influence of Entrepreneurship on Employees Affective Commitment in Micro and
Small Organization, Tilburg University, 2011
Gibson L. James, et al., Organizations: Behavior, Structure, Process. New York: McGraw-Hill, 2009
Griffin, W, Ricky, and Moorhead Gregory, Organization Behavior Managing People and
Organization, New-York: Houghton Miffin Comp, 2007.
Lisa., M, Mayniham , Wendy R, Boswell dan John W, Boudrew, The Influence of Job Satisfaction
and Organizational Commitment on Executive Withdrawal and Performance, Cornell
University, 2000
John Howard , Doing Job Better, 2001. http:// www. Mng. Djbet.com

The Critical Analysis of Some Comparative Eastern
Africa Corporate Governance Standards After
Financial Crisis, Corporate Scandals and
Manipulation
Dinh Tran Ngoc Huy, PhD candidate, MBA1*

1*
Banking University, HCMC, Viet Nam - Graduate School of International Management, International University of Japan,
Niigata, Japan
*
Corresponding Author: e-mail: dtnhuy2010@gmail.com, Tel +84-08-39934160, SkypeID: dinhhuy121
Abstract
Even though corporate scandals and bankruptcy in US and Europe and Asia show some
certain evidence on weak corporate governance, weak internal control system and weak audit,
Global corporate governance forum noted corporate governance has become an issue of
worldwide importance. Therefore, this paper chooses a different analytical approach and
among its aims is to give some systematic opinions.
First, it classifies Eastern Africa representative corporate governance (CG) standards into two
(2) groups: Malawi and Kenya latest CG principles covered in group 1 and, group 2,
including corporate governance guidelines from EVCA 2005, so-called relative good CG
group, while it uses ACCA and CFA principles as reference.
Second, it , through analysis, shows differences between above set of standards which are and
have been used as reference principles for many relevant organizations.
Third, it establishes a selected comparative set of standards for Eastern Africa representative
corporate governance system in accordance to international standards.
Last but not least, this paper covers some ideas and policy suggestions.
Keywords: corporate governance standards, board structure, code of best practice,

financial crisis, corporate scandals, market manipulation, internal audit
JEL Classification: G00, G3, G30

1. Introduction
After corporate scandals and bankruptcy taking place recently, such as Tyco, Enron, Worlcom,
we find out that there are signals of accounting frauds, and market manipulation as well. This
leads to a question on qualification of top management team which is soon replaced by new
members in a hope that the business market value can be recovered. Despite of trying to select
an easy-reading writing style, there is still some academic words need to be explained in
further.
The organization of paper contents is as following. As our previous series of paper, Research
literature and theories are covered in the first two sessions. Next, it followed by introduction
of our research methodology in session 3 (3 rd). Continuously, session four (4) covers our
familiar four (4) groups of empirical findings. And our conclusion and policy suggestion is
covered in the fifth (5th) session. Before last, there are exhibit session which covers some
summary of this paper’s analysis and comparison. And lastly, a glossary notes is provided
with information for reference and because of reducing repeating terminology.
2. Research literature review

There are many and controversial opinions on corporate governance theories and practices.
For example, Jensen and Meckling (1976) presented their conceptual agency theory on the
separation of ownership and management. Lin, Andrew Jen-Guang (2007) pointed that
Corporate Governance will maintain its vital position in corporate law and securities law with
the simple focus on investors.
Besides, Commonwealth Association (1999) pointed the fact that every country and
businesses nowadays need good corporate governance practices and theories as a necessity.
Moreover, the South Africa King Code (2009) mentioned the terms of “corporate citizenship”
and CSR or Corporate Social Responsibility and stated Corporate responsibility is the
responsibility of the company for the impacts of its decisions and activities on society and the
environment, through transparent and ethical behaviour that: contributes to sustainable
development, including health and the welfare of society;
Furthermore, Exhibit 2 shows us different parties and components, internal and external,
should be involved in a policy or system of corporate governance. And certainly, global crisis
and scandals recently such as Enron, Tyco, and Phidelphia partially signify the importance of
corporate governance. As Demirag and Solomon, 2003 stated, The Asian crisis in 1997-1999
and corporate scandals such as Barings and WorldCom enhanced the need for corporate
governance reform at a global level.
Additionally, Becht, Marco., Bolton, Patrick., Roel, Ailsa., (2005) developed corporate
governance, the term is related with the resolution of collective action problems among
dispersed investors, as well as the reconciliation of conflicts of interest between various

corporate claimholders. They also pointed that when the outside investors have conflicts of
interest with and want to exercise control differently from what the managers do, it will be
among causes of corporate governance problems. Moreover, Adams, Renee B., Hermalin,
Benjamin E., and Weisbach, Michael S., (2009) realized that as a consequence of corporate
scandals and relevant corporate governance issues, boards have been at the center of the
policy debate concerning governance reform and many further researches should deal with it.
Then, Ahmed (2013) mentioned in nearly five decades of its existence, Islamic finance has
gained only one percent of the global market share for finance. While some of this can be
chalked up to the relative newness of the industry, some of its problems stem from ambiguous
corporate governance model and less than stellar commitment to ethics. Bekiaris et all (2013)
pointed budgets on internal audit have increased significantly, both in national and
international level, while in the future the internal audit itself should have as a priority to
consult the board, in order to identify, manage and monitor the key risks.
Because there are not many researches and surveys done in Eastern Africa, next, what is the
limited comparative standardized set of so-called comparative Eastern Africa corporate
governance standards?
Theory of Corporate Governance, Scandal and Market Manipulation
Theory of manipulation
There are different views on Manipulation subjects because of different types of it. Market
manipulation covers errors in interfering the market operation and creates false information
on price or market for a financial commodity such as stock.
Besides, the involvement of financial intermediaries and brokers may contribute to
manipulate market price while maintaining their credibility.
Last but not least, there is a role of speculators in manipulation transactions to cause the
increasing in investment flow into the invested company when speculators produce enough,
or as much and sufficient as possible, information.
Theory of corporate governance and financial crisis

In 2008, OECD also stated that the financial crisis revealed severe shortcomings in corporate
governance. During the financial crisis, some stock markets experienced downturn in stock
price volatility and little or quite small fluctuation of price volatility. And although corporate
governance in some financial markets has a lot of strengths, there are still a few weaknesses.
Beside, corporate governance in a globalization trend has many things to work with building a
good internal system and quality flows of information inside the business to face the
challenges which comes from the external factors of globalization.
Hence, we can see, there exist various views on corporate governance and its importance.

3. Research methodology
Firstly, we analyze and compare corporate governance principles in each of two (2) different
groups including: 1) Group 1 – Eastern Africa CG representative standards including Malawi
Code 2010 and Kenya 2002 Corporate Governance Principles; and 2) Group 2 - Relatively
good corporate governance group including EVCA 2005 principles;
We also use, but not limited to, international standards of corporate governance such as:
World Bank, and Mc Kinsey corporate governance principles and surveys as reference, as
well as ICGN and OECD Corporate Governance Principles which have many modifications
in corporate governance principles after the crisis period.
Then, we suggest on what so-called limited comparative Eastern Africa corporate governance
principles which is aiming to create a basic background for relevant corporations interesting
in different aspects of corporate governance subjects and functions as the recommendation to
relevant countries’ government and other relevant organizations for public policy and
necessary evaluation.
Last but not least, for a summary of our standards, see Exhibit and the below table 1 and 2 in
relevant sessions.
4. Empirical findings
A- Findings on Corporate governance issues after financial crisis, corporate scandals

and market manipulation
Several popular issues including: the responsibility of the Board of Directors, both as a whole
and as individual, to the mission of protecting and growing net value of total company asset.
This is clearly identified after many crises and scandals recently. To break this issue in more
details, we can see there is the un-effectiveness of Board, CEO and Board processes, as well
as the inefficiency roles of audit function in dealing with matters relevant to Board
effectiveness.
Also, we can find out another corporate governance (CG) issue. It is, the lack of effective
mechanism to protect well net value of company and investors and shareholders’ asset and
investment. Another one is the transparency mechanism still exisiting with errors that lead to
declining company’s credibility to investors.
Moreover, the lack of an effective Code of Ethics and Code of Conduct might be a cause
contributing to failures, frauds and bankruptcy recently and after financial crisis time.
B- Findings on Ways of Manipulation during Corporate Scandals

Several Manipulation Techniques found out during corporate scandals involve, but not
limited to:
B.1 – The manipulation techniques in the income statement:

Here, the technique is used to manipulate either income or expense or profit to maximize
benefits for both Board and investors.
In the scandal of Zhengzhou Baiwen company in China, the firm success is reported based on
creative accounting and fraudulent practices. Falsifying financial statements were used for
maintaining its stock exchange listing. And it made up artificial sale record and excluded 22
subsidiaries because of their poor performance between 1996 and 1998.
B.2 - The manipulation techniques in both the income statement and balance sheet:
In ABB scandal, although the technological company performed very well in previous years,
until it hid losses and reported the first loss in 2002 but actually it is for 2001. Also, in the
year 2000, ABB forgot the loss from divestments when it reported the benefits from
acquisition. Hence, the result for the 2nd quarter is much worse than that in the 1 st quarter.
Another scandal in China, in Hongguang case in 2001 or previous years, it was discovered to
inflate or manipulate profits of RMB 150 million by forging sales, manipulating depreciation,
and overstating inventory.
B.3 - The manipulation techniques relevant to international accounting practice code:
There is a going controversial concern between some different practices in IFRs and GAAP
standards. Furthermore, in the case of ABB scandal in Sweden, the company switched from
IAS to US GAAP to be listed on the US stock exchange. And it is said that under IAS
(International Accounting Standards), ABB could use gains from selling various assets to
inflate its operating income while this accounting practice is not allowed under US GAAP.
B.4 - Other manipulation techniques net belong to above classifications:
Financial manager could make use of irregular accounting rules to manipulate assets in
accounting number not in its real life number, for example, Waste Management Inc case show
us the depreciation time length of property is expanded in the year 2002.
On the other hand, financial managers can manipulate interest rates to earn profits and these
are fraudulent actions. For example, in scandals relevant to Libor (London interbank rate),
banks were falsely inflating or deflating their rates so as to profit from trades or in order to
create impression that they are more creditworthy than they were.
C- Actions on Preventing or Controlling negative manipulation
Firstly, it is necessary to have a controlling mechanism on accounting processes and
procedures and the proper use of international accounting standards.
Other necessary actions to control negative market manipulation are, enhancing capability of
the board and management, as well as the capability of internal control system.
D- Findings on Construction of Comparative International Corporate Governance

Standards
These findings will be shown in a detailed analysis of a model indicated in the later sessions.

<D.1> - Group 1 – Eastern Africa Corporate Governance standards analysis
The Malawi Code of Governance 2010

This is the modified Code since its first publication in 2001.
Among its advantages are, but not limited to, clear descriptions of Board duties including
developing policies to minimize conflicts of interest.
Additionally, it is good to state that the Board need to develop a board charter based on
articles of association and organization’s constitution.
Besides, it has involved detailed roles of Board including ensuring appropriate procedures
protecting firm assets, resources and reputation.
Generally speaking, The 2010 Code has certain different strong points including Board
ensuring members playing a full role in the affairs of firm. However, it would be better to
identify roles of CFO.
The 2002 Kenya Corporate Governance Principles
One of its distinctions is mentioning good CG based on advancing long term shareholder
value and human-centered development.
And it also pointed good CG could create competitive companies and promote effective use
of limited resources.
Besides, the Kenya Code mentioned BD ensure no one person or group has unfettered power.
For more information, please see Exhibit 4. However, it would be better to clarify duties of a
compliance officer.
Comparison between the Malawi and Kenya Corporate Governance Principles
Different from most of Asian Codes, there is a focus in Malawi Code 2010 on clear
illustration of roles of Board of directors. Also, it makes a sound point when it considers the
firm as a good corporate citizen.
On the other hand, the Kenya Code 2002 refer CG to promoting an efficient process of value
adding and creation.
Table 1 – A so-called Eastern Africa CG representative standards
Subjects or parties Main quality factors Sub quality factors
Audit committee Meet at least twice a year; discuss EA on Review scope and results of
IC, IA and RM; audit, effectiveness of auditors;
review annual F.S;
CEO and The Chair Board appoint chairman who is the only Board ensure orderly
person adding value to the position; Firm succession of CEO;
determine length of service by chairman;
Corporate Secretary Advise chairman and board on the All board members have access
implementation of Code; to advice and services of
secretary;
Compliance officer N/A (for further research and Board ensure firm compliances
implementation) with law, accounting standards;
Board of Directors Right mix of expertise, experience and Define requirements for
knowledge, skills; independent judgement reporting by Executive MGT and
on issues of strategy, performance, monitor their performance;
resources;

Independent Independent judgement; NED independent from MGT;
director
Supervisory board N/A (for further research and NED not take any advisory
to the Management implementation) work unless it is approved by
Board;
Supervisory to the Board members seek independent Chair facilitates effective board
Board of Directors professional advice at the expense of the MGT;
organization;
Internal control Put in place measures to minimize risks; Board review processes of IC;
Internal audit Provide independent opinion on future Independent opinion on
risk; financial performance;
External audit Independent EA; raise matters directly Report on whether the firm has
with Board; financial and risk MGT control;
Disclosure and Board disclose to EA any potential Board members disclose all the
transparency conflict of interest; information for Board to make an
informed decision;
Shareholders Owner foster constructive relationship N/A (for further research and
with board to facilitated the success; implementation)
The corporation as a Firm acting as a good corporate citizen; Creating better CG lead to
whole entity easier access to capital at a lowest
cost;
<D.2> -Group 2 – Relative Good Corporate governance group analysis
EVCA 2005 Corporate Governance standards analysis:

This is the guideline for privately held companies in the private equity and venture capital
sector.
Good recommendations involved in the 2005 Code include, but not limited to, a good
governance will create good environment, attitude and behavior that facilitate well decision
making.
Besides, it makes a sound point to create good practice for management of privately held
companies.
A minor point might be noted here is that the duties of CFO and CEO need to be clarified. For
a summarized analysis on corporate governance factors, please refer to the Exhibit 5.
The 1st Establishment of so-called relatively Good Corporate Governance standards

This following table is built with the summary of above EVCA CG standards.
Table 2 – A relatively Good Corporate Governance standards
Audit committee N/A (for further research and N/A (for further research and
implementation) implementation)
CEO and The Chair N/A (for further research and N/A (for further research and
Corporate Secretary N/A (for further research and N/A (for further research and
Compliance officer N/A (for further research and N/A (for further research and
Board of Directors Identification and assessment of risk; Appropriate authority, skill and
experience;
Independent N/A (for further research and N/A (for further research and
director implementation) implementation)
Supervisory board Executives work with MGT to deliver N/A (for further research and
to the Management business strategy; implementation)
Supervisory to the N/A (for further research and N/A (for further research and

Board of Directors implementation) implementation)
Internal control MGT aware of, review control activities; MGT identify, adopt a control
framework;
Internal audit N/A (for further research and N/A (for further research and
External audit N/A (for further research and N/A (for further research and
Disclosure and Treat corporate information with due Timely , transparent
transparency consideration to commercial sensitivity; communication;
Shareholders Internal and external communication N/A (for further research and
based on accurate, timely information; implementation)
The corporation as a MGT access reliability of business Firm act with integrity toward
whole entity information system; the investee companies;
D.3- The 1st Establishment of so-called limited comparative Eastern Africa Corporate
Governance standards
Comparison of corporate governance standards between<D.1> and <D.2> group
Before we come to set up a set of general limited standards of corporate governance, we need
to review the standards combined in the previous two (2) groups
The advantages of Group 1, but not limited to, CG principles are intended to be applied for all
three sectors: private, public and not-for-profit sectors for developing economy.
On the contrary, the relative Good Corporate Governance Group standards states well and
focus on roles of MGT in risk MGT including establishing procedures for risk assessment.
A so-called Limited Comparative Eastern Africa Corporate Governance Set of
standards
Based on the above analysis, we consider building comparative standards for a comparative
Eastern Africa Corporate Governance system.
Table 2 - The Comparative Eastern Africa Corporate Governance standards
Audit committee Meet at least twice a year; Review scope and results of audit,
discuss EA on IC, IA and RM; effectiveness of auditors; review annual
F.S;
Nominating Recommend to board qualified, Evaluating sub-committees, if any;
committee proper candidates;
Numeration or Balancing remuneration in the Evaluating sub-committees, if any;
Compensation context of industry;
Committee
CEO and The Chair Separating roles of CEO and Board appoint chairman who is the only
chairman; Board appoint, define person adding value to the position; Firm
limits of authority of CEO; Chair determine length of service by chairman;
access directors by one-to-one Chair organize balance of internal and
interview annually; external relationship;
CFO N/A (for further research and N/A (for further research and
Corporate Secretary Advise chairman and board on All board members have access to advice
the implementation of Code; and services of secretary; ensure adequate
information sent to BD prior to meeting;
Compliance officer N/A (for further research and Board ensure firm compliances with law,
implementation) accounting standards;
Board of Directors Roles, duties in board manual; Board members diligent in discharging
or Management Board duty of confidentiality, care and their duties to the firm, express
skill; disagreements with Board including
Chairman and CEO;
Board meeting Receive communication from Read and confirm minutes of last
the chair; receive and consider meeting; discussion of issues that affect

reports from CEO; individuals;
Management Board join in appointing senior Board ensure a succession plan for senior
MGT; BD set proper MGT MGT;
structure (organization, system,
people);
Independent Independent judgement; NED independent from MGT;
director
Supervisory board Executives work with MGT to NED not take any advisory work unless
to the Management deliver business strategy; it is approved by Board;
Supervisory to the Chair facilitates effective board Board members seek independent
Board of Directors MGT; professional advice at the expense of the
organization;
Internal control Board review processes of IC; Put in place measures to minimize risks;
Internal audit Provide independent opinion Qualified, independent of MGT; ensure
on future risk; Independent proper conduct of company’s affairs;
opinion on financial performance;
External audit Report on whether the firm has Independent EA; raise matters directly
financial and risk MGT control; with Board;
Disclosure and Board disclose to EA any Board members disclose all the
transparency potential conflict of interest; information for Board to make an informed
decision;
Financial Ensure qualified, competent, Maintain adequate system of financial
accounting; proper persons taking duties; MGT;
Shareholders Owner foster constructive Owners elect competent directors;
relationship with board to
facilitate the success;
Stakeholders Firm communicate with all Cooperation, kinship and belonging with
stakeholders effectively; the community;
Accountability Self dealing and insider trading Firm reports on how they positively and
prohibited; negatively impact on the environment,
economic and social life of community;
Sustainability Firm acting as a good This concept may be involved in the
corporate citizen; Owner foster Code; adoption of better CG practices;
constructive relationship with sustainability reporting integrated with
board to facilitated the success; financial reporting;
Leadership Leadership for results; Board exercise leadership, sound
conscious of its obligations; be judgement in directing firm;
ready to account;
Employee Promote fair, equitable Code of ethics give a clear guide to
employment policies; expected behaviour standards of all
employee;
Training Initial training of directors: Adequate training for MGT and
roles, duties, board practices and employee;
procedures, Risk MGT, IT for
board, IC and IA, financial MGT;
3rd parties and Inform owners of related party Board facilitate performance-enhancing
conflicts of interests transactions that affect current or mechanisms for stakeholder participation;
future financial position;
The corporation as a Quality standards and Creating better CG lead to easier access
whole entity responsibility to customers; to capital at a lowest cost;
The Code To secure greater transparency Specified and customized to apply in
and to reduce corruption; different sectors;
(Note: source are based on corporate governance standards of group <D.1> and <D.2> and the
appraisal of these standards)
5. Conclusion
Among several key corporate governance issues is, but not limited to, the leadership roles and
the effectiveness of top management team, including CEO, chair, Board and outside directors.
To reduce its impacts, The Malawi code 2010 mentioned CG practices can support
sustainable development and greater access to capital.

Besides, the Kenya Code emphasized role of governance in management of economic and
social resources for sustainable human development.
EVCA 2005 Principles show us a strong focus on enhancing risk management role of board,
toward risk control and identification.
Past surveys from McKinsey in 2000 showed results such as investors willing pay 24%
premium for good CG in South Korea and 18% premium for that in UK.
In consideration of corporate governance issues analyzed in the previous sessions, we
proposed the main and sub quality factors in this paper a set of general Eastern Africa
corporate governance standards in a limited Eastern Africa model with selected countries.
Though limited, it has some implications for further research and proper recommendations to
relevant government and organizations. And it also provides relevant academic and non-
academic, lawyer and consultant, board and non-board people with minimum information for
further researches.
ACKNOWLEDGEMENTS
I would like to take this opportunity to express my warm thanks to Board of Editors and Colleagues at Citibank –
HCMC, SCB and BIDV-HCMC, Dr. Chen and Dr. Yu Hai-Chin at Chung Yuan Christian University for class
lectures, also Dr Chet Borucki, Dr Jay and my ex-Corporate Governance sensei, Dr. Shingo Takahashi at
International University of Japan. My sincere thanks are for the editorial office, for their work during my research.
Also, my warm thanks are for Dr. Ngo Huong, Dr. Ho Dieu, Dr. Ly H. Anh, Dr Nguyen V. Phuc and my lecturers at
Banking University – HCMC, Viet Nam for their help.
Lastly, thank you very much for my family, colleagues, and brother in assisting convenient conditions
for my research paper.

REFERENCES
1. Ahmed, P., (2013), Corporate Governance and Ethics of Islamic Finance Institutions, SSRN
Working Paper
2. Allen, F., and Gale, D., (1992), Stock Price Manipulation, Review of Financial Studies
3. Bekiaris, M., Koutoupis, A.G., and Efthymiou, T., (2013), Economic Crisis Impact on
Corporate Governance and Internal Audit: The Case of Greece, Corporate Ownership &
Control, Vol.11, Issue 1
4. Chatterjea, Arkadev., Jerian, Joseph A., and Jarrow, Robert A., (2001), Market Manipulation
and Corporate Finance: A new Perspectives, 1994 Annual Meeting Review, SouthWestern
Finance Association, Texas, USA.
5. Edmans, A., (2013), Blockholders and Corporate Governance, ECGI-Finance Working No.
385
6. Fong, A., (2013), Practicing Corporate Governance Through Corporate Disclosure?, SSRN
Working Paper
7. Khwaja, Asim Ijaz., Mian, Atif., (2005), Unchecked intermediaries:Price manipulation in an
emerging stock market, Journal of Financial Economics 78 (2005) 243-241
8. ADB and Hermes 2003 CG Principles
9. IFRs and US GAPP, Deloitte, 2007.
10. OECD Corporate Governance Guidelines, OECD, 1999
11. www.cbc.to
12. www.cii.org/corp_govenance.asp

Exhibit
Exhibit 1 – The 2010 Malawi Code of Governance for South Africa (a short summary
evaluation)
Subjects Main quality Sub Responsibilities Objectives Note

or parties factors quality
factors
Audit Not Not Evaluating sub- Not mentioned clearly
committee mentioned mentioned committees, if any; by the Code;
clearly by the clearly by the
Code; Code;
Nominatio Not Not Evaluating sub- Not mentioned clearly
n committee mentioned mentioned committees, if any; by the Code;
Code; Code;
Compensa Not Not Evaluating sub- Not mentioned clearly
tion or mentioned mentioned committees, if any; by the Code;
Remuneratio clearly by the clearly by the
n committee Code; Code;
CEO or Not Role of Evaluating CEO; Not mentioned clearly
Lead mentioned CEO and by the Code;
director; clearly by the secretary
Code; separated;
The Chair Non Evaluating Owner can change Not mentioned clearly
executive; chairman; chairman or board not by the Code;
recommend to perform to expectation;
owners
removal of
board;
CEO and Chair obtains Roles chair encourage Not mentioned clearly
The Chair optimal input separated; proper deliberation of by the Code;
relationship from all board all matters needing
members; board’s attention;
Corporate All board Advise Board discuss Ensure effective
Secretary members have chairman and chairman and secretary information flows
(CS) access to advice board on the before seeking between Board, top MGT,
and services of implementatio independent and sub-committees;
secretary; n of Code; professional advice;
Complian Not Not Not mentioned Not mentioned clearly
ce officer mentioned mentioned clearly by the Code; by the Code;
(compliance) clearly by the clearly by the
Code; Code;
Board of Ensure New and Jointly oversee and Ensure firm comply
Directors/of strategy in place unbiased direct affairs of the with legislation,
manager/of to achieve goals; viewpoints firm; sustainable success;
trustees into
discussion
and decision-
making;
Executive Not One tier Deal with strategic Not mentioned clearly
director mentioned board planning, standards of by the Code;
(EDs) clearly by the structure conduct, resource
Code; include ED allocation;
and NED;
Non- Independent One tier Owner decide the Not mentioned clearly
executive in character and board term served by NEDs; by the Code;
director judgement; not structure Join in strategic
(NEDs) join in day to include ED planning, standards of
day MGT; and NED; conduct, resource
constructively allocation;
challenge;
(Senior) Not Not Not mentioned Not mentioned clearly
Independent mentioned mentioned clearly by the Code; by the Code;
director clearly by the clearly by the
Code; Code;

CFO Not Not Not mentioned Not mentioned clearly
(senior mentioned mentioned clearly by the Code; by the Code;
financial clearly by the clearly by the
officer) Code; Code;
Managem Board hold Owner Board is the main Not mentioned clearly
ent team MGT ensure governing body situated by the Code;
(senior) accountable for remuneration between owner and
implementation; keeping Exe.MGT; NED may
quality and appoint or remove
calibre of senior MGT and
individuals; determine their
remuneration;
Superviso Board should NED not Board members seek Not mentioned clearly
ry board seek legal take any independent by the Code;
advice relating advisory work professional advice at
to termination unless it is the expense of the
clauses when approved by organization;
appointing Board;
executive
members;
Internal Use IT Put in Board responsible for Not mentioned clearly
control system for back place governance of risks; by the Code;
up measures; measures to
minimize
risks;
Internal Not Not Not mentioned Not mentioned clearly
audit mentioned mentioned clearly by the Code; by the Code;
Code; Code;
External Not Not Independent EA; Not mentioned clearly
(Independent mentioned mentioned raise matters directly by the Code;
) audit clearly by the clearly by the with Board;
Code; Code;
Disclosure Not Formal, Board members Less corruption;
and mentioned transparent disclose all the improved transparency;
transparency clearly by the process for information for Board
Code; determining to make an informed
remuneration decision;
of Board;
Sharehold Owner foster Constitute Exercise ownership Not mentioned clearly
ers and constructive the supreme role in AGM; by the Code;
Minority relationship with authority;
Stockholder board to
facilitated the
success;
Accounta Not Firm has a Firm considers Not mentioned clearly
bility mentioned moral and impacts of its decision by the Code;
clearly by the social on internal and external
Code; standing in stakeholders,
the society; environment and
society;
Leadershi Not Not Board exercise Sustainable success;
p mentioned mentioned leadership, sound
clearly by the clearly by the judgement in directing
Code; Code; firm;
Employee Not Not Code of ethics give a Not mentioned clearly
mentioned mentioned clear guide to expected by the Code;
clearly by the clearly by the behaviour standards of
Code; Code; all employee;
3rd parties Inform May be an May be an entity Not mentioned clearly
and conflicts owners of entity joint significantly influence by the Code;
of interests related party control with the firm;
transactions that the firm;
affect current or
future financial
position;
Code of Receive total Specified Highest standards of Not mentioned clearly

ethics commitment and behaviour; by the Code;
(conduct) from Board and customized to
CEO; apply in
different
sectors;
Group and not-for profit Private Public sector Not mentioned clearly
subsidiaries sector includes sector includes SOEs, public by the Code;
non- includes authorities;
governmental SMEs,
organizations, family-owned
community business,
based informal
organizations; sector;
Note The underlined part is describing some more works needed to be done for relevant subjects and parties.

Exhibit 2 – Corporate Governance system
(source: Brazil Code of Best Practice of CG)

Exhibit 3 – Evaluation of Kenya Code Corporate Governance

factors
Audit Meet at least NED Review scope and Not mentioned clearly
committee twice a year; contribute results of audit, by the Code;
discuss EA on independent effectiveness of
IC, IA and RM; judgement; auditors; review annual
F.S;
Nominatio Not Not Recommend to board Not mentioned clearly
n (HR) mentioned mentioned qualified, proper by the Code;
committee clearly by the clearly by the candidates;
Code; Code;
Compensa Not Not Not mentioned Not mentioned clearly
tion or mentioned mentioned clearly by the Code; by the Code;
Remuneratio clearly by the clearly by the
CEO Board define Board Board access Not mentioned clearly
authority limits appoint CEO; performance of CEO; by the Code;
of CEO;
The Chair Chair board Lead the Ensure decisions Not mentioned clearly
meetings; board; fairly made; facilitate by the Code;
effective board MGT;
CEO and Chair Chair Separating roles of Not mentioned clearly
The Chair represents board attend CEO and chairman; by the Code;
relationship and shareholder committee Board appoint CEO;
to MGT; meeting in
case
appropriate;
Corporate Knowledge, Qualified, Advice Board on Ensure the firm
Secretary experience; competent matters of procedures, complies to CG code,
(Board) and fit; a rules; coordinate the AGM held with
channel of publication and requirements of Company
communicatio distribution of annual Act;
n for NED; report;
Complian Not Not Not mentioned Board ensure firm
ce officer mentioned mentioned clearly by the Code; compliances with law,
clearly by the clearly by the accounting standards;
Code; Code;
Board of Independent New Utilize the resources; Meet objectives of As
Directors judgement; a members monitor MGT shareholders; maximize understood
mix of proficient inducted into performance; shareholder value; from the code;
directors; roles;
Executive Not BD Not mentioned Not mentioned clearly
director mentioned comprise of a clearly by the Code; by the Code;
clearly by the balance of ED
Code; and NED;
Non- Independent BD Not mentioned Not mentioned clearly
executive from MGT; 1/3 comprise of a clearly by the Code; by the Code;
(external) Board is NED; balance of ED
director and NED;
Independe Not Independen Not mentioned Not mentioned clearly
nt director mentioned t NED; clearly by the Code; by the Code;
clearly by the
Code;
mentioned mentioned clearly by the Code; by the Code;
Code; Code;
Managem Adequate Board BD set proper MGT Maintain reputation,
ent team training for appoint senior structure (organization, responsibility;
(senior) MGT; MGT, ensure system, people);
a succession
plan for
senior MGT;

Superviso Not Not Board can find Not mentioned clearly
ry board mentioned mentioned independent prof. by the Code;
clearly by the clearly by the adviser;
Code; Code;
Internal Not Adequate Board review Accuracy of financial
control mentioned IC system; processes of IC; reporting; minimize risk
clearly by the of fraud;
Code;
Internal Independent Provide Initial board training Not mentioned clearly
audit opinion on independent with IA and IC by the Code;
financial opinion on procedures; AC review
performance; future risk; major findings on IA;
External Report on Provide A director disclose to Not mentioned clearly
(Independent whether the firm independent EA reasons for his by the Code;
) audit has financial and opinion on resignation;
risk MGT future risk;
control;
Disclosure Not Board Not mentioned Not mentioned clearly
and mentioned disclose to clearly by the Code; by the Code;
transparency clearly by the EA any
Code; potential
conflict of
interest;
Sharehold Board ensure Exercise Owners elect Not mentioned clearly
ers and firm supreme competent and reliable by the Code;
Minority communicate authority in directors;
Stockholder effectively; GM;
Accounta Promote fair, Firm Self dealing and Not mentioned clearly
bility equitable complies with insider trading by the Code;
employment legal; prohibited;
policies;
Leadershi Chairman Exercised Leadership for Achieve continuing
p provides by board; results; conscious of its prosperity;
leadership to obligations; be ready to
board in account;
planning and
direction;
Employee Not Not Adequate training for Not mentioned clearly
mentioned mentioned MGT and employee; by the Code;
Code; Code;
3rd parties Quality Firm Board facilitate Not mentioned clearly
and conflicts standards and preserves performance-enhancing by the Code;
of interests responsibility to environment; mechanisms for
customers; stakeholder
participation;
Code of Board define Board outline Board define, protect To prevent the
ethics ethical values, ethics, corporate ethics and development of
(conduct) standards; beliefs; beliefs; undesirable practices;
Group and Chair and Chair and The firm promotes Not mentioned clearly
subsidiaries CEO represents CEO welfare, interests of by the Code;
firm to represents communities;
government; firm to staff,
public;

Exhibit 4 – How responsible business embedded into function of BD
(source: IFC and Global Compact 2009)

Exhibit 5 – Evaluation of EVCA Code 2005 (from both investor and investee viewpoint)

factors
Audit Not Not Not mentioned Not mentioned clearly
committee mentioned mentioned clearly by the Code; by the Code;
Code; Code;
Nominatio Not Not Not mentioned Not mentioned clearly
n committee mentioned mentioned clearly by the Code; by the Code;
Code; Code;
Compensa Not Not Not mentioned Balancing
tion, mentioned mentioned clearly by the Code; remuneration in the
Remuneratio clearly by the clearly by the context of industry;
CEO Not Not Not mentioned Not mentioned clearly
Code; Code;
The Chair Not Not Not mentioned Not mentioned clearly
Code; Code;
CEO and Not Not Not mentioned Not mentioned clearly
The Chair mentioned mentioned clearly by the Code; by the Code;
relationship clearly by the clearly by the
Code; Code;
Corporate Not Not Not mentioned Not mentioned clearly
Secretary mentioned mentioned clearly by the Code; by the Code;
Code; Code;
Complian Not Not Not mentioned Not mentioned clearly
ce officer mentioned mentioned clearly by the Code; by the Code;
Code; Code;
Board of Identification Appropriat Appropriate support In the best interests of
Directors and assessment e authority, and training for board; the co.;
of risk; skill and
experience;
Executive/ Not Work with Board determine Not mentioned clearly
Representati mentioned MGT to appropriate levels of by the Code;
ve director clearly by the deliver remuneration;
Code; business
strategy;
Non- Not Not Not mentioned Not mentioned clearly
executive mentioned mentioned clearly by the Code; by the Code;
director clearly by the clearly by the
Code; Code;
Independe Not Not Not mentioned Not mentioned clearly
nt director mentioned mentioned clearly by the Code; by the Code;
Code; Code;
Code; Code;
Managem Management Remunerati Reporting Ensure firm
ent team agreements on provide obligations; information is clear and
(Senior developed; incentive for unambiguous, keep secure
Administrati performance and confidential;
on) and reward
for results;
Superviso Not Not Not mentioned Not mentioned clearly
ry for the mentioned mentioned clearly by the Code; by the Code;

board clearly by the clearly by the
Code; Code;
Superviso Not Not Not mentioned Not mentioned clearly
ry for the mentioned mentioned clearly by the Code; by the Code;
managers clearly by the clearly by the
Code; Code;
Internal MGT aware Take into MGT identify, adopt Prevent errors;
control of, review account of a control framework;
control complexity,
activities; size of
business;
Internal or Not Not Not mentioned Not mentioned clearly
statutory mentioned mentioned clearly by the Code; by the Code;
audit clearly by the clearly by the
Code; Code;
External Not Not Not mentioned Not mentioned clearly
audit mentioned mentioned clearly by the Code; by the Code;
Code; Code;
Disclosure Clear Timely , Treat corporate Not mentioned clearly
and disclosure; transparent information with due by the Code;
transparency communicatio consideration to
n; commercial sensitivity;
Sharehold Not Not Not mentioned Not mentioned clearly
ers and mentioned mentioned clearly by the Code; by the Code;
Minority clearly by the clearly by the
Stockholder Code; Code;
Accounta MGT access Taking a Firm act with Operate with
bility reliability of long term integrity toward the effectiveness and
business view of investee companies; continuous efficiency;
information investment;
system;
Leadershi Not Internal Not mentioned Not mentioned clearly
p mentioned and external clearly by the Code; by the Code;
clearly by the communicatio
Code; n based on
accurate,
timely
information;
Employee Not MGT Act openly, honestly, Not mentioned clearly
mentioned inform balancing the interests by the Code;
clearly by the employee of companies and the
Code; about strategy needs of stakeholders;
and expected
performance;
3rd parties Not Board not Respect interests of Not mentioned clearly
and conflicts mentioned have conflict stakeholders; by the Code;
of interests clearly by the of interest;
Code;
Code of Not Timely MGT review In accordance with
ethics mentioned review; at appropriateness of CG applicable laws;
(conduct) clearly by the least review procedures;
Code; annually;
Group and Not Not Business generate Not mentioned clearly
subsidiaries mentioned mentioned large information about by the Code;
clearly by the clearly by the customers, markets;
Code; Code;

THE EFFECT OF QUALITY SERVICE TOWARDS CUSTOMER
SATISFACTION IN PEKANBARU (A CASE STUDY FROM BANK BNI
PEKANBARU)
Dwika Lodia Putri, Jeni Wardi, Zulia Khairani.

Lecturer in Faculty of Economy Lancang Kuning University.
Email: lodiaputri_62@yahoo.com
ABSTRACT
The purpose of this research is to analyze the impact of quality service

towards customer satisfaction in Bank BNI Pekanbaru. After knowing the related
literature, these are some important factors that strongly influence customer
satisfaction, tangibles, reliability, responsiveness, assurance, and empathy.
Therefore, the understanding towards the influence of tangibles, reliability,
responsiveness, assurance, and empathy with the others variables that influences can
be used as basic strategy for to develop customer satisfaction.
The sample of this research is 100 costumer of Bank BNI Pekanbaru that
randomized using accidental sampling. After that, the analysis of data obtained by
using quantitative and qualitative analysis. The analysis quantitative is including:
validity and reliability, the classic assumption test, linear regression analysis, F-test
and T-test, and also determination analysis (R2). The qualitative analysis is the
interpretation from the data that coming from the research and also the result of the
data analysis with more description.
The statistics result shown that tangibles, reliability, responsiveness, and

empathy partially have positive and significant impact towards customer satisfaction
in Bank BNI Pekanbaru.
Keywords: Customer Satisfaction, Tangible, Reliability, Responsiveness,

Assurance, and Empathy
A. Introduction
The quality services are really important in banking business. Aside from
offering many products, improvements in technological side, physical services and
non physical services is intended to improving the quality services (Ariyani, 2008).
Making a superior value will improve the satisfaction level to which the feelings of
someone that declare the ratio between product performance towards the expected
(Kottler, 2007). To measure the satisfactory level, it is important to understand the
extent of quality service that given to satisfy the costumer.
According to Tantri (2012:38) satisfy is the level of people feelings after

comparing the product performance (result) that they feel towards the expectations.
So the satisfy level is a differential function between the performance and the
expectations.
In addition, the growing of competitor in banking business pushed Bank BNI

Pekanbaru to searching a correct strategy in order to win the competition. One of the
strategies is to created customer satisfactory.
This research was designed to test the quality service towards customer
satisfaction and to determine whether the tangibles, reliability, responsiveness,
assurance, and empathy influence the costumer satisfaction. In industrial service,
costumer expects to deserve a good service, in other side, the service providers also
have the standard quality in delivering the service. It is also the same as banking
business that also service providers, the customer have an expectation towards quality
service that is different with the service providers. Consumer perception towards the
quality service is already an assessment from the service.
B. Literature Review
Based on Tciptono (2005), quality is a dynamical condition that connects with

product, services, people, process, and environment that meet or exceed the
expectation. So, quality service can be define as an effort to fulfill the need and desire
of consumers also the exactness of delivery to balancing the consumer expectations.
Valerie A. Zeithani in Rajawali View (2003) stated that quality services is the
ability of a company to delivers or fulfills what being promised to the costumer.
Kotler (2007) also stated that satisfaction is the happy feeling or disappointed feelings
that come from the comparison of impression towards the product performance or
result with the expectations. If the result is below the expectation, costumer is not
satisfied. There will be a bad impact for company that can decreasing the number of
costumer and causing the costumer no longer interest in the banking services.
These are factors that influencing costumer satisfactory. First, the tangible
which can be defines as physical appearance. It is used by company to increasing the

image from costumer view which can be illustrated with room cleanliness, the dress,
and the interior place. Second, the reliability is the ability to give the promising
service properly. It is connect with the ability to offers a service with good attitude,
on time service, professional with costumer, and accurate keeping system. Third, the
responsiveness is the willingness to help costumer and give proper help quickly. It is
emphasize in response to request, statement, complains and costumer problems.
Fourth, the assurance including knowledge, ability, attitude, staff trustworthiness, and
don’t have any danger, risk, or doubting situation. Fifth, the empathy is individual
attention that comes from service providers in order to make costumer important,
appreciated, and understand by the company. This is how the company convinces the
costumer that they are unique and different from the other by give the costumer a
personal attention. The costumer wants to be treated exclusively by the bank.
The research conducted by Dabholkar et al (2000) in Tciptono (2005) stated

that quality service have a significant result towards customer satisfaction. Another
research about the effect of quality Service towards customer satisfaction is by Bagus
Tri Leksono (2009) entitled “The analysis of the quality service effect towards
costumer satisfaction of BPD Card User in Bank Jateng Semarang.” The result of the
research stated that costumer attitude and customer service reaction in response about
customer complaints are satisfying, meanwhile the quality service that still not
satisfied the customer is payment services, additional facility, and punctuality.
The research conducted by Martiawati (2009) entitled, “The analysis of brand

image effect, quality service effect, and gasoline station facility “Pasti Pas” effect
towards customer satisfaction.” In this research, there are 100 samples taken by
purposive sampling technique. The partial result from this research is all of the three
variables have a significant effect towards the customer satisfaction. The most
significant variable is quality service.
The research held by Dodik Agung (2004) entitled “The effect of service
quality towards customer individual and group credit satisfaction: a case study in
BPR Bank Pasar Kabupaten Karanganyar. It uses quality service dimensions that
developed by Parasuraman et al (1998) which is stated that reliability,
responsiveness, empathy, assurance, and tangible, have significant effect towards
customer satisfaction. The most dominant variable is responsiveness.
The research held by Hartanto (2010) entitled the analysis of the effect of
quality banking service towards customer satisfaction in BPR Bank Jogja. This
research verifies the 5 quality dimension quality service which is reliability,
responsiveness, empathy, assurance, and tangible towards customer satisfactions. The

result shown that empathy variable has a positive and significant effect towards
customer satisfaction, meanwhile the other variable has positive effect but not really
have significant effect towards customer satisfaction.
Based on the result above, it can be hypothesized as, H1: tangible has positive
and significant effect partially towards customer service, H2: reliability has positive
and significant effect partially towards customer service, H3: responsiveness has
positive and significant effect partially towards customer service, H4: assurance has
positive and significant effect partially towards customer service, H5: empathy has
positive and significant effect partially towards customer service, H 6: tangible,
reliability, responsiveness, assurance, and empathy have positive and significant
effect towards customer service.
C. Method
The population of this research is Bank BNI Pekanbaru customer. According

to the company data, the amount of customer from 2013 until 2014 is 3.741.018
customer. The sample from this population is 100 respondents. Technique of the
collecting data in this research is survey method by using questionnaire that directly
delivers to the respondent which is Bank BNI Pekanbaru customer. The answers from
the questionnaire will be analyzed with Likert scale.
The operational definition was an elaboration of variable definition and

indicator in this research:

Table 2
The Research Variable and Operational Definition
Research Variable Operational Definition Indicator
Tangible Tangible defines as  Comfortable
physical appearance such  Staff performance
as equipment,  Proper facility
performances, building  Parking lot
facility, and the others
Reliability Reliability defines as the  Maximum service
ability to deliver the  Precise and accurate
service accurately.  Sympathetic
 punctuality
Responsiveness Responsiveness defines as  provide complete
the willingness to help information
customer and give quick  resolving the
and proper service. complaint quickly
 quick and responsive
service
 assist customers’
trouble
Assurance Assurance defines as  can answer
knowledge, attitude, and questions properly
staff ability to increasing  embed a secure
customer trust towards feelings
company  polite and friendly
 a trustworthy
transaction
Empathy Empathy defines as  understand about the
individual attention that needs and interest
comes from service  caring and patient
providers in order to  appreciate and
make costumer important, understand costumer
appreciated, and complaints
understand by the
company
Customer Satisfaction Customer satisfaction  correct in giving
defines as happy feeling transaction
or disappointed feelings information
that come from the  fulfill the needs
comparison of impression  the product offer is
towards the product satisfying
performance or result  not a disappointed
with the expectations product
This research use quantitative analysis with multiple regression linear
analysis. The result from the score is used in statistical analysis with SPSS 17, 00 to
prove the relations among research variable.
The steps that used to analyze the data are: validity and reliability, the classic
assumption test, multiple regression analysis in which the function is, Y = α + β 1X1 +
β2X2 + β3X3 + β4X4 + β5X5 + e. it was followed by coefficients determination (R2),
and F-test and T-test.
D. Result
According to the table above, the result of multiple linear regressions is:
Y = a + b1X1 + b2X2 + b3X3 + b4X4 + b5X5 + e
Y= 4,190+0,336X1+0,196X2+0,486X3+0,203X4+0,219X5
In this research can be seen that the most impacting variable is responsiveness with
standardized coefficients 0,580
Table 3
Multiple Linear Regression Result
a
Coefficients
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta t Sig.
1(Constant) 4.190 .771 5.436 .000
Tangible .336 .138 .472 2.442 .016

Reliability .196 .138 .232 2.218 .025
Responsiveness .486 .177 .580 2.748 .007
Assurance .203 .134 .225 2.125 .020
Empathy .219 .025 .251 2.335 .017
a. Dependent Variable: kepuasan nasabah total
Source: SPSS 17
In F-test obtained F-result as 53, 676 with significations 0,000 and also F-
table result as 4, 40. It can be concluded that F-result > F-table with significations
0,000<0, 05 which also can be interpreted that tangible, reliability, responsiveness,

assurances, and empathy simultaneously have significant result towards customer
satisfaction.
In partial test, there is T-count all independent variables are bigger that T-
table. So, it makes H0 rejected and H1, H2, H3, H4, and H5 accepted or it can be
concluded that tangible, reliability responsiveness, assurance, and empathy partially
have positive and significant impact on customer satisfaction Bank BNI Pekanbaru.
From the results of SPSS 17, 00, there is obtained that R=0,861 so coefficients
determination (R2) is 0,727. It is also concluded that tangible, reliability,
responsiveness, assurance, and empathy are able to explain 72, 7% customer service.
Meanwhile the other 27, 3% explained by others factors that not included in this
research.
E. Discussion
The result showed that tangible, reliability, responsiveness, assurance, and

empathy partially have possible and significant effect towards customer satisfaction
in Bank BNI Pekanbaru. This research result is supporting the previous research
conducted by Dodik Agung (2004) entitle, entitled “The effect of service quality
towards customer individual and group credit satisfaction: a case study in BPR Bank
Pasar Kabupaten Karanganyar. By using quality service dimensions that developed
by Parasuraman et al (1998) that stated tangible, reliability, responsiveness,
assurance, and empathy variable has significant effect either individually or
collectively towards customer satisfaction.
The result of this research also support the previous research conducted by
Suhendra et al (2010) entitled, The analysis of quality service effect towards customer
satisfaction in BPR Artaguna Sejahtera, in which reliability have positive and
significant impact towards customer satisfaction.
The result of this research also supports the previous research conducted by
Hartanto (2010), entitled, the analysis of the effect of quality banking service towards
customer satisfaction in BPR Bank Jogja, where the result proved that empathy
variable partially has a positive and significant impact on customer satisfaction. The
result of this research also supports the previous research conducted by Dabholkar et
al (2000) that states quality service has a significant impact towards customer
satisfaction. According to Valerie A. Zeithani (in Rajawali View, 2003) quality
services is the ability of a company to delivers or fulfill what being promised to
customer.

F. Conclusion
This research studies about the effect of 5 dimensions quality service which is
tangible, reliability, responsiveness, assurance, and empathy towards customer
satisfaction where the respondents is customer of Bank BNI Pekanbaru. It can be
concluded that tangible, reliability, responsiveness, assurance, and empathy partially
and simultaneously have positive and significant effect towards customer
satisfactions.
G. Suggestions
For educational, this research can contribute towards the understanding of

quality service that consist of tangible, reliability, responsiveness, assurance, and
empathy towards customer satisfaction in a service company. For Bank BNI
Pekanbaru, based on the impact from tangible, reliability, responsiveness, assurance,
and empathy are affect the customer satisfaction. Bank BNI is expected to consider
the indicator in quality service so that customer satisfaction always maintained.
The next researcher is expected to add other factors that could affect costumer
satisfaction. This research only uses survey method that has drawbacks and
potentially biased. The next research is expected to use the interview method in order
to overcome the shortcomings of the survey.
REFERENCES
Agustiyadi, T. 2008. Pentingnya Mengenali Tipe-tipe Loyalitas Nasabah Untuk

Meningkatkan Profit. (online), (triagus.multiply.com/reviews/item/3).
Akbar, M.M., and Parvez, N. 2009. Impact of Services Quality, Trust, andCustomer
Satisfaction on Customer Loyalty, ABAC Journal, Vol. 29, No. 1,pp. 24-38.
Al-Rousan, Ramzi, M., and Mohamed, B. 2010. Customer Loyalty and theImpacts of
Service Quality: The Case of Five Star Hotels in Jordan
International, Journal of Business and Economic Sciences, Vol. 5, pp. 202-208.
Alma, Buchari. 2005. Manajemen Pemasaran dan Pemasaran Jasa. Bandung:

Alfabeta
Anggraeni, Savitri. 2012. Pengaruh E-Service Quality terhadap Kepuasan dan

Loyalitas Pelanggan (Kasus Pada Pengguna Internet Banking
diCommonwealth Bank Cabang Seminyak Bali), Tesis, Program Studi
Magister Manajemen Universitas Udayana, Denpasar.
Ariyani, F. 2008. Membangun Loyalitas Nasabah Melalui Peningkatan
KualitasPelayanan dan Keunggulan Produk (Studi Empiris Pada PT. Bank
BukopinTbk di Kota Semarang), Tesis, Magister Manajemen
UniversitasDiponegoro, Semarang.
Bloemer J, Ko de Ruyter dan Matin Wetzels. 1998. Lingking Perceived Service

Quslity and Service Loyalty: A Multi Dimensional Perspective,
EuropeanJournal of Marketing, Vol. 33, pp. 11-12.
Bowen, John T & Shiang-Lih Chen.2001. The Relationship Between Customer

Loyalty and Customer Satisfaction, International Journal of
ContemporaryHospitality Management, Vol. 13, No. 5, pp. 213-217.
Caruana, A. 2002. Service Loyalty: The Effects of Service Quality and The
Mediating Role of Customer Satisfaction, European Journal of Marketing,
Vol. 36, No. 7-8, pp. 811-828.
Choudhury, K. 2008. Service Quality: Insights from The Indian Banking Scenario,
Australasian Marketing Journal, Vol. 16, No. 1, pp. 48-61.
Cronin, J. Joseph Jr, Michael K. Brady dan G. Tomas M. Hult. 2000.Assessing The
Effects of Quality, Value, and Customer Satisfaction on ConsumerBehavioral
Intentions in Service Environments, Journal of Retailing, Vol.76, No. 2, pp.
193–218.
Edgar, M dan Galia, F. 2009. Why and How Service Quality Perceptions Impact
Consumer Responses, Journal of Managing Service Quality, Vol. 19, No. 4
pp. 474-485.
Ghozali, Imam, 2011, Aplikasi Analisis Multivariasi Dengan Program SPSS,

Semarang. BP Universitas Diponegoro.
Hartanto, Tri, 2010, Analisis Pengaruh Kualitas Pelayanan Terhadap Kepuasan

Nasabah (Studi Kasus PD BPR Jogja), papers.gunadarma.ac.id
Kasmir. 2007. Bank dan Lembaga Keuangan Lainnya. Edisi 6. Jakarta:

PT.RajaGrafindo Persada.
Kotler, P. dan Keller, K.L. 2007. Manajemen Pemasaran. Jilid 1 dan 2. Jakarta:PT
Indeks.

THE EFFECT OF ENTREPRENEURSHIP IN ACHIEVING THE
FRANCHISE BUSINESS MARKET OPPORTUNITIES IN PEKANBARU
(A CASE STUDY IN RM SEDERHANA)
DWIKA LODIA PUTRI

Accountant Lecturer Lancang Kuning University. Jl. DI. Panjaitan KM 8.
Rumbai. Pekanbaru.
Telp 0761-52581
Email: lodiaputri_62@yahoo.com
ABSTRACT
This research aims to determine the influence of entrepreneurship in
achieving franchise business market opportunities in Pekanbaru. (A case study in RM
Sederhana). Nowadays it has been accepted that franchise held an important role in
develops business opportunities in Pekanbaru.
The methods of analysis data are using simple linear regression with
entrepreneurship and business opportunities as the variables. Business can expand
rapidly with franchise because the cost and opportunities spread individually. The
result showed that entrepreneurship is very influencing towards the franchise
business market opportunities in Pekanbaru.
The obstacle in getting jobs and the big demand in economical side makes
most of them start to enter the business world. Becoming an entrepreneur is one of
the life choices that people choose in Pekanbaru. Therefore, an entrepreneur is
required to always be creative and innovative in every moment and also dare to face
all the challenges.
Keywords: Entrepreneurship and Business Opportunities
A. Introduction
Business competition nowadays forces every business owner to be able to see
opportunities that exist in the market. It makes every business owner should be
creative and innovative in creating a product or service. For that reason,
entrepreneurial economic is really needed. It is an attempt to build up the people
ability in entrepreneurship that aims to improve people live towards a new job. An
entrepreneur should have a strategy, where the strategy is about the way and
technique of an entrepreneur or self-employment can be viewed at the same time.
The term franchise was first made by United States. The words franchise
means “freedom”. The definition of a franchise in KBBI, franchise means waralaba
or literally translated as benefit. Wara means more. And laba means profit (Sewu,
2004:15). Franchise means the freedom gained by someone to run your own business

in the particular area. Franchising is an activity with the franchisee system that
mutually beneficial between the franchisor and the franchisee.
According to PP no. 42 in 2007 and Regulation of Minister Trade EI no.
12/M-DG/PER/3/2006, franchise is an engagement where one party is given the right
to carry on the business by using the intellectual property right or inventions or
characteristics that is owned by another party with a reward based on the terms &
conditions.
Mari Elka Pangestu, former Minister of Commerce, at the time said that the
massive growth of the franchise business is in the period 2006-2008. It is estimated
that the growth of this franchise business will continue to advance in the next years,
which means franchise will be a business trend that will continue to grow.
According to (Widjaja, 2002) profit for franchisee that chooses to run a
franchise is:
1. Franchisee gets benefit from promotional and advertising activities from
franchisor at national and international level
2. Franchisee gets benefit and big purchasing from negotiations ability that
doing by franchisor to all franchisee.
3. Franchisee gets special knowledge and highly skilled also experienced in
organization and management of the franchisor’s headquarters, even though
the franchisee remain independent in their own business.
While the weakness franchisee in franchise (Widjaja, 2002) is:
1. The franchisee must pay the franchisor for the services acquired and for the
use of franchise system is in the form of introduction money (franchise fee) or
continuously money.
2. The franchisor may make mistakes in its policies which may take decisions
related to business innovation that ended in failure and this may affect the
activity of the franchisee.
3. The reputation and brand image that being franchise might be down because
of some reasons that beyond the control of both franchisor and franchisee
Franchise business opportunity is still wide open in Indonesia, especially in
Riau, the sector also covering a wide variety of fields. Entrepreneurs in this field have
a very bright prospect. Business owner also can earn big profit only in a short time.
No wonder many business owners are interested in this business (restaurant).
However, based on research conducted by the Small Business Administration (SBA),
only 2, 5% business is successful in 5 years.
Nowadays, Pekanbaru is rapidly growing into a business city with multi-
ethnicity. This diversity has become an asset social in achieving a common interest to
be used for people welfare. As a promising city, there will be opportunities for every

entrepreneur for their business. One of the opportunities is culinary business that
growing quite rapidly in this city.
B. Literature Review
1. Definition Of Entrepreneurship
The term entrepreneur comes from French translated into English, which
means “between taker” and “go-between”. Entrepreneur term began to be used in
English since 1878, and can be understood as “a contractor acting as intermediary
between capital and labor”. Richard Cantillon in 1975 began to use this term in
general. Cantillon is French economist who comes from Scotland; he popularized the
term entrepreneur in the Essai Sur La Nature du Commerce en General. According to
Cantillon entrepreneurs are those who pay a certain price for a certain product to be
sold at uncertain able price, while making decisions about achieving and utilizing
resources, and accept the risk of trying.
In the mid 20 century, there is an opinion of entrepreneur as an innovator (the
th
man who discovered something/innovation). The opinions stated by Schumpeter, an

economist who did a lot of research on entrepreneurs and entrepreneurship: “the
function of the entrepreneur is to transform or revolutionize the pattern of productions
by using a new discovery (invention) or, generally, a possible technology to produce
a new commodity or producing an old commodity in the new ways, opening a supply
source of new materials, or a new method of distribution
(remember the distribution channels in marketing activities) or reorganize new
industry.
John J. Kao defines entrepreneurship as follows: “entrepreneurship is the
attempt to create value though recognition of business opportunity, the management
of risk-taking appropriate to the opportunity, and through the communicative and
management skills to mobilize human, financial, and necessary material resources to
bring a project to Fruition.” (Entrepreneur is an attempt to create value through the
introduction of business opportunities, the appropriate risk management, and through
the communication skills and management to mobilize human, money, and raw
materials or other resources that needed to produce a project).
Definition entrepreneurship by Hisrich, et al in Saiman (2009, p. 42) as
follows: “entrepreneurship is the dynamic process of creating incremental wealth.
The wealth is created by individuals who assume the major risk in terms of equity,
time, and / or career commitment or provide value for some product or service. The
product or service may or may not be new or unique, but value most somehow be
infused by the entrepreneur by receiving and locating the necessary skill and
resources”.(Entrepreneurship is a dynamic process for certain of additional wealth.
Wealth is created by individuals who are willing to take risks with a fairness, time or
commitment to a career or providing value for goods and services. Products and
services are May or may not be new or unique, but the value should be encouraged by
businessmen with the placement of skill needs and resources).
Hisrich (1992) define entrepreneurship by three approaches from economist,
psychologist, and businessmen. Below are the approaches:
a. Autonomous approach, entrepreneur is a person who brings the resources,
energy, materials, and other assets into a combination that makes the value
higher than before, and also the person who introduced the change,
innovation/updates and the new world order.
b. Psychologist approach, entrepreneur is a characteristic that is driven by a certain
activities to produce or achieve something in trial, in consummation, or perhaps
in the authority to find a way out; and
c. Businessman approach, entrepreneur is businessman who emerged as a threat,
aggressive competitors, in contrast to the other businessman, entrepreneur may
be an ally/partner, a source of deals, a customer, or someone who creates wealth
for others, also find a better way to utilize resources, reduce waste, and generate
new jobs for other people.
According to Presidential Instruction no. 4 1995: “Entrepreneurship is the
spirit, attitude, behavior, and ability to handle a business or activity that leads to the
search for, create, implement ways of working, new technologies and products to
improve efficiency in order to provide better services or gain greater profits.
2. Market Opportunities
As for the growth of the company, company needs to analyze the market
opportunities that can be exploited. The market opportunities analysis is very
important, because the company need to know the available opportunities in
marketing their products and be able to set whether the market is big enough to
support another product and still leave with profit.
Every company needs an ability to recognize new market opportunities. There
is no company that can always rely on present products and market.
Attractive opportunities for certain companies are an opportunity that can
benefit companies, together with resources and objectives. A marketing strategy plan
tries to adjust the existing opportunities with the company’s resources and its
objectives, which is doing what they want to do.
According to Kotler (1997:72) market Opportunities is: the market
opportunity is a need where companies can operate with a profit.
While Pearee and Robinson (2000:230) define the market opportunities is a
crucial situation which is the most profitable in the company environment.
3. Identifying Market Opportunities

Organizations can seek new opportunities systematically. Many organizations
get new ideas by simply put the ears and eyes open to the changes in market.
Companies can use informal methods, read newspapers, and attend tradeshows,
reaching competitors products to get an idea of the market opportunities. One of the
useful tools is the network expansion of the product/market expansion grid (Kotler,
1997:45).
Product/market grid is a model that has been proven very useful in the
business strategy. The unit process has two dimensions namely product and markets.
Other that these 2 dimensions, four growth strategies that can be formed are:
1. Market opportunities
Market opportunities is the efforts to increasing production sales that already
owned by the company in current market, including more aggressive marketing
mix. The company can try to increasing the level of customer usage or attract
competitors’ customer or new customers who have not used the product.
2. Market development
Market development is the efforts to increasing the current products sales in new
markets. Market development can help in searching a new use for a product.
3. Product development
Product development is the efforts to offering a new products or enhanced
products to the current market. The companies need to know the needs of their
current customer. The companies can see a way to add or modify the product
feature, held some quality level, or reproduce the type or size to be better in the
needs of new customers.
4. Diversification
Diversification is moving to completely different business lines that including
products, markets, or even in system production level, a completely unknown
marketing. This method can allow the company to take advantage of changes in
the current market, or more fundamental changes in the environment.
The further the opportunities, the more attractive it looks. But the more
difficult to judge. Opportunities that far from the company experience is involve a
greater risk (Jerome, 1993:62).
Current Product New Product

Existing Market 1. Market Penetration 3.Product Development
New Market 2. Market Development 4. Diversification
Product/Market Expansion Grid

C. Methods
The research was held in RM Sederhana Pekanbaru in 2015.
1. Data Sources and Types

There are 2 types of data according to the source (Mantra, 2001:47):
a. Primary data is data obtained from field survey using the original method of
data collection that obtained directly from respondents through a questionnaire.
b. Secondary data is obtained indirectly, in the form of data from other sources
that had been analyzed and have connection with research that is
complementary or supporting the primary data.
2. Technique of Collecting Data

a. Questionnaire, is a way of collecting data by proving a list of questions to
respondents that are expecting to response the questions
b. File research, is technique of collecting data by searching the required
documents for the study
3. Population and Sample

As for the population and sample in this research is the entrepreneurship and
market opportunities (a case study in RM Sederhana) for 50 people. The technique of
collecting sample is purposive sampling method.
4. Technique of Analyzing Data

In analyzing the data, the researcher used descriptive and quantitative
analysis. It is start from collecting data and the tabulated into a table and then
explained systematically, by connecting it with the relevant theories so it can be
analyzed using simple regression method, (Sugiyono, 2011:200). The step in the data
analysis is as follows:
Y = a + BX1
Where:
Y = Entrepreneurship
a = Constant
b = Coefficient Regression
X = Market Opportunity
1

There is a preliminary test of the data quality in the research by the following
steps:
1. Validity and Reliability

The purpose is to find valid items in determining a variable. The testing is held
by comparing the correlation value of each item with the total score of each
variable (Singgih, 2004:12). The test is held by comparing product moment
correlation (R-count) with R-table. The criteria are:
a. If the R-count > R-table then the item is valid question.
b. If the R-count<R-table the item in the question is invalid and eliminated.
Furthermore, the valid questions from all variables have a reliability testing.
Reliability test is aims to determine the level of reliability of the valid question.
The tests held by using alpha cronbach’s with the following criteria:
a. If the alpha cronbach’s > 0, 5, then the items are reliable.
b. If the alpha cronbach’s < 0, 5, then the item is not reliable.
2. Classical Assumption Test

The use of regression analysis in statistics should not include classical
assumption such as normality, multicolinearity, heteroskedastisitas and auto
correlation. The classical assumption in this research is limit to the normality test,
multicolinearity test, and heteroskedastisitas test. Auto correlation test is not used
because the autocorrelation usually found in time series data (time series), while this
research has the cross section time.
a. Normality Test
The purpose of normality test is to determine whether the regression model,
have a normal distribution (Erlina and Mulyani, 2007). There are two ways that can
be used, first by looking at the histogram graph and normal probability plots. If the
data is spread around the diagonal line, the regression model fulfills the normality
assumptions, and vice versa. The second way is using Kolmogorov Smirnoff Test by
finding N-value. If the probability value exceeds 0, 05 significant level it means the
data used in this study have normal distribution. If the probability value is less than 0,
05 it means the data used in this study is not normal.
b. Multicolinearity Test
This test is to determine whether there is an independent variable that has
similarities with other independent variables. To detect the multicolinearity, it can be
seen in the VIF (Variance Inflation Factor) and the value of tolerance. Both of these
measurements is shows independence variable explained by other variable. In this
test, the regressions that don’t have multicolinearity are having a VIF less than 10.
c. Heterokedasitas Test

This test is looking at specific pattern on a scatter-plot graph. If the graph is
forming a particular pattern, then there is Heterokedasitas.
3. Hypothesis Testing
a. F-Test
F-test use if the hypothesis testing is in remains. The criteria used are:
1. If the F-count > or P-value < α then Ho is rejected and Ha accepted, in other
words the independent variables affect the dependent variable.
2. If the F-count < P-value > α then Ho is accepted and Ha rejected, in other
words the independent variables has no effect on the dependent variable.
b. T-test
The criteria are:
1. If T-count > T-table or P-value < α then Ho is rejected and Ha accepted, in
other words independent variable partially effect on the dependent variable
2. If T-count < or P-value > α then Ho is accepted and Ha rejected, in other
words, the independent variable is not partially effect the dependent variable.
4. The coefficients of determination (R ) 2
This is to measure the percent (%) of dependent variable that explained by the
independent variable. The percentage for the determination (R ) is between 0 and 1
2
(Sugiyono, 2005:185)
D. Discussion
The method for analyzing data and test hypothesis in this research is simple
linear regression model. In this case, the dependent variable is entrepreneurship and
the independent variable is the market opportunities. Based on the results using
simple linear regression models with SPSS for Windows 17.00 obtained an output as
described in Table 3:
Table 3
Simple Regression Linear Results
Coefficients ’
Unstandardized Coefficients Standardized Coefficients

Model B Std. Error Beta t Sig.
1 (Constant) 7.622 1.713 4.449 .000
PeluangPasar .307 .155 .275 1.982 .053
a. Dependent Variable: Entrepreneurship
Source: SPSS 17
The results in the table above can also explained by the following formula:

Y = a + b1X1
Y = 7,622 + 0,307
The elaboration of formula above is:
a. Constant value (a) is positive (7,622), it is means entrepreneurship has
positive towards business franchise by 7,622
b. Market opportunities variable regression coefficients value (b1) is positive
(0,307), it is means that every RP. 1 increasing in market opportunity will
increase market opportunities by RP. 0,307 with assumption the others
variable remain still.
To prove the results of the research there is hypothesis result as follows:
a. F-test
This is to determine whether the independent variables together affecting the
dependent variable. The results of data processing can be seen in Table 4:
Table 4
F-test Result
ANOVA s
Model Sum of Squares df Mean Square F Sig.

1 Regression 26.234 1 26.234 3.928 .053 a
Residual 320.586 48 6.679

Total 346.820 49
a. Predictors: (Constant), PeluangPasar
b. Dependent Variable: Entrepreneurship
Source: SPSS 17
So, F-count > F-table (3,928 > 1, 69), it can be concluded that there is
significant influence between entrepreneurship and market opportunities of
franchising in Riau.
b. T-test
The T-test aims to see the influence of the independent variables individually
towards the dependent variable, and also the partial test can determine the
contribution of independent variables in influencing the dependent variable.
Table 5
T-test Results
Coefficients ’
t Sig.
Model
1 (Constant) 4.449 .000

PeluangPasar 1.982 .053
a. Dependent Variable: Entrepreneurship
Source: SPSS 17
From the table 5 above obtained results of the T-test as follows: Market
opportunities variable (X1) the T-count is 1, 982 and T-table is 1,967 with 0,053
significant. It is indicate that market opportunities have significant effect towards
entrepreneurship.
c. The Coefficient Determination (R ) 2
Furthermore, to see the relationship between the dependent variable with the
independent variable it can use coefficient correlation from the data result in Table 6:
Table 6
Coefficient Determination Result
Model Summary
Durbin-Watson
Model R Square Adjusted R Square Std. Error of the Estimate
1 .766 .566 2.58435 2.412
a. Predictors: (Constant), PeluangPasar
b. Dependent Variable: Entrepreneurship
From the table 6 above, the R obtained is 0,766. It can be concluded that the
2
opportunities chance to rising or not is 76, 6%, while the remaining 23, 4% is
determined by other factors.
E. Conclusions and Suggestions

1. Conclusions
The result of the effect of entrepreneurship in achieving the franchise business
market opportunities in Pekanbaru is:
Entrepreneurship has an influence towards the franchise business market
opportunities in Pekanbaru.
2. Suggestions
It suggested for RM Sederhana get more market share opportunities of
franchising in every district in the Riau.
REFERENCES
Amit, R., Glosten, L., & Muller, E. (1993). Challenges to Theory Development in
Entrepreneurship Research. Journal 0f Management Studies, 30, 5, 815-834.

Alvarez, Laura Marques dan Albuquerque, Cristina. 2012. Entrepreneur Education
and The Development of Young People Life Comperencies and Skills.
Portugal; ACRN Journalof Entrepreneurship Perspectives.
Berson,. Y., Oreg, S., & Dvit, T (2008). CEO Values, Organizational Culture, and
Firm Outcomes, Journal of Organizational Behavior, 29,615-633.
Hisrich, R.D. & Peters. M.P. 1992. Entrepreneurship. Starting Developing and
Managing A New Entreprise. New York, Richcard D. Irwin. Inc.
Kotler, Philip (1997), Manajemen Pemasaran, Analisis, Perencanaan, Implementasi

dan Kontrol. Jakarta. PT. Prenhalindo.
Kao, J.J., 1991, The Entrepreneur, New Jersey, Prentice Hall.
Nugroho, Riant. 2009. Memahami Latar Belakang Pemikiran Entrepreneurship

Ciputra. Jakarta : PT. Elex Media Komputindo Kelompok Gramedia
Saiman Leornardus, 2009, Kewirausahaan: Teori, Praktik, dan Kasus-kasus, Jakarta,

Salemba Empat.
Sugiyono, Ibnu, 2009. Metode Penelitian Bisnis, Edisi kesebelas. Alpa Beta
Bandung.
Sugiyono, 2011. Statistika Untuk Penelitian. Alfabeta Bandung.

THE IMPACT OF CORPORATE GOVERNANCE ON INTERNET FINANCIAL
REPORTING
by
Dyah Eras Mita
Perbanas Business and Banking College – Surabaya, Indonesia
Email : 2013311078@students.perbanas.ac.id
ABSTRACT
Due to globalization and advanced technology, Corporate Governance and Internet
Financial Reporting (IFR) are increasingly important topics as more companies are
expanding globally and the economies are becoming closely interrelated. Therefore, this
study investigates the relationship between Internet Financial Reporting as dependent
variable and Corporate Governance as independent variable measured by shareholder
rights, ownership structure, audit committee, and board composition. This study is aimed to
provide new guidelines for implementing new corporate governance that leads to the
improved transparency disclosure through IFR. The scope of this study is limited to the
Indonesian Companies listed in Indonesia Stock Exchange (IDX), while the samples taken
are companies incorporated in the KOMPAS 100 index. Data used in this study are
secondary data drawn from the company’s website, website of IDX, and academic journals.
Regression analysis was employed in this study which are revealed in results sections and
interpreted in conclusions.
Keywords: Internet Financial Reporting, Corporate Governance, Transparency, Audit
Committee
Introduction
In the era of communication, internet usage is increasing so rapidly. Internet
technology is regularly claimed to facilitate greater relevance and timeliness of business
information. While, due to globalization and advanced technology, Corporate Governance
and Internet Financial Reporting (IFR) are increasingly considered as an important topics as
more corporates are expanding globally and the economies are becoming closely
interrelated.so rapidly.
The integrity of information disclosed on corporate websites has, however, been
subject to comparatively little scrutiny. This study focuses on the integrity of Internet
Financial Reporting (IFR) by reference to the adequacy of underlying corporate governance
procedures. This phenomenon can be viewed by the corporate to facilitate the disclosure
process, in particular the financial statements. Corporations use their World Wide Web
homepage as a platform to present financial data, especially annual reports, databases on
press releases and other company-specific informations.
The widespread use of the Internet as a medium of presentation has decreased
financial presentation in hard copy. This decline is already perceived Ashbaugh et al. (1999)
who in the late 19th century states that "The use of paper-based reporting began to decline".
Research regarding this phenomenon was answered by Almilia (2009), who states that the
development of an increasingly dynamic business world, make financial reporting paper-
based fast becoming less and less useful. Financial reporting in the electronic-based also
replaces in which globalization has made the evolution of the financial reporting, from paper-
based to electronic-based.
The objective of this study is to investigate corporate governance components that
related to Internet Financial Reporting. The implementation of adequate corporate
governance procedures is important given a current business reporting environment in which
the effectiveness of corporate governance is generally under the spotlight. Specifically, we
examine the impact of shareholder rights, ownership structure, audit committee, and board
composition on the Internet-based reporting.
The remainder of this paper is organized as follows: the relevant prior literature is
reviewed in the next section. The third section of the paper sets out the research question and
research method adopted. The fourth section reports the result of research. While,
conclusions are drawn in the final section based on a discussion of the research findings.
Literature Review
Paper based general purpose reports were the most substantial and frequent of direct
corporate communications between management and the majority of stakeholders. Under this
model, companies provide different users with standardized audited financial reports (Jesen
and Xiao, 2001). Within a few years, an increasingly dynamic and global business
environment has resulted in greater demands on business communications. While, increasing
political and social demands for corporate responsibility have also increased demands for
corporate information (Ashbaugh et.al., 1999; Lymer, 1999). Based on that demands, large
companies then seeking alternative, means of cost-effective communications, the large
companies have increasingly turned to the Internet since the mid-1990s.
Basically, the accounting information used in decision making by investors, so the relevance
is needed (Ashbaugh et al., 1999). Timeliness is an important component in the relevance of
financial statements, the timeliness of reporting and presentation to the public. Actually,
timeliness has been recognized as qualitative characteristics of financial statements. The
development of technology, especially the Internet, is the answer to the problems related to
timeliness of financial reports (Ezat and El-Masry, 2008). Internet Financial Reporting can be
characterized as solely another distribution channel for existing printed material, having the
ability to interact with internet technologies such as web browsers and search engines or
providing enhanced and expanded information that can not be cost effectively produced in
printed form (IASC, 1999).
In Indonesia, Indonesian Company Act 2007 which requires companies in Indonesia reported
its sustainability activities, in which companies are using internet to supplement their
traditional corporate reporting practice. On the other hand, Indonesia has no specific
regulations related to the presentation of financial statements via the internet. This raises new
issues about the comparability and reliability of the financial statements of the company
(Almilia, 2009). In fact, not all of the companies listed in Indonesia Stock Exchange
completely disclose their sustainability and financial reporting.
Since 2007, several researchers examined the relationship between Internet Financial
Reporting and Corporate Governance (CG). Prior research by Abdelsalam et al. (2007) on
companies in the London Stock Exchange showed evidence that there is a significant
negative effect between corporate ownership (major shareholding and director holding) with
Corporate Internet Reporting (CIR). The results of the study followed by Abdelsalam and

Street (2007) by linking corporate governance used by CIR timeliness, the CIR measurement
of the timeliness of reporting and presentation of financial statements via the Internet.
Recent empirical work on the association between disclosure in traditional financial reporting
and corporate governance includes Chen and Jaggi (2000) and Eng and Mak (2003). Chen
and Jaggi (2000) find a positive association between the proportion of independent non-
executive directors and the comprehensiveness of information in mandatory financial
disclosures of Hong Kong companies. Eng and Mak (2003) find that lower managerial
ownership and significant government ownership are associated with increased disclosure
and that an increase in outside directors reduces the corporate disclosures of firms listed on
the Stock Exchange of Singapore
Studies of Internet Financial Reporting began much done in some countries. Especially for
Indonesia, Almilia (2009) have tried to modify the index can be used. Starting from the
research and supported from previous studies to be tested then the relationship between
corporate governance on Internet Financial Reporting Index. The use of the index here refers
to Internet Financial Reporting Index (IFRI) developed by Almilia (2009), specifically for
companies in Indonesia.
Research Question And Methods

The primary objective of this paper is to investigate whether corporate governance
mechanisms affect a firm’s Internet financial reporting behavior, including both the content
and presentation format of Internet disclosures. Agency theory (Jensen and Meckling 1976)
provides a framework linking disclosure behavior to corporate governance. In theory, the
impact of corporate governance on voluntary disclosures may be complementary or
substitutive (Ho and Wong 2001). It is complementary when adoption of governance
mechanisms strengthens the internal control of the corporate and makes it less likely for
managers to withhold information for their own benefits, leading to improvements in
disclosure comprehensiveness and in the quality of financial statements. On the other hand, it
is substitutive when governance mechanisms reduce information asymmetry and
opportunistic behaviors in the corporate, resulting in a decrease in the need for more
monitoring and voluntary disclosure.
Researcher also tested the company's financial statement disclosure of the IFR. An early
indication of this test is the relationship between the disclosure of a company's financial
statements and Internet Financial Reporting (IFR). Accordingly, the formulations of the
problem that will be answered in this study are:
1. Is corporate governance has a positive impact on Internet Financial Reporting?
2. Is the disclosure of financial statements of companies has a positive impact on
Internet Financial Reporting?
The populations in this study are the go public companies in the Indonesia Stock Exchange.
The samples taken are companies incorporated in the Compass 100 index. Data used in this
study is the data quantitative, while sources of this study were drawn from three places: the
corporates website, the website of Indonesia Stock Exchange (IDX), and academic journals.
Of the proposed formulation of the problem, researcher create a mathematical model of
research as follows:
IFRI   0  1CG   2 SDisc  
Internet Financial Reporting Index (IFRI)

In this study, the dependent variable is IFR with built Almilia index model (2009). IFR is
composed of four components: content, timeliness, technology, and user support. Calculation
is done for IFRI by summing and weighting according the following formula:
𝑐𝑜𝑛𝑡 𝑡𝑖𝑚𝑒 𝑡𝑒𝑐ℎ 𝑢𝑠𝑒𝑟
𝐼𝐹𝑅 = ( × 40%) + ( × 20%) + ( × 20%) + ( × 20%)
44 10 11 9
Corporate Governance (CG)

Index of Corporate Governance (CG) is measured from the four components by the total
number of index shareholder rights, ownership structure, audit committee, and board
composition. Corporate Governance index calculation is done by summing and weighting
formula as follows:
𝑆𝑅𝑖𝑔ℎ𝑡𝑠 𝑂𝑠𝑡𝑟𝑢𝑐𝑡 𝐴𝑢𝑑 𝐵𝑜𝑎𝑟𝑑
𝐶𝐺 = ( × 25%) + ( × 20%) + ( × 25) + ( × 30%)
5 4 5 5
Annual Report Disclosure (Disc)

Disclosure index is measured by weighting the index number of the items used in the
research instrument Botosan (1997). The instrument used Botosan a checklist consisting of
35 items and the total index of 100%. The following formula is used:
𝐵𝑎𝑐𝑘𝐺 + 5 𝑆𝑢𝑚 + 𝑁𝑜𝑛𝐹𝑖𝑛 + 𝑃𝑟𝑜𝑗𝑒𝑐𝑡 + 𝑀𝐷𝐴
𝑆𝐷𝑖𝑠𝑐 =
35
Analysis of the data used in this study is multiple regressions, which connects
between the independent variables with the dependent variable. Initial step analysis was
conducted on the normality test, multicollinearity, and heteroscedasticity test, which is often
called the classical assumption. After the classical assumption done, the next step is
performing statistical tests and hypothesis testing.
Results and Discussion
Financial information generally disclosed in printed paper reports are now very likely
to be available for downloaded from the corporate websites. Voluntarily disclosed additional
information is also relatively easy to access on these websites. Document previously
presented in writing may now be sent electronically (email or website) if shareholders agree.
Evidently, Internet Financial Reporting is, in principle, well established and formally
recognized as a legitimate means of business communication.
This paper suggest that, in practice, Internet technologies such as hyperlinks and
multimedia, which provide the potential for substantial paradigm changes from paper based
reporting, continue to be conservatively applied to IFR. This paper suggest that preparers
continue to regard IFR as a distribution channel for existing printed material that has some
limited ability to interact with internet technologies.

This study set out to establish whether corporate governance procedures in corporate
listed in Indonesia Stock Exchange has a significantly positive impact on Internet Financial
Reporting. This study uses data companies listed on the KOMPAS 100. The amount of
sample can be processed by is 64 companies. This screening process or elimination involves
Companies without websites and the Company is included outlier.
This component consists of the IFR content (cont), timeliness (time), technology
(tech), and user support (user). Content component provides an overview of financial
statement presentation forms via the Internet, timeliness component describes the level of
updating the information presented through the company website, the technology components
describes the completeness of enhancement analysis tools that can not be provided in the
form of printed reports, while the user support components describe the improved
accessibility for investors in the company's web page due to the implementation of tools that
facilitate the use of internet financial reporting or computer skills for investors who do not
have state-of-the-art technology. Figure 1 below shows that the value of the component IFR
dominated by technology. While the value of component content, timeliness, and user
support is not too much different.
Fig. 1 Mean of IFRI components
CG assessment instrument consists of four components: shareholder rights (Srights),

which measures the power of shareholder rights, ownership structure(Ostruct), which
measures managerial ownership and institutional ownership, audit committee(Aud), which
measures the activity of the audit committee, and board composition(Board), which measures
board independence. The result shown by figure 2 indicates that the sample firm provides
impartial assessment activities in the company's CG.

Corporate Governance
0.95
0.9
0.85
0.8
0.75
0.7
0.65
Srights Ostruct Aud Board
Fig. 2 Mean of CG components

In a research instrument by Botosan (1997), the disclosure is divided into five sections:
background information (BackG) public disclosure about the company, five year summary of
historical results (5-Sum) the disclosure of financial data last five years, key non-financial
statistics (NonFin) the disclosure of non-financial data company, projected information (projct)
in the form of disclosure in corporate forecasting, and management discussion and analysis
(MDA) in the form of disclosure in the form of change analysis. Of figure 3 shows that the result
in disclosure of the annual report of MDA-dominated, because the items in the MDA component
is an obligation that must be disclosed in accordance Kep-134/BL/2006.
Fig. 2 Mean of SDisc components

The test results by using regression can be seen in Table 1 which shows that the first
hypothesis (H1) is statistically acceptable. It means that corporate governance (CG) is
significantly has a positive impact on Internet Financial Reporting (IFR). But, the second
hypothesis (H2) cannot be proven statistically. Disclosure of test results in an annual report
(SDisc), showed significantly has a negative impact on IFR.

Table 1. Hasil Uji Regresi
Test result
Coefficient Probability
Variabel Prediction
Constant 0.7374 0.0006 ***
CG H1 (+) 0.4363 0.0132 *** accepted

SDisc H2 (+) -0.2105 0.2078 * rejected
* significant at 10%; ** significant at 5%; *** significant at 1%
Conclusion
The advent of the internet as a business reporting medium initially elicited claims of
paradigm shifts in business reporting models (Spaul, 1998; Wallman, 1997). Actual changes
have been largely incremental with new technologies conservatively implemented.
Currently, disclosure on the Internet is for the most part voluntary; consequently, there
are limited assurances as to the quality of the information reported on corporate web sites. As of
the date of this study, there are no accounting disclosure regulations specifically targeting
Internet financial reporting. The Financial Accounting Standards Board’s Business Reporting
Research Project (2000) noted concerns with the quality of web financial information: “with
increased timeliness there is the potential for decreased reliability” (FASB 2000, p.3) and
“information provided on the Internet does not have the same quality of predictable
completeness” (FASB 2000, p. viii). Regulators have also expressed concern over the format in
which information is displayed on the web: “a company may inadvertently give visitors the
impression that all information provided in other web sites to which the company’s web site is
linked is afforded the same level of accuracy and reliability” (FASB 2000, p.3).
The testing result showed that the Corporate Governance (CG) has a positive impact on
Internet Financial Reporting significantly. These results are consistent with agency theory, where
the disclosure of the company via the Internet can reduce the agency problem. Indirectly, these
findings are consistent with the results of the study Abdul Salam et.al (2007), Abdelsalam and
Street (2007), Ezat and El-Masry (2008), and Kelton and Yang (2008) who also proved the
significance of CG over Internet Financial Reporting.
These results may also suggest that companies with good CG, completeness of
presentation of financial information via the website also strengthened, as a suggestion for
corporate disclosure. Although there are no mandatory rules of OJK, corporate websites remains
to be seen as a media in delivering the disclosure of information without having to be required.
The first testing result finds that companies with weak shareholder rights are more likely
to use the Internet to disclose information to existing and potential investors. More over,
companies with weak shareholder rights are also more likely to provide specific information

regarding corporate governance on their web sites. The reasonable explanation is that managers
provide additional disclosures to shareholders in response to the increase in agency costs that
result from the existence of weak shareholder rights. In addition, results shows that firms with a
greater percentage of independent directors are more likely to engage in IFR. The board
independence also increases disclosure using a voluntary dissemination tool – the Internet. This
study also finds a positive association between board independence and corporate governance
disclosures. The results suggests that board independence is effective in increasing voluntary
corporate disclosures as corporate governance and disclosure are considered necessary measures
to protect shareholders, this results provide empirical evidence to policy makers and regulators
for implementing new corporate governance requirements and Internet Financial Repoting
guidelines.
The testing result of the second hypothesis is not consistent with the predictions, that the
disclosure of financial statements has a positive impact on Internet Financial Reporting
significantly. The test results actually indicate a negative significant effect on IFRI. These results
indicate that the more disclosure in the annual report the less disclosure through the company's
website, and vice versa, fewer disclosures in the annual report the more disclosure through the
company's website. The results obtained in this test are different to what has been hypothesized.
Here are some arguments why this second hypothesis test is not appropriate:
1. The capital market in Indonesia has not been efficient. Investors often use technical
analysis than fundamental in analyzing the movements in the stock market. Along
with this, this does not provide benefits for companies to speed up the publication of
information that is fundamental, particularly annual reports.
2. Indonesia does not have specific regulations that obliged company in disclosing
financial reporting through the internet.
3. It may be possible companies in Indonesia are not too concerned with the
development of the latest technologies for presentation of corporate information.
This could be related to the cost of upgrading, website maintenance, or the use of
other technologies that are categorized as large.
4. The preparers of the financial statements and the company website designer done by
different sections. Usually for financial reporting done by the finance and accounting
section, while the design and maintenance of websites submitted to the IT
department.
This study is an exploratory investigation of the integrity of Internet Financial Reporting

by reference to the existence of Internet Financial Reporting-specific corporate governance
procedures in corporate listed in Indonesia Stock Exchange. While this study provides
information about a number of issues, it also raises questions that may be addressed through
further research. The totality of corporate governance implemented by companies could provide
further assurance on IFR integrity, in particular. Additional research on the existence of
comprehensive controls that mitigate Internet Financial Reporting risks highlighted by this study
is therefore recommended. A study of the role of external auditors from the perspective of the
external auditor is also desirable to investigate the possibility of an expectations gap with regard
to the role and responsibilities of external auditors in relation to IFR.

Attention is drawn in this study to the question of whether preparers regard IFR as a
primary or secondary source of information. This question is a part of a broader issue of what the
business reporting community wants specifically from IFR in terms of the utilization of available
technologies. The potential of IFR is well documented but the extent to which that potential
should be realized and how it should be done has comparatively received little attention.
However, even if IFR amounts to little more than replication of paper reports, it is reasonable to
expect the integrity of the information communicated to be protected from risks potentially
posed by the medium of communication. The result of this study question the integrity of the
current IFR environment given the absences of IFR knowledge at individual level and of
coherent corporate governance procedures at organizational level.
REFERENCES
Abdelsalam, O.H., Bryan S.M., and Street D.L. (2007). An examination of the
comprehensiveness of corporate internet reporting provided by london-listed companies.
Journal of International Accounting Research, 6, 2.
Abdelsalam, O.H., and Street D.L. (2007). Corporate governance and the timeliness of
corporate internet reporting by UK listed companies. Journal of International
Accounting, Auditing, and Taxation, 16, 111-13.
Abdolmohammadi, M., Harris J., and Smith K. (2002). Government financial reporting on the
internet: the potential revolutionary effects of XBRL. Journal of Government Financial
Management, 51, 2.
Almilia, L.S. (2009). Determining factors of internet financial reporting in Indonesia.
Accounting and Taxation, 1, 1.
Ashbaugh, H., Johnstone K.M., and Warfield T.D. (1999). Corporate reporting on the internet.
Accounting Horizons, 13, 3.
Accounting Horizons 13 (3), 241-257.
Badan Pengawas Pasar Modal dan Lembaga Keuangan (Bapepam-LK). KEP-134/BL/2006
tentang Kewajiban penyampaian laporan tahunan bagi emiten atau perusahaan publik.
Botosan, C.A. (1997). Disclosure Level and Cost of Equity Capital, The Accounting Review, 72,
323-349.
Bartov, E., S. Radhakrishnan, and I. Krinsky. 2000. Investor sophistication and patterns in
stock returns. The Accounting Reviews 75 (1), 43-63.
Beasley, M. 1996. An empirical analysis of the relation between the board of director
composition and financial statement fraud. The Accounting Review 71 (4), 443-465.
Chen, C. J. P., and B. Jaggi. 2000. Association between independent non-executive directors,
family control and financial disclosures in Hong Kong. Journal of Accounting and Public
Policy 19, 285-310.
Chow, C. W., and A. Wong-Boren. 1987. Voluntary financial disclosure by Mexican
corporations. The Accounting Review 62 (3), 533-541.

Debreceny, R., Gray G.L., and Rahman A. (2002). The determinants of internet financial
reporting. Journal of Accounting and Public Policy, 21, 371-394.
Eng, L. L., and Y. T. Mak. 2003. Corporate governance and voluntary disclosure. Journal of
Accounting and Public Policy 22, 325-345.
Ezat, A., and El-Masry A. (2008). The impact of corporate governance on the timeliness of
corporate internet reporting by Egyptian listed companies. Managerial Finance, 34, 12.
FASB. 2000. Business Reporting Research Project: Electronic Distribution of Business
Information. Financial Accounting Standards Board, Norwalk, CT.
Gujarati, D., (2003). Basic econometrics. New York: McGraw-Hill.
Hindi N.M., and Rich J. (2010). Financial reporting on the internet: evidence from the
Fortune 100. Management Accounting Quarterly, 11, 2.
Ho, S. S. M., and K. S. Wong. 2001. A study of the relationship between corporate governance
structures and the extent of voluntary disclosure. Journal of International Accounting,
Auditing and Taxation 10, 139-156.
Hunter S.A., and Smith L.M. (2009). Impact of internet financial reporting on emerging
markets. Journal of International Business Research, 8, 2.
Hurtt D.N., Kreuze J.G., and Langsam S.A. (2001). Using the internet for financial reporting.
Journal of Corporate Accounting and Finance, 12, 3.
Jensen, M.C., and Meckling W.H. (1976). Theory of The Firm: Managerial Behavior, Agency
Costs and Ownership Structure, Journal of Financial Economics, 3, 4, 305-360.
Jones M.J., and Xiao J.Z. (2004). Financial reporting on the internet by 2010: a concencus
view. Accounting Forum, 28, 237-263.
Kelton A.S., and Yang Y. (2008). The impact of corporate governance on the internet financial
reporting.
Journal of Accounting and Public Policy, 27, 62-87.
Kristanto, Bayu Septian. (2013). Corporate Governance, Annual Report Disclosure, And
Internet Financial Reporting. International Conference on Entreprenurship and Business
Management.
Marston C., and Polei A. (2004). Corporate reporting on the internet by German companies.
International
Journal of Accounting Information Systems, 5, 285-311.
Pendley J.A., and Rai A. (2009). Internet financial reporting: an examination of current
practice. International
Journal of Disclosure and Governance, 6, 2.
Prabowo R., and Tambotoh J.J.C. (2005). Internet financial reporting as a voluntary disclosure
practice: an empirical analysis of Indonesian manufacturing firms using order logit
regression. Jurnal Akuntansi dan Bisnis, 5, 2.
Scoot W.R. (2009). Financial accounting theory. 5th ed. Toronto: Prentice Hall

Smith B., and Pierce A. (2005). An investigation of the integrity of the internet financial
reporting. The International Journal of Digital Accounting Research, 5, 9.
The Indonesian Institute for Corporate Directorship (IICD). (2009). Research report on
Indonesian corporate governance scorecard. Jakarta: Author
Utami, A.C.W. (2009). Pengaruh kualitas website bagi investor terhadap nilai perusahaan
publik di Indonesia. Tesis Pascasarjana Ilmu Akuntansi, Universitas Indonesia: Depok.
Wagenhofer, H. (2003). Economic consequences of internet financial reporting. Schmalenbach
Business Review, 55, 262-279.
Wardhani, R. (2009). Pengaruh Proteksi Bagi Investor, Konvergensi Standar Akuntansi,
Implementasi Corporate Governance, dan Kualitas Audit Terhadap Kualitas Laba:
Analisis Lintas Negara Di Asia. Disertasi Pascasarjana Ilmu Akuntansi, Universitas
Indonesia: Depok
Xiao J.Z., Jones M.J., and Lymer A. (2005). A conceptual framework for investigating the
impact of the internet on corporate financial reporting. The International Journal of
Digital Accounting Research, 5, 10.
Xiao J.Z., Yang H., and Chow C.W. (2004). The determinants and characteristics of voluntary
internet-based disclosures by listed Chinese companies. Journal of Accounting and
Public Policy, 23, 191-225

DETERMINANTS ANALYSIS OF STOCK RETURN:EVIDENCE
FROM INDONESIAN STOCK EXCHANGE
Gatot Nazir Ahmad

Faculty of Economy State University of Jakarta
Email: gatot11510@yahoo.com
Umi Mardiyati
Faculty of Economy State University of Jakarta
Email: umi.madiyati@gmail.com
Willy Novianto Thomas

Alumnus of Faculty of Economy State University of Jakarta
Email: novihikari@yahoo.com
Abstract
This research was to examined the effect of Earning Per Share, Price Earning Ratio, and
Debt to Equity Ratio to stock return on mining sector companies in Indonesia Stock
Exchange with length period from 2005 until 2009. Panel regression was used with
common effect model as the chosen model of this study. The results show that
simultaneously; Earning Per Share, Price Earning Ratio, and Debt to Equity Ratio have
a significant relationship toward stock return. Partially; Price Earning Ratio have a
significant and positive effect toward stock return, while Earning Per Share and Debt to
Equity Ratio have no significant and positive effect toward stock return.
Key words: Stock Return, Earning Per Share, Price Earning Ratio, Debt to Equity
Ratio.

INTRODUCTION
Capital market play a role in the national economy, as a source for financing a
business and for companies to obtain funds from public investors, the proceeds from
capital market can be used for business development, expansion, additional working
capital and other. Capital markets are also a means for communities to invest in
financial instruments such as stocks, bonds, mutual funds, and others. Thus, society can
put its own funds in accordance with the characteristics of the benefits and risks of each
instrument as desired. It can be defined that the capital market is a meeting place for
those who need funds, such as companies that want to expand their business, raise new
capital, and so on, with the parties who have excess funds, the investors who want to
invest their funds hoping of gain from it.
Investors investing in the stock market are always faced with the return and risk on
the investment they have. Investment can be defined as the commitment of funds to one
or more assets that will be held over some future period (Jones, 2007: 3). The purpose
of the investment is to improve the welfare of a financial (monetary) for current and
future (Jones, 2007: 4). So the investment is an activity to place funds in one or more
assets during a certain period in the hope of gain or increase in investment income. It
shows an investment is to improve the welfare of investors.
Investors need to have some information in order to decide which stocks are worthy
of selected usually seen from the financial statements. There are two types of analysis
that can be used to find the value of the shares, that is fundamental analysis and
technical analysis. Fundamental analysis is an analysis that uses fundamental data, ie
data derived from corporate finance, it is because the data are required on fundamental
analysis are the data derived from company financial statements. While technical
analysis is an analysis that uses data from the stock market such as stock price
movements.
One of the tools for analyzing stocks is by ratio analysis. Ratio analysis is a tool
that helps to analyze the company's financial statements so that we can know the
strengths and weaknesses of a company. Financial ratios derived from financial
statements is often called the fundamental factor that used for fundamental analysis.
Many factors can affect stock returns in the stock market, but in this study will be
203
analyzed through the variable Earning Per Share (EPS), Price Equity Ratio (PER), and
the Debt to Equity Ratio (DER).
Mining sectoral price index has the highest value among the other sectoral indices.
Mining sector growth conditions are good enough to make investors could consider
mining stocks as one of their investment in capital markets. Head of Banking Research
and Regulation of Bank of Indonesia expressed acceptance of the mining sector is
estimated to rise to around Rp 16.5 trillion or about 26.9% in 2011. Positive growth rate
makes this sector became one of the alternatives in investing through the stock. Issuer's
share prices mining sector also showed an upward trend although it had decreased quite
dramatically at the end of 2008 due to the impact of global crisis. Mining sectors
affected by the global trade situation so that the global financial crisis will also impact
on this sector.
The purpose of this study was to examine the effect of Earning Per Share (EPS),
Price Earning Ratio (PER), and the Debt Equity Ratio (DER) to stock return on mining
companies in Indonesia Stock Exchange 2005-2009.
LITERATURE REVIEW
Stock Return
Stock return is usually defined as the price change between the current period with
the previous period plus other income is usually referred to as the yield from dividends.
In this study researchers only consider the stock return from capital gains which is
usually called as actual return. Below is the formula of actual return, ‘P’ is the current
price, ‘Pt-1’ is the previous price.
(Pt – Pt-1)
Actual Return =
Pt-1
Earning Per Share (EPS)
EPS is the amount of profit derived from any shares, this ratio is commonly used as
an indication of financial performance. EPS is a ratio that shows how much profits for
investors or shareholders can get per share.
204
EPS is a comparison between the revenue generated (net income) and the number
of shares outstanding. This ratio measures how large a dividend per share will be
distributed to shareholders.
EPS is one of the most statistical value frequently used when discussing the
performance of a company or stock value. This figure provides information about how
much the profits derived of common stock sharehoders for each share their owned
(Walsh, 2003: 148).
Growth in EPS provides information about the company's growth, EPS growth over
time is an important statistic information. Many corporate leaders expressed that the
growth in EPS is the main target in the annual report. EPS growth has an influence on
stock prices. Investors will be very concerned about the quality of earnings. They do not
like the erratic company's performance with low profits. High earnings quality rating
will be given on earnings that showed a steady increase and does not fluctuate (Walsh,
2003: 150).
Price Earning Ratio (PER)
PER is frequently used to value stocks. The formulas the share price divided by
EPS. The result show a number that indicates the stock price to earnings multiples. The
value of this ratio focuses on the future (Walsh, 2003: 158).
PER is the ratio of stock prices to earnings by using historical data, current data,
and estimated data. PER is an indication of how big the market is willing to pay for the
stock. Most investors are intuitively aware that the company which have high PER are
expected its earnings would grow well in the future (Jones, 2007: 278).
It appears that stocks with low PER is seen as an attractive investment. But in
reality, a high-PER stocks are typically seen as better than stocks with low PER. This is
because the market price of the stock market reflects expectations of future corporate
performance. Therefore, a high PER is seen as an indication that the company's stock
performance will be good in the future.
205
Debt to Equity Ratio (DER)
DER is one measure of corporate finance. The purpose of this ratio is to measure
the mix of funds and make comparisons among funds offered by the owners (equity)
and borrowed funds (debt) (Walsh, 2003: 118).
If this ratio is poor then the company will have a real problem in long term, one of
which can lead to bankruptcy (Walsh, 2003: 122)
The reason companies take debt in general is to increase profitability, which then
raise its stock price, thereby increasing the welfare of shareholders and to build greater
growth potential. Debt increase both profits and risks, this is the responsibility of
management to manage the right balance between them (Walsh, 2003: 123).
Wijaya (2008), examines the influence of the ratio of capital to the variable ROE,
PER, BVPS, and PTBV to return shares in telecommunications companies with a period
of years of research is the year 2007. We got the result that the relationship of all
variables with stock returns is positive and simultaneously all the variables significant
effect on stock returns, but partially no significant effect on stock returns as well as
PER. Solechan (2009), examines the influence of EPS, discretionary accruals, IOS,
BETA, Size, and DER on the stock returns of manufacturing firms BEI period 2003-
2006. Simultaneously gained a significant influence results. Partially EPS and DER
both positive and significant effect on stock returns. Nugroho (2009), examines the
influence of dams EPS ROI on stock prices of tobacco companies listed in Indonesia
Stock Exchange in 2004-2009 period with a sample size of 2 companies.
Simultaneously obtained a significant result of the influence between the ROI and EPS
with stock prices. Partially obtained the result that the EPS is positive but not significant
effect on stock prices.
Aga (2006), examined the effect of PER, IPI (Industrial Price Index) and CPI
(Consumer Price Index) to return to the Istanbul Stock Exchange (ISE), Turkey 1996-
2003 period partially with samples consisting of firms that fall into ISE National-30.
206
Obtained results that PER has positive and significant impact on stock returns in
Istanbul Stock Exchange. Yunanto and Medyawati (2009), examined the effect of ROA,
DER, BVS, and Risk of the stock returns of manufacturing firms IDX year period 2001-
2006. Simultaneously obtained results that together all of the variables no significant
effect on stock returns. DER partially negative and significant effect, while the ROA,
BVS, and Risk positive but not significant effect. Tripathi (2009), examines the
influence of market capitalization, book equity-to-market ratio, PER, and the DER on
stock returns in Indian Stock Market in 1997-2007 period with a sample of 455 firms.
Partially obtained results that PER and significant negative effect while the DER has
positive and significant.
Stefanis (2006) examined the relationship between the PER with the stock returns
on the 226 companies in the Athens Stock Exchange (ASE) in 2005-2006. Obtained
results that PER has a negative and significant impact on stock returns in the Athens
Stock Exchange (ASE). Martani and Rahfiani (2009), examines the influence of NPM,
ROE, CR, DER, tattoo, PBV, CFO / sales, and TA to the abnormal returns and adjusted
returns on manufacturing firms in 2002-2006 on the Stock Exchange. The result is the
DER has positive and insignificant. NOM, ROE, and PBV positive and significant
effect. TATTOO negative and significant effect. TA and CR negative and insignificant
effect. Sasanti and Nufuziah (2005) investigated the influence of the BEP, ROE, PER,
dividend, and deposit interest rates to fluctuations in stock prices in manufacturing
companies in 1998-2000 in the BEI. The result is the ROE and PER has a positive and
significant impact on prices, while the BEP and deposit interest rates have a positive but
not significant.
Stella (2009), examined the effect of PER, DER, ROA, and PBV on stock prices on
14 companies in category of LQ45 IDX year 2002-2006. The result is that PER has a
positive and significant influence, PBV and the DER has a negative and significant
influence, and the ROA has positive and insignificant. Somoye (2009), examines the
influence of EPS, the national gross domestic, lending interest rate and foreign
exchange rate on stock prices in the Nigerian Capital Market 2001-2007. We got the
result that the EPS and the national gross domestic positive and significant effect, while
the lending interest rate, foreign exchange rate and a significant negative effect.
Samontaray (2010), examines the influence of ROCE, EPS, DER, PER, net fixed assets,
PAT, and sales at the company's Nifty 50 Indian Stock Market in 2007-2008. The result
207
is positive and significant berpengrauh EPS, PER and DER positive but not significant
effect.
Solomon and Handi (2008), examines the influence of the financial performance of
the variables studied were EPS, PBC, CR, FL, tattoo, ROI, and ROE on stock returns of
manufacturing period 2004-2005. The result is that all variables including EPS positive
effect and no significant except FL. Astuti (2006), examines the influence of
fundamental factors, EVA, and MVA on the stock returns of manufacturing on the
Stock Exchange 2001-2003. The results for the DER is not significant and negative
effect on stock returns. AH (2007), examines the influence of fundamental factors and
systematic risk of property stock prices on the Stock Exchange, obtained the result that
the PER signifkan positive effect, while the EPS DER negative effect is not significant.
Hidayat (2009), examines the influence of financial ratios on stock returns in companies
listed on the Stock Exchange, obtained the result that the DER is not a significant
negative effect, positive EPS is not significant, significant and positive influence PER.
Based on the problems and research objectives stated previously, the hypothesis
proposed in this study are as follows:
H1: There is significant effect between the Earning Per Share (EPS) in partial response
to stock returns on mining sector companies in Indonesia Stock Exchange 2005-
2009.
H2: There is significant effect between the Price Earning Ratio (PER) in partial
response to stock returns on mining sector companies in Indonesia Stock
Exchange 2005-2009.
H3: There is significant effect between the Debt to Equiy Ratio (DER) in partial
response to stock returns on mining sector companies in Indonesia Stock
Exchange 2005-2009.
H4: There is significant influence between the EPS, PER, and DER simultaneously to
stock returns on mining sector companies listed in the Indonesia Stock Exchange
2005-2009.
RESEARCH METHODOLOGY
Populasi dan Sampel
208
The population of this study are companies belonging to the classification of the
mining sector listed in Indonesia Stock Exchange period 2005-2009. The sample is
selected by purposive sampling technique. The criteria are:
1. Mining sector companies listed on the Indonesia Stock Exchange.
2. Publish financial statements 2005-2009 periods.
Based on the above criteria the company obtained 16 samples, after going through
the outlier test there were six companies should be eliminated so that the amount was
reduced to 10 companies with a total of 50 observations.
Analysis Method
This study used regression analysis using panel data. To demonstrate the
relationship between the dependent variable (Y) with the independent variable (X), the
model is as follows:
Yit = αit + b1 X1it + b2 X2it + b2 X2it + eit
or
Rit = αit + b1 (EPS)it + b2 (PER)it + b2 (DER)it + eit
note:
Yit = stock return
eit = error term
αit = constanta
b1 s/d b5 = regession coefficient
X1it = EPS
X2it = PER
X3it = DER
RESULTS AND DICUSSION
Outlier Test
Outlier test performed to detect and eliminate data that is considered deviant and
has a value that is too high or too low (extreme) so it is not relevant to put together with
other data. The value seen from the figures on the residual standard column, the data
must lie in the interval -3 to 3, beyond that is considered deviant. From the test results
shown there are 6 companies for which data are distorted so that should be excluded
from the study data, observational data is left is 50 observations from 10 companies.
Table outlier test details in attachment.
209
Normality Test
Normality test is performed to determine whether the data are have normal
distribution or not. The results of Jarque-Bera probability value of 0.4693 which is
higher than the value α = 5% (prob.> 0.05). Thus it can be said that the data distribution
are normal.
Multicolinearity test
Multicolinearity test conducted to see the correlation between independent

variables. The data are free from multicollinearity if the correlation value below 0.8.
Multicollinearity test results can be seen in table 1, there is no correlation that have
values above 0.8 or close to 1, meaning there is no multicollinearity.
Table 1: Multicollinearity
EPS PER DER
EPS 1 -0.130604 -0.057838
PER -0.130604 1 0.021134
DER -0.057838 0.021134 1
Source: processeed by researcher
Autocorrelation Test
Autocorrelation test viewed using Breusch-Godfrey LM Test. Shown in table 2, the

results of the probability of Obs*R-squared is 0.8907 which is higher than α=5% (prob.
> 0.05). Thus the autocorrelation does not happen.
Table 2: Autocorrelation
Breusch-Godfrey Serial Correlation LM Test:
F-statistic 0.017016 Prob. F(1,45) 0.8968

Obs*R-squared 0.018900 Prob. Chi-Square(1) 0.8907
Heteroskedasticity Test
Heteroskedasticity test seen with white heteroskedacticity test. Table 3 shows the
results of White test, the probability of Obs*R-squared is 0.00 which is lower than
α=5% (prob. < 0.05). Thus, the data contain heteroskedasticity problem. Because the
data contain heteroskedasticity problem then it can not use Ordinary Least Square
210
regression method, then the treatment is to do a regression using the Generelized Least
Square regression method.
Table 3: Heteroskedasticity
Heteroskedasticity Test: White

Scaled explained SS 39.29688 Prob. Chi-Square(9) 0.0000
Panel Model Selection
Chow Test
To help determine which model is more appropriate to be used then Chow test is
conducted, test using the Chow Test is to determine the common effect model or fixed
Effective models are more suitable for use. Chow Test Test results shown in table 4.
From the table, it can be seen that the probability of Chi-Square Statistic is 0.3977
which is higher than α=5% (prob. > 0.05) so that it can be concluded that the null
hypothesis which states that the common model is more appropriate than the fixed
model effect is accepted.
Table 4: Chow Test
Effects Test Statistic d.f. Prob.
Cross-section F 0.854255 (9,37) 0.5728

Cross-section Chi-square 9.439683 9 0.3977
Breusch-Pagan, Lagrange Multipler Test (LM Test)
The next test is the Breusch-Pagan Lagrange Multipler Test or known by the LM
test, LM test was conducted to determine whether the common effect model or random
effect that is more appropriate to be used. LM Test Test results shown in table 5. From
the table, it can be seen that the probability value of Breusch-Pagan is 0.840 which is
higher than the value α=5% (prob. > 0.05) so that it can be concluded that the null
211
hypothesis which states that the common effect model is more suitable than the random
effects model is accepted. So in this study the common effect model was used.
Table 5: Breusch-Pagan LM Test

Breusch-Pagan LM test
Stat. Prob.
Breusch-Pagan 0.040710 0.840099
Honda 0.201767 0.420050
Panel Data Common Effect Regression
In accordance with the Chow Test and LM Test, the results obtained that the most
appropriate panel model to be use is the common effect model to determine how the
effect of Earning Per Share, Price Earning Ratio, and Debt to equity ratio to stock
return. Regression results in Table 5 below:
Table 6: Panel Data Regression, Common Effect GLS (cross-section weight)
Variable Coefficient Std. Error t-Statistic Prob.
C 0.014267 0.113217 0.126016 0.9003

EPS 0.000509 0.000340 1.499157 0.1407
PER 0.006244 0.002481 2.517094 0.0154
DER 0.006683 0.005821 1.148072 0.2569
Weighted Statistics
R-squared 0.248622 Mean dependent var 0.447575

Adjusted R-squared 0.199619 S.D. dependent var 1.117643
S.E. of regression 1.039238 Sum squared resid 49.68076
F-statistic 5.073609 Durbin-Watson stat 2.306910
Prob(F-statistic) 0.004055
Unweighted Statistics
R-squared 0.382887 Mean dependent var 0.507075

Sum squared resid 54.97290 Durbin-Watson stat 2.056320
212
From the table 6 the regression equation can be written:
Y = 0,014267 + 0,000509 (EPS) + 0,006244 (PER) + 0,006683 (DER)
We can see that coefficients of all independent variables is positive for Earning Per
Share (EPS), Price Earning Ratio (PER), and the Debt to Equity Ratio (DER). If there is
an increase or decrease of EPS for a single unit ‘1’ with the assumption that the PER
and DER remain constant (unchanged), it will be followed by increase or decrease in
the return of 0.000509. Similarly, the PER, if there is an increase or decrease of PER for
a single unit ‘1’ with the assumption that EPS and DER remain constant (unchanged), it
will be followed by increase or decrease in return of 0.006244. And if there is an
increase or decrease of one unit ‘1’ DER assuming EPS and PER remain constant
(unchanged), it will be followed by the increase or decrease in return of 0.006683
Partial Test (t-test)
Earning Per Share (EPS)
From the calculation shown in table 6, t-statistic probability value of Earning Per
Share (EPS) is 0.1407 which is higher than α=5% (prob. > 0.05) so that the null
hypothesis which states that there is no significant effect between the Earning Per Share
(EPS) to stock return is accepted. So in this study can be concluded that patially Earning
Per Share (EPS) had no significant effect on stock returns.
In terms of significance, the results of this study is inconsistent with research
conducted by Solechan (2009), Somoye (2009) and Samontaray (2009). However, this
study is consistent with the results of research by Solomon (2009), Nugroho (2009), and
Hidayat (2009). Although there are differences in terms of significance but the
relationship are same with all the research which is is Earning Per Share (EPS) has a
positive relationship to stock returns. These results indicate that the mining sector
investors are paying less attention to the level of profit in the investment decision
making EPS ratio has no significant effect on stock returns. Hijriah (2009) argues, the
insignificant effect of EPS to the stock price can be indicated that most investors prefer
short-term profits in the form of capital gains, and they less considering EPS. Another
possibility that cause insignificant effct of the EPS to stock return is from the
measurement data, shown in the appendix that the distribution of EPS data is not good
because the data are gathered on the left of the midpoint so that it might have an impact
to the insignificant results of the regression
213
Price Earning Ratio (PER)
From the calculation shown in table 6, t-statistic probability value of Price Earning
Ratio (PER) is 0.0154 which is lower than α=5% (prob. < 0.05) so that the null
hypothesis which states that there is no significant effect between the Price Earning
Ratio (PER) to stock return is rejected. So in this study can be concluded that partially
Price Earning Ratio (PER) have a significant effects on stock returns.
These results are consistent with previous research conducted by Sasanti (2005), Aga
(2006), Stella (2009), and the Hijriah (2009). However, the results of this study are not
consistent with research conducted by Stefanis (2006) and Tripathi (2009) which results
a significant negative effect between the Price Earning Ratio (PER) to stock return. In
addition, although there are also research that differ in terms of significance but has the
same relationship which is positive, the study was conducted by Wijaya (2008), Hidayat
(2009), and Samontaray (2010).
Price Earning Ratio (PER) has a positive and significant effect on changes in stock
return during the study period, it indicates the PER has the ability to predict stock
returns, any increase in PER result in increases in stock returns. Hijriah (2009) argues,
the existence of significant influence on stock prices PER indicates that investors assess
a company's earnings growth prospects. That is, growth of profits of a company valued
if the company's PER is higher when compared with other companies in the industry
PER of its kind. The higher the PER, then the market will reward the company's stock
will be higher so that stock prices tend to rise.
Debt to Equity Ratio (DER)
From the calculation shown in table 6, t-statistic probability value of Debt to Equity
Ratio (DER) is 0.2569 which is higher than α=5% (prob. > 0.05) so that the null
hypothesis stating that there is no significant effect of Debt to Equity Ratio (DER) to
stock return is acceptep. So in this study can be concluded that patially Debt to Equity
Ratio (DER) have no significant effect on stock returns.
214
The results of this study is inconsistent with the results from Hidayat (2009),
Solechan (2009), and Tripathi (2009). However, this study is consistent with the results
of research conducted by Setianingrum (2009), Martani (2009), and Samontaray (2010).
Any increase in Debt to Equity Ratio (DER) will be followed by a rise in stock returns,
the results indicate a positive relationship between debt and return, it also explain that
the company has not yet reached the point where the use of debt will lower the value of
the shares. The results are not significant can be indicated that the level of debt is less
noticed by investors in making investment decisions. Martani (2009) argue, positive
results indicate that companies using debt as well, debt can support the growth of profit
if the usage are good. This shows that the company has not been on condition of
financial distress and the level of debt usage has not reached the point where the debt
will lower the value of its profits. Possible causes of insignificant effect between the
DER with a stock return is might from the measurement data, shown in the appendix
that the distribution of DER data is less good because the data are gathered the right side
of the midpoint so that it might have an impact to the insignificant result of the
regression.
Simultaneous Test (F -Test)
Table 6 show F-statistic probability value is 0.004 which is smaller than α=5%
(prob. < 0.05) so that the null hypothesis stating that there was no significant effect
between the Earning Per Share (EPS), Price Earning Ratio (PER), and Debt to Equity
Ratio (DER) to stock return is rejected. So in this study can be concluded that
simultaneous Earning Per Share (EPS), Price Earning Ratio (PER), and the Debt to
Equity Ratio (DER) have significant effect toward stock returns.
Coefficient of Determination (R-squared)
To determine the percentage variation of the dependent variable that can be

explained by the independent variable, then can be seen fom R-squared value. From
Table 6, R-squared value is 0.2486. This value indicates that 24.86% variation of stock
returns can be explained by the variable Earning Per Share, Price Earning Ratio, and
Debt to Equtiy Ratio, while the rest 75.14% is explained by other variables that are not
revealed in this study.
215
CONCLUSIONS AND SUGGESTIONS
Conclusions
This study examines the influence of variables Earning Per Share (EPS), Price
Earning Ratio (PER), and the Debt to Equity Ratio (DER) to return the shares of listed
companies mining sector in Indonesia Stock Exchange. Study period was 2005 to 2009
with a total sample of 10 companies. Based on these results, it can be concluded as
follows:
1. Results showed that partially; Earning Per Share (EPS) have a positive and
insignificant effect to stock returns on mining sector companies at Indonesia Stock
Exchange 2005-2009.
2. Results showed that partially; Price Earning Ratio (PER) have a positive and
significant effect to stock returns on mining sector companies at Indonesia Stock
Exchange 2005-2009.
3. Results showed that partially; Earning Per Share (EPS) have a positive and
insignificant effect to stock returns on mining sector companies at Indonesia Stock
Exchange 2005-2009.
4. Results showed that simultaneously; Earning Per Share (EPS), Price Earning Ratio
(PER), and the Debt to Equity Ratio (DER) have significant effect to stock returns on
mining sector companies in Indonesia Stock Exchange 2005-2009.
Suggestions
The advice can be given to investors and further researchers are as follows:
1. For Investors
Investors can consider the variable Price Earning Ratio (PER) when investing in
stocks, especially mining companies because the variable Price Earning Ratio (PER)
have significant effects on stock returns.
2. For Further Researchers
216
This study is still has a lot of weakness, therefore, further research can wider the
object, not only in the mining sector but also other sectors. Researchers can also add
more variables besides Earning Per Share, Price Earning Ratio, and Debt to Equity
Ratio. Study period can also be extended by a period of years or different from the
present study, so that might have a different result from this study.
REFERENCES
Aga, Mehmed and Berna Kocaman, 2006. An Empirical Investigation of the

Relationship between Inflation, P/E Ratios and Stock Price Behaviors Using a
New Series Called Index-20 for Istanbul Stock Exchange. International Research
Journal of Finance and Economics, Issue 6, p.133-165
Astuti, Subekti Puji, 2006. Analisis Pengaruh Faktor-faktor Fundamental, EVA, dan
MVA terhadap Return Saham. Tesis Magister Manajemen. Program Pascasarjana
Universitas Diponegoro, Semarang
Hidayat, Taufik, (2009). Pengaruh Rasio Keuangan terhadap Return Saham Pada
Perusahaan yang Terdaftar di Bursa Efek Indonesia. Tesis Magister Sains Studi
Akuntansi Program Pascasarjana Universitas Sumatera Utara, Medan.
Hijriah, Almas (2007). Pengaruh Faktor Fundamental dan Risiko Sistematik terhadap
Harga Saham Properti di Bursa Efek Jakarta. Tesis Magister Sains Studi Ilmu
Manajemen. Program Pascasarjana Universitas Sumatera Utara, Medan.
Jones, Charles P., 2007. Investment: Analysis and Management. Asia : John Wiley &
Sons (Asia) Pte. Ltd.
Martani Dwi., Mulyono and Rahfiani Khairurizka, 2009. The effect of financial ratios,
firm size, and cash flow from operating activities in the interim report to the stock
return. Chinese Business Review Journal, vol.8 no.6.
Nugroho, Widyo, 2009. Analisis Pengaruh Pengembalian Investasi dan Penerimaan Per
Saham Terhadap Harga Saham (Studi Pada Perusahaan Rokok di Bursa Efek
Indonesia). Journal Business and Economics, vol.14 no.3.
Samontaray, Durga Prasad, 2010. Impact of Corporate Governance on the Stock Prices
of the Nifty 50 Broad Index Listed Companies. International Research Journal of
Finance and Economics, Issue 41, p.7-18.
Sasanti, Widya Retno dan Nurfauziah, 2005. Analisis Faktor-faktor yang Berimplikasi
terhadap Fluktuasi Harga Saham di Bursa Efek Jakarta. Jurnal Sinergi Edisi
Khusus Keuangan, hal.33.66.
Setianingrum, Roskarina (2009), Pengaruh Faktor-Faktor Fundamental dan Risiko
Sistematik terhadap Harga Saham (Studi Kasus Pada Perusahaan MAnufaktur
yang Listed di BEI). Tesis Magister Manajemen. Program Pascasarjana
Universitas Sebelas Maret, Surakarta.
Solechan, Acmad, 2009. Pengaruh Earning, Manajemen Laba, IOS, Beta, Size, dan
Rasio Hutang terhadap Return Saham Pada Perusahaan yang Go Public di BEI.
Tesis Magister Akuntansi. Program Pascasarjana Universitas Diponegoro,
Semarang
217
Somoye, Russel., Ishola Akintoye and Jimoh Oseni, 2009. Determinants of Equity
Prices in the Stock Markets. International Research Journal of Finance and
Economics, Issue 30, p.177-189.
Stefanis, Lambros, 2005. Testing The Relation Between Price-To-Earning Ratio and
Stock Returns in The Athens Stock Exchange. Social science Research Network,
SSRN-id872272
Stella, 2009. Pegaruh Price to Earning Ratio, Debt to Equity Ratio, Return On Asset,
dan Price to Book Value terhadap Harga Pasar Saham. Jurnal Binis dan akuntansi
vol.11 no.2, hlm.97-106.
Sulaiman dan Ana Handi, 2008. Pengaruh Kinerja Keuangan terhadap Return Saham
Pada Perusahaan Manufaktur di Bursa Efek Jakarta. Jurnal Penelitian dan
Pengembangan Akuntansi, vol.2 no.2.
Tripathi, Vanita, 2009. Company Fundamentals and Equiy Returns in India.
International Research Journal of Finance and Economics, Issue 29, p.188-266.
Wijaya, David, 2008. Pengaruh Rasio Modal Saham Terhadap Return Saham
Perusahaan-Perusahaan Telekomunikasi Go Public di Indonesia Periode 2007.
Jurnal Manajemen dan Kewirausahaan vol.10 no.2.
Walsh, Ciaran, 2004, Key Management Ratios, Edisi 3, Terjemahan Shalahudin Haikal,
2004, Erlangga, Jakarta. Weston, J. Fred & Thomas.
Yunanto, Muhammad dan Henny Medyawati, 2009. Studi Empiris Terhadap Faktor
Fundamental dan Teknikal yang Mempengaruhi Return Saham Pada Bursa Efek
Jakarta. Jurnal Business and Economics, vol.14 no.1
218
MEDIATION EFFECT OF ENVIRONMENTAL PERFORMANCE : THE
RELATIONS WITH GREEN INNOVATION STRATEGY AND BUSINESS
PERFORMANCE
Hariyati
Accounting Department, Universitas Negeri Surabaya
Email: aaan_har@yahoo.com
Dian Anita Nuswantoro

Email: dianuswantoro@gmail.com
Lintang Venusita
Email: lvenusita@gmail.com
Abstract
The findings of the previous research that examine the relationship among green innovation
strategy, environment performance, and business performance remain inconsistent. This
research considers the relationship between green innovation strategy and business
performance through mediation between environmental performance. The hypothesis of
this research is that green innovation strategy affects the business performance which is
mediated by environmental performance .This research is a quantitative research at the
explanatory level. The population of this research is food manufacturers in East Java. There
are 125 companies. The data was obtained through questionnaires. There are 48
questionnaires or response rate for 38%. The analysis unit is the business unit. The research
respondent is the manager of a business unit in Manufacturing Company in East Java. The
research result is proved that the environmental performance mediate partially the relation
between green innovation strategy and business performance.
Keywords: Green innovation strategy, mediation, business performance, environmental

performance.
INTRODUCTION
Companies must maximize the welfare of the owners with attention to the
environment. Maximizing the wealth of company owners can be determined to maximize
the value of the company (Brigham and Houston, 2001: 16). Increasing the value of the
company can be achieved if a company has a good business performance. Business
performance is multidimensional included non-financial performance and financial
performance. Performance measurement with a single measurement dimension can no
longer be provide a comprehensive understanding (Bhargava et al., 1994). Measurement of
performance should integrate diverse measurement (Bhargava et al., 1994; Venkatraman
and Ramunajam, 1986).

Companies are aware of environmental friendliness that is by trying to bring each
other processed food products safe for companies concerned about the image of the
company. Image of the company must be found in order to provide the best possible
security for consumers who use the processed food products. By providing security to the
consumer, then the consumer can influence the selection of food products. Besides being
able to affect consumers in terms of product selection, may also affect the marketing of its
products. Consumers prefer a product that is responsible and friendly to the environment
and are supported by the emergence of Green Consumerism, Green Product, and Green
Marketing.
Green Productivity is a strategy for simultaneously enhancing productivity and
environmental performance for overall socio-economic development that leads to sustained
improvement in the quality of human life. It is the combined application of appropriate
productivity and environmental management tools, techniques and technologies that reduce
the environmental impact of an organization's activities, products and services while
enhancing profitability and competitive advantage.
Green consumerism is global consumerism movement that began with the consumer
awareness of their rights to obtain adequate product, safe, and environmentally friendly
products. Environmentally friendly products are products that are produced through the
process and using materials that can reduce the number of environmental damage (Haryadi,
2009). Green consumerism creates a balance between the expectations of consumer
behaviour and businesses' profit motives - within the orbit of environmental protection. It is
increasingly calls upon to look at the entire life cycle of a consumer's purchases - because a
consumer does not just buys 'a' product, but also everything that went into its production,
and everything that will happen in the future as a result of that product.
According to the American Marketing Association, Green marketing is to market a
product in an environmentally friendly manner, including modifying the product, change
the production process, change the packaging and even make changes to the way of
promotion. However, Ottman (2006) proposed a slightly different concept, namely, the first
regulation on green marketing is focused on consumer benefits. This may be because when
consumers see the advantages of the purchase. They will be keen to make a purchase again.
With this concept environmental factors become a connector for the purchase. According to
the (Grant, 2007) includes intuitive green marketing, integrative, inviting, and informed.
In a green product, the product must have a higher quality, which is more related to the
environment than similar products from competing companies. Otherwise the company will
be declared a failure in the sale. Companies must provide information that is clear and open
to products that will be marketed to consumers. In addition, it should also be monitored
competitor to see if they are developing green products that match the same product, with
lower prices or lower quality (Grant, 2007).
Business performance can be accomplished when the company has a competitive
advantage by taking into account environmental factors. Relating to competitive strengths
to achieve Business performance, then there is some underlying theory. Depending on the
Theory of Industrial Organization (I/O), to achieve the performance of the organization or
company must pay attention to factors and external environment (Porter, 1996). According
to Resource Based Theory (RBT), to achieve the organization's performance is established
by factors internal environment (Barney, 1991). In the stakeholder theory states that the

company gets another entity that operates for its own sake, but must provide benefits to all
stakeholders (Ghozali and Chariri, 2007). The existence of a company is highly influenced
by the support of stakeholders in the company.
To achieve the necessary competitive advantage through innovation strategy that
fits through innovation strategy that prioritizes the environment, which is then referred to as
green innovation strategy. Green Consumerism, Green Product, and Green Marketing is
important in green innovation strategy. Environmental performance and accounting
information management systems, that will either mediate green innovation strategy with
business performance.
Some previous researches, green innovation strategy affected the business
performance. However, it should be realized, that the strategy will affect the performance
when through several aspects. The aspect was environmental performance as a part of CSR.
According to the GRI standards, environmental performance using six indicators
disclosures, namely economic aspects, environment, employment, human rights, society
and the responsibility for the product.
Improved performance is achieved through an increase in the company's operations,
such as an increase in production capacity, cost savings and continuous innovation process.
An increase in the company's operations have an impact on the earth's existence, human
and economic. This concept is called sustainability. According to Elkington (1998),
sustainability is a balance between people, planet, and profit is then known as the Triple
Bottom Line. The Company shall be responsible for the positive and negative impact of the
increase in operational activities to the economic, social and environmental.
Besides the environmental performance, which needs to be considered accounting
information management systems that is reliable. Reliable information system is a system
of information broad scope, aggregate, integration, and timelines. Business performance
depends on the interaction between management accounting information systems and
business strategies. Implementation of the strategy is in desperate need of information. The
information provided by the Management Accounting Information System is needed for
decision making. Accounting Information Systems Management needs information
technology (Abernethy and Guthrie , 1994).
The focus of the study consisted of test the mediating effect of environmental
performance to the relationship between green innovation strategy with the business
performance in the manufacturing companies engaged in food processing in East Java. The
motivation of this study were (1) Closing the gap theory and previous empirical studies on
the model of the Resource -Based theory, the model I / O and stakeholders theory by
incorporating variables as described contingency contingency theory, (2) to test whether the
variable environmental performance and accounting information management systems (as a
contingency variables) are mediation variables on the relationship between green
innovation strategy with business performance, (3) use the concept of green innovation
strategy in implementation of strategy.
RESEARCH QUESTION
The research questions in this study are:

1. Is the green innovation strategy affect the business performance?
2. Is the environmental performance mediates the relationship between green innovation
strategy with business performance?
THEORETICAL FRAMEWORK AND HYPOTHESES DEVELOPMENT

Theory I/O
Theory I/O explains that the external factor (industry) is more important than the
internal factor to achieve the competitive advantage. The main consideration of theory I/O
is competition. Power structures analysis is needed in the competition it is known as five
forces model (Porter, 1985). There are five important things in five forces model. They are :
(1) intensity of competitive rivalry, (2) threat of new entrants, (3) threat of substitute
products or services, (4) bargaining power of suppliers and (5) bargaining power of
customers.
Theory I/O explains that above average return (AAR) for the company is
determined by the characteristics outside the company. This theory focuses on the industrial
structures or external environment attractiveness which then focuses on the company
internal sources. The external factors meant in the Theory I/O are: (1) economic strength,
(2) social, cultural, demography, and environmental strength, (3) political, government, and
law strength, (4) technological strength.
The previous studied which are related to the I/O model has been conducted by
some researchers. The external environment factor plays a role in the business condition
because the environmental factors really determine the strategy which will be run (Covin
and Covin, 1990; Miller and Friesen, 1982). Ansoft (1991) and Moller and Friesen (1983)
also stated that the relation between the environment changing and the strategy planning is
very strong. It is in the numerous numbers to anticipate the inconsistent changing and
condition. Bird (1990) stated that the complexity and the changing of the environment in
the certain industry may affect the intensity of strategic planning. The research which is
conducted by Hopkins and Hopkins (1997) concluded that the strategic planning does not
affect the financial performance but the financial performance improves the strategic
planning. The previous research shows that there are various result related to the
performance achievement and Above Average Return which are expected by implementing
fit strategy.
Stakeholder Theory
Based on stakeholder theory, organizational management is expected to perform
activities that are considered important by stakeholder and report back on these activities on
the stakeholder. Stakeholder theory, explaining that the management of the organization is
expected to perform activities that are considered important by stakeholder and report back
on these activities on the stakeholder.
The term stakeholder of Gray et al definition (2001) stated that the stakeholder are:
".....stakeholder in the company that may affect or be affected by the activities of the
company, among other community stakeholder, employees, governments, suppliers, capital
markets and others. "the survival of the company depends on the support of stakeholder and
the support should be sought so that the activity of the company is to seek such support.

The more powerful stakeholder, the greater the company's business to adapt. Social
disclosure is considered as part of a dialogue between the company and stakehodernya
(Ghozali and Chariri, 2007).
Stakeholder theory states that all stakeholder have the right to be given information
about the activities of the company (such as pollution, social movements, business
companies for safety). The main purpose of the stakeholder theory is help corporate
managers understand their stakeholder environment and to manage more effectively in the
presence of relationships in their corporate environment.
The concept of stakeholder theory this helps corporate managers in increasing the
value of the impact of their activities and minimize losses for the stakeholder. The focus of
stakeholder theory lies in what happens when corporations and stakeholder carry out their
relationship.
In a moral perspective, stakeholder theory emphasizes that all stakeholder have the
right to be treated fairly by the company and that the issue of the power of stakeholder
(stakeholder power) is not directly relevant. This theory sees the company not as a
mechanism to improve financial returns stakeholder and as a vehicle for coordinating
stakeholder interests and see that management has a fiduciary relationship (lien) not only
with some stakeholder but with all stakeholder.
The stakeholder theory normative view, management should provide balanced
consideration to the interests of all stakeholder. When stakeholder have different
perceptions so that a conflict of interest, then the manager should manage the company
properly so as to achieve an optimal balance between them. Managerial perspective view in
this stakeholder theory, trying to explain when the management company intends to
achieve the expectations of certain stakeholder (in particular having strength), so that it can
be said in this view is more likely to organizational perspective. Gray et al. (1996 in
Deegan, 2004) states that the stakeholder are identified through the company's attention.
The company believes that the interplay between managers and stakeholder should be
managed in order to achieve the interests of the company that should not be restricted to the
conventional assumption that for profit only. For companies increasingly important
stakeholder, the more work done to manage the relationship. The company sees a major
element of information that can be used to manage or manipulate the stakeholder in order to
seek their approval or support and resistance and to divert their disapproval. In this context,
the concerned stakeholder to influence the management in the process of exploiting the full
potential of the organization. Because only with proper management and the maximum
over all this potential organization will be able to create value added and then push the
company's financial performance which is the orientation of the stakeholder in the
management intervenes
Contingency Theory
According to Otley (1980) prior thesis of the Contingency Theory is the absence of
organizational concept or design which can be applied universally everywhere or in every
condition effectively. An organizational design is only appropriate or fit for certain context
or condition the use of contingency theory should support the researcher to identify the
appropriate condition to design the certain organization and develop the theory which can
support it (Riyanto, 1999). The Contingency theory identifies the optimal form to control

the organization under different operating condition and try to explain the operating
procedure of controlling the organization.
Otley (1980) argues that Contingency approach can explain why accounting system
can be different with certain condition to another condition. Based on its findings, it can be
concluded that there are three concepts which affects the affectivity of the accounting
system. There are: (1) technology, organizational structures, and (3) environment.
Contingency approach in the management accounting is based on the premise that there is
none of the accounting system in universal which is always appropriate to be applied in
every organization. However, it depends on the condition or situation in that organization.
The researchers have applied the contingency approach to analyze and design the control
system especially in the management accounting system. Some of the researchers in the
management accounting examine it to find the relation between contextual variables such
as inconsistency environment, inconsistency task, organizational structures and cultures,
inconsistency strategy by using management accounting system design.
The Green Innovation Strategy

Innovation is a critical factor for the company to compete effectively in domestic
and global markets and is regarded as one of the most important components of an
organization's strategy (Davila, 2000; Hitt et al., 2001). Organizations that have a high
degree of innovation is able to develop a competitive advantage and achieve higher levels
of performance (Hurley and Hult, 1998; Davila, 2000; Weerawardena, 2003). Innovation
strategy adopted by the company should pay attention to environmental factors or the so-
called green innovation strategy. Startegy includes: Green Consumerism, Green Product,
and Green Marketing.
Green marketing is a hot topic at the moment. Everyone believes that green
marketing is a good idea and the potential for the future. Green marketing is the process of
selling products or services on the basis of the environmental advantages. Such as products
or services that are environmentally friendly by way of production or packaging. In the
study conducted by Grant (2007), green marketing is a new focus in the business, which is
a strategic marketing approach that starts to rise and the concern of many parties start late
20th century this condition requires marketers (marketers) to be more careful in decisions
involving the environment. Attention to environmental issues is characterized
implementation of international standards or better known as ISO-14000. ISO-14000 is an
environmental management system that can provide assurance to producers and consumers
that with the system apply both waste products produced, the products have been used, or
its services has been through a process that takes into account the rules or environmental
management efforts (Chandra and Cristian, 2002).
According to the (Grant, 2007) had five first green marketing are:
a. Intuitive – Making better alternative accessible and easy to grasp
b. Intergrative – Combining commerce, technology, social; effects ecology
c. Inviting – A positive choice not a hair shirt
d. Informed – Lack of knowledge is what most, distorts people behaviour
Junaedi (2005) defines, Green products (Green products) is a product that is not
harmful to humans and the environment, not wasteful of resources, does not produce
excessive waste, and does not involve cruelty to animals. Green product must consider

environmental aspects in the product life cycle so as to reduce negative impacts on nature.
The minimization efforts to encourage all parties to assume a role in technology
development towards environmentally friendly products. In the production sector, various
ways can be made to produce an environmentally friendly product that is one of them by
using the concept of sustainable green product.
The resulting product should have a higher quality, which is more related to the
environment and compared to the competition among companies. Otherwise the company
would be deemed unsuccessful in sales. Companies must provide information that is clear
and open to products that will be sold to consumers. In addition it should also be monitored
competitors to see if they are developing green products that match the same product, with
lower prices or lower quality (Grant, 2007). Characteristics of green product, according to
some researchers:
a. The product does not contain toxic (poison).
b. Products are more durable.
c. Products using raw materials from recycled materials.
d. Products using raw materials in the recycling buffer.
e. The product does not use materials that can damage the environment .
f. Using a simple packaging and provides refill products.
g. Not harmful to human and animal health.
h. Do not spend a lot of energy and other resources during the processing , use and sale.
i. Does not produce waste that is not useful due to the packaging in a short time frame.
Green Consumerism, as a continuation of global consumerism movement that starts
from consumer awareness of their rights to obtain adequate and safe product that demands
on environmentally friendly products is getting stronger. While Green Consumers have
confidence that there is a real environmental problem, the problem should be taken
seriously and addressed in a way that is active, they feel they have enough information in
their daily lives, every individual can and should contribute to save the planet from
environmental disaster scary (Grant, 2003).
Green Consumerism is defined as "The use of individual consumer preference
environtmentally less damaging to promote products and services" (Ottman, 2011). What's
interesting about this definition is that the green Consumerism arises from the
consciousness of every individual. Furthermore, the desired product is not really "green"
but enough that slightly reduced the level of damage that may occur.
Environment Performance
Environmental performance is measured results of the environmental management
system, which is linked to the control aspects of environmental aspects. According to the
company's environmental performance Suratno et al. (2006) is the company's performance
in creating a good environment. The company's environmental performance is measured by
PROPER. Measurement of environmental performance has been implemented by the
government since 2002. The program is used by the Ministry of Environment to measure
the level of compliance of companies based on legislation that berlaku.Program
digunakanuntuk also assess the performance of the company in the implementation of
various activities related to environmental management activities.

In this study, environmental performance is measured by using the GRI-G3
Guidelines. Corporate environmental disclosure is a disclosure made by the company to the
stakeholders in the form of a report environmental activities undertaken by the company.
CSR disclosure standards were developed in Indonesia using standards developed by GRI
(Global Reporting Initiatives). GRI is a non-profit organization that spearheaded economic
performance, environmentally and socially sustainable. This study used the GRI standard
for measuring corporate environmental disclosure (CED). GRI provides to all companies
with a comprehensive sustainability reporting framework that is used throughout the world
(www.globalreporting.org). List of social disclosure by using six indicators GRI standard
disclosure, namely:
1. Economic
This theme contains nine items that included company profits were distributed to
shareholders bonus, compensation of employees, government, finance activities due to
climate change and other economic related activities.
2. Environment
This theme contains 30 items which included the environmental aspects of the
production process, which included control of pollution in running business operations,
prevention and repair of environmental damage caused by the processing of natural
resources and the conversion of natural resources.
3. Employment
This theme contains 14 items which included the impact of the company's activities on
the people in the company. The activity included recruitment, training, salaries and
demands, transfer and promotion, and other.
4. Human Right
This theme contains nine items that included how much investment -related treaties
involving human rights, suppliers and contractors who uphold human rights, incidents
involving accidents or crimes against underage employees, and other activities.
5. Social
This theme contains eight items that included social activities, followed by the company,
such as activities related to health, education and the arts as well as the disclosure of
other community activities.
6. Responsibility for Products
This theme contains nine items involving qualitative aspects of a product or service,
among other uses durability, service, customer satisfaction, honesty in advertising,
clarity/completeness of the content on the packaging, and others.

RESEARCH MODEL AND MEASUREMENTS
Model
Based on theoretical foundation, a research model is developed and presented in
figure 1. The model illustrates that business performance is affected by green innovation
strategies mediated by environmental performance.
environmental
performance.
green
business
innovation
performance
strategies
Figure 1: Research model
Research Design
We designed this research as a causal study (Cooper and Emory, 1995), quantitative
research at the explanatory level. The main objective was to show empirically the
mediating effect of Environmental Performance and accounting information management
systems to the relationship between innovation strategy and financial performance. Data
were collected using questionnaires. The unit of analysis was a strategic business unit.
Respondents were managers of strategic business units in food manufacturing in the East
Java Province.

We derived the sample for this research from 125 manufacturing companies in the
East Java Province. Because there were not so many companies in the population, we
decided to send faxes and emails to all of these companies. The response rate was 38
percent.
Variable and Its Measurement

The variables in the study were classified as follows: (1) business performance was
the dependent variable; (2) green innovation strategy was the independent variable, (3)
environmental performance was mediating variable.
Business performance was described as the perception of respondents regarding the
Business conditions of the SBUs compared to previous years. To measure the Business
performance, we used financial indicators developed by Kaplan and Norton (1992),
namely: (1) improve cost structure, (2) increase asset utilization, (3) expand revenue
opportunities, (4) and enhance customer value. Likert scale from 1 to 7 was used as the
measure.

Green Innovation strategy was defined as the perception of respondents regarding
their unique ways to achieve sustainable competitive advantage and excellent performance.
To measure the innovation strategy, we used three indicators developed by Grant (2007),
namely: (1) green marketing, (2) green product, (3) green consumerism. Likert scale from 1
to 7 was used as the measure.
Environmental performance is the measurable results of the environmental
management system, which is associated with the control aspects of environmental aspects.
In this study, environmental performance is measured by using the GRI-G3 Guidelines.
Corporate environmental disclosure is a disclosure made by the company to the stakeholder
in the form of a report environmental worked on the company. CSR disclosure standards
developed in Indonesia using standards developed by GRI (Global Reporting Initiative).
This standard covers the economic, environmental, labor, human rights, social and product
responsibility. By using a 5-point Likert scale, respondents were questioned about the
company's position compared to other companies with these aspects.
ANALYSIS, RESULTS AND DISCUSSIONS

Analysis
This research focused on the mediating effect of environmental performance to green
innovation strategy-business performance relationship. The data was analyzed using the
structural equation modeling (SEM) and processed using the Partial Least Square (PLS)
WARP version 4.0 to test the hypotheses.
These two procedures were conducted to test the hypotheses. First, we tested the
direct effect of green innovation strategy to business performance. Second, if the direct
effect was significant, we continued with the second test to prove the mediating effect of
environmental accouting and management accounting information systems to green
innovation strategy-business performance relationship. Testing the mediating effect was
carried out using beta coefficient difference approach. The steps were as follows: (a) to
examine the magnitude of beta value as a measure of direct effect of independent variable
to dependent variable without involving mediating variables. (b) to examine the magnitude
of beta value as a measure of direct effect involving mediating variables, (c) to check the
effect of independent variables to mediating variables, and (d) examine the effect of
mediating variables on the dependent variable (Solimun, 2011; Hair et al., 2010; Kock,
2010, 2011, 2014).
Results
Direct Effect Test
This direct effect test was conducted to test hypothesis 1 stating that green innovation
strategy significantly affects business performance. Table 1 showed the results of validity,
reliability, and fit tests.
=== Insert Table 1 ====
Results showed that loading value of green innovation strategy (STR) and business
performance (BP) indicators were more than 0.70 with a p-value of less than 5%
(significant). This convinced that measurement of the innovation strategy and financial

performance constructs had qualified convergent validity. Convergent validity could also
be seen from the values of AVE. The AVE value of more than 0.50 means that
measurements construct has qualified convergent validity. The values of composite
reliability coefficients and Cronbach's alpha coefficients of innovation strategy and
financial performance were greater than 0.70. This showed that those variables were
reliable.
The value AVE measures colinearity problem. Results showed that the AVE values
of innovation strategy and financial performance were less than 3.3. It showed that the
model was free from vertical colinearity, lateral and common method bias. Furthermore,
the average path coefficient (APC) and the average value of R-Square (ARS) were used to
test model fit. Result showed that APC coefficient was 0.658 and significant (less than 5%).
The value of R-Square (ARS) was 0.433 and significant (less than 5%). Average value of
variance inflation factor (AVIF) was 1 (less than 5). Thus, it was concluded that goodness
of fit of the model was fulfilled
Figure 2 showed the direct effect of innovation strategy on financial performance.
Innovation significantly affected financial performance with beta value of 0.73 (p-value
less than 0.01). This means 1 variance increase in innovation strategy increase 0.73
variance in financial performance. Table 2 showed that the value of r-squared was 0.53
meaning that data variation in innovation strategy explained 53% data variation in financial
performance.
Source: Output of PLS WARP
Figure 2: Direct effect of STR-KK relationship
=== Insert Table 2 ====
In conclusion, results confirmed that green innovation strategy significantly affected

business performance. Therefore, the hypothesis 1 was supported.
Indirect Effect Test

After the goodness of fit model has been fulfilled, then the next calculation of the
estimated coefficients in the model lines Indirect Effect. Statistical test results with a full
model that can be seen in Figure 3 below:

Source: Output of PLS WARP
Figure 3: Contingency Model of STR-EP-FP
The second hypothesis of this study is the Green Innovation Strategy affects the
Business Performance (BP), which mediated the Environmental Performance (EP). The
Effect of mediation Environmental Performance (EP) to the relationship of green
innovation strategy (STR) with Business Performance (BP) are statistically at a significance
level of 5% can be seen from the following lines (figure 3):
1. Innovation strategy (IS) effect on Environmental Performance (BP) and statistically
significant at the 5% level with coefficient 0.71.
2. Environmental Performance (BP) effect on Business Performance (FP) is statistically
at a significance level of 5% with a coefficient of 0.76
Of the two pathways, the identification of the Environmental Performance (EP)
partially mediates the relationship between Green Innovation Strategy affects the Business
Performance (BP). This is because there are all significant mediation lines namely
Environmental Performance (EP) Therefore, the second hypothesis in this study proved.
Discussion
Green Innovation strategy is a strategy that focuses on process innovations that
promote the sustainable development. According to Grant (2007) include green product,

green marketing and green Consumerism. Awareness of the impact of the innovation
process makes manufacturing company in East Java more attention to its environmental
performance. Company manufacturing companies in East Java, especially in the field of
processed food in their activities pay more attention to aspects of Economics, Environment,
Employment, Human rights, Community, responsible for the product. The sixth aspect
according to the GRI environmental performance. Attention to environmental issues is
marked by the proliferation of businesses in applying international standards, or better
known as ISO-14000. ISO-14000 is an environmental management system that can provide
assurance to producers and consumers that with the system apply both waste products
produced, the products have been used, or its services has been through a process that takes
into account the rules or environmental management efforts ( Chandra and Cristian, 2002).
International Organization for Standardization (ISO) has developed a series of international
standards for Eco Labelling (ISO-14000). Eco labeling is labeling activities in the form of
symbols, attributes or other forms of a product and services. This label will provide
assurance to the consumer that the product or service that has been consumed by the
process that takes into consideration the principles of environmental management (Rudi
Haryadi, 2009).
Strategies in innovating with memorisation environmental performance will have an
impact on the information needs. This is the same as the research conducted by Bromwich
(1990) argues that the information in Information Systems Management Accounting help
companies face the challenges of a competitive market. Information management
accounting system as one product management accounting role in helping to predict the
possible consequences of various alternative measures, such as planning, control, and
decision making as well as environmental organizations.
Characteristics of the information available to the organization to be effective if it
can be used by decision makers. Research conducted by Gerloff (1991) which concluded
that the correspondence between the information needs of decision makers will improve the
quality of the decisions to be adopted, and in turn can improve the performance of the
company. The strategy adopted is also an impact on the needs of a reliable information
system including management accounting information systems. Information reliable
accounting system according Chenhall and Morris (1986) is a broad scope of information,
aggregation, timeliness, and integration. Therefore, innovation in the implementation of
strategies to determine the needs of management accounting information systems that are
reliable.
Green innovation strategy influence on business performance through the
implementation of environmental performance and accounting information management
systems. Based on the research results of environmental performance and accounting
information management systems partially mediate the relationship between Green
innovation strategy with business performance. This suggests there are still other variables
(variables contingency) that mediate the relationship between Green innovation strategy
with business performance.
CONCLUSION
Results of this research can be concluded as follows :
(1) Green Innovation strategy Significantly Affects Business performance ;

(2) Environmental Performance (EP) partially mediate between innovation strategy (IS)
with financial performance (FP) .
This research has several limitations. Including: (1) does not take into account the
life cycle of a business; (2) study presented only in manufacturing companies in the field of
food processing. For their next study should incorporate other mediating variables
considering the results of this study indicate a relationship green innovation strategy and
business performance partially mediated by environmental performance.
REFERENCES
Abernethy, M. A., and C. H. Guthrie. 1994. An empirical assessment of the “fit” between
strategy and management information system design. Accounting & Finance,
34(2), 49-66.
Ansoft, H.I 1991. Critique Henry Mintzberg. The Design School : Reconsidering the Basic
Premise of Strategies Management. Strategic Management Journal12 (6): pp.449-
461
Bird, A. 1990. A 1990 Twist On Strategic Planning. Banker’s Magazine Pp 66-69

(March-April 1990)
Chandra, H.P & Cristian, D. (2002). Analisa Sistem Manajemen Lingkungan (ISO 14000)
dan Kemungkinan Implementasinya oleh Para Kontraktor Kelas A di Surabaya.
Dimensi Vol. 4 No. 2 September 2002 pp: 77-84.
Chang, Nai-Jen. (2010). “Green Product Quality, Green Corporate image, Green
Customer Satisfaction, And Green Customer Loyalty”. African Journal of
Business Management Vol. 4 (13), October 2010.
Chamarro, A., & Miranda, F.J. (2009). “Characteristics of Research on Green Marketing”.
Journal Business, Strategy and The Environment, Vol. 18, No. 4.
Bhargava, M., C. Dubelaar, dan S. Ramaswami. 1994. Reconciling diverse measures of

performance: a conceptual framework and test of a methodology. Journal of
Business Research, 31(2), 235-246.
Barney, J.B. 1991. Firm Resources and sustained Competitive Advantage. Journal of
Management 17(1): pp. 99-120.
.
Barney, J., M. Wright, and D. J. Ketchen. 2001. The resource-based view of the firm: Ten
years after 1991. Journal of Management, 27(6), 625-641.
Bontis, N. 2002. National intellectual capital index: Intellectual capital development in the
Arab Region. Institute for Intellectual Capital Research, Ontario.

Chenhall, R. H., dan D. Morris. 1986. The impact of structure, environment, and
interdependence on the perceived usefulness of management accounting systems.
Accounting Review, 16-35.
Chong, V. K., dan K. M. Chong. 1997. Strategic choices, environmental uncertainty and
SBU performance: a note on the intervening role of management accounting
systems. Accounting and Business Research, 27(4), 268-276.
Covin, J. G., dan Covin, T. 1990. Competitive aggressiveness, environmental context, and
small firm performance. Entrepreneurship: Theory and Practice, 14(4): 35-50.
Choo, C. W., dan N. Bontis. 2002. The strategic management of intellectual capital and
organizational knowledge: Oxford University Press.
Davila, T. 2000. An empirical study on the drivers of management control systems' design
in new product development. Accounting, Organizations and Society, 25(4), 383-
409.
Edvinsson, L., dan M. Malone. 1997. Intellectual Capital: Realizing Your Company’s True
Value by Finding its Hidden Brainpower. NY: Harper Business, New York: ISBN 0-
66730-841-4.
Gerloff, E. A., N. K. Muir, dan W. D. Bodensteiner. 1991. Three components of perceived

environmental uncertainty: An exploratory analysis of the effects of aggregation.
Journal of Management, 17(4), 749-768.
Grant, John. (2007). The Green Marketing Manifesto. John Wiley & Sons, Ltd., West
Sussex, England. Journal of Business Ethics, Vol. 29.
Grant, R.M. (2003). “The Greening of Business: The Role of Green Consumerism, the
limits of Earth”. Department of Marketing, University of Southern California.
Gordon, L. A., and Narayanan, V. K. 1984. Management accounting systems, perceived

environment uncertainty and organization structure: an empirical investigation.
Accounting, Organizations and Society, 9(1):33-47.
Haryadi, R. (2009). “Pengaruh Strategi Green Marketing Terhadap Pilihan Konsumen

Melalui Pendekatan Marketing Mix”.
Hitt, M. A., R. D. Ireland, S. M. Camp, dan D. L. Sexton. 2001. Strategic

entrepreneurship: entrepreneurial strategies for wealth creation. Strategic
Management Journal, 22(6‐7), 479-491.

Hopkins dan Hopkins. 1997. “Strategic Planning – Financial Performance Relationship in
Bank ; A Causal Examination” Strategic Management Journal,Vol 18:8,pp:635-652
Hurley, R. F., dan G. T. M. Hult. 1998. Innovation, market orientation, and organizational
learning: an integration and empirical examination. The Journal of Marketing, 42-
54.
Junaedi, S.M.F. (2005). “Pengaruh Kesadaran Lingkungan pada Niat Beli Produk Hijau:
Studi Perilaku Konsumen Berwawasan Lingkungan” Benefit Jurnal Manajemen
dan Bisnis, Vol. 9, No. 2, hal. 189-201.
Kock, N. 2010. Using WarpPLS in E-collaboration Studies: An Overview of Five Main

Analysis Steps. International Journal of e-Collaboration, 6(4): 1-11.
Kock, N. 2011. Using WarpPLS in e-Collaboration Studies: Mediating Effects, Control and
Second Order Variables, and Algorithm Choices. International Journal of e-
Collaboration, 7(3): 1-13.
Kock, N. 2014. Advanced mediating effects tests, multi-group analyses, and measurement
model assessments in PLS-based SEM. International Journal of e-Collaboration,
10(1), 1-13
Miller, D., dan P. H. Friesen. 1982. Innovation in conservative and entrepreneurial firms:
two models of strategic momentum. Strategic Management Journal, 3(1), 1-25.
Nazaruddin, I. 1998. Pengaruh desentralisasi dan karakteristik informasi sistem akuntansi

manajemen terhadap kinerja manajerial. Universitas Gadjah Mada.
Otley, D. T. 1980. The contingency theory of management accounting: achievement and

prognosis. Accounting, Organizations and Society, 5(4), 413-428.
Ottman, J.A., et al. (2006). ”Green Marketing Myopia: Ways to Improve Consumer Appeal
for Environmentally Preferable Products”. Environment Volume 48, Number 5 pp
22-36 Heldref Publications, 2006.
Ottman, J.A., et al. (2011). “Green Marketing: Challenges and Opportunities For The New
Marketing Age”. NTC Business Books, Lincolnwood.
Porter, M. E. 1985. Competitive Advantage :Creating and Sustaining superior performance.

New York : Free Press
Riyanto, B. 1999. Identifikasi Isu Penelitian Akuntansi Manajemen: Pendekatan

Kontinjensi. Media Akuntansi.

Shapiro A, Katherine Sierra, and Nathan Hultman (2012), Innovation and Technology for
Green Growth. The 2012 Brookings Blum Roundtable Policy Briefs.
Teece, D. J., Pisano, G ., dan Shuen, A. 1997. Dynamic capabilities and strategic
management. Strategic Management journal 18(7), 509-533
Terziovski, M. 2002. Achieving performance excellence through an integrated strategy of

radical innovation and continuous improvement. Measuring Business Excellence,
6(2), 5-14.
Venkatraman, N., dan V. Ramanujam. 1987. Measurement of business economic

performance: an examination of method convergence. Journal of Management,
13(1), 109-122.
Weerawardena, J. 2003. The role of marketing capability in innovation-based competitive

strategy. Journal of Strategic Marketing, 11(1), 15-35.

MODEL OF EMPLOYEE SATISFACTION : An Empirical
Study at Karo District Government
Hendri Sembiring1
Haris Madiistriyatno2
1
The Lecturer of Sekolah Tinggi Ilmu Ekonomi IBBI Medan Indonesia
2
The Associated Professor of UPI YAI Doctoral Management Science Program,
Jakarta. Indoensia
The purpose of study was to know the influence of leadership attitude,

organizational culture, work disciplin, and job satisfaction simultaneously on
employee performance.
The research used descriptive survey and explanatory survey methods.
The investigation type is causality. The unit of analisys was personal, its meant
the employee of Karo District Government in North Sumatera. The time horizon
was crossectional.
Finding in this research, leadership attitude especially leadership behavior,
organizational culture especially internal integration, work discipline especially
employee responsibility, and job satisfaction especially satisfied at own job had
positive and significant influence simultaneously at employee performance of
Karo District Government especially work quality with contribution 81%.
Key Words : leadership attitude, organizational culture, work discipline, job

satisfaction, employee performance.
INTRODUCTION
Index hdi for indonesia are still relatively low, on the level of the world
indonesia occupy basis of ranking 121 with value 0.629 figures. While in asean
indonesia is only are at a position sixth under the state singapore (figures rank: 18
, figures value: 0.895 ), and brunei darussalam (30, 0.855 ), malaysia (64 , 0.769),
thailand (103 , 0.69 ), and philippines (114 , 0.654).
Regional government performance district in the province of north
sumatera up to 2014 decline , this is shown almost 61,54 % the local government
of district in north sumatera experienced ratings lowered national of performane.
Ratings lowered national performance on 61,54 % the local government of district
in the province of north sumatera almost entirely still in status performing “high”,
except the local government of Karo District ratings lowered followed with the
decline in performance status .Decreasing performance in the local government
karo district tending to caused by the limited performance employees , this

indicated based on rjpmd karo district, the average local units in districts are not
to reach the target work that has been set.
The low the employee performance the local government of karo district
tending to is caused by the low level employee satisfaction, it is based is still a
rather high dissatisfaction employee. Discontent employees the local government
of Karo District refer to data on the average observation with regard to the
researchers on dissatisfaction with the award, discontent over the direction,
dissatisfaction with work assigned to, as well as dissatisfaction with the increase
in office / group. The low the employee performance the local government of
Karo District tending to is caused by a still less good news attitude leadership of
the leaders of the local government of Karo District.
The low attitude leadership in the local government of Karo District
indicated based on data observation that show approximately 32 % stated less
good attitude leadership as in the event the resolution always dominated by
understand unilateral off leaders without through a process coordination water,
less distinct task, communication rigid, lacking in motivate, lacking concern, and
lack of confidence over employees. The other factors that expected couse the low
performance regional government officials karo is still less good culture
organization, this indication that there are still rather high employees that reveals
the attitudes is not in accordance with values organization in run and the purpose.
The attitude of civil servants far of the value of values organization based
on data observation is there are still many employees with habit of procrastinating
works, working years much used for discussion about such matters has nothing to
do with works, the low initiative employees in working who seemed always
awaiting instructions from the boss, egoism employees in did work, the low
understanding of values organization, and most of employees limited only status
as employee not as responsibility work government officials in serving the public.
Factors the awareness of discipline expected also as the other factors that causes
the performance employees in the local government of Karo District, this
indicated still relatively high absence rate and the employees.
And the absence of civil servants was recorded high in the local
government of karo district seen from data of employment karo district , up to
2014 the average per year absence ill reached 6,17 % , permission reached 7,58 %
, without welds ( alpa reached owned 8.67 % , and the reach on average 15,75 % .
LITERATURE REVIEW
Attitude of leadership is the ability possessed by a leaders in influence
and as an example for subordinate in achieving its objectives organization.Culture
organization is constituting the constellation typical of confidence, values, the
style of work, relationships distinguish one organization of another, and includes
of the properties of organization that give a certain climate.While discipline
employment was an attitude and behavior to obey ordinances organization based
on self-awareness to adjust to the ordinance organizations and prevailing social
norms.While satisfaction work is an attitude someone with their projections that
reflects it was a wonderful experience and unpleasant in his work and their hope
to experience the future.

Leaders who able to understand that this will impact the emergence of
satisfaction of work an employee ( Umam , 2010: 192 ) .This is in accordance
with the results of research conducted by Darmawati et (.2010), who performs
empirical studies on employees fise state university Yogyakarta
Arnold ( 2005: 625 ) said “that organisational culture is the distinctive

norms , beliefs , principles and ways of behaving that combine to give each
organisation its distinct character”. That cultures organization is a distinctive
norms , confidence , the principles and manner of behaving that combines to give
each character of different organisations .While hellriegel et al (2004: 365 )
declared that elements of culture and their relations in an organization create a
pattern that is part unique of the organisation. Like according to akbar, pilcher and
perrin ( 2012: 271 ) said that the system implementation performance
measurement employees in government needs change one of them is in culture of
organization.
Discipline it is important in the management, kind described by Siagian

(2009: 305 ) discipline is a management to make the members of an organization
meet certain provisions .In other words reform employees is a form of training
that seeks to improve and forming pegetahuan , the attitudes and behavior
employees so that the employees are voluntary trying to cooperatively with
employees who other and improve their performance it works .It is like unfold on
the outcome of the research of the Supartha ( 2006 ) which states that the
awareness of discipline puskesmas have had a positive impact and significant on
performance employees in puskesmas bali province .
Yukl ( 2006: 464 ) define satisfaction work as a gesture of someone with

their projections that reflects it was a wonderful experience and unpleasant in his
work and their hope to experience the future .Mangkunegara ( 2009: 117 ) define
satisfaction work that is the feeling that associated with a job involving aspects as
wage or their salary , a chance career development , relationship with other
employees , placement work , kinds of work , structure organization to an
enterprise , quality supervision while feeling that deals with him among others age
, the health condition , the ability and education .
According to a the research of the syauta et , the .( 2012 that satisfaction

work of a employees to influences the performance of the employees concerned
.While colquitt , lepine , and wesson ( 2009 ) have an opinion about satisfaction
work impact on performance .It is declared by third the experts as follows:
“satisfaction has a moderate positive effect on job performance” .
According to a research conducted by Kiswanto ( 2010 ) stated that if

leadership have had a positive impact and significant impact on of employee
performance kaltim post samarinda.While according to Akbar, Pilcher and Perrin
( 2012: 271 ) said that the system implementation performance measurement
employees in government needs change one of them is in culture
organization.And the results of the study of Supartha ( 2006 ) states that the
awareness of discipline puskesmas have had a positive impact and significant on
performance employees in puskesmas bali province. And the results of the study
of Syauta et, all( 2012 ) mentioned that pleasure work of a employees to
influences the performance of the employees concerned.
Hypothesis to research that as a while of formulation problems number 1

through no 9 , so based on the framework of the same may be prepared hypothesis
Hypothesis to research that as a while of formulation problems number 1 through
no 9 , so based on the framework of the same may be prepared hypothesis
Hypothesis 1 ( H1 ) is the attitude leadership to satisfaction work in employees the
government of Karo District. Hypothesis 2 ( H2 ) is the culture organization to
satisfaction work in employees the government of Karo District. Hypothesis 3
(H3 ) is the discipline work against satisfaction work in employees the
government of Karo District. Hypothesis 4 ( H4 ) is the attitude leadership, culture
organization and discipline simultaneous to satisfaction work in employees the
government of Karo District.
Hypothesis 5 ( H5 ) is the attitude leadership of the performance of employees the
government of Karo District. Hypothesis 6 ( H6 ) is the culture organization of the
performance of employees the government of karo District. Hypothesis 7 (H7) is
the discipline work of the performance of employees the government of Karo
District. Hypothesis 8 (H8) is the satisfaction work of the performance of
employees the government of Karo District. Hypothesis 9 ( H9 ) is the attitude
leadership, culture organization, discipline work and satisfaction simultaneous on
performance employees the government of Karo District.
METHODOLOGY
Purpose of study from the study is descriptive and verifikatif.Research

descriptive is that research aims to obtain a description of about the characteristics
of variable attitude leadership, culture organization, discipline work, satisfaction
work, and performance employees. Of the nature of research verifikatif basically
want testing the truth of a hypothesis implemented through data collection in the
field, where in this research will test influence attitude leadership, culture
organization and discipline work against satisfaction work and implications on
performance employees the government of Karo District.
Remember of the nature of this research is descriptive and verifikatif, so
research methodology used is the method descriptive survey and method
explanatory survey.Type investigation in this research was causality.Unit analysis
in this research is individual, who are staff in the neighborhood the local
government of Karo District the province of north sumatera.Time the horizon in
this research was crossectional, namely information from some of the population (
sample respondents ) collected directly from the in empirical, for the purpose of
know the opinion of some population towards an object who are being
investigated.

At this section will be conducted the testing of hypotheses of the influence of
between variables exogenous attitude of leadership ( ξ1) , culture organization (ξ 2)
and exogen variable discipline work (ξ 3 ) on variables endogenous satisfaction
work (1 ) whether partial and simultaneous all together .Results obtained by on
the lisrel 8.70 to model equation structural, in accordance with hypothesis
advanced by is:
KK = 0.25*KM + 0.21*BO + 0.34*DK, Errorvar.= 0.37 , R² = 0.63

(0.069) (0.073) (0.099) (0.080) (0.008)
3.64 2.87 3.43 6.60 86.06
Where :
KK = Work Satisfaction
KM = Leadership Attitude
BO = Organizational Culture
DK = Work Dicipline
At this section will be conducted the testing of hypotheses of the influence of

between variables exogenous attitude of leadership ( ξ1) , exogen variable culture
organization (ξ2), and variable exogenous discipline work on variables
endogenous performance employees (2) through variable endogenous
satisfaction work (1) whether partial and together .Results obtained by on the
lisrel to model equation structural , in accordance with hypothesis advanced by is:
KP = 0.41*KK + 0.042*KM + 0.40*BO + 0.18*DK, Errorvar.= 0.19 , R² = 0.81

(0.078) (0.087) (0.092) (0.091) (0.026) (0.002)
5.26 0.48 4.29 1.98 7.33 412.10
Where :
KP = Employee Performance
KK = Work Satisfaction
KM = Leadership Attitude
BO = Organizational Culture
DK = Work Dicipline
Tabel Hypotetical Result
thitung ttabel /
No Hypotesis SLF/R2 Result
/Fhitung F tabel
Leadership Attitude  Work 0.25 3.64
1 1,96 Significant
Satisfaction
Organizational Culture  Work 0.21 2.87
2 1,96 Significant
Satisfaction

thitung ttabel /
No Hypotesis SLF/R2 Result
/Fhitung F tabel
3 Work Dicipline  Work Satisfaction 0.34 3.43 1,96 Significant
Leadership Attitude, Organizational
R2=0.63 86.06
4 Culture, and Work Dicipline  3,84 Significant
Work Satisfaction
Leadership Attitude  Employee 0.04 0.48 Non
5 1,96
Performance Significant
Organizational Cuiture  Employee
0.40 4.18
6 Performance 1,96 Significant
Work Dicipline  Employee

0.34 1.98
7 Performance 1,96 Significant
Work Satisfaction  Employee

8
0.41 5.26 1,96 Significant
Performance
Leadership Attitude, Organizational

R2=0.81 412.10 3,84 Significant
9 Culture, Work Dicipline, and Work
Satisfaction  Job Perforamance
Source : LISREL 8.70
The results of testing above shows that directly variable attitude leadership
,culture organization and discipline work influential on variables satisfaction work
contributing of 63 %.Then variable attitude leadership , culture organization and
discipline work influential directly against performance variables employees
contributing of 31,52 % .But through satisfaction work , variable attitude
leadership , culture organization and discipline work impact on performance
employees increased contributing of 81 %.
Based on the results of testing and the above analysis, so the findings from the
study is that performance employees the local government of Karo District can be
increased especially on element the quality of work (Y5) if the local government
Karo District able to increase satisfaction work especially elements are satisfied
on the job itself (Y2), where satisfaction work capable of being improved through
discipline work especially element responsibility employees (X9) and supported
by good attitude leadership especially on conduct leaders (X2) and supported also
with exactly culture organization especially element integration internal (X8).
CONCLUSION
1. Satisfaction employees work the government of Karo District which were

dominated by elements are satisfied on the job itself will be able to be
increased if the government of Karo District able to increase work
discipline especially on elements responsibility of the civil servants who
supported by increasing the attitude of the leadership of especially on

elements leader behavior , as well as support is also the case with increase
their organization especially on elements internal integration.
2. The employee performance that later reflected by the quality of work will
be able to be increased if the government of Karo District able to increase
work satisfaction especially on elements are satisfied on the job itself ,
where work satisfaction employees karo district government will be able
to be increased if the government of Karo District able to increase work
discipline especially on elements responsibility of the civil servants who
supported by increasing the attitude of the leadership of especially on
elements leader behavior as well as support is also the case with increase
their organization especially on elements internal integration.
RECOMMENDATION
1. To increase satisfaction work later reflected by are satisfied on the job

itself , so the awareness of discipline who reflected by responsibility
employees to be raised with support by the attitude of leadership the good
later reflected by the conduct leader, and culture organization that
appropriate later reflected by integration internal.
2. To improve their performance employees later reflected by the quality of

work, so satisfaction work later reflected by are satisfied on the job itself
to be raised, supported by the discipline of work later reflected by
responsibility employees, culture organization that later reflected by
integration internal, and attitude leadership later reflected by the conduct
leader.
REFERENCE
Abbas, Qaisar, and Sara Yaqoob, 2009, Effect Of Leadership Development On

Employee Performance In Pakistan, Interdisciplinary Journal Of
Contemporary Research In Business, September 2013 Vol 5, No 5
Abu-Jarad, Ismael Younis, Yusof, Nor’Aini, and Nikbin, Davoud, 2010, A
Review Paper on Organizational Culture and Organizational Performance,
International Journal of Business and Social Science, Vol. 1 No. 3;
December 20, pp. 26-46
Aden R. Hanggar Kreator.2010. 100 Prinsip Sikap kepemimpinan ; Yogyakarta,
PenerbitAndi.
Adeoti, Johnson Olabode, & Lawal, Adedoyin Ishola., 2012, The Impact of
Interpersonal Factors on Quality Health Delivery in Kwara State
Government Hospitals

Akbar Rusdi, Pilcher Robyn, dan Perrin Brian, 2012, Performance Measurement
in Indonesia: The Case of Local Government. Dalam Pacific Accounting
Review, Vol. 24 No. 3, Hlm. 262-291.
Al Rasyid, Harun, 1998,
AnalisisJalurSebagaiSaranaStatistikDalamAnalisisKausal, LP3-UNPAD,
Bandung.
Ali, Molla Hosseini. 2011, A Survey on the Role of Gender Differences in
Leadership Style Selection and its leading to Organizational Crisis-
preparedness or Crisis-proneness. Journal of Peace, Gender and
Development Studies, Vol.1(2), pp. 042-047, Available Copyright © 2011
International Research Journals
Alkahtani, Ali Hussein., Abu-Jarad, Ismael,., Sulaiman, Mohamed,., and Nikbin,
Davoud, 2011. “The Impact Of Personality And Leadership Styles On
Leading Change Capability Of Malaysian Managers”, Australian Journal
of Business and Management Research, Vol.1 No.2, May-2011
Anastasia, A. &Urbina S., 1998, TesPsikologi (edisiBahasa Indonesia), Jakarta:
PT Prehalindo.
Arnold, John, 2005, Work Psychology: Understanding Human Behaviour in the
Workplace, 4th Edition, Prentice Hall
As'ad, Moh., 2008,PsikologiIndustri, Yogyakarta: Lyberty.
Awadh Alharbi Mohammad dan Alyahya Mohammad Saad., 2013, Impact of
Organizational Culture on Employee Performance, International Review of
Management and Business Research, Vol. 2, No.1, Maret : 163–175
Bachrudin, Achmad & Harapan L Tobing. 2003. Analisis Data untuk Penelitian
Survey dengan Menggunakan Lisrel
8DilengkapiContohKasus,JurusanStatistika,Bandung, FMIPA UNPAD,
Badam Pusat Statistik Republik Indonesia, http://www.bps.go.id
Bernardine, Jhon H, and Russel, Joice E, 2000, Human ResourceManagement,
Singapore: McGraw- Hill, Inc.
Brown, A. 2005. Organizational Culture. Singapore: Prentice Hall
Chipunza, Crispen, Michael O. Samuel and Tendai Mariri. 2011, Leadership style,
employee motivation and commitment: Empirical evidence from a
consolidated retail bank operating in a depressed economy. African
Journal of Business Management, Vol. 5(20), pp. 8337-8346.
Cohen, A. William, 2011, Setiap Pemimpin Harus Baca Buku Ini. Penerjemah
:AndiekKurniawan, Jakarta, Tangga Pustaka
Colquitt, Jason A, Jeffery A. Lepine., Michael J. Wesson, (2013),Organization
Behavior. Singapore: McGraw-Hill.

Daft, Richard L., 2005, The Leadership Experience, South Western: Vanderbilt
University
Danim dan Suparno, 2009.ManajemendanSikap
kepemimpinanTransformasionalKepalaSekolah, Jakarta :RinekaCipta.
Darmawan, D., 2013, Prinsip-prinsip Perilaku Organisasi, Surabaya: Pena
Semesta.
Deal, T.E., and Kennedy, A.A. 2002. “Corporate cultures: The rites and rituals of
corporate life”. London: Penguin
Djokosantoso, M. 2008. More About Beyond Leadership, Jakarta: PT. Elex Media
Komputindo.
Gomes, Faustino Cardoso. 2006. Manajemen Sumber Daya Manusia. Yogyakarta:
CV. Andi Offset.
Greenberg, Jerald dan Robert A. Baron, 2003. Behavior in Organizations, New
Jersey : Prentice Hall.
Hair et al., 2006, Multivariate Data Analysis, Fifth Edition, New Jersey: Prentice
Hall, Upper Saddle River.
Handoko T. Hani, 2010, Manajemen Personalia dan Sumber Daya Manusia,

Yogyakarta: Penerbit BPFE Universitas Gajah Mada.
Hariandja, Marihot Tua Efendi, dan Sembiring, Sentosa, 2014, Budaya Organisasi
dan Kepuasan Kerja (Studi Kasus FISIP UNPAR), Jurnal Administrasi
Bisnis (2014), Vol.10, No.1: hal. 33–63, (ISSN:0216–1249)
Hariandja, Marihot Tua Effendi, 2005. Manajemen Sumber Daya Manusia,
Jakarta, PT Gramedia Pustaka Utama.
HarrisonTrice M. 2003. Studying Organizational Culturesthrough Rites and
Ceremonials.The Academy of Management Review, Vol.9, No. 4.
Harnoto. 2002. ManajemenSumberDayaManusia, Edisikedua, Jakarta PT.

Prehallindo
Haryono, Siswoyo., 2010, Intisari Teori Sikap kepemimpinan, Jakarta. PT.
Intermedia Personalia Utama
Hasibuan, Malayu S.P, 2007, ManajemenSumberDayaManusia, (EdisiRevisi),
Jakarta: PT. BumiAksara.
Heidjrachman and Husnan, Suad, 2002. Manajemen Personalia. Yogyakarta,
Penerbit BPFE Universitas Gajah Mada.

Hellriegel, Donand John W. Slocum Jr., 2011. OrganizationalBehavior, Australia:
South-Western, Cengage Learning
Imran Amen and Elnaga Amir, 2013, The Effect of Training on Employee
Performance, European Journal of Business and Management, ISSN
2222-1905 (Paper), ISSN 2222-2839 Online), Vol.5, No.4.
Indrafachrudi, R. Soekarto, 2006. Bagaimana Memimpin yang Efektif, Bogor :
Ghalia
Ismail, Rahmah, and Abidin, Syahida Zainal, 2012, Influence of Organizational
Culture on Employee Work Behavior, International Journal of
Contemporary Business Studies, Vol: 3, No: 11. November, 2012 ISSN
2156-7506
Jöreskog, Karl G. and Dag Sörbom. 2001. LISREL 8: User's Reference Guide.
Lincolnwood, IL: Scientific Software International, Inc.
Kalloh, J. 2006. Pemimpin Antara Keberhasilan Dan Kegagalan. Jakarta : Kata
Hasta Pustaka
Kartono, K., 2005, Pemimpin dan Sikap kepemimpinan, Jakarta, PT Raja Grafindo
Persada.
Kementrian PANRB, http://www.menpan.go.id
Kiswanto, M., 2010, Pengaruh Sikap kepemimpinan Dan Komunikasi Terhadap
Kinerja Karyawan Kaltim Pos Samarinda, Jurnal Eksis, Vol.6 No.1, Maret
2010: 1267 – 1439
Kreitner, Robert, dan Angelo Kinicki, 2001. Organizational Behavior, New York
: McGraw-Hill Companies, Inc.
Larry al Mallak et.al., 2003, Culture, the built environment and healthcare
Organizational Performance, Managing Service Quality Journal, Vol 13
No 1, 2003, pp 27-38
Lewis, J., Packard, T., & Lewis, M., 2007, Management of human service
programs, 4th ed., Belmont, CA: Thompson/Brooks Cole.
Locke, E. A. 2005. The nature and causes of job satisfaction. In M.D.Dunette
(Ed.), Handbook of industrial and organizationalpsychology (p. 1297-
1349). Chicago: Rand McNally
Luthans, F., 2006, Organizational Behavior, 10th ed, New York: McGraw-Hill
Irwin
Mahmood, Fahad, Iqbal, Nadeem, and Samsaa Rasul Sahu, 2014, The Impact of
Human Resource Management Practices on Employee Performance in
Banking Industry of Pakistan, Euro-Asian Journal of Economics and
Finance, Vol 2, No 1 (2014), pp. 86-99, p-ISSN: 2310-0184, e-ISSN:
2310-4929

Malhotra, Naresh K, 2005, RisetPemasaran :PendekatanTerapan,
Terjemahanoleh : Ir. SolehRusyadiMaryam,MM, EdisiKeempat, Jilid 1
dan 2, Jakarta: PT. INDEKS.
Maman, Ukas. 2004. Manajemen. Bandung: Agini.
Mangkunegara, A.P. 2009. Manajemen Sumber Daya Manusia Perusahaan.
Bandung : PT. Remaja Rosda Karya
Masaong, Kadim & Tilomi, Arfan, 2011, Sikap kepemimpinan Berbasis Multiple
Intelligence, Bandung: Alfabeta.
Mathis, Robert L and Jackson, John H, 2006. Human Resources Management
(12thed).Mason, OH, Thomson South Western.
Milkovich, George T., and Newman, J.M., 2005, Compensation, Boston: The
McGraw-Hill Companies, Inc.
Nawawi, Hadari, 2013, Budaya Organisasi Sikap kepemimpinan Dan Kinerja,
Jakarta : Kencana Prenada Media Group.
Nawawi, Hadari, 2003, ManajemenSumberDayaManusia, Yogyakarta: UGM
Press
Nawawi, Hadari, 2005, Manajemen Sumber Daya Manusia untuk Bisnis yang
Kompetitf, Yogyakarta : Gajah Mada university Press.
Nazir, Mohammad, (2003), MetodePenelitian, CetakanKeempat, Jakarta: Ghalia
Indonesia.
Nazir, Mohammad, 2009,MetodePenelitian. Cetakan ke-7, Jakarta: Ghalia
Indonesia.
Ndraha, Taliziduhu, 2003, Kybernology, Jakarta: Rineka Cipta.
Ng’ang’a, Muya James, and Nyongesa, Wesonga Justus, 2012, The Impact of
Organisational Culture on Performance of Educational Institutions,
International Journal of Business and Social Science, Vol. 3 No. 8,
[Special Issue - April 2012]
Nimran, Umar, 2004,PerilakuOrganisasi, CetakanKetiga, CV.Citra Media,
Surabaya
O’Reilly, C. A., Chatman, J. A., & Caldwell, D. F. 2001. People and
organizational culture: a profile comparison approach to assessing person-
organization fit. Academy of Management Journal, 34 (3), 487-516
Pamungkas, Sutan, 2012, Jurus Ampuh Menjadi Pemimpin Dahsyat Dan
Fenomenal. Yogyakarta: Araska.
Patulak, Martin Effendi et, al, 2013, The Role of Organizational Commitment as
Mediator of Organizational Culture and Employees’ Competencies on

Employees’ Performances (A Study on Irrigation Area Management in
Southeast Sulawesi), Journal of Economics and Sustainable Development,
ISSN 2222-1700 (Paper) ISSN 2222-2855 (Online) Vol.4, No.5
Prasetya, A., and Kato, M., 2011, The Effect of Financial and Non Financial
Compensation to the Employee Performance, The 2nd International
Research Symposium in Service Management,Yogyakarta, Indonesia
Rahmawati, Diana, 2010, Pengaruh Pemanfaatan Teknologi Informasi Terhadap
Kualitas Pelayanan Pegawai Administrasi Dan Pengaruh Kualitas
Pelayanan Pegawai Administrasi Terhadap Kepuasan Mahasiswa Di
Lingkungan FISE UNY, Jurnal Pendidikan Akuntansi Indonesia, Vol.
VIII. No. 2 – Tahun 2010, Hlm. 18 – 32
Rivai, Veithzal, 2004, ManajemenSumberDayaManusiaUntuk Perusahaan,
Jakarta: RajaGrafindoPersada.
Rivai, Veithzal, 2009. Islamic Human Capital (Manajemen Sumber Daya Islam),
Jakarta, PT Raja Grafindo Persada.
Robbins, S.P., 2003, Teori Organisasi, Struktur, Desain, Aplikasi. Edisi 3,
Terjem. Jusuf Udaya, Penerbit Acan.
Robbins, Stephen P and Judge, Thimothy A, 2008. Perilaku Organisasi, edisi
keduabelas, Jakarta, Salemba Empat.
Robbins, Stephen P.,&Judge, Timothy A., 2009, Organizational Behavior, New
Jersey: Prentice Hall, Inc.
Sadili, Samsudin, 2006, Manajemen Sumber Daya Manusia. Bandung: CV
Pustaka Setia.
Sanusi, A., 2009, Sikap kepemimpinan Sekarang Dan Masa Depan, Bandung:
Prospect
Sastrohadiwiryo, BejoSiswanto, 2003, ManajemenTenagaKerja Indonesia, Edisi.
2, Jakarta: PT. BumiAksara
Sastrohadiwiryo, Bejo Siswanto, 2005, Manajemen Tenaga Kerja Indonesia
Pendekatan Administratif dan Operasional. Jakarta: Bumi Aksara
Schein, Edgar H. 2004.Organizational Culture and Leadership, Third Edition,
Jossey –Bass Publishers, San Francisco.
Sedarmayanti,2000,
RestrukturisasidanPemberdayaanOrganisasiUntukMenghadapiDinamikaP
erubahanLingkungan,Bandung:MandarMaju.
Sekaran, Uma, 2003 Research Method for Business, International Edition,Prentice
Hall, USA.

Sekaran, Uma, 2006, Research Methods For Business, Edisi 4, Buku 1, Jakarta:
Salemba Empat.
Sevilla, Consuelo et, Al. 1998. PengantarMetodePenelitian.Jakarta :Universitas
Indonesia Press.
Shahzad, Fakhar, 2012, Impact of Organizational Culture on Organizational
Performance: An Overview, Interdisciplinary Journal Of Contemporary
Research In Business, January 2012. Vol 3, No 9
Shahzad, Fakharet al., (2012). “Impact of Organizational Culture on
Organizational Performance: An Overview”. Interdisciplinary Journal of
Contemporary Research in Business. Vol. 3, No. 9: hh. 975-85.
Siagian, Sondang P. 2009. Manajemen Sumber Daya Manusia. Jakarta : Bumi
Aksara
Sihotang, A, 2007,ManajemenSumberDayaManusia, Jakarta
:PT.PradnyaParamita
Sugiyono, 2006, StatistikauntukPenelitian, Bandung :Alfabeta.
Suharsimi, Arikunto, 2002, Prosedur Penelitian Suatu Pendekatan Praktek,
Jakarta: Rineka Cipta.
Suharsimi, Arikunto, 2003, ManajemenPengajaran. Jakarta: RinekaCipta.
Sukmalana, Soelaiman, 2009, Manajemen Kinerja. Jakarta: PT. Intermedia
Personalia Utama
Sule, E. 2002. “Keterkaitan antara Kepuasan Kerja Karyawan dan Kepuasan
Pelanggan dengan Kinerja Perusahaan”Jurnal Akuntansi dan Manajemen
Vol.2, No.2, Yogjakarta, STIE YKPN.
Sun, Shili, 2008, Organizational Culture and Its Themes, International Journal of
Business and Management, Vol. 3, No. 12, December 2008
Sunyoto, D. 2012. Teori, Kuesioner, Dan Analisis Dan Sumber Daya Manusia.
Yogyakarta: CAPS (Centre for Academic Publishing Service).
Supartha, Wayan Gede, 2006, Pengaruh Kebijakan dan Sikap kepemimpinan
terhadap disiplin kerja dan kinerja pegawai PUSKESMAS di Provinsi
Bali, Jurnal Bisnis dan Manajemen, Vol 6 No. 2
Supranto, J. 2003Teknik Sampling, Penerbit PT. Jakarta, Rineka Cipta.
Sutiadi, H. Noermijati, danArmanuThoyib. 2003.
MotivasiKaryawandanAktivitasManajerialSikap kepemimpinan:
PengaruhnyaTerhadapKinerjaKaryawan. JurnalAplikasiManajemen. Vol.
94, hal 95

Sutikno, B.R., 2007. The Power of Empathy in Leadership, Jakarta: PT. Gramedia
Pustaka Utama.
Sutrisno, Edy, 2012, Sumber Daya Manusia. Jakarta:Kencana Prenada Media
Group.
Sutrisno, Edy. 2011. ManajemenSumberDayaManusia. Jakarta: Kencana
Suwatno dan Priansa, D., 2011, Manajemen SDM Dalam Organisasi Publik Dan
Bisnis, Bandung: Alfabeta.
Suwatno, 2001,Asas-AsasManajemenSumberDayaManusia, Bandung:
PenerbitSuci Press.
Syauta, Jack Henry, et, al., 2012, The Influence of Organizational Culture,
Organizational Commitment to Job Satisfaction and Employee
Performance (Study at Municipal Waterworks of Jayapura, Papua
Indonesia), International Journal of Business and Management Invention,
ISSN (Online): 2319 – 8028, ISSN (Print): 2319 – 801X, Volume 1, Issue
1, December. 2012, pp.69-76
Terry, George R. dan Leslie W. Rue. 2005. Prinsiples of Manajement.
Terjemahan oleh G. A. Ticoalu: Prinsip-prinsip Manajemen. Jakarta:
Bumi Aksara.
Thoha, M, 2009, Sikap kepemimpinan dalam Manajemen, Jakarta, Rajawali Pers.
Timpe A. Dale. 2002. Seri Manajemen Sumber Daya, Manusia Memotivasi
Pegawai. Jakarta: Penerbit PT Alex Media Komputindo.
_______, 2000, Seri Ilmu & Seni Manajemen Bisnis Kinerja : Alih Bhs : Cikmat
Sofyan, Jakarta: Elex Media Komputindo.
Triton PB, 2009, Mengelola Sumber Daya Manusia. Jogyakarta: Oryza
Umam, Khaerul, 2010, Perilaku Organisasi, Bandung : Pustaka Setia.
Undang-undang Nomor 32 Tahun 2004 tentang Pemerintahan Daerah Pasal 129
Undang-Undang Nomor 34 tahun 1999,Tentang Perubahan UU Nomor 8 Tahun
1974
Undang-undang Nomor 43 Tahun 1999 tentang Perubahan atas Undang-undang
Nomor 8 Tahun 1974
Undang-Undang Nomor 8 Tahun 1972 Pasal 32
Werner, A., 2007, Organisational Behaviour: A Contemporary South African
Perspective, Pretoria: Van Schaik Publishers
Wibowo, 2007. Manajemen Kinerja. Jakarta : PT. Raja Grafindo Persada.
_______, 2010, Manajemen Kinerja, Jakarta, PT Raja Grafindo Persada.

Widiati, Emilia, 2012, Pengaruh Motivasi Kerja, Disiplin Kerja Dan Budaya
Organisasi Terhadap Kinerja Pegawai Kesehatan Pada Rumah Sakit Panti
Secanti Gisting, ©Jurnal Magister Manajemen, Vol. 1 No. 1, April 2012,
pp. 109 – 142, www.ejurnal.asmi.ac.id
Wijayanto, Setyo Hari,2008, Sructural Equation Modeling denganLisrel 8.8.
Jakarta, PascaSarjanaIlmuManajemenFakultasEkonomi UI
Yukl, Garry, 2009, Sikap kepemimpinandalamOrganisasi, alihbahasaJusufUdaya,
Jakarta, Prenhallindo.

THE EFFECT OF LEADERSHIP EFFECTIVENESS, WORK ENVIRONMENT AND
TRUST ON STAFF WORK EFFECTIVENESS AT STATE UNIVERSITY OF MANADO,
INDONESIA
HENNIJ LENNIJ SUOT

Faculty of Economics, State University of Manado
ABSTRACT
Staff Work effectiveness is one of important indicators for the achievement of the organizational
goals. The lack of staff work effectiveness reflected from less creativity of the staff, team work is
not optimal, work discipline is no optimal, and the result of work is not optimal. The objective of
this research is to analyze the effect of leadership effectiveness, work environment and trust on
Staff Work Effectiveness at State University of Manado. The sample method using proportional
random sampling technique with 100 respondents and all respondents were employees of State
University of Manado. The data were collected by questioner and analyzed using multiple linier
regression. The result of this research indicated that 1) leadership effectiveness had a positive
effect on staff work effectiveness, 2) work environment had a positive effect on staff work
effectiveness, 3) trust had a positive effect on staff work effectiveness and 4) leadership
effectiveness, work environment and trust had a positive effect simultaneously on staff work
effectiveness.
Keywords: Work Effectiveness, Leadership Effectiveness, Work Environment, Trust, State

University of Manado

INTRODUCTION
Effectiveness of the work reflects the responsibilities of the job given to him can be
completed on time in accordance with a predetermined plan. It can encourage work, work
attitudes, employment diversity, recognition of work, and the realization of organizational
goals. Through the effectiveness of work will reflect the results of the work achieved, work
behavior, and the ability to work can be seen through the mastery of the work.
One of the problems faced by organization in efforts to achieve the goal is concerning
human resources is becoming a major pillar wheel at the same organization. In other words, the
achievement of organizational goals determined by the quality and effectiveness of human
resources in the organization called the employee or employees.
Low employee effectiveness is reflected in the employees lack the creativity, teamwork is
not optimal, work discipline is not optimal, and the work has not been maximized. The
effectiveness of work of employees is very important in achieving the goals and success of the
organization is not only determined by the availability of funds / money sufficient, adequate
facilities, planning and work programs are well structured, but lies in human resources as
executors.
Problems employee effectiveness is one indicator of important and decisive for the
achievement of an organization. Stefani and Lanto (1997) said that the effectiveness of the work
is how employees manage time there.
Similarly, the opinions expressed by Siagian (1991) said that: the effectiveness of the
work is complete work on at a predetermined time. It means that the task of implementing
something that is considered good or not largely depends on where the assignment if it is
completed.
One phenomenon that is found in an organization is the lack of effectiveness of the
employment. It can be seen from a form of execution of work tasks in the office, in terms of job
quality, and timeliness in settlement of a person's job typist typing a letter, which should have the
job can be completed within 5-10 minutes but settled for 20 minutes. As an archivist find the
necessary files superiors within 2 minutes had to be found, but is found within 10 minutes ..
Every organization seeks to achieve its full potential. By him, in achieving this goal, we
need an effective leader, a conducive working environment, trust, and commitment to the task. In
other words that the success of an organization in achieving its objectives depends on how a
leader effectively influence the behavior of people headed for successful cooperation.
The phenomenon is valid also at the Institute of Higher Education UNIMA where the
employee has not demonstrated the effectiveness of the Optimal, in the sense that less creative in
determining the time, the discipline of work, employees who arrive late, employees who leave
work before office hours ended, the initiative in working low and not a job well done, delaying
the completion of work and the number of jobs generated
However, in reality, as expected, on average, the presence of a maximum of 22 times but
from the observation documentary data shown on the field, the average attendance is not
maximized or only 18 times / month or (81%), which is then related to discipline, time working
visits of the effectiveness of daily work was supposed to start at 07:30 until 15:30 which should
effectively work is 8 (hours) hours, but empirically they can only work around five (5) hours /
day from 7:30, they came around 08.00 ( eight) or passing out of it at 09:00 (nine), as well as the
home should be at 15.30, there is a return at 14.15 or prematurely gone home, so the average
contribution in the work of only about seven (7) hours, less time off eating one (1) hour so that
the average contribution in the job only about six (6) hours. which supposedly is 8 (eight) hours

Of the fact that some of the above, it needs to be studied carefully, why the employee has
not shown high effectiveness but judging from the educational background, experience, length of
service, is sufficient for administrative work. Of course this can be found inside and outside the
self of each employee
From some of the realities above, then that becomes a statement of what is causing so
staff employees not or do not show the effectiveness of the work is high, then it needs to be
studied carefully, why the officers had not demonstrated the effectiveness of high employment in
the case judging from the background education, experience, tenure is sufficient for
administrative work. Of course this can be found both inside and outside of each individual
employee.
The level of employee effectiveness is influenced by many factors, among others: The
effectiveness of leadership, work environment, trust, and commitment to the task. Every
organization seeks to achieve its full potential. To achieve these objectives, we need a leader
who is able to control the organization and be able to influence people or subordinates in the
organization. In other words, the success of an organization in achieving its objectives depends
on how a leader effectively influence the behavior of people headed to succeed in working
together to achieve goals. Of the problem, the problem described above, it can be identified as
follows: Effectiveness of employees working at the State University of Manado, is still
low; leadership effectiveness is not optimal, the work environment is not
conducive, trust for employee has not been optimal, and commitment to the task has not been
maximized.
The main problem in this research concerns the effectiveness of the administrative staff
employees, by looking at the effectiveness of the leadership, work environment, and the trust, the
task, as the main variables that affect it.
The study aims to 1) analyzing the effect of leadership effectiveness on staff work
effectiveness, 2) analyzing the effect of work environment on staff work effectiveness, 3)
analyzing the effect of trust on staff work effectiveness, and 4) analyzing the effect of leadership
effectiveness, work environment, and trust simultaneously on staff work effectiveness.
LITERATURE REVIEW
Effectiveness of Leadership and Work Effectiveness
Effectiveness is a condition which implies the occurrence of the desired effect or result. If
someone does something act with specific intent that it wished then that person is said to be
effective, if the consequences or have intent as he pleases.
Someone who served as a leader to influence the behavior of others, especially
subordinates to think and act in such a way that through positive behavior he gives a real
contribution in the achievement of the organization.
A leader's actions in directing the activities of individuals and organizations to achieve
organizational goals, indicators: involve subordinates in decision making, encourages
subordinates to improve work effectiveness and job performance, directing subordinates to
achieve the goals of the organization, demonstrating confidence in the ability of subordinates,
build commitment tasks subordinates, developing a harmonious and intimate relationship with a
subordinate.
Effectiveness of the work is the performance of a person in carrying out his duty with
indicators of adherence to the rule, responsible, disciplined, able to cooperate, reliable.

Leaders with the quality of the behavior of leadership that is high in involving
subordinates to make decisions, encourages subordinates to improve work performance,
directing subordinates to achieve organizational goals in a show of confidence and commitment
to the task, will encourage subordinates carry out his duty to obey the rules, responsible, honest ,
disciplined, have initiative, can work together, and reliable. It can be concluded that the higher
the effectiveness of leadership, then increasing effectiveness. Thus it can be assumed that the
effectiveness of leadership has positive influence on the effectiveness of the work.
Work Environment and Work Effectiveness

Work environment influence the effectiveness of the work. the working environment is
part of the organizational climate that influence the effectiveness of an organization. Working
environment is often also referred to the climate of the organization which is the whole influence
in organizational life that can not be separated from the influences, both internal and external
environment for the organization as a system will always interact with their environment. The
work environment of an organization can affect the effectiveness of the work if the work
environment is seriously fun at work.
An employee or an organization working in a particular environment with the atmosphere
or the work environment that is safe, comfortable, fun, will support to work towards what the
objectives of the organization. Conversely, if a leader is not able to build a working environment
that is safe, comfortable and fun, it can be presumed that the situation is not conducive
organizations, the personal relationship between the employee and the employee will not run will
be difficult to work in teams effectively.
Good working environment, delightful with all the facilities can work to motivate all
employees to do a job willingly and wholeheartedly so that the effectiveness of the work is
increasing. Work environment directly affect the effectiveness of the work related to the
condition and quality of infrastructure, which is increasingly better, administration condition is
organized or well ordered. conditions of work that is conducive to support the working
conditions of employees further increased, so that employees are more motivated to work well,
interpersonal relationships, workers, relationship with the community around the working place
well established therefore supported by the good cooperation among employees so that no just be
easier to work but rather to an atmosphere that feels safe and comfortable in working him more
motivated employees to improve work effectiveness. Conversely, if the work environment
related to the things mentioned above, unfavorable, making employees feel insecure and
uncomfortable in the work, then it will reduce the effectiveness of employee. The more
supportive working environment, (infrastructure, administration, work, personal relationships
between workers, community relations work place), the more likely an organization can work
more effectively and efficiently. Based on that idea, it can be presumed that the work
environment has a positive influence on the effectiveness of the employment.
Trust and Work Effectiveness

Trust is an expectation of an individual that the behavior of another person or group will
be altruistic and useful for personal (personally beneficial). Some people tend to trust other
people when he believes that other people do not benefit from behavior that can not be trusted,
and if there is a certain degree of confidence in the attitude.

Confidence as an individual’s belief or faith that is common in a group of individuals that
other individual or group use its best endeavors to behave according to which there is either
implicity or explicity, be honest in any negotiations that precede the commitment, and did not
take advantage of excessive of the theory that trust is a willingness of a party to be vulnerable to
the other party under belief that the other party has the trust, competent, reliable, open, and care.
Every activity that done, if it done properly under the rules and procedures applicable,
will manifest the effectiveness of good work. Effectiveness of the work can be viewed from
various fields and faceted and multi-dimensional. Effectiveness will not be separated from its
objectives or targets to be achieved by an organization. The effectiveness of the emphasis on
attention to the suitability of the results achieved by the organization’s objectives to be achieved.
Effectiveness is an assessment of the success of tasks and responsibilities. Based on the
theoretical description that the effectiveness of the work is creative in doing the work, discipline
in performing their duties and set rules, teamwork harmonious communication, coordination
even well established, also authorized, discipline to the presence, administrative management of
well-organized and orderly, with regular duties according to the program, the utilization of
infrastructure in support of job, can provide services smoothly; Labor productivity according to
Hasik expected work achieved according to the specified target. From the description above, it
can be concluded that it is suspected that Trust directly effect positively on Work Effectiveness.
Based on theoretical studies above, then developed a model which is reflected in the
constellation frame as below:
Leadership
Effectiveness
(X1)
Work Work
Environment Effectivity
(X2) (Y)
Trust
(X3)
Figure 1. Theoretical Framework
Hypothesis
Based on theoretical studies above, it can be the research hypothesis as follows:
H1: There is an influence of leadership effectiveness on the staff work effectiveness.
H2: There is an influence of work environment on the staff work effectiveness.

H3: There is an influence of trust on the staff work effectiveness.
H4: There is an influence of leadership effectiveness, work environment, and trust
simultaneously on the staff work effectiveness.
METHODOLOGY
The research was conducted at the Central Office staff Employees State University of
Manado (UNIMA) .Unit objectives in this study were employees of the State University of
Manado (UNIMA) class III who qualified scholars that amounted to 205 employees, and they are
scattered at 17 Work Unit. By using Slovin formula is obtained sample of 102 people. To obtain
a sample unit with size 102 employees, researchers used a technique of proportional random
sampling. This is done so that the sample can be obtained from all units that are represented
proportionally.
Data were obtained using instruments in the form of a questionnaire. The instrument
derived from the research variables are: (1) the effectiveness of the leadership, (2) the work
environment, and (3) effectiveness. The scale used in this instrument is a Likert scale is an
interval scale: 5, 4, 3, 2, 1 for positive statements and 1, 2, 3, 4, 5 for negative statements.
Work Effectiveness is success in their duties and responsibilities precisely at the
appointed time and is obtained through respondents' answers on the research instruments that
include indicators are: (1) creative, (2) discipline, (3) teamwork, (4) work in accordance with
established standards.
Effectiveness of Leadership is the behavior of a person to, influencing and directing
others in carrying out the work to achieve organizational goals effectively measured using a
questionnaire that is described in the following indicators: (1) the authority and responsibility,
(2) decision making, (3) clarity duty, (4) communication, (5) trust in subordinates.
The work environment is space and facilities and atmosphere interactions pleasant and
comfortable among people who work that consists of the physical environment, and the social
environment is shown in two parts: First, the physical environment with the indicator (1) the
condition of working facilities, (2) pre means, (3) state administration. Second, the social
environment indicators: (1) workplace conditions, (2) the personal relations between workers (3)
the relationship (4) the relationship with the communities in which to work.
Employee trust is an employee votes on the actions and desires of superiors in order to
achieve organizational objectives with indicators of integrity, consistency, competence, loyalty,
and positive reciprocal openness (reciprocal).
Data analysis techniques used in order to test the hypothesis of the research is multiple
linear regression analysis. This technique is used to determine the influence of independent
variables on the dependent variable. Multiple regression analysis technique involves a dependent
variable and two or more independent variables (Maholtra, 2005).Multiple regression equation
can be expressed as follows:
Y = a + b 1 X 1 + b 2 X 2 + b 3 X 3 + ... + b k X k + e
In this study, the independent variables (X) is the leadership effectiveness (X1), the
working environment (X2), and the trust (X3) while the dependent variable (Y) is the
effectiveness of the work. Thus, the multiple regression equations used in this study can be stated
as follows:
Y=a+b1X1+b2X2+b3X3+e

Hypothesis testing is done with a confidence level of 5% with degrees of
freedom (degree of freedom) / df = (k-1) and (nk). Drawing conclusions on the results of
hypothesis testing was performed using the t test and F test with SPSS.
T test performed to show whether the independent variables (independent
variables) partial effect on the dependent variable (the dependent variable. According to Imam
Ghozali (2005), to test the hypothesis can be done by a quick look. By way of a
quick look, criteria for decision-making is if the value of t is greater than 2 (in absolute value)
then H o can be rejected at the 5% confidence level or in other words the alternative hypothesis
(Ha) is accepted.
F test performed to show whether the independent variables (independent
variables) influence simultaneously on the dependent variable (the dependent variable).
According to Imam Ghozali (2005), to test the hypothesis can be done by a quick look. By way
of a quick look, criteria for decision making is when the calculated F value is greater than 4 then
H o can be rejected at the 5% confidence level or in other words the alternative hypothesis (H a) is
accepted.

Results of multiple regression analysis using the t test and the F test shows that the
effectiveness of the work (X1), work environment (X2) and trust (X3) have significant influence
partially or simultaneously on the effectiveness of the work.
At t test obtained t value and significance probability of each independent variable
(X). The probability of each indicate a value less than 0.05. Probability smaller than 0.05
indicates that the effectiveness of leadership, work environment and trust partially affect the
effectiveness of the work. Hypothesis testing is done by using a quick look. By
using quick look, the t value of each independent variable is greater than 2, so the H1, H2 and H3
accepted. T value and significance probability of each independent variable can be seen in Table
1 below.
Table 1. t value and significance Variables
Variables t- hit Sig. Ket.
Leadership effectiveness 3,199 0,002 significant
Work environment 4,913 0,000 significant
Trust 3,349 0,001 significant
In the F test, obtained calculated F value of 46.744 with a significance probability of

0.000. Probability is much smaller than 0.05 indicates that the effectiveness of leadership (X1)
and work environment (X2) simultaneously affect the effectiveness of the work. Hypothesis
testing is done by using a quick look. By using quick look, F count = 46.744 is greater than 4, so
H3 is received. F count and the probability of significance can be seen in table 2 below.
Table 2. Value F count and Significance
F count Sig Description
46.744 0,000 significant

Influence of Leadership Effectiveness on the Effectiveness of Work
Hypothesis testing results provide empirical confirmation of the importance of leadership
effectiveness in influencing the effectiveness of the work. Logically it is understandable that the
effectiveness of leadership have a significant impact on the effectiveness of the work. Variations
work effectiveness can be explained by variations in the effectiveness of the leadership exercised
by any leader in directing and encouraging their members / employees in agencies Manado State
University. A decrease in the effectiveness of employees is partly due to less supportive
leadership effectiveness. It is understood that leadership effectiveness is an important factor
affecting the level of employee effectiveness. Each employee or subordinate require decisiveness
of leadership in implementing any decisions that have been set. Moreover clarity of tasks,
encouragement and communication as well as trust and guidance of the leadership will affect the
effectiveness of the employee. High working effectiveness marked with employees effectively
and efficiently in carrying out its work quality. Quality employment to complete the job
properly, discipline in the use of working time and work for the success of the work in achieving
its objectives.
The findings in the institution UNIMA is still there selfishness of the leaders in the
institution UNIMA. that is to say in general, should have an effective leader must be flexible and
adaptive to the task-oriented behavior, relationships and change. As said Stogdill, findings in his
research, he explained that some traits and skills Ownership increases the likelihood that a leader
would be effective, but they do not guarantee effectiveness. A leader who has certain
characteristics, can be effective in certain situations, but not effective in different situations. But
the two leaders have different characteristic patterns can be managed in the same situation. But
the reality is not one hundred percent done optimally, by the heads of the UNIMA, because
where the leadership tends to describe patterns of behavior change-oriented, especially in
improving the strategic decision; adapt to environmental changes; increase flexibility and
innovation; make major changes in the field of process; and get a commitment to change.
Results of empirical evidence, this finding suggests a variable effectiveness of leadership
is one of the most important variables and variables directly affect the effectiveness of the work.
Influence of Work Environment on the Affectiveness of Work

Hypothesis testing results provide confirmation that the work environment has an
influence on the effectiveness of the work. Thereby decreasing the effectiveness of employees
can be ascertained to be significantly reduced effectiveness implications on employment. The
effectiveness of which is reflected in the work and effectiveness in carrying out the work and
also the efficiency in carrying out and doing work that is not supported by the work environment
comfortable and fun then the effectiveness of the work will not increase. In this case the
employee can work with the maximum if supported with working facilities and conditions /
adequate organizational climate. Because the work environment is not only the physical working
environment but also the social environment. The social environment in question is the climate
or conditions of work or a pleasant working atmosphere, established cooperation between the
leadership and employees and also among employees.
Physical work environment affects one's work, which affect the environment, among
others, noise, lighting, and working conditions, including temperature and humidity, are
important factors in the work environment / working conditions. Many studies have shown
evidence that indicates that working conditions can affect the comfort of employment, health,
and performance.

Work environment, where day-to-day work activities of the employees do have an
enormous influence on their work performance. Pfefer (1998) in Prianto stated that the
environment in which work is a very big influence on the effectiveness of the work. Edvarsson
Bo and Bengt Ove Gustavsson in research they say that the quality of the work environment is a
prerequisite for success in the development of new work effectiveness. That is, there are five
requirements that must be met in service-focused organization, while from Watkin & Hubbart in
Prianto shows that the business organization, the greater the positive work climate, the greater
the net revenue that will be earned
In the organization of the working environment is also called the organizational
climate; spirit of cooperation in the sense that if the work environment improved positively or
work environment conducive to the performance of the staff of employees will increase. To
achieve high effectiveness, employees must use the time to work well in carrying out the work.
Thus these findings further confirm previous research which shows that the work
environment is one of the factors that significantly influence the effectiveness of
Results of empirical evidence, this finding indicates variable work environment is one of
the most important variables and variables directly affect the effectiveness of the work.
Influence of Trust on the Effectiveness of Work

Results of testing the third hypothesis, shows that trust directly affect positively to
organizational commitment. Thus, trust is an important variable in increasing the work
effectiveness.
Colquit, Lepine, and Wesson defines that trust is defined as the willingness to be
vulnerable to an authority based on positive expectations about the authority’s actions and
intentions. Where trust can be defined as the desire to provide the authority with ease by a
positive expectation for the acts and intent of such authority. George and Jones expressed trust is
an expression of confidence in another person on a group of people that you will not be put at
risk, harmed, or injured by their actions. Trust is an expression of confidence in the other person
or group where you will not be at risk, harmed, or injured by their actions.
Employees who believe that the organization will work quietly so as to generate optimal
effectiveness. In the sense of a positive expectation that the other party will not be through
words, actions or decisions to take the opportunity to hurt the other party. Robins and Judge also
stated that there are five dimensions of trust, such as: (1) Integrity; (2) Competency; (3)
Consistency; (4) Loyalty; and (5) Openness. Integrity, honesty and the real situation. This
dimension is most critical when someone is judging the trust of the others; competence,
including knowledge and technical skills and interpersonal relationship of individuals;
consistency, linking the reliability, predictability and good judgement of individuals in control of
situation; loyalty, is the desire to maintain and save face for others; openness is a foundation of
trust by relying on the honesty of others.
Building trust in accordance with the principles in the granting of authority in an
organization through consistency between words and actions, openness, boss actions who cares
about the welfare of subordinates, their feelings of pleasure superiors to subordinates,
subordinate to his superiors and fellow employees, and the positive response that reciprocal can
increase organizational commitment. It is clear that the trust factor in an organization becomes a
very important factor in supporting the growing effectiveness. Due to lack of confidence will
lead to a sense of responsbility, solidarity and sense of belonging of all its members. Trust will
also encourage democratic atmosphere and increase the effectiveness of the entire organization.

The results of empirical evidence, this finding indicates that trust variable is one of the
most important variables and directly affect the work effectiveness.
CONCLUSIONS AND IMPLICATIONS

Based on the results, it can be concluded as follows:
1. There is an influence of the effectiveness of leadership on effectiveness. That is an effective
leadership resulting in increased work effectiveness.
2. There is the influence of the work environment on the effectiveness of the work. That is a
conducive working environment resulting in increased work effectiveness.
3. There is the influence of the trust on the effectiveness of the work. That is a high trust
resulting in increased work effectiveness.
4. There is an influence of effectiveness of leadership, work environment, and trust
simultaneously on the effectiveness of the work. That is an effective leadership, conducive
work environment, and high trust resulting in increased work effectiveness.
Results of the study have implications as follows:
1. If it will improve employee effectiveness, it needs to be improved the effectiveness of
leadership at the State University of Manado. It means that the increase in the effectiveness of
leadership will improve the effectiveness of employees working at the State University of
Manado.
2. If it will improve the effectiveness of the employee, the work environment must be improved
at the State University of Manado. In other words that the working environment is conducive
and convenient to be able to increase the effectiveness of employees working at the State
University of Manado.
3. To improve employee effectiveness, it is necessary to build trust in the employees of Manado
State University. In other words, positive employee trust will be able to improve the
effectiveness of employees working at the Manado State University.
BIBLIOGRAPHY
Tanri Abeng, Management Professional, Jakarta: Gamedia Press, 2006.
Angelina. MO & Chan Yiong Huak, Influence of work environment on emotional health in a
health care setting, Opccupational Medicine, Vol. 54 No. 3, 2004.
Alan Lakein, How to get control of your time and life, translation Rieke Harahap, Jakarta:
Library, 2005.
Armanu Thoyib, Relationship Leadership, Culture, Strategy, and Performance: Approach
concept, Journal of Management & Entrepreneurship, 2005.
Alan H. Anderson and Dennis Barker. Effective Enterprise and Change Management. New
York: Blackwell Publishers Inc., 1996.
Anoraga Panji, labor Psychology, Jakarta; publishers; Ineka copyright 2001.
Arikunto Suharsimi, Research Procedure: A Practice Approach, Jakarta: Bhima Script 2004.
Michael Armstrong, Personnel Management Practice, London: Kogan Page, 1995
Benkhoff, "Ignoring comitment and Performance" Human Relations, 50, (6), 1997.
Hersey Blanchard, Management of Organizational Behavior, Utilizing, Human Resources Third
Edition. Prentice Hall, Inc., 1998.
Erick Berne. 1998 Managing Human Resources: Productivity, Quality of Work Life, Profit
(Singapore: McGraw-Hill international Editors). 1998.

Buchanan, (Sri Sugiarti), Synopsis Dissertation, Influence Style Leadership and Organizational
Commitment belief systems, the Jakarta State University, 2011.
Colquit Jason A., A. Lepine Jetfery a Miciraet J. Wesson, Organizational Behavior: Improving
Pertormance and Commitment in the Workplace New York: McGraw-Hill, 2009.
Michael.D, Cohen, Routine and Other Recurring Action Pattern of Organization; Contemporary
Research Isus. Industrial and Corporate Change, Vol. 5, No. 3, 2003.
David A., et al, Organizational Psychological, Prentice-Hall, Engelwood Cliffs, 1984.
Davis Mayer, RC, .. JH, and Schoorman, FD An integrative models of organizational
trust. Academy of Management Review, 1995.
Druker, 1982, The Practice of Management, Haeper and Row, New York.
Delery & Abdulla, Shaw, Organizasional Comitmen and Performance Among Guest Works and
Citizent of an Arab Country Journal of Besearch, 56, 2003.
James R. Evans, Total Qualty: Management, Organization, and strategy, Ontario: Thomson
South-Western, 2005.
Jennifer M. George and Gareth R. Jones, Understanding and Managing
Organizational Behavior. New Jersey: Pearson Education, Inc., 2005.
Organizational Behavior New Jersey. Prentice-Hall, 2002.
James L. Gibson, et. al., Organizations: Behavior, Structure, Process (New York: McGraw-Hill
/ Irwin, 2009.
Daniel Goleman, Emotional Intelligence to Achieve Peak Performance, Alex translation
Kantjono Tri Widodo, Jakarta: PT Gramedia, 1999.
Jerrold Greenberg. S, managing behavior Organization, New Jersey: Prentice
Hall, 2010.
Comprehensive Stress Management, 8 th New York: McGraw-Hill Companies Inc., 2002.
Hackett & Guinon (1987) in Sopiah, Behavior Organizational, Yogyakarta. 2008.
Handoko. T. Hani. Management, Yokyakarta; BPPE, 1984.
Hartanto Frans Mardi, paradigms New Management Indonesia; Focused on creating value with
the Policy and Human Potential, Bandung, 2009.
Hayness Marion E., Managing Performance: A Comprehensive Guide to
Effect Supervision, California: Life-Time Learning Publications, 1994.
Herbert Theodore.T., Dimension of Organization Behavior, Mac Publishing Milan in 1988.
Paul Hersey, Kenneth H. Blanchard and E. Dewey J ohnson, Management of Organizational
Behavior: Utilizing Human Resources, New Jersey: Prentice-Hall, Inc., 1996.
Hong Wayne K., Education administration theory. New York: Random House, 1982.
Jon Howard, Doing Better Job, 2001.
James Gibson, L., Ivancevich M, and James H Donnaly. Organization, translation by
Djoerhaban Wahid, Jakarta: Erland, 1987.
. Organizations: Behavior, Structure, Prose s, translated by Nunuk Adiarni with Title:
Organizational Behavior, Structure, Processes Jakarta: Binarupa Script, 1996.
Kisdarto, Towards Empowerment HR 2002.
Lunar Aan, CEPI Triatna, Visionary Leadership, Jakarta: Earth alphabet, 2006.
Kribbin James J., Leadership Strategies for Organiztional Effectiveness, AMACO, New York,
1992.
Kuengo Djafar, Influence Satisfaction Leadership Style Guru, Jakarta 2009.
Lakein Alan, How to get control of your time and life, terjemahyan Rieke Harahap, Jakarta
Library stairs.

LaPine Colquitt, and Wesson, Organizational Behavior, Improving Performance and
Commitment in the Workplace, McGraw-Hill Irwin, 2011.
Laurie J. Mullins, Management and Organizational Behavior, Portmouth, New York: Prentice-
Hall, 2005.
Ralph Lewis G. and Douglas H. Smith, Total Quality in Higher Education, Florida: ST. Lucie
Press, 1994.
Luthans, Fred Organizational Behavior (Singapore: Mc Graw-Hall Book Co. 1995
Michael.D, Cohen, Routine and Other Recurring Action Pattern of Organization; Contemporary
Research Isus. Industrial and Corporate Change, Vol. 5, No. 3, 2003.
Mathias and Jackson (2000) in Sopiah, Organizational Behavior, 2008.
Masri Singarimbun and Sofian Effendi (ed). Survey Research Methods, Jakarta: Indonesia LP3S
Library, 1995.
Steven L. McShane & Mary Ann Von Glinow. Organizational Behavior [essentiaols] 2 nd Ed,
New York: McGraw hill 2009.
Menaker Ronald and Rebecca S. Bahn, How physician perceived leadership behaviors Affects
physician satisfaction, Mayor Clinic Proccedings; Sept 2008; Pro Quest Medical
Library.
Muchinsky Paul M .. Psychology Applied to Work: An Introdustin to Industrial and
Organizational Psychology. California: Thomson Wadsworth, 2006.
Laurie J. Mullins, Management and Organization Behavior. New York: PrenticeHall 2005.
________, Organizational Behavior, New York: McGraw-Hill, 2005.
Margaret A. Neale and Gregory B. Northcraft, "Factors Influencing
Organizational Commitment," Motivation and Work Behavior, ed. 2006.
John W. Newstrom, Or John W, Organization Behavior at Work, 12 th edition, Boston: Mc Graw
Hill, 2007.
Ogbonna Emmanuel and Harris, "Leadership Style, Organizational Culture
and Performance: Empirical Evidence From UK Companies, International Journal of Human
Resource Management 11: 4 August,
Lloyd C, 2000
Charles O'Reilly, "Corporations, Culture, and Commitment: Motivation and Social Control
in Organizations," Psychological Dimensions of Organizational Behavior, ed. M Barry
Staw, New Jersey: Prentice-Hall, Inc., 1995.
Robert G. Owen, Organization Behavior in Education, Boston: Allyn, 1991.
Paramita Budi 1986 (Taliziduhu Ndraha), Theory of Organizational Culture, Jakarta, in 2005.
Rad Ali Mohammat Mosadegh and Mohammat Hossein Yarmoammadian, A study of
relationship between manager's leadership style and employee s''Job satisfacion
Leadership in Helth Services, Vol. N0 19, 2, 2006.
Richard M. Steers and Lyman W. Porter, Singapore: McGraw-Hill, Inc., 1991.
Robbins Stephen P ,. Organization Behavior. New Jersey: Prentice Hall International Inc.2003.
________, Organizational Behavior: Concepts, Controversies, and Applications New Jersey:
Prentice-Hall, Inc., 1998.
________ ,, 2000. Essentials of Organizational Behavior, New Jersey: Prentice Hall, 2000.
Stephen P. Robbins and Thimoty judge. Organization Behavior, 13 th Edition Upper Saddle
River, New Jersey: Pearson Education, Inc., 2009.
Robert Kreitner and Angelo Kinicki, Organizational Behavior, McGraw Hill, 2007.

Robert. Knoop Involvemeaction Relationship Among Job, Job statisfaction, and Organization
and Commitment for Nurses. Journal of Psychology. 1995.
Salancik Gerald R., "Commitment and the Control of Organizational Behavior and Belief,"
Psychological Dimensions of Organizational Behavior, ed. M Barry Staw New Jersey:
Prentice-Hall, Inc., 1995.
Salancik Gerald R., comitment and the Control of Organizational Behavior and
Belief, Psychological Dimensions of Organizational Behavior, ed Barry M Staw New
Jersey: Prentice-Hall, Inc., 1995.
John R Schermerhorn, James G. Hunt, and Richard N. Osborn, Managing Organization
Behavior, New York: John Wiley & Son, 1994.
Sedarmayanti, Work Procedures and Services Produktiitas, Bandung: Mandar Maju 2011.
Siagiaan Sondra P., Organizational Behavior Kepemimpnan and Administration, Jakarta: Earth
Literacy, 1991.
________, Human Resource Management, Jakarta, Budi Script 2006.
Sibson Robert E., Increasing Productivity Employé New York: AMACIM 1976.
Laurence Siegel and Irving M. Lane, Personnel and Organizational Psychology Illinois: Irwin,
1987.
Steers Ricard. M., Organizational Effectiveness, translation Magdelena, 2000.
Stevani and Sandra Lanto, Stress with strength USA: Park Avenue Productions, 1997.
Stogdill, 1974 (Gary Yukl), Leadership in Organization, Jakarta: 2000.
Stone Raymon J .. Human Resources Management Milton: John Wiley & Sons Australia, in
2005.
Stoner James, Edward Freeman, DanielGilbert, Management, Jakarta: Gramedia Group, 1996.
Behavior In Organization: Understanding and Managing the Human Side of Work (Englewood
Cliff: Prentice-Hall). 1989.
Suit Joseph, Almasdi, Aspects of Mental attitude in Human Resources Management Jakarta:
Ghalia Indonesia, 1996.
Sutarto, Fundamentals of Organization, (Jogyakarta: Gajah Mada University Press, 1990
Victor Tan, SL Changing Your Corporate Cuture. Singapore: Times Books International, 2002.
Miftah Toha, Organizational Behavior, Basic Concepts and Applications, Jakarta: Rajawali
2007.
Wahjosumidjo, Leadership and Motivation, Jakarta: Ghalia Indonesia, 1987,
Wahyudi, Conflict Management in the organization, ed.2, Bandung: Alfabeta 2006.
Marc Wallace J. & N. Fredric Crandall, Winning in the Age of Execution: The Central Role of
Work Effectiveness, 2001
Wayne K Hoy, Cecil-G Miskel, Educational Administration Theory Research and Practice, by
Random Hous, 1998.
Wibowo, Change Management, Second Edition Jakarta: Eagle Press, 2008.
William F Moshavi ,. Brown and Nancy G. Dodd, Leadership self Awarness and its Relationship
to Subrodinate and Performance, Journal 2003
Winardi, Conflict Management Change and Development, CV Mandar Maju, Bandung, 2004.
Hero, Leadership Theory, Yayasan Bangun Indonesia, UHAMKA Press, 2003.
Dale Yoder, et al, Handbook of Personnel Management and Labor Relations at New York:
McGraw-Hillbook Company, Inc., 1958.

CUSTOMER SATISFACTION WITH SHARIA MARKETING STRATEGY:
A CASE STUDY IN KEDAI BUBUR JAGUNG JEZZ BRANCH DEPOK AND
CIBUBUR
1
Henny Medyawati, 2Silvi Oktaviani, 3Muhamad Yunanto
1,2,3
Faculty of Economics, Gunadarma University
ABSTRACT
This study aimed to analyze the effect of the service quality and product attributes on
customer satisfaction of Jezz corn porridge. The object of this research is that
consumers Porridge Corn Jezz in Depok and Cibubur that characterized the marketing
system of sharia. Data collection techniques in this study conducted by distributing
questionnaires directly and through social media to respondents. The questionnaires
were collected as many as 150 respondents and were valid for no 130. The processed
data analysis tools in this study were calculated using a Likert scale, the test
conducted are reliability and validity test, classic assumption test, multiple linear
regression analysis, correlation, determination test, F test, and T test. The results
showed that partially and simultaneously the quality of service and product attributes
have a significant impact on consumer satisfaction of Jezz corn porridge.
keyword: service quality, product attribute, grits

Introduction
Competitive climate in world trade increasingly felt, this is due to creative and
innovative ideas. Along with the development of the idea of marketing concept also
helped to develop. Culinary business is one of the industrial sectors which can be
taken into account in increasing market competition and stabilization of the existing
economic system. In improving competitive advantage are many ways that can be
firm, one alternative strategy is to consider the attributes of the product so that the
product can compete in the market. According Simamora (2001: 147), product
attributes are the factors considered by buyers when purchasing the product, such as
price, quality, packaging, completeness functionality (features), design, after-sales
service, and others.
According to Lovelock (2007: 418), quality of service is good or bad condition
grain levels provided by the seller in order to satisfy consumers by providing or
delivering services exceeds consumer expectations. Thus, consumers' assessment of
the quality of service is a reflection of the evaluative perception of the service
received at any given time. Consumers' assessment of service quality is a reflection of
the evaluative perception of the service received at any given time. In its
development, to assess the quality of services in marketing research used a model
known as the model SERVQUAL (Service Quality) developed by Parasuraman,
Zeithaml, Berry (1985), namely an abstract and elusive construct because of three
features unique to services: intangibility, heterogeneity and inseparability of
production and consumption. In the next research, Parasuraman, et.al (1988)
developed the first 10 dimensions of service quality, which then this 10 dimension
summarized and become the SERVQUAL’s five dimension (final service quality
dimension). The SERVQUAL’s five dimension are: (1) Reliability: the company's

ability to provide the promised service with immediate, accurate and satisfactory; (2)
Tangible: that is physical evidence of service, can include physical facilities,
equipment, and the equipment used and the means of communication; (3)
Responsiveness: the desire to help customers and provide services quickly, accurately,
with clear information; (4) Assurance: Includes knowledge, skills, courtesy, and
properties that can be trusted, free from hazards, and hesitations; (5) Empathy:
include the ease of good communication, personal attention and satisfy the needs of
consumers (Parasuraman, Zeithaml, Berry, 1993). In order to retain customers,
companies must be able to satisfy consumers. Kotler and Kevin Lane Keller (2007),
mentions satisfaction is feeling happy or upset someone who comes from a
comparison between his impressions of the performance (results) of a product with
expectations. Quality of service is one of the factors that must be considered by a
company to survive in the increasingly fierce competition. Good service quality will
create a sense of complacent consumers and will establish a positive reputation in the
eyes of consumers. Syariah marketing is a strategic business discipline that directs the
process of creating, offering, and exchanging values from one inisiatorto its
stakeholders and the whole process should be accordance with muamalah principles in
Islam (Kertajaya, 2006)
The object of this study is an attempt Porridge Corn Branch Depok Jezz and
Cibubur. Restaurants have been the object of research because it has a different
marketing strategy with other restaurants that marketing sharia does not provide a
place to gather, implement the system take away the special sales and serving food is
grits. This study is a preliminary study that is part of a research conducted by
Oktaviani (2013). The aim of this study was to analyze the influence of the quality of
service and product attributes, to customer satisfaction with sharia marketing system.
Related Articles
Here are some previous researches related to quality of service to customer
satisfaction. Yungkun Chen (2007) studied the recreation area Lushan Hot Springs,
this study explores on service quality, customer satisfaction, customer loyalty and
lifestyle. The study used 500 samples using analytical tool and test the validity of the
Likert scale. The results showed that the service quality significantly influence to
customer satisfaction. Sujandari and Deny Hamdani (2009) analyzed the relationship
between product attributes of the level of customer satisfaction and loyalty in the
mobile telecommunication industry in Indonesia by using Structural Equation
Modeling (SEM). Results showed that the structural modeling of the customers of
Telkomsel in Jabodetabek can explain the patterns of consumer behavior related to
customer product attribute variables influence the level of satisfaction, trust,
commitment, complaints and customer loyalty either direct or indirect influence.
Agbor (2011) showed distinctive results for the relationship between service
quality dimensions and service quality/customer satisfaction. ICA Alidhem Centrum
and Forex Bank had significant relationship between service quality and customer
satisfaction; but Umeå University had no significant relationship between service
quality and customer satisfaction. Meanwhile the group result showed that:
´responsiveness`, empathy´ and ´reliability´ were significantly related to service
quality; ´reliability` and èmpathy`, were significantly related to customer satisfaction
but `responsiveness` was not significantly related to customer satisfaction; meanwhile
service quality was significantly related to customer satisfaction. Ishak (2011)

examines the role of Switching Cost as a mediating influence consumer satisfaction
nd consumer trust in using the telephone service provider Celular. These results
indicate that consumer loyalty is not only determined by the satisfaction and
confidence of consumers to service providers, but also determined by the presence of
switching costs represent barriers to move to another service provider. Dimyati
research results (2012) states that the product quality attributes are factors that affect
customer satisfaction. Customer satisfaction is the customer response to the evaluation
of the perceived mismatch between expectations and the actual performance of the
product in use. This study took a sample of 100 respondents using a structural
equation model aqution modeling. Results from the study showed that, product
attributes significant effect on customer satisfaction.
Research Methode
The data used in this research is primary data obtained by distributing questionnaires
to the respondents. The variables in this study consisted of the independent variable is
the quality of service (X1), and product attributes (X2), while the dependent variable
is the consumer satisfaction (Y). Questionnaires were distributed in this study
consisted of 30 questions. The answer of each indicator using a Likert scale is
Strongly disagree (1), do not agree on what (2), quite agree (3), agree (4) and strongly
agree (5). The five indicators are adopted with modifications from research of Aryani
and Febrianti Rosinta (2010). Some questions amended tailored to the needs of
research are: Tangible indicators with questions recency of physical facilities owned
transformed into the room decor as well as the convenience of its location. Emphaty
indicators with questions of personal attention by employees converted into a
comfortable operation. Reliability indicator was added to the questions about how to
keep a good name. Variable product attributes and satisfaction adopted based on the
research of Miharja (2012). Questionnaires were distributed subsequently tested for
validity and reliability. The method uses multiple linear regression analysis, the data
processing phase includes the classic assumption test, t test and F test.
Result and Discussion

The initial stage of the study was to test the validity and reliability of the
questionnaire. The test results showed that all the statements in the questionnaire were
valid and reliable. R value table at the 0.05 level with 2 test side and the amount of
data (n) of 130 is equal to 0.172. Data processing results showed that all instruments
are valid for the value of r in the column Corrected Item Total Correlation bigger than
r table or greater than 0.172. Reliability test results for the variable quality of service,
product attributes and customer satisfaction each obtained Cronbach's Alpha value of
0.922, 0798 and 0904. Cronbach's Alpha value of more than 0.6, it can be concluded
that the measuring instrument in this study is reliable.
The next step in the processing of the data is test for normality and
multicollinearity. Results of the Komolgorov-Smirnov test showed a significance
value (Asymp.Sig.) of 0.236, which means greater than 0.05. It can be concluded that
the residuals data were normally distributed. To determine whether there is
multicollinearity, based on the value of Tolerance and VIF. Tolerance and VIF value
for the quality of service is 0.359 and 2.789, while for the attributes of the product is

0.312 and 3.207. Based on tolerance thresholds above 0.10 and VIF values below 10,
then it can be concluded there is no multicollinearity. Heteroskedasisitas test results
showed that the correlation of quality of service with unstandardized Residual
significant value of 0.286, with unstandardized residual product attributes at 0.251 and
consumer satisfaction with unstandardized residual of 0.101. Because of the
significance of more than 0.05, it can be said that the regression model did not happen
heteroscedasticity problem.
Description of the Respondent

The following is a description of the profile of respondents, namely consumer
Jezz corn porridge. A total of 150 questionnaires were distributed, but only 130
questionnaires collected and processed. The percentage of questionnaires obtained
response rate was 87%. Distributing questionnaires carried out two stages to
determine the level of validity of the question. The first deployment is done by 30
respondents with a six-point statement the results are invalid. After repairs to the six-
point statement, the second stage of questionnaires conducted by spreading back 30
questionnaires and the results of all valid point statement.
Distributing questionnaires is done directly and through social media such as
google docs, twitter and facebook. Dissemination through social media obtained the
number of respondents as many as 98, but there are inaccuracies because some
elements are not answered by the respondent so the total questionnaire which can be
processed are 78 questionnaires, or by 60%. Questionnaire circulated as many as 52
respondents or 40%. Direct deployment smaller result, it may be due to the time
constraints of the respondents as well as the lack of adequate facilities to answer the
questionnaire submitted at the site of grits. Questionnaires were distributed through
social media gain more response partly due to the way that the filling is relatively
more practical and easier. The online questionnaires obtained the following data:
female gender by 48 or 62%, of respondents aged <25 years at 49 or 63%, of students
by 52 or 67%, of respondents locations dominated in Depok area by 47 or 60%.
Overall, the profile of respondents who either directly or through social media
by gender, more dominated by women with a total of 86 respondents, or by 66%,
while the male sex as much as 44 respondents or 34%. It is based on direct
observation of sales, that more women have plenty of time to come to the store
location hominy grits considering operating hours opened in the afternoon. Based on
the observations that have been made, some families are welcome to come buy grits
remains to be ordered grits are women, both wives, and friends. The highest responder
age <25 years at 68 or 52% while those aged 25-35 years as many as 28 people or
21%, then aged > 45 years as many as 18 people or 14%, whereas the lowest 36-45
years by 16 people or 13%. The age of respondents <25 and aged between 25-35,
have the result of a fairly large compared with other age, where users of social media
are generally used by those aged <25 to 35 years. For respondents aged 36 to> 45
years to obtain a low percentage due to limited time for direct survey so that the
results can for ages 36 to> 45 is not as high as the deployment is done through social
media. Most respondents are student as much as 75 respondents or 58%, then as self-
employed or entrepreneurs as much as 33 respondents or 25%, and housewife as
many as 22 respondents or 17%. Students obtain the highest percentage is caused by
the location of the grits that are relatively close to campus and the percentage spread

online questionnaire is the highest percentage of student respondents. The job profile
as employees and housewives obtain a fairly high percentage. This is because the
operating hours of the kiosk fit to the time of the employee office hour and also a very
fitting as relaxed or rest time. Respondents who buy corn porridge in Depok area is as
much as 93 respondents or 72%, while in Cibubur area is as much as 37 respondents
or 28%. These results can be explain that the location in Depok more strategic than
the location in Cibubur.
The next step is the analysis by multiple linear analysis method. Results of
data processing using SPSS regression coefficient based standardize coefficient for
the variable quality of service (X1) and product attributes (X2) respectively 0396 and
0394 with respective significance level 0:00. Based on these results it can be
concluded that the quality of service and product attributes have a significant effect on
customer satisfaction. More regression equation is: Y = 0, 396 X1 + 0,355 X2+ e
Adjusted R Square is 0.543, also known as the coefficient of determination.
This means that 54.3% contribution of the independent variables namely the quality of
service and product attributes, influence the customer satisfaction. The next step, the F
test is performed to determine whether the quality of service and product attributes
together significantly influence consumer satisfaction. From the data processing the F
value obtained of 77.787 with a significant level of 0.000 <0.5 which means that the
variable quality of service and product attributes, together affects customer
satisfaction.
60%
60% 55% 53% SA A QA
50% NA SD
40%
30% 23%
20% 20%
16% 17%
20% 14%
10% 4% 5%
2% 0 0 0
0%
Service Product Customer
Quality Attribute Satisfaction
Figure 1. Recapitulation of the Questionnaire Answers

Based on Figure 1 shows that the answers agree from the
questionnaire showed the highest yield with a percentage of more than 50% for all
three variables: quality of service, product attributes, and customer satisfaction.
Answer strongly agree obtain a yield of about 30%, and the lowest is the answer to
strongly disagree that get results about 0.5%. Overall, the answers ‘agree’ for service
quality variable with the greatest number of around 84 respondents, product attributes
as many as 86 respondents, and customer satisfaction as many as 87 respondents.
The application of sharia marketing strategy led to the limitations of time,
which is not acceptable to consumers because the store opened at 15:00 pm, while
consumers want to enjoy grits in the morning or during the day, thus having to wait
hours of operational applied by the kiosk grits. Service quality indicators of

responsiveness, assurance, concern (empathy) and physical (tangible) do not affect
customer satisfaction. Responsiveness consists of the ability of employees to provide
fast service, answering any questions consumers and always meet consumer demand.
All employees are male, who tend to not much to talk to consumers who are mostly
women and girls. In general, consumers have not felt the attention and ease in dealing
with shop employees, given the Islamic principles espoused make employees limit the
interaction is too deep to consumers. Indicators of physical capabilities include the
ability of employees to always maintain the cleanliness of the shop, the appearance of
Islamic nuances, location easy to find as well as a large parking area, the decor is
attractive, and the implementation of the system take away as a principled sharia and
physical capacity is physical facilities that are offered to consumers. The results
showed that physical ability possessed by the tavern has not been able to give
satisfaction to the consumer. For example, a tavern located in Cibubur area has very
little parking area and too close to the highway. In addition, there are many consumers
who know that the take away shop implement the system, it is characterized by the
absence of an information board explaining that the purchase grits take away only by
the system, thus no means to enjoy grits directly at the place of purchase.
Conclusion
The quality of service and product attributes partially and jointly significant
effect of customer satisfaction. Based on the feedback from respondents there is
interesting thing that the physical condition of the store which does not provide a
place to enjoy the direct grits and responsiveness, are relatively less does not deter
them to make purchases of Jezz grits. There are several factors that cause this could
happen, the first is the uniqueness of the products offered. Products are offered in the
form of grits that are relatively different from other pulp products as well as the still
relatively new on the market. Another factor is the range of products offered are not
just grits are offered, but some other kind of porridge like durian sauce glutinous rice
porridge, porridge jali, black glutinous rice porridge, green bean porridge and gruel.
The assortment of the slurry can be served in one bowl.
REFERENCES
Agbor, Jenet Manyi. 2011. “The Relationship between Customer Satisfaction and
Service Quality: a study of three service sectors in Umea”. Master Thesis,
Umea School of Business
Aryani, Dwi and Febrina Rosinta. 2010. “Pengaruh Kualitas Layanan Terhadap
Kepuasan Pelanggan dalam Membentuk Loyalitas Pelanggan”. Jurnal Ilmu
Administrasi, Vol. 17 No. 2 pp. 114-126.
Chen, Yungkun. 2007. “Correlation of Service Quality, Customer Satisfaction,
Customer Loyality and Life Style at Hot Springs Hotels”. Journal of
International Management Studies.
Dimyati, Mohamad. 2012. “Model Struktural Pengaruh Atribut Produk Terhadap
Kepuasan dan Loyalitas Pelanggan Produk Pond’s”. Jurnal Aplikasi
Manajemen, Vol. 10, No. 1, pp. 107-118.

Dwi Mayasari, S. and Suwarni. 2011. “Pengaruh Kualitas Produk dan Harga terhadap
Loyalitas melalui Kepuasan Konsumen”. Jurnal Ekonomi Bisnis, TH. 16 No.
1.
Ishak, Asmai. 2011. “Pengaruh Kepuasan Dan Kepercayaan Konsumen Terhadap
Loyalitas Tentang Peran Mediasi Switching Cost”. Jurnal Siasat Bisnis, Vol.
15 No. 1 pp. 55-66.
Kartajaya, Hermawan and Muhammad Syakir Sula. 2006. Syariah Marketing,
Bandung Mizan Mark Plus & Co.
Kotler, Philip and Kevin Lane Keller. 2007. Manajemen Pemasaran. Edisi
Keduabelas, Indeks: Jakarta.
Lovelock, Christopher. 2007. Services Marketing People, Technology, Strategy.
Pearson Prentice-Hall, Sixth Edition.
Miharja, Nike. 2012. Pengaruh Harga, Atribut Produk, dan Kepuasan Konsumen
terhadap Loyalitas Konsumen Body Lotion. Skripsi, Fakultas Ekonomi,
Universitas Gunadarma.
Parasuraman, A., Zeithaml, V.A & Berry, L.L (1985). “A Conceptual Model of
Service Quality and Its Implications for Future Research”. The Journal of
Marketing, Vol. 49. No. 4, pp.41-50.
Parasuraman, A., Zeithaml, V.A & Berry, L.L (1988). “SERVQUAL A Multiple-item
Scale for Measuring Consumer Perceptions of Service Quality”. Journal of
Retailing, Vol. 6 No. 1, pp. 12-40.
Parasuraman, A., Zeithaml, V.A. & Berry, L.L. (1993). “Research note: more on
improving service quality measurement”. Journal of Retailing, 69(1), pp. 140-
147
Simamora, B. 2001. Memenangkan Pasar dengan Pemasaran Efektif dan Profitable.
Jakarta : Gramedia Pustaka Utama
Sujandari, Isti dan Deny Hamdani. 2009. “Model Struktural Pengaruh Atribut Produk
Terhadap Kepuasan Pelanggan: Studi Kasus Pelanggan Telkomsel di
Jabodetabek”. Jurnal Manajemen Teknologi, Vol. 8 No. 1.
Wahyuni, Silvi Oktaviani. 2013. “Pengaruh Kualitas Pelayanan, Atribut Produk dan
Kepuasan Konsumen terhadap Loyalitas Konsumen Bubur Jagung Jezz dengan
Sistem Pemasaran Syariah (Cabang Depok dan Cibubur)”. Skripsi, Fakultas
Ekonomi Universitas Gunadarma

The Relationship of Unconscious Mind towards The Creation of Successful
Entrepreneur
Iskandarini*
Harmein Nasution**
*Faculty of Agriculture, Department of Agribusiness, University of North Sumatra,
Indonesia
rini_soetadi@yahoo.com
**Faculty of Engineering, Department of Industrial Engineering, University of North
Sumatra, Indonesia
harmein_nasution@yahoo.com
Abstract
Indonesia still requires a lot of entrepreneurs to become a developed nation. Big
effort of the government has not increased the number of entrepreneurs. They do not
become entrepreneurs because of the use of analytical conscious mind. The
successful entrepreneur’s experience in the world level as well as national level is the
ability of thinking that influenced his unconscious mind. The objective of this study is
to analyze the relationship of unconscious mind towards the creation of a successful
entrepreneur. The sample in this study amounted to 300(three hundred)
entrepreneurs who are and have been developed and survived more than 5 (five)
years from several regions in Indonesia. This is a correlation analytic study. The
analysis shows that the unconscious mind has a relationship of 0,787 to the success
of entrepreneurs. The indicators that contributed the dominant unconscious mind is
creativity of 0,823.
Keywords: Unconscious Mind, Entrepreneur, Entrepreneurship
1. INTRODUCTION

Entrepreneurial growth in Indonesia is still very low (0.24%), although many efforts
have been made by the government. Research of Iskandarini (2010) shows that the
barriers that holding career workforce to become entrepreneurs are lack of
entrepreneurial expertise, the adversity to be an entrepreneur, no willingness to be an
entrepreneur and the perception that being an entrepreneur is not feasible as life
assurance. Moreover, Iskandarini (2011) states that entrepreneurship education that
provided for student in higher education negatively affects the intention of alumni of
the college to be the entrepreneur.
The Government has included entrepreneurship education curriculum as a
compulsory subject in educational institutions. Expected entrepreneurship education
could change the condition of society to pursue a career workforce to be the
entrepreneur, but the result shows that universities in Indonesia annually produce new
educated unemployment. This is a result of the education process that is based on
theory only, so graduated students that created are only know more, not do more just
like the statement from Bob Sadino (2009). These cause no changing of the mindset
of alumni from finding job to become the creator of job.
According to the Guidance of Entrepreneurship Development, Indonesia needs new
entrepreneurs to improve the dynamics of national economy. Currently, the number
of entrepreneurs in Indonesia is 570.339 people or 0.24% of the population 237.64
people. Yet to become a developed nation it takes entrepreneurs in minimum 2% of
the population. For the current condition, Indonesia still needs 4.18 million career
people to become entrepreneurs.

One factor that causes the graduates do not want to be entrepreneurs is because they
use the analytical conscious mind. Meanwhile, according to Abduh (2010) in
becoming the successful, the unconscious affects of 88% while the conscious mind
only affects the remaining 12%. This is supported by Eka (2012) that the potential
for entrepreneurial personality and family environment influence the interest in
entrepreneurship.
Successful entrepreneurs have personality such as great confidence, persistence in
difficult times, never give up and want to learn from mistakes. To become successful
entrepreneurs is not enough to rely on talent, but must be supported by knowledge
and experience. An entrepreneur often rely on intuition to make decisions, it is not a
justification to not study because intuition arises because of the forging of experience.
One source of experiences is through education (Harefa and Sadari, 2008).
Humans in a comfort zone are not looking for better possibility. They do not make a
higher target to stimulate the power of their mind, though the new target will move
them to carry out the action.
Humans are the strongest magnets in the earth that can attract the things they want.
Unfortunately, the environment makes humans be afraid of making a great target in
his life. So that, the aspiration to be a successful entrepreneur did not dare to dream.
Eventually, humans often expect something unwanted (Byrne, 2007). If the
impossible can be done through the power of the unconscious mind, then it can also

be used to change the mindset of people who had only thought to be employee then
convert into a dream of becoming an entrepreneur.
Changing a habit of being an employee and then become entrepreneur is one of the
changes set of belief. While changing belief is not easy, because it will be influenced
by resistance. Resistance is what is perceived conflicts (emotion; the unconscious
mind) and what to think logically (Gunawan, 2007). Learning the factors of the
conscious mind and the unconscious mind of the successful entrepreneurs are
expected to create more new entrepreneurs in Indonesia. Many entrepreneurs are
success and can survive not only because of logical thinking but also because of
belief, creativity, and personality that are the factors of the unconscious mind which
are more dominant.
2. RESEARCH OBJECTIVE
Entrepreneurship education continues to grow worldwide, that aims to increase the
number of entrepreneurs. In fact, a growing number of entrepreneurs is still low.
According to the explanation, it is necessary to do research that are related to the
success of successful entrepreneurs. The objective is to analyze the relationship of
unconscious mind towards the successful entrepreneur and become the basis for
forming a model of entrepreneurship education.
3.1. Entrepreneurship

Definition of entrepreneurship continues to grow in accordance with the progress of
its activities that quite rapidly at the moment. Entrepreneurship was originally
derived from the French "entrepreude" meaning adventurer, creator, and manager of
the business. The base of entrepreneurship is innovation, so that entrepreneurship is
the ability to create something new and different through creative thinking and
innovative action to create opportunities (Drucker, 2002). People who do the idea,
combining resources in becoming reality called entrepreneurs.
According to the concept of Schumpeter (1934) explained that entrepreneurs are
businessmen who implement new combinations in commercial and technical fields in
the form of practice. Entrepreneurship is often associated with the process, the
formation or growth of a new business that is unique and innovative.
Entrepreneurship is also an innovative capability that is used as the base, tips, and
resources to find opportunities to success (Susrofi, 2003).
3.2. Unconscious Mind
The unconscious mind of human is formed in the womb. From birth to age three, no
matter what happens around us, whether it is positive or negative thing it will be
directly absorbed and enter the unconscious mind. The ability to absorb information
by the unconscious mind like the capability of sponge to absorb water, so the most
memorable experience will be very powerful information that recorded in the
unconscious mind.

According to Gunawan (2006), the unconscious mind has the functions of the
following things:
a. Habits include good habits, bad habits, and reflex habit
b. Emotion is how human feels about a situation, certain things, and to others.
c. Long-term memory is permanent storage of information.
d. Personality is the individual characteristics that make humans relate to others and
the environment.
e. Intuition is the feeling of knowing something instinctively.
f. Creativity is the ability to transform vision, thoughts, and dreams into reality.
g. Perception is how humans see the world according to their "eyeglasses".
h. Belief is everything that is believed to be the right thing.
i. Value is anything that is regarded as important.
Active muscles and coordination of movements, everything is controlled by the
unconscious mind. This occurs because of the program that has been stored in the
unconscious mind as exercise since childhood. The unconscious mind works in
accordance with the command of the conscious mind. But the unconscious mind
sometimes seems incompatible with the conscious mind.
3.3. The entrepreneur

An entrepreneur is a person who has the ability to manage and develop a business/
enterprise of his own. By using resources in the best way that aims to profit as much
as possible.
The characteristics and behavior of entrepreneur are: able to identify business
opportunities, confident and always positive, spirit of leadership, initiative, creative
and innovative, hard-working, broad-minded and have a vision, a good missionary,
willing to take risks, and able to receive advice.
Characteristics of entrepreneur according to Mc.Clelland: the desire to excel, the
desire to be responsible, preference to medium risks, perceptions of the likelihood of
success, a stimulus for feedback, energetic, invest into the future, skills in organizing,
attitude towards money (Susrofi, 2003).
From the definition of competence, scope of characteristics of entrepreneur, it can be
concluded that in order to undertake entrepreneurial activities needs a stimulus far
ahead that require unconscious and conscious mind.
Suryana (2006) stated that the entrepreneurial spirit arises when a person has an
attitude as follows:
a. Confidence which is reflected in the belief, optimistic, and full commitment to the
goal of his life.
b. Initiative, this is reflected in his energetic style, always has a solution to the
various problems that encountered, dynamic and happy life changes.

c. Having leadership are shown with a bold attitude, not afraid of and does not feel
inferior.
d. Willing to take challenges with courage shown in taking risks, creative and
innovative, hardworking and disciplined, have a high curiosity, with the
orientation of life in a better future.
4. METHODOLOGY
This study is a field study by using explanatory research approach, the study explains
the causal relationship between the variables through hypothesis analyze by the
sample survey that obtained from a population and using a questionnaire as a data
collection tool on the business community, which is an individual analysis unit.
Population as the object of this study is the entrepreneurs in big cities of North
Sumatera, Jakarta, and Aceh. Entrepreneurs are purely doing entrepreneurial
activities and has survived at least 5 (five) years in running their business. The
amount of sample has been tested by using standard deviation formula with a level of
accuracy by 5% and reliable level by 95%.
The sampling method is snowball principal so that more accurate sample obtained
with the recommendations of the previous sample. In choosing the sample was also
carried out by taking the entrepreneur of the manufacturing business group,
plantation, and services group.
The questionnaire established by the research team by referring to the opinion of
some experts. Each variable is comprised of six (6) question indicators. It is adequate

based on Augusty (2002) required at least three (3) question indicators to observe
variable in form to construct factor or latent variable. Number of latent variables in
this study of the unconscious aspect consists of eight (8) latent variables, namely
behavior, emotions, long-term memory, personality, intuition, creativity, perception,
and belief.
Aspect of successful entrepreneur consists of four (4) variables: confidence, initiative,
leadership, and willing to take challenges.
Model analysis of the conceptual framework of each factor of unconscious mind and
the successful entrepreneur, formed based on the following concepts.
Picture of Study Conceptual Framework
Unconscious Mind Successful Entrepreneur
 Habits  Self-Confident
 Emotions  Initiative
 Long-termMemory  Leadership
 Personality  Willing to Take
 Intuition Challenges
 Creativity
 Perception
 Belief
Based on the conceptual framework,the hypothesis of study was analyzed by the
method of correlation that would be obtained dominant factors of the unconscious
mind which has the strongest correlation in creating the successful entrepreneur.
5. RESULT AND IMPLICATION

Variables used as indicators of the Unconscious Mind are Habits (X1); Emotions
(X2); Long Term Memory (X3); Personality (X4); Intuition (X5); Creativity (X6);
Perception (X7), and Belief (X8). Correlation results with Persons Method for the
variable of unconscious mind towards the successful entrepreneur can be seen at
Table 1.
Table 1. The Result of measurements of the variable indicator relationship of
Unconscious Mind
Estimation
X1 Y 216
X2 Y 416
X3 Y 217
X4 Y 568
X5 Y 502
X6 Y 823
X7 Y 727
X8 Y 722
Result of correlation analysis of the variables of unconscious mind, indicates that:
a. Habits Indicator has a correlation by 22%
b. Emotional Indicator has a correlation by 42%
c. Long-term memory Indicator has a correlation by 22%

d. Personality Indicator has a correlation by 57%
e. Intuition Indicator has a correlation by 50%
f. Creativity Indicator has a correlation by 82%
g. Perception Indicator has a correlation by 73%
h. Confidence Indicator has a correlation by72%
The analysis indicates that the dominant indicator that correlated with variable of the
unconscious mind is creativity.
Table 2. Result of Analysis of the Relationship between The Unconscious Mind
and Successful Entrepreneur
Correlations
SUCCESSF
UL_ENTRP UNCONCIO
RENEUR US_MIND
SUCCESSFUL_ENT Pearson 1 .787**
RPRENEUR Correlation
Sig. (2-tailed) .000
N 300 300
UNCONCIOUS_MI Pearson .787** 1
ND Correlation
Sig. (2-tailed) .000
N 300 300
**. Correlation is significant at the 0.01 level (2-tailed).
Result of the analysis of the correlation between the unconscious mind and successful
entrepreneur are described in Table 2.

The test result suggests that there is a positive correlation between the unconscious
mind and successful entrepreneur with a value by 0,787
6. DISCUSSION
6.1. Analysis of the relationship of variable indicator of unconscious mind to
successful entrepreneur
The analysis shows that creativity is a dominant indicator in correlation with the
unconscious mind. Creativity, according to Zimmerer (1996) defined as the ability to
develop new ideas to find new ways to solve problems and face the opportunities in
entrepreneurial activity.
Entrepreneurship is the application of creativity to take advantage of business
opportunities that exist. Creativity is the root and the beginning of all success. With
the creativity, the innovation will continue to be done to improve his creation.
The success of a business will certainly be emulated by others, but as an entrepreneur
must have high creativity that will continue to innovate on its business. Business
creativity is the originality that will benefit many people. Business creativity is
combined in expertise, capabilities and creative thinking skills, imagination, and
motivation.

6.2. Analysis of the relationship of unconscious mind and the successful
entrepreneur
Relationship between unconscious mind and a successful entrepreneur has a value by
0.787. This indicates that successful entrepreneurship has a significant correlation
with quite high value. According to these results, it is necessary to consider
entrepreneurship education teaching materials with more patterns using the
unconscious mind. Accustom the student to use the power of the unconscious mind
so that they are sure to be a successful entrepreneur.
The human mind is divided into two: the conscious mind and the unconscious mind.
The unconscious mind has an enormous power. According to Dr. Brian Tracy in
Highway to Success states that the unconscious mind has the power of 30 thousand
times higher than the conscious mind. Unfortunately, most people only use about
10% of the unconscious mind. The unconscious mind is able to control the action
automatically.
Students must have belief in willing to become successful entrepreneurs through the
unconscious mind. Then the students will use all efforts to achieve it. Sandy Mc.
Gregor in his book Piece of Mind, explaining that the unconscious mind does not
know the difference between imagination and reality. In fact, humans only use about
12% of his conscious mind and the remaining 88% with the unconscious mind. It is
seen that the actual unconscious mind will determine this life (Gunawan, 2006).

7. CONCLUTIONS AND RECOMMENDATIONS
Result of a study indicates a significant relationship between the unconscious mind
and the successful entrepreneur. Relationship value of unconscious mind and
successful entrepreneur is 0,787 indicates there is a fairly strong correlation between
the unconscious mind and the successful entrepreneur. The dominant indicator of the
value of the unconscious mind is creativity and followed by perception and belief.
The conclusion is to be a successful entrepreneur needs the unconscious mind which
used in the business operations. In the pattern of education for entrepreneurship
subject required teacher who strengthen the unconscious mind to their students.
Based on the study results, there is recommendation that the pattern of
entrepreneurship education need to be more focused on the use of the unconscious
mind. Patterns of teaching should be tends to be more relax so that the students can
be more creative. Teachers more meaningful as a facilitator, and provide freedom of
creative thinking to become a successful entrepreneur.

REFERENCES
Abduh, M. (2010). Spiritual Hypnosis. Robbani Press.
Byrne, R. (2007). The Secret. Jakarta:PT Gramedia.
Clelland, Mc. (2000). Macam-macam Emosi. Online. Vol. 1, No. 1.

http://repository.usu.ac.id/bitstream/123456789/27243/4/Chapter%20II.pdf.
(Diakses 07 Oktober 2015, 16:04 ).
Drucker, Peter F. (1988). Inovasi dan kewirausahaan (innovation and

Entrepreneurship), Airlangga.
Eka A. (2012). Pengaruh Kepribadian wirausaha, pengetahuan kewirausahaan, dan

lingkungan terhadap minat berwirausaha. jurnal pendidikan Vokasi, Vol 2.
Nomor 3. November 2012.
Gunawan, A, W. (2006). The Art of Subconscious Communication Meraih Sukses

dengan Kekuatan Pikiran. Jakarta:PT Garamedia.
Gunawan, A, W. (2007). The Secret Of Mindset. Jakarta:PT Ikrar Mandiriabadi.
Geoffrey G, Meredith et,al. (2000). Kewirausahaan. Teori dan Praktek, Ppm, Pusaka
Binaman Pressindo, Jakarta.
Harefa, A dan Siadari, E. (2008). The Ciputra Way Praktik Terbaik Menjadi
Entrepreneur Sejati. Jakarta:Elex Media Komputindo.
Iskandarini. (2010). Pengaruh Hambatan Kewirausahaan Terhadap Niat

Berwirausaha Untuk Mengurangi Tingkat Pengangguran Melalui
Pemberdayaan Masyarakat. Medan, Sumber Dana Masyarakat Lembaga
Penelitian Universitas Sumatera Utara.
Iskandarini. (2011). Evaluasi Model Pendidikan Kewirausahaan Di Perguruan

Tinggi Terhadap Niat Berwirausaha Alumni Untuk Mengurangi Jumlah
Pengangguran. Medan, Sumber Dana Dinas Pendidikan Provinsi Sumatera
Utara.
Sadino, B. (2009). Pengusaha Sukses dari Indonesia. http://www.kolom-

biografi.blogspot.com/2009/12/biografi-bob-sadino-pengusaha-sukses.html.
(Diakses 10 maret 2014).

Schum Peter. (1934). Kemajuan Suatu Negara Sangat Dipengaruhi Pertumbuhan
Ekonominya
(https://www.google.com/search?tbm=bks&q=Schum+Peter%3B+%281934%
29%2C+Kemajuan+Suatu+Negara+Sangat+Dipengaruhi+Pertumbuhan+Ekon
ominya#tbm=bks&q=Schumpeter;+(1934),+Kemajuan+Suatu+Negara+Sanga
t+Dipengaruhi+Pertumbuhan+Ekonominya).
Stanhaff, Burgess. (1993). Small Business Management Fundamentals Newyork-US.

McGraw-Hill Inc.
Suryana. (2006). Kewirausahaan. Salemba Empat. Jakarta.
Susrofi, M. (2003). Kunci Sukses Berwirausaha. Penerbit PT. Elex Media

Komputindo, Gramedia, Jakarta
Zimmerer W. Thomas Et al. (1996). Entrepreneurship and The New

Venture Formation. New Jersey: prentice Hall Inc.

Analysis of Waste Management and The Effect of The Increased in
Retribution waste in Retribution Waste in Bandung City
Keni Kaniawati, Ni Putu Nurwita pratama Wijaya, and D. J. Anderson Butarbutar

Widyatama University
Abstract
Bandung as one of the cities that experienced a rapid increase in population, is currently facing a
problem of increasing the volume of waste. Prediction waste generation in the city amounted to
6,860 m3 / day (BPLH Bandung 2007)
Waste management in the city is still experiencing problems related to infrastructure are still low,
financing is not adequate, operational capability is still low, the capability and quality of human
resources is still low, the lack of community participation, implementation of regulations K3 is not
optimal and the unavailability final place processing of waste is adequate. Less than optimal
management of waste management from planning management, operational management to the
limitations of the responsible institutions is a problem that needs to be solved.
The objective of this study was to; (1) Analyzing Waste Management, (2) Determine the Effect of
Waste Management for Improved Management Services Rates Sanitary Service. This research used
Qualitative and Quantitative Methods. Population of this study is the number of homes which is
required to pay as much as 328 339 homes. By using the formula Slovene at a significance level (α)
of 0.10 was obtained a sample of 100 respondents.
Keywords: Waste Management, Retribution of Waste Management, Bandung City

Introduction
Bandung as one of the cities in rapid population increase faces issue of the increasing volume
of waste. The high number of population Bandung, reaching more than 2.6 million people in 2013,
affects on the increasing volume of waste as a natural product of human life. The waste production
prediction in Bandung according to Cleanliness PD (Local Company) is 7.500m3 / day with the
gravity of 225-250 kg / m3, it certainly can cause problems which not only affect on the aesthetics,
cleanliness, and comfort of the city, but also affect on the population health and urban environment
as a result of waste production and pollution. There are still some problems in the waste management
in Bandung city related to still minimal infrastructure, inadequate financing, and still low operational
service capabilities, still low human resources capability and quality, the lack of public participation,
not optimal K3 regulation application and unavailability adequate waste final processing place. It is
also about less optimal waste management from the planning management, operational management
to the responsible institution limitations as the problems which are necessary for immediate
solutions.
Currently, the Cleanliness PD is still losing money; it is because of less optimal waste
management, also there is no tariff adjustment which is not based on the expectation, also because of
the difficulty in withdrawing waste retribution from the society. Currently, the waste retribution
withdrawal system with the society is cooperated with the regional authorities and private parties, but
the results are not in accordance with the expectation as the cooperation with the third parties is in
deadlocked and there is no follow up for any cooperation with regional Neighbourhood council
(RW) apparatus which there is no any significant increase. This is because the retribution withdrawal
system conducted by the cleanliness PD is based on the number of TICKETS requested by each RW,
so the definite amount of payment for waste retribution is unknown. Besides, the tickets given do not
always correspond to the number of the retuning tickets. It means that there is leak deposit of
retribution money by RW. The RW gives reason that the retribution money is used for the
operational costs and local cleanliness though from the amount of all in retributions, the Cleanliness
PD has agreed to provide the incentive payments to RW at 15% of total waste revenue retribution
withdrawal by each RW.
The purpose of this study is to find data and information on the waste retribution
management in relation to the improvement of services and waste tariff classification (retribution) by
Cleanliness PD Bandung City. Specifically, this study aims to determine:
a. The Waste Retribution Management System in Bandung
b. The Cleanliness Levy Service Tariff Improvement System in Bandung.
c. The Effects of Waste Levy Management On The Increased Service Tariff
d. The Cleanliness Services (Levy) in Bandung.
Problem Statement
The waste problem is now becoming a major problem in large cities, especially in Bandung
City. The poor waste management is regarded as at the root of this problem. In fact, as one of the
major cities, the city cleanliness is one of the main factors of city ratings. Therefore, the city
government, especially PD Cleanliness needs to know where the main problem of waste miss-
management in Bandung city. Related to the problems, so the issues to be examined in this study are:
a. How the Waste Levy Management in Bandung is.
b. How the effects of Waste Levy Management on The Cleanliness Increased Tariff Service
(Levy) in Bandung are.
Theoretical Framework
A. The Awareness on Waste

Garbage is basically a wasted material or waste from human activity and natural process
results which have no economic value, even these can give negative economic value because the goo
management, either to remove or clean is required considerable cost. Waste is a material with no
value or worthless for ordinary or main purposes in defective good manufacture or use in
manufacturing or surplus or rejected or discarded materials (Ministry of the Environment, 2005). In
Act 18 concerning the Waste Management, it is stated the waste definition as the remaining of
human daily activities and / or natural processes in the solid form.
B. Waste Processing Management
Figure 1
Management waste of Bandung city
WASTE SOURCES
From sources / housing until WASTE SERVICE
Waste Processing Place
responsibility of soccitey /
self management
MANAGEMENT
Housing
PATTERN
Shops / malls
Market
Transport
into TPA
Hotel Road, public facility Organic waste into waste bank /

& social facility organic processing into decomposing
in Ex- Jelekong TPA
Source: Cleanliness PD Bandung

C. Waste levy
The waste management is a type of service which is until now provided by the City
Government. The sources of financing for the implementation of city waste management services are
derived from the local revenue sources including the receipt of Services Fees (Levy).
Figure 2
Flow Funding Sources for Waste Management and Allocation Usage
Service Bill Results (Levy) of Used for Service Implementation for

1 Waste Management from Service Society as the Service Users
Users (Residential, Commercial and Office
Complex)
Regional Revenue Results Used for Service Implementation of City

Besides Cleanliness Levy (taxes, Road Cleanliness, City Park, Water
2 Drainage, River and Special Events
Assistances, Grant, Loan, etc) (Commemorate Ceremony / Common
Events)
Source: PD Cleanliness Bandung
The Funding Sources for Waste Management and Utilization Allocation:

1) The waste management funding is expected to meet the need for minimum standards of service
implementation (the full services for public places and facilities, housing for all strata, the final
processing by the safe system for the environment).
2) The waste management in residential, commercial areas, offices, industry and other activities
as the levy objects expected to be financed from the levy on the services provided or enjoyed
by service users (cost recovery).
3) If the levy payment results are not sufficient to implement the service according to the
minimum standard, then it should be met from the Regional Budget allocation (subsidized) in
order to that the service function can be maintained and there is no service degradation which
can cause the interference on environment and health community.
4) In the event of a subsidy payment mechanism, then it should try to continuously reduce the
subsidy by the increasing acceptance of levy results by levy rate intensification and adjustment.
5) The government presents the budget funded by APED for the waste management services in
public places and facilities. This is the Government responsibility and not a retribution object.
D. Customer satisfaction theory Tjiptono (2004: 70)

The dimensions of customer satisfaction:
1. Tangible (direct evidence): Physical facilities, equipment, etc.
2. Reliability: the ability to provide the promised service immediately, accurately, and
satisfactorily
3. Responsiveness: Giving fast service response
4. Assurance
5. Empathy: the ability to do a good relationship with customers

Research Framework
Research Method
The method used in this study is Descriptive Analysis Method and Analysis Verification
Method. The objects in this study are; Total Home Living in Bandung, Total Fee Required for Waste
Management Activity in Bandung, as well as Waste Management System in Bandung. The
population in this study is the number of home living in Bandung city. Based on data from the
Cleanliness PD, the number of home living in Bandung city is 328.339 home livings. So, based on
the Slovene formula, the number of sample obtained is 100 houses.
The hypotheses in this study are:

Ha = There is Significant Relationship Between Waste Levy Processing Management and
Cleanliness Service Increased Tariff (Levy) in Bandung.
H0 = There is no Significant Relationship Between Waste Levy Processing Management and
Cleanliness Service Increased Tariff (Levy) in Bandung.

Result and Discussion
A. Waste Processing Management in Bandung City
Explanation:
1. The Waste Management Service Providers organize the operational services to the service
recipients of waste management in a given volume for individual and public
2. From the service operational, there will be service charge.
3. The services cost is divided by the volume of service recipients; it will obtain the unit cost of
services, which is subsequently converted into a service tariff.
4. The services recipients are obliged to make a payment services to the service provider.
5. The payment services from the services recipients are based on the service rate; this will be the
services income for the service providers by billing management.
6. The service provider through the service operations can continue if the services cost can be met
by the service recipients through the payment of services and generate adequate services income
for the service providers, continuously as a service cycle.
7. The study is to answer the question on how the adjustment of service tariff and billing
management can be conducted so that the service cycle can continue to run on an ongoing basis.
B. Effect of Waste Levy Management on Increased Cleanliness Tariff Service (Levy) in Bandung
Based on the questionnaires distributed to 100 respondents, which in this case are the people
of Bandung then, it is obtained the following results.
1. Validity and Reliability Tests

Cronbach's
Alpha N of Items
.728 21
Out of the 21 items of questionnaire statements after a reliability test, it can be said that the
indicators used are reliable.

2. Linear Regression
R-value of 0.560 can be explained that the X variable is able to explain the Y variable.
From these calculations, we can see that t count of 5.968 with a significant level of 0.000 if
compared to t table of 1.677 which can be seen here that t count > t table. Because t count is bigger
than t table, it can be said that the hypothesis is accepted. Where the hypothesis states that there is
significant relationship between the Waste Levy Management Levy and Increased Cleanliness Tariff
(Levy) in Bandung.
Where from the questionnaires distributed to the 100 respondents, it said that basically, the
good waste levy management will affect on the improvement of waste management services.
References
Badan Perencanaan Pembangunan Daerah Kota Bandung (2007) ;Kelayakan Tarif Pungutan
Sampah Kota Bandung
Lia Yuliati (2013) ;Pengaruh Alih Fungsi Rumah Terhadap Willingness To Pay Retribusi
Sampah Dan Pengelolaan Sampah Di Kota Bandung. Thesis. Post Graduate Program
Padjadjaran University, Bandung.
Moh Nazir (2003) ;Metode Penelitian. Ghalia Indonesia, Jakarta. Nur Indriantoro dan Bambang
Supomo (2002) ;Metode Penelitian Bisnis untuk Akuntansi dan Manajemen, First
Edition. BPFE-Yogyakarta.
PD Kebersihan Kota Bandung (2014) ;Rencana Kerja Anggaran PD Kebersihan Tahun 2014.
Purbayu Budi Santosa dan Ashari (2005) ;Analisis Statistik dengan Microsoft Excell dan SPSS,
1st Edition. Andi, Yogyakarta.
Syahnaz Rachmaningtyas (2013) ;Sistem Pengelolaan Sampah Kota Bandung, Jawa Barat,
Laporan Kerja Praktek. Diponegoro University, Semarang.
Sugiyono (2009) ;Metode Penelitian Kuantitatif, Kualitatif dan R&D. CV. Alfabeta, Bandung.

EMPLOYEE COMMITMENT MODEL :
(An Empirical Study at SME’S of Bank Sumut Coordination)
Kiki Farida Ferine 1
Alex Zami 2
1 The Lecturer of STIE Harapan, Medan. Indonesia
2 The Assistant Professor of UPI YAI Doctoral Management Science Program. Jakarta.
Indonesia
ABSTRACT
The purpose of this research was to determine the influence of leadership style, motivation, competence,
and organization commitment simultaneously on the employee's performance of SMEs under Bank
Sumut Coordination. The research used descriptive survey and explanatory survey methods. This type of
research is causality. The unit of analysis in this research is personel, which means that employee’s of
SMEs under Bank Sumut Coordination, with sample size is 230 employees. The statistical analysis used
in this research is a structural equation modelling.
The findings of this research is the style of leadership, motivation, competence, and organizational
commitment and significant positive effect on employees’s performance simultaneously with the
contribution of 64%. Competence is the dominant influence on employee’s performance.
Keywords: leadership style, motivation, competence, organizational commitment, employee performance
INTRODUCTION
There are indications employee behavior low performance of SMEs under Bank Sumut Coordination, it is
viewed of a quantity of products produced are not based on a target, the quality of work is under
standard, less creative in doing the work and less character, like a discipline, not comprehensive, and less
than honest .
The low employee’s performance of SMEs under Bank Sumut Coordination tending to be caused by athe
low commitment .The low employee’s commitment of SMEs under Bank Sumut Coordination is
characterized by lack of feelings as a member of the smash, less feeling to have an employee , less loyal
in work, less proud as employees of SMEs and less equipped to meet all the company rules that have been
agreed in advance. The low commitment organization by the force leadership that is inaccurate. Less
exactly the style of leadership to SMEs under Bank Sumut Coordination is characterized by less precise
in organized work, less closely relationships with employees, less appropriately in determining the
purpose and do not care of employees.
The low employee commitment is predicted due to the lack of motivation employees of SMEs under
Bank Sumut Coordination. The lack of motivation of employees of SMEs under Bank Sumut
Coordination indicated by lacking of passion for achievement and lack of passion for the responsibility
given by the leader. The low employees commitment did not predicted caused by the low employees
competence.
The low competence SMEs under Bank Sumut Coordination because of low education levels, or find it
difficult to adapt to the process of renewal as a result of the development of science and technology being
very quick.Only small minority had once followed technical training and management, in fact the
sustainability of the activity or process the company is a must for the companies .Not all accounts officer
(AO) of Bank Sumut that has the capacity to provide guidance to small and medium enterprises.

LITERATUR REVIEWS
An effective manager must meet the capacity to govern like a network, growing social capital and
political maneuvering to reach and develop resources allow employees to meet organizational objectives
(Ahearn et al., 2004). Leadership related to employee attitudes and behaviors; particulary relating to the
perception , anxiety work, job satisfaction, the tendency to stop, and reciprocity (Avolio, 2004).
Employees who work with a leader who is able to communicate with inferiors having satisfaction a larger
work because they feel respected, independent and able to express his own good, (Kahai et al, 2005).
Leadership creates a work environment where people are motivated, inspired, challenged, and felt. In
addition, under the leadership of easily communicated, employees have a voice in allocation decisions
resources and in experienced decrease .On the other hand, when employees are faced with a demand not
fixed and see the lack of their influence on the allocation of resources, they are frustrated, disappointed
and dissatisfied. Crowfoot John & Peter Lock (2003) with a headline research the relationship between
commitment and organizational culture, subculture, leadership style and job satisfaction in organizational
change and development and innovation .His innovation shows that there is a strong attachment between
variables with organizational change and development organization.
Robbins (2008) states that motivation is the willingness to implement measures to a high degree in order
toward the goals organizational, conditioned by this utility business was to satisfy the needs of particular
individuals. Based on it one of the factors that influence commitment to work is the motivation of
working .Motivation as positive influence to the employee commitment . Employees motivation is
directly proportional to the commitment of employees working .If employees motivation high,
commitment was high and on the other hand. Sopiah (2008: 159) believes that in the process of the
accurance of employees namely the commitment among which is build values based on a common .Any
member organizations have equal opportunities, for example for the promotion of the basis used for the
promotion is the ability, skills, interests, motivation, performance, without discrimination. Thus
motivation have an important relationship with employee commitment, motivation is one aspect of the
commitment of the employees process. Commitment does not appear out of the hands of its own
employees, but there several factors affecting. Commitment is an attitude, which reflects the extent to
which an individual know and bound to the core. Sardiman (2005) will be a leader is one of the human
component, who had a role in business formation of human resources for the development .Hence, the
leader must be active and put professional positions, fit with public demand that growing .Leaders is
required to have adiquate competence, both in terms of type and its contents .One of the efforts that we
can do is through the optimal role .Is not one hopes excessive unless the head as the manager has a
mission to develop the performance of personnel, especially the increase .Professional competence
competence here, not only pertaining to their mastery of the material, but includes all kinds of
competence and filling content.
The hypothesis for the research a while of formulation problems number 1 s / d 9 so based on the frame
work may be prepared as following on the frame work above, so the hypothesis can be determined as
follows:
Hypothesis 1: The leadership style have effect on organization's commitment SMEs under Bank
Sumut Coordination Medan
Hypothesis 2: The motivation have effect on organization's commitment SMEs under Bank Sumut
Coordination Medan.
Hypothesis 3: The Competence have effect on organization's commitment SMEs under Bank Sumut
Coordination Medan.

Hypothesis 4: The leadership style, motivation and competence have effect simultaneously on
organization's commitment SMEs under Bank Sumut Coordination Medan.
Hypothesis 5: The leadership style have effect on employee’s performance of SMEs under Bank
Sumut Coordination Medan.
Hypothesis 6: The motivation have effect on employee’s performance of SMEs under Bank Sumut
Coordination Medan.
Hypothesis 7: The competence have effect on employee’s performance of SMEs under Bank Sumut
Coordination Medan.
Hypothesis 8: The organization commitment have effect on employee’s performance of SMEs under
Bank Sumut Coordination Medan.
Hypothesis 9: The leadership style, motivation, competence and organization commitment have effect
simultaneously on employee’s performance of SMEs under Bank Sumut Coordination
Medan
METHODOLOGY
Based on the research uses descriptive analysis with methods of field research and surveys (correlation),
hypothesis test proposed, making predictions (forecasts of events, giving meaning or sense or an
implication on the treatment problem). According Sukmalana (2007: 316) the method of survey
descriptive is a methods of research take a sample of the population and using questionnaires as a means
of data collection .The research approach uses data analysis techniques qualitative descriptive and
quantitative descriptive. Approach of quantitative descriptive using numbers and statistics, to answer
questions or specific research hypotheses and to perform the prediction that certain variables affect other
variables. While the descriptive qualitative method used in order to provide about the community a man
torn between the neighborhood of an object research, namely SMEs under Bank Sumut Coordination
Medan. Analysis done by comparing between reality and whose theories acquired at literature.

Based on the results of hypothesis testing, so it can be concluded that the hypothesis H1,H2, H3, and H4
supported the received), it means that leadership style, motivation, and competence have a positive
impact on organization commitment , whether partial or simultaneously. These results are consistent with
the hypothesis, that the leadership style better so that organizational commitment will be higher; better
motivation so that the organization commitment will be higher; the higher the competency and
organization commitment will be higher; so if leadership is better leadership style, better motivation, and
higher competency and organization commitment will be higher.But when viewed as a partial coefficient
(standardized) appeared leadership style a dominant influence organization commitment .
KO = 0.67*GK + 0.51*MO + 0.49*K, Errorvar.= 0.39, R² = 0.61

(0.091) (0.070) (0.084) (0.059)
7.36 7.28 5.83 10.33

Where :
KO = Organizational Commitment
GK = Leadership Style
MO = Motivation
K = Competency
Similarly, the hypothesis H5, H6, H7, H8, H9 supported and accepted, this means that the leadership
style, motivation, competency and organizational commitment shown to have a positive impact on
employee’s performance, whether partly or simultaneously. This results in line with preliminary estimates
(hypothesis) that better leadership style so that the employee's performance will be higher, the better
motivation so employee’s performance will be higher; the higher competence so the employee's
performance will be higher; organizational commitment to employee’s performance will be higher; so if
the leadership style better, better motivation, high competence, high organizations commitment together
so that employees with high performance But when viewed as partial the path coefficient (standardized)
appear competence dominant influence employee’s performance
KI = 0.39*KO + 0.41*GK + 0.37*MO + 0.71*K, Errorvar.= 0.36, R² = 0.64

(0.068) (0.073) (0.083) (0.088) (0.041)
5.71 5.62 4.46 8.11 15.61
Where :
KI = Employee Performance
KO = Organizational Commitment
GK = Leadership Style
MO = Motivation
K = Competency
Tabel
Hypotetical Test Result
Hypotesis Deskription Result
H1 Leadership style have effect on organizational commitment SMEs under
Bank Sumut Coordination Medan Accepted
H2 Motivation have effect on organizational commitment SMEs under Bank
Sumut Coordination Medan Accepted
H3 Competency have effect on organizational commitment SMEs under Bank
H4 Leadership style, motivation, and competency simultaneous have effect on
organizational commitment SMEs under Bank Sumut Coordination Medan Accepted
H5 Leadership style have effect on employee’s performance SMEs under Bank
H6 Motivation have effect on employee’s performance SMEs under Bank
H7 Competency have effect on employee’s performance SMEs under Bank
H8 Organizational commitment have effect on employee’s performance SMEs
under Bank Sumut Coordination Medan Accepted

H9 Leadership style, motivation, competency and organizational commitment
simultaneous have effect on employee performance Accepted
Source : Processing results LISREL 8.30
Based on the research done above, the purpose of this study was employee’s performance SMEs under
Bank Sumut Coordination Medan will be able to increase especially on the character of the work and the
relationships (Y19) if the employee SMEs under Bank Sumut Coordination Medan afford to have
organizational commitment is high, especially in the loyalty of work (Y5 ), where the organization's
commitment will be higher if SMEs have the leadership style, especially in building mutual trust (X4),
motivation, especially in the spirit of cooperation (X12). Given the responsibility by the leadership, that is
the spirit of helping others, actively determine the direction of activity, a member that reflects the
achievements, and sensitive to the influence of interpersonal structure of the group or organization and
have high competence especially in the aspect of knowledge in entrepreneurship (X15).
CONCLUTION
1. Leadership style have effect on organizational commitment SMEs under Bank Sumut
Coordination Medan.
2. Motivation have effect on organizational commitment SMEs under Bank Sumut Coordination
Medan.
3. Competency have effect on organizational commitment SMEs under Bank Sumut Coordination
Medan.
4. Leadership style, motivation and competency simultaneously have effect on organizational
commitment SMEs under Bank Sumut Coordination Medan.
5. Leadership style have effect on employees performance SMEs under Bank Sumut Coordination
Medan.
6. Motivation have effect on employees performance SMEs under Bank Sumut Coordination
Medan.
7. Competency have effect on employees performance SMEs under Bank Sumut Coordination
Medan.
8. Organizational commitment have effect on employees performance SMEs under Bank Sumut
Coordination Medan.
9. Leadership style, motivation, competency and organizational commitment simultaneously have
effect on employees performance SMEs under Bank Sumut Coordination Medan
RECOMMENDATION
1. Leadership style through dimension X4 (to build trust) by taking the results of descriptive
analysis, which found the mean value for the Leadership Style is at the rate agreed (in the sense
of not maximal). Similarly, for the dimensions (to build trust) that has a level below the average
value (the lowest). Thus any improvement efforts focused on increasing build mutual trust.
2. Competence through dimensions X15 (insight into entrepreneurship) by taking the results of
descriptive analysis, which found the mean value for the competence is at a level agreed (in the
sense of not maximal). Similarly, for the dimensions of X15 (insight in entrepreneurship) that
have levels below the average value (the lowest). Thus any improvement efforts focused on
increasing insight into entrepreneurship.

3. Performance improvements related to SMEs under Bank Sumut Coordination Medan,
Organizational Commitment was not mediating Competency variables. So, the Bank Sumut in
facilitating the provision of credit / loans should be focused on SMEs that have competence in the
field.
REFERENCES
Allen, N. J. and Meyer.2005.Commitment in The Workplace Theory Research and Application. California
: Sage Publications.
Alex Soemadji Nitisemito, 2001. Manajemen Personalia. Jakarta: Ghalia Indonesia
Alwisol. 2006. Psikologi Kepribadian. Malang :Universitas Muhammadiyah Malang Press.Amara Books.
Anderson RE, Huang W-yR., 2005. Empowering sales people: Personal, managerial, and organizational
perspectives.Psychol Market 23(2):139–59.
Avolio BJ, Zhu W, Koh W, Bhatia P., 2004. Transformational leadership and organizational
commitment: Mediating role of psychological empowerment and moderating role of structural
distance. Journal Organization Behavior, 25(8):951–68.
Bass,Bernard M and Riggio,Ronald E, 2006, Transformational Leadership, New Jersey;Lawrence

Erlbawn Associates Publishers.
Becker,B.,Huselid,M &Ulrich,D ,2001,The HR Scorecard : Linking People, Strategy and Performance,

Boston :Harvard Business School Press
Benardin Russel, Joyce E.A. 2001. Human Resources Management an Experimental Approach. New
York McGraw Hill, Inc. International Edition.
Coetzee,M,.2005. The Fairness of Affirmative Action:An Organizational Justice Perspective Employee

Commitment. Publised :University of Pretoria etd.
Chan, Syafruddin. 2003. Relationship Marketing: Inovasi Pemasaran yang Membuat. Pelanggan
Bertekuk Lutut, Cetakan Kedua. Jakarta :Penerbit Gramedia.
Cherrington, David J,.2000 Organizational Behavior : The Management of Individual and Organizational
Performance, Second Edition, Boston, Allyn& Bacon
Cooper, D.R. dan Pamela S.S. 2001.Business Research Methods. New York: Mc.Graw-Hill Companies,
Inc.
Deluga, R. J. 2005 .Leader-member exchange quality and effectiveness ratings: The role of subordinate-
supervisor conscientiousness similarity. Group and Organization Management, 23, 189–216
Dessler, Gary, 2007, Human Resource Management.Edisi11th. Upper Sadle River, New Jersey.
Ferdinand, Augusty. 2006. Structural Equation Modelling Dalam Penelitian. Semarang : FE UNDIP.

Filley,Allan C House,Robert J and Kerr,Steven ,2005 ,Managerial Process and Organizational Behavior,
Hillsdale,Illinois :Scott Foresman and Company
Gerungan, W. 2009.Psikologi Sosial.Bandung: RafikaAditama.
Gibson, J.L., Ivancevich, J.M., dan Donnely Jr., J.H. 2009. Organizations Behavior, Structure, Processes,
14th Edition. Published by McGraw-Hill, a business unit of The McGraw-Hill Companies, Inc.,
1221 Avenue of the Americas, New York, NY, 10020.
Greenberg, J., & Baron, R. A. 2003. Behavior in Organizations.4th Edition. USA: Allyn & Bacon.
Gordon, Judit R, 2003, A Diagnostic Approach to Organizational Behavior 7th Edition (June 19, 2001)
Publisher New Jersey Prentice Hall;
Griffin, Ricky . 2012. Management. 11 th Edition. Publisher: Cengage South-Western ISBN:

111196971X / 9781111969714
Hadari Nawawi, 2006 Mengefektifkan Organisasi, Yogyakarta Penerbit: Gadjah Mada University Press
Hair, J. F., Anderson, R. E., Tatham, R. L., & Black, W. C., (2005), Multivariate Data Analysis, New
Jersey Prentice Hall.
Hasibuan, Malayu S. P. 2008. Manajemen sumber daya manusia, Jakarta : PT. BumiAksara.
Hutapea, Parulian dan Nurianna Thoha. 2008. Kompetensi Plus. Jakarta PT.Gramedia Pustaka Utama
Kahai SS, Sosik JJ, Avolio BJ.2005, Effects of leadership style and problem structure on work group
process and outcomes in an electronic meeting system environment. Pers Psychology ;50(1):121–
46.
Kartono.2005. Pemimpin dan Kepemimpinan, Jakarta : PT. Raja Grafindo. Persada.
Kuntjoro, Zainudin Sri, 2002 Komitmen Organisasi , Jakarta e-psikologi.com, Jakarta
Koontz Harold et,al.,1990., “Essentials of Management”, New York McGraw Hill Publishing Co.
Luthans, Fred. 2006,. Organizational Behavior 11th Published New York McGraw-Hill
Mangkunegara, Anwar Prabu. 2005. Sumber Daya Manusia Perusahaan. Bandung :Remaja Rosda karya.
_____. 2009. Evaluasi Kinerja Sumber Daya Manusia. Bandung: Penerbit Refika Aditama.
Mangkuprawira. Tb Syafri 2004, Manajemen SDM Strategik, Jakarta: PT Ghalia
Masùd, Fuad. 2004. Survai Diagnosis Organisasional, Konsep & Aplikasi. Semarang: Badan Penerbit
Universitas Diponegoro

Mathis, Robert. L & Jackson John.H, 2007.Human Resources Managemet 10th Edition .Singapore
:Thomson Asia Pty,Ltd
Miner, J.B. 2005.Industrial-Organizational Psychology.United States of America : McGraw-Hill. New

Jersey
Moeheriono. 2009. Pengkuran Kinerja Berbasis Kompetensi. Bogor: Ghalia Indonesia.
Mulyasa. 2009. Menjadi Guru Professional.Bandung :RemajaRosda.
Palan, R. 2007. Competence Management-A Practicionser’s Guide (Competency Management, Publisher:

Sage Publications Pvt. Ltd.
Payne, Adrian 2007.The Essence of Service Marketing Prentice Hall Essence of Management Series.
Publication
Purwanti, Dwi. 2012. “Peranan Seorang Guru”. Diakses dari www. infodiknas. com
Rivai, Veithzal, 2006. Manajemen Sumber Daya Manusia untuk Perusahaan: dari Teori Ke Praktik.
Jakarta :Penerbit PT. Raja Grafindo.
Robbins, Stephen P.; Judge, Timothy A .2009. Organizational Behavior, 13th

Edition, ISBN: 0136007171 published by Pearson Education, Inc, publishing as Prentice Hall,
Copyright © 2009
Ruky, A.S. (2003). Sumber Daya Manusia Berkualitas Mengubah Visi Menjadi Realitas Jakarta: PT
Gramedia Pustaka Utama.
Sardiman. 2005. Interaksi Dan Motivasi Belajar Mengajar. Jakarta: Rajawali
Siagian, Sondang. P. 2006.Sistem Informasi Manajemen. Jakarta : PT. Bumi Aksara.
Sinambela,Lijan Poltak, dkk. (2012). Kinerja Pegawai Teori Pengukuran dan. Implikasi.Edisi
PertamaYogyakarta; Graha Ilmu
Shinta Haryanti 2014,Pengaruh Gaya Kepemimpinan, Budaya Organisasi dan Kompetensi Terhadap
Kinerja Karyawan dengan Komitmen Organisasional sebagai Variabel Mediasi (Studi Kasus Pada
Rumah Sakit Islam Klaten), UNS-Pascasarjana Prodi. Magister Manajemen. Tesis dipublikasi.
Soegoto, Eddy Soeryanto. 2009. Enterpreneurship, Edisi Pertama, Jakarta : PT. Elex Media Komputindo.
Sopiah.2008. Perilaku Organisasi. Yogyakarta :Andi.
Staw, B.M.2005. Psychological Foundation of Organizational Behaviour. Illinois : Scott, Foreseman and
Company.
Steers, R.M., & Porter,L.W.,2005.Motivation and Work Behavior. USA: McGraw - Hill inc.
Stoner, J.A.F., Freeman, R.E., dan Gilbert, D.R. 2005.Management New Jersey : Publised by Prentice –
Hall Inc.Edisi ke-13.

Sudjana, Nana. 2009. Penilaian Hasil Proses Belajar Mengajar. Bandung :Remaja Rosdakarya.
Sukanto, Soerjono. 2006. Sosiologi Suatu Pengantar. Jakarta. PT. Raja Grafindo Persada.
Sukmalana, Soelaiman. 2007. Manajemen Kinerja (Langkah Efektif Untuk Membangun, Mengendalikan
dan Evaluasi Kerja). Jakarta: Intermedia Personalia Utama.
Sulaiman, 2004, Analisis-Analisis Regresi menggunakan SPSS, Yogyakarta :Andi
Suliyanto.2006.Metode Riset Bisnis.Yogyakarta :Penerbit Andi.
Supranto, J. 2000. Teknik Sampling untuk Survei dan Eksperimen.Penerbit PT Rineka Cipta, Jakarta
Suryana. 2006. Kewirausahaan, Pedoman Praktis, Kiat Dan Proses Menuju. Sukses. Jakarta :Salemba
Empat.
Sutrisno, Edy.2009. Manajemen Sumber Daya Manusia. Jakarta: Kencana
Tambunan, Tulus, T.H. 2002.Usaha Kecil dan Menengah di Indonesia Beberapa Isu Pentimg Jakarta :PT
Salemba Empat.
Tika Pabundu ,2006, Budaya Organisasi Dan Peningkatan Kinerja Perusahaan, Jakarta Bumi Aksara
Thoha, Miftah. 2007. Kepemimpinan Dalam Manajemen. Jakarta : PT. Raja Grafindo Persada.
Ulrich, K. T. &Eppinger, S. D. 2008. Product Design and Development Fourth Edition . New York : The
McGraw - Hill Companies Inc.
Untung, Budi, H, 2000, Kredit Perbankan di Indonesia,Yogyakarta. Andi Offset,
Usmara. 2002. Paradigma Baru Manajemen Sumber Daya Manusia. Yogyakarta :PT. Amara Books
Veithzal Rivai& Ahmad Fawzi Mohd Basri. 2005. Performance Appraisal Sistem Yang Tepat Untuk
Menilai Kinerja Karyawan Dan Meningkatkan Daya Saing Perusahaan.. PT. Raja Grafindo
Persada, Jakarta.
Wahyudi, 2009. Kepemimpinan Kepala Sekolah Dalam Organisasi

Pembelajaran (LEARNING ORGANIZATION). Bandung : Alpabeta.
Wijaya, Cecedan A.Tabrani Rusyan.2000.Kemampuan Dasar Guru Dalam Proses Belajar

Mengajar.Bandung :Remaja Rosda Karya.
Wirawan.2009. Evaluasi Kinerja Sumber Daya ManusiaTeori Aplikasi dan Penelitian. Jakarta. Penerbit:
SalembaEmpat.
Yukl, Gary A.2005. Leadership in Organization; Seventh Edition, New York ,Mc Geaw Hill
Zimmerer and Scarborough. 2002.Essentials of Entrepreneurship and Small Business Management, Edisi
3rd ed.Penerbit New Jersey .Pearson Education.

PeraturanPerundang-undangan
Peraturan Pemerintah No. 32 Tahun 1998 Tentang Pembinaan dan Pengembangan Usaha Kecil.
Undang-Undang Republik Indonesia No.20 Tahun 2008 Tentang Usaha Mikro, Kecil dan M enengah.
Jurnal
Ahearn KK, Ferris GR, Hochwarter WA.. C, Ammeter AP,2004,Leader Political Skill and team
Performance, Journal Management 30(3):309-27
Afifur Rohman (2013) Analisis Mengenai Pengaruh Kompetensi, Kompensasi dan Motivasi Terhadap
Komitmen dan Kinerja Karyawan PT. Kota Jati Furindo Jepara
Anjar Salajegheh, Shabnam Vaziri, Seyed Yousef Hajiasghari, MostafaHoseinali Beigiand Niusha
Meftah.(2015), Explaining The Relationship Between Leadership Style And Work Conscience And
Organizational Commitment Among Golestan Melli Bank Staff.
Ayman H. Metwally and Nada El-bishbishy (2014),The impact of transformational leadership style on
employee satisfaction
Barbara,et al, 2000. Kemampuan Menyusun Laporan Keaungan Yang Dimiliki

Pelaku UKM dan Pengaruhnya Terhadap Kinerja UKM, Jurnal Riset Akuntansi dan Bisnis
Volume14 No. 1/Maret 2014
Buraidah, Lieke E. M. W, ,2013 Pengaruh Kompensasi dan Motivasi Kerja Terhadap Komitmen
Organisasi di Organisasi Pendidikan Islam X, PascaSarjana Psikologi Universitas Gunadarma.
www.gunadarma.ac.id/library/articles/Artikel_94104015.pdf, diunduh 16 Februari 2015
Ciptodihardjo.Irawan. 2013.Pengaruh Gaya Kepemimpinan, Motivasi, Kepuasan Kerja Terhadap

Komitmen Organisasional Dan Kinerja Karyawan Pada Karyawan PT Smartfren,Tbk Di Surabaya.
http://download.portalgaruda.org/article.php?article=130440&val=5209
Crowfud Jhon&Peter Lock ( 2003),The Relationship Between Commitment and Organizational

Culture,Subculture,Leadership Style and Job Satisfaction In Organizational Change & Development.
Journal Leadership &
Organizational Development, 2003,Volome 20 no.7 Univercity of New
South Wales
Dhaifallah Obaid Almutairi (2013) ReRelationship between Leadership Styles and Organizational
Commitment: A Test on Saudi Arabian Airline, World Review of Business ResearchVol. 3. No. 1.
January 2013 Issue. Pp. 41 – 51
D Dika Arizona, 2013, Analisis Pengaruh Gaya Kepemimpinan , Motivasi Kerja

Dan Komitmen Organisas iterhadap Kinerja Pegawai (studi pada Dinas
Kelautan dan Perikanan Kabupaten Malang) Jurnal Agribisnis Perkanan
vol 1 No.1

Donghong Ding, Haiyan Lu, Yi Song, Qing Lu (2012), Relationship of Servant
Leadership and Employee Loyalty: The Mediating Role of Employee
Satisfaction
Endang Purnomowati, 2006, Analisis Pengaruh Motivasi Terhadap Kinerja Karyawan Dan Kepuasan
Kerja Dengan Variabel Moderator Komitmen Pada Perusahaan Garmen Di Surabaya Majalah
Ekonomi Tahun XVI, No. 3 Desember 2006
Folorunso, Adewale, and Abodunde (2014), Exploring the Effect of Organizational Commitment
Dimensions on Employees Performance: An Empirical Evidence from Academic Staff of Oyo State
Owned Tertiary Institutions, Nigeria
Gamage Dinoka Nimali Perera, Ali Khatibi, Nimal Navaratna Karuthan Chinna (2014), Job Satisfaction
And Job Performance Among Factory Employees In Apparel Sector
Guritno,Bambang dan Waridin. 2005 Pengaruh Persepsi Karyawan Mengenai Perilaku Kepemimpinan,
Kepuasan Kerjadan Motivasi Terhadap Kinerja. Jurnal Riset Bisnis Indonesia Vol.1No.1, p. 63-74.
Imam, Fauzi, 2012. Pengaruh Kepemimpinan Dan Motivasi Terhadap Kinerja Karyawan Management
Analysis Journal Vol 1, No 1 (2012)
Jae, M. Moon. 2000, ”Organizational Commitment Revisited In New Public Management (Motivation,
Organizational, Culture, Sector, and Manajerial Level,” Public Performance & Management
Review, Vol. 24, No. 2,Desember 2000, p. 177-194.
Kumar danEng.,R. 2012. Perceived Organizational Commitment and its Impact to the turnover Intention:
Correlation Analysis. Journal Of Global Business and economic January Vol.4 no:1
Kohtamäki, Marko; Kraus, Sascha; Mäkelä, Markus; Rönkkö, Mikko (2012) "The role of personnel
commitment to strategy implementation and organisational learning within the relationship
between strategic planning and company performance."International Journal of Entrepreneurial
Behaviour& Research 18.2 : 159-178.
Liliyana, Utin Nina Hermina dan DesviraZain. 2011. “Pengaruh Budaya Organisasi terhadap Motivasi
Kerja, Komitmen, dan Kinerja Karyawan di SMA 9 Pontianak”.Jurnal Aplikasi Manajemen
Politeknik Negeri Pontianak..Vol.9. No.9. 2.Maret 2011.Hal.491–499.
Listiana Kusuma Wardani (2014) Pengaruh Kepemimpinan Motivasi Kerja dan Komitmen Organisasi
Dalam Meningkatkan Kinerja Guru SMP Negeri Kota Tegal. Program Pascasarjana Magister
Manajemen Universitas Dian Nuswantoro Semarang
Ma’rifah, Dewi, 2005. Pengaruh Motivasi Kerja dan Budaya Organisasi Terhadap Kinerja Pekerja
Sosial pada UPT Dinas Sosial Propinsi Jawa Timur Program PascaSarjana Universitas
Airlangga, Surabaya. Didownload dari http://www.damandiri.or.id/detail.php?id=312 pada 6
Juli 2014
Mamik ,2010 ,Pengaruh Gaya Kepemimpinan, Motivasi Kerjadan Komitmen Organisasi Terhadap
Kinerja Karyawan, Jurnal Majalah Ekonomi Vol. 1, Hal. 82–99. April 2010
Markonah, Siti dan Sunarto.2014. Pengaruh Motivasi Dan Kompetensi Terhadap Kinerja Guru
Dimediasi Komitmen Organisasional (Studi Kasus Di SMA Negeri 1 Jakenan Kabupaten Pati).J
urnal Mahasiswa PascaSarjana http://www.unisbank.ac.id/ojs/index.php/pasca1/article/view/2527

Mai Ngoc Khuong and Dang Thuy Hoang (2015), The Effects of Leadership Styles on Employee
Motivation in Auditing Companies in Ho Chi Minh City, Vietnam, International Journal of Trade
Economicand Finance Volume 6 No.4 Agustus2015
Murdoko, Tri.2007, Pengaruh Kepemimpinan Dan Motivasi Terhadap Kinerja Pegawai Dinas
Perkebunan Propinsi Jawa Tengah Dengan Mediasi Komitmen Organisasional ,Jurnal Mahasiswa
Pasca Sarjana .
Muthuveloo, Rajendran dan Raduan Che Rose.2005.“Typology of Organizational Commitment.”

American Journal of Applied Science,2 (6):1078-108
Nicko Permana Putra 2013 ,Pengaruh Kepemimpinan, Motivasi, Lingkungan Kerja, dan Disiplin Kerja
Terhadap Kinerja Karyawan Pada PT. Indonesia Power Semarang ,JURNAL EKSEKUTIF,
Vol.2, No.1, April 2005, 63-80
Okky Satria (2012)Pengaruh Gaya Kepemimipinan,Komitmen dan Kepuasan Kerja Terhadap Kinerja
Karyawan Badan koordanasi Promosi dan Penanaman Modal Daerah Jawa Barat. ,Jurnal Ekonomi,
Bisnis dan Entrepreneurship Vo. ^ No.2. Oktober 2012. ISSN 2443-0633
Peace Irefin, Mohammed Ali Mechanic (2014), Effect of Employee Commitment on Organizational
Performance in Coca Cola Nigeria Limited Maiduguri, Borno State. IOSR Journal Of Humanities
And Social Science (IOSR-JHSS) Volume 19, Issue 3, Ver. I (Mar. 2014), PP 33-41
Ruslan Ade, Kamis, Noermijati, Christin Susilawati (2013), The Influence of Organizational
Commitment and Individual Competence on Teacher Performance (A Study on Elementary
School Teachers in Ternate City).InternationalJournal of Businessand Behavioral
SciencesVolune 3 No.,2013
Sabir, M. S., Sohail, A., & Khan, M. A. 2011.Impact of Leadership Style on Organization Commitment :
In A Mediating Role of Employee Values. Journal of Economics and Behavioral
Studies.Vol.3.No.2.Hal.145-152.
Sarah Brown (2011),Workplace Performance, Worker Commitment and Loyalty. Jurnal IZA DP no.5447,
Bonn Germany,University of Sheffield and IZA,
Siswanto Wijaya Putra (2014) Pengaruh Komitmen Organisasi, Budaya Organisasi ,Gaya
Kepemimpinan dan Lingkungan Terhadap Kinerja Karyawan Pada Industri Kecil
Tanggulangin Sidoarjo. Jurnal Modernisasi Volume 11 No.1 Februari 2014
Soegihartono,A 2005, Pengaruh Kepemimpinan dan Kepuasan Kerja Terhadap Kinerja dengan Mediasi
Komitmen (di PT Alam Kayu Sakti Semarang) Jurnal Mitra Ekonomi dan Manajemen Bisnis,
Vol.3, No. 1, April 2012, 123- 140
Sugiarty, Lisa dan Ciecilia Srimindarti.2014. Pengaruh Kompetensi Guru Dan Disipli nTerhadap
Kinerja Guru Di Mediasi Komitmen Organisasional (Studi Kasus Pada SD Se-Kecamatan Genuk
Kota Semarang) .Jurnal Mahasiswa PascaSarjana.
http://www.unisbank.ac.id/ojs/index.php/pasca1/article/view/2500

Suliman, Abubakar., Paul Iles, 2000. Is Continuance Commitment Beneficial to Organizations?
Commitment-Performance Relationship: A New Look. Journal of Managerial Psychology, 15( 5):
1-9.
Sunarsih.2001. Kepemimpinan Transformasional Dalam Era Perubahan Organisasi .Jurnal Managemen

dan Bisnis.Vol 5 No.2.Desember 2001 :106-116.
Suranta, Sri. 2002. Dampak Motivasi Karyawan Pada Hubungan Antara Gaya Kepemimpinan Dengan
Kinerja Karyawan Perusahaan Bisnis. Empirika.Vol 15. No2. Hal: 116-138.
Tampubolon, Biatna. D. 2007. AnalisisFaktor Gaya Kepemimpinan Dan Faktor Etos Kerja Terhadap
Kinerja Pegawai Pada Organisasi yang Telah Menerapkan SNI 19-9001-2001. Jurnal
Standardisasi. No 9.Hal:106-115.
Tella,Adeyinka. 2007.“Work Motivation, Job Satisfaction, and Organisational Commitment”.Journal of

Library Philosophy and Practice Nigeria (April) Vol.7 No.1, pp.1-16
Teman,Koesmono Pengaruh Budaya Organisasi dan Kepemimpinan terhadap Kinerja melalui Variabel
Mediasi Komitmen Organisasional Karyawan Perusahaan Swasta di Surabaya TimurJurnal Mitra
Ekonomi dan Manajemen Bisnis, Vol.2 No. , Oktober 2011,155-17 ISSN 2087-1090
Umer Paracha, Adnan Qamar, AnamMirza, Inam-ul-Hassan & Hamid Waqas.(2012) ,Impact of
Leadership Style (Transformational & Transactional Leadership) On Employee Performance &
Mediating Role of Job Satisfaction” Study of Private School (Educator) In Pakistan. Global
Journal of Management and Business Research Volume 12 Issue 4 Version
1.0 March 2012
Ventje Jeffry Kuhuparuw, 2012 Pengaruh Gaya Kepemimpinan dan Komitmen Organisasional Terhadap
Kinerja Karyawan PT Pos Indonesia (Persero), Jurnal Manajemen dan Akumtansi Volume 1,
Nomor 1, Desember 2012
Vrinda N N, Nisha Ann Jacob (2015), The Impact Of Job Satisfaction On Job Performance
Yustiani, Utai Dian, 2005, Analisa Pengaruh Kepuasan Kerja, Keadilan Kompensasi Terhadap Kinerja
Karyawan Dengan Komitmen Organisasi Sebagai Intervening, Jurnal Mahasiswa Pasca Sarjana
Yuwalliatin, Sitty. 2006. Pengaruh Budaya Organisasi, Motivasi dan Komitmen Terhadap Kinerja Serta
Pengaruhnya Terhadap Keunggulan Kompetitif Dosen Unissula Semarang. Jurnal Ekonomi dan
Bisnis, Vol. 7 No. 2, Juli,p. 241-256

Web-Based Corporate risk reporting: The View of
Stakeholder Theory and Maqasid Al-Shariah (Maslahah
Concept)
Mahlindayu Tarmidi1 and Rusli Abdul Roni2
1
Department of Accounting, College of Business Management and Accounting, Universiti Tenaga Nasional,
26700 Bandar Muadzam Shah, Pahang, Malaysia. mahlindayu@uniten.edu.my
2
Department of Business and Social Science, College of Foundation and General Studies, Universiti Tenaga
Nasional, 26700 Bandar Muadzam Shah, Pahang, Malaysia. rusli@uniten.edu.my
ABSTRACT
The evolution of internet technology had assist the companies to disseminate the corporate
information regardless of time and geographical location to the audience. Due to the current
economic instability, the demand for risk information had increases and considered as critical to the
stakeholders for decision making and future planning. However, as currently the disclosure of
information through the websites is voluntary in nature, company may refuse to provide more risk
information to the public due to the cost of information and the perception of too much risk
information will expose the company to the competitor, which eventually may cause of losing their
competitive advantage. Hence this paper will discuss the importance of risk information which
disclosed through the company’s websites through the view of stakeholders theory and Maqasid al
Shariah, specifically the Maslahah concept. As this study is among the few attempt to analyse the
web-based risk reporting by comparing the conventional and Islamic theory, it is believed that the
paper will provide a better insight on the risk disclosure issues and also the awareness of voluntary
disclosure as part of religious responsibility.
Key Words: web-based corporate risk reporting, maslahah concept, stakeholder theory
1. INTRODUCTION
The disclosure of information is important for any functions of capital market (Akerlof, 1970).
The company is expected to provide comprehensive narration of the firm’s situation in order to
increase investors and stakeholders confidence (Souissi & Khlif, 2012) in order to enable the them
in determining the firm risk profile, assess the market value and accurately predict the security price
(Abraham & Cox 2007; Islamic Financial Service Board, 2013). A comprehensive narration of the
firm’s situation especially pertaining risk issues may increase investors and stakeholders confidence
towards the company (Souissi & Khlif, 2012).
Traditionally, such information are provided through the paper based reports, the annual
report. However, the development of internet technology had shifted the reporting environment
instead of historical paper-based reporting, towards more timely information through the company’s
websites. Previous researches recorded numbers of positive effect on the firms by providing more
information through the internet. Among others the benefits include the reduction of information
asymmetry which eventually will increase the firm value (Gordon, Loeb, & Sohail, 2010), increase
in firms beta and share price (Elshandidy, Fraser, & Hussainey, 2014) and reduction in the cost of
capital (Botosan, 2004), and low information production cost (Botosan, 1997). However, businesses
may be reluctant to provide more risk information in their websites as the information may be used
by the competitors to gain competitive advantage in the market (Mokhtar & Mellett, 2013).
Businesses will looking forward to disclose their status if the benefits of doing so exceed its cost.

Since the disclosure of information in the websites is voluntary in nature, researchers had
utilized numbers of disclosure theories in order to gain understanding pertaining this issue. It is
argued that, to date, there is no single theory which clearly explain the web-based voluntary
disclosure phenomena (Abraham & Shrives, 2014). In most of internet reporting literatures, the
web-based disclosure were based on the voluntary disclosure theories which were mostly viewed
through the economic theories, which argues that companies are motivated to disclose more
information to gain more economic advantage. For example, companies provide more voluntary
disclosure to gain more capital (capital need theory), to be perceived as good by existed and
potential shareholders (signaling theory) and to be seen as responsible in fulfilling the need of
shareholders (agency theory). However, the main user of these economic theories are mainly focus
to the managers and shareholders benefits, which does not reflect the real world condition. The
information provided by companies may affect and used by other market players such as the
government, consumers, employees, suppliers and creditors (Elsayed, 2010).
This has call for socio-economic approach which believe that there is a certain right of the
society towards the company’s information, especially on the activities which may directly or
indirectly affect them. In the conventional perspective, the stakeholder theory may provide the best
underlying argument for such situation. However, this theory was argued as fail to provide sound
governance to the companies inclusive for the disclosure issue (Sternberg, 1997). Hence, this study
is to discuss the incorporation of Islamic view pertaining voluntary disclosure in the through the
concept of Maslahah on the web-based risk disclosure issue, with the comparison of stakeholder
theory.
Through the library research approaches, the next section of this paper will discuss the nature of
web-based risk reporting and followed by the stakeholder theory in the perspective of web-based
reporting. The third section will introduce the Islamic view on the issue of creating good norms and
preventing harm by extracting the verses of the Holy Quran and hadith, and the need for Shariah in
guiding human lives. The definition and concept of Maslahah is discussed in section 4, followed by
the application of the Maslahah concept for web-based risk disclosure in the final section as the
concluding remarks.
1. WEB-BASED REPORTING
The development of technology offers a new dimension for information dissemination and
offers the solution for timely and location issue which was previously faced by the traditional
reporting report, annual reports. Although annual reports still accepted as main reference for
investors and shareholders, the existence of regularly updated websites provide better insight for
timely decision making. The benefits of internet technology utilization for information
dissemination, or also known as web-based reporting, include the reduction in cost, the ability to
direct interaction with stakeholders, availability of information in timely basis and cross boundaries
(Ashbaugh, Johnstone, & Warfield, 1999; Debreceny, Gray, & Rahman, 2002; Debreceny & Gray,
2001). Hence, among the earlier content which was provided in the websites is the company’s
financial reports, the transformation from paper-based to the electronic documents, which mostly
focus on the investor relationship information (Ashbaugh et al., 1999; Deller, Stubenrath, & Weber,
1999; Ettredge, Richardson, & Scholz, 2001). Given the advantages of internet technology for
investor’s relation, companies tend to provide more then financial information in the websites. The
information had spurs to the non-financial information inclusive the corporate governance
information, corporate social responsibility and also qualitative information (Elsayed, 2010). It is
predicted that in the future, the web-based reporting may replace the traditional method of
conventional reporting as it provide better communication to the public (Marston & Polei, 2004).
Evidently, the widespread of web-based reporting had put some concern to the regulatory
bodies and researchers pertaining the content of the web-sites due to the absent for its reporting
standards. In Malaysia, it is a requirement for all listed companies to have their own websites,

however the requirement for content is general and can be interpreted to be left for the management
discretions. The following guidelines is extracted from the Bursa Malaysia Listing Requirement,
pertaining to web-based disclosure requirement:
9.21 Listed issuer to have a website

(1) Every listed issuer must have its own website.
(2) A listed issuer must publish on its website all announcements made to the Exchange
pursuant to these Requirements. The listed issuer must ensure that such announcements are
placed on the listed issuer’s website, as soon as practicable after the same are released on
the Exchange’s website.
(3) A listed issuer must ensure that its website contains the email address, name(s) of
designated person(s) and their contact numbers to enable the public to forward queries to
the listed issuer.
(4) A listed issuer should ensure that its website is current, informative and contains all
information which may be relevant to the listed issuer’s shareholders including analyst’s
briefings.
(Source: www.bursamalaysia.com)
The forth requirement clearly stated that it is the management of the company’s responsibility to
provide information which is considered as relevant to the public in timely manners. However, it
does not spell out the type of information which need to be provided. Pertaining to risk information,
the requirement for risk disclosure is stated to be included in the company’s annual report. The
following section will discuss the previous researches on risk disclosure.
2. WEB-BASED RISK DISCLOSURE
Literally, risk disclosure may be directly defined as the communicating to the public any
information about the uncertainty occurrence of both benefits and losses affected from certain
decision made. In a business point of view, a further discussion was provided in guiding the
information owner to communicate such information to the interested parties. ICAEW had
suggested a framework which encourages business to disclose the risk information, including the
source of risk, type of risk and the estimated future performance.
Researchers had struggled with defining risk disclosure, among others, risk disclosure is
defined as “a communication of information concerning firms‟ strategies, characteristics,
operations, and other external factors that have the potential to affect expected results” (Beretta &
Bozzolan, 2004). Miihkinen (2012) define risk disclosure as all information that is presented in
annual report pertaining to the review of risk faced by the business which have a future economic
impact on future performance. (Dobler, 2008) focus the definition to any risk related disclosure
which affects the future cashflow of the company.
Among the most used definition of risk disclosure is the one given by Linsley and Shrives
(2006, pg 389) which define risk disclosure in embracing both good and bad, and risk and
uncertainty in the situation that “… if the reader is informed of any opportunity or prospect, or of
any hazard, danger, harm, threat or exposure, that has already impacted upon the company or may
impact upon the company in the future or of the management of any such opportunity, prospect,
hazard, harm, threat or exposure.”
Previously, risk disclosure studies were based on annual reports and more towards descriptive
in nature. It was reported that there is still insufficient risk information reported by companies (P.M.
Linsley & Shrives, 2005), lack of standardization (Lajili & Zéghal, 2005; Oliveira, Rodrigues, &
Craig, 2011), more focus on future stocks (Deumes & Knechel, 2008) and lack of improvement on
the level of risk information (Pérignon & Smith, 2010).

In order to understand the scenario, most of previous literature attempt to evaluate the firm
characteristics as the factors that may influence the level of such risk disclosure. It was found that
firm size plays an important role in determining the level of risk disclosure (Beretta, Bozzolan,
Shevlin, & Botosan, 2004; Domínguez & Gámez, 2014; Philip M. Linsley & Shrives, 2006;
Mohobbot, 2005). Another factor which were found to largely influence the level of risk disclosure
is the corporate governance characteristics (Elshandidy et al., 2014; Mokhtar & Mellett, 2013;
Ntim, Lindop, & Thomas, 2013; Probohudono, Tower, & Rusmin, 2013).
These findings were based on studies done on companies’ annual reports. To date, there is still
lack of study which specifically evaluate the risk information disclosed through the company’s
websites. However, these findings provide some insight that the larger the firm, the higher the level
of risk disclosure level as the management realize that they have more audience that will be
interested and affected by the company’s activities. In order to explain this, the stakeholder theory
may best suits to be visited.
3. THE STAKEHOLDER THEORY
The definition of stakeholder was provided by Freeman, (1984), p. 46 (as cited by Freeman
& Mc Vea, 2001) as “any group or individual who is affected by or can affect the achievement of
an organization’s objectives”. The posits that there is a relationship between company’s
management and all parties who have a stake in the company such as creditors, shareholders,
employees and customers. It is suggested that the management should maintain a balance between
the objectives the stakeholders and financial benefits of the owners (Sternberg, 1997). It is stated
that there must an alignment between the total wealth creation by the company and the critical
interest of the stakeholders. The argument by Freeman (1984), the basic idea of this theory is to
extend the benefits gained by the companies instead of concentrating only on shareholders, to
include other stakeholders as the size of the companies are so large and there is a pervasive impact
of the company’s activities to the society. Hence, companies should not only focus on shareholders’
interest but also the general public.
The stakeholder theory has been used in the internet reporting studies (Castelo Branco,
Delgado, Sá, & Sousa, 2014; Liao, Luo, & Tang, 2014) and risk disclosure (Amran, Manaf, Bin,
Che, & Mohd, 2009; Barakat & Hussainey, 2013; Khlifi & Bouri, 2010; Oliveira et al., 2011) as the
basis to explain the level of information disclosed by companies. The theory support the findings of
size and corporate governance to be the main factors which will affect the level of the disclosures.
As stated, large companies will provide more information in order to serve larger demand from the
public where the company is positioned. A good corporate governance companies will provide
better disclosure due to the sense of responsibility to serve the public with more information about
the company and their business.
However, this theory has been argued to be insufficient to provide better corporate
governance, business performance and business conduct (Sternberg, 1997). The largest challenge of
this theory is to define the stakeholders itself. It was argued that company will not be able to satisfy
all stakeholders requirement as different stakeholders may require different type of information.
Companies may face a huge challenge and cost in order to satisfy the stakeholders’ demand of
information.
Hence, in light of this argument, this study will shift the view of stakeholder theory from the
conventional perspective to the Islamic perspective. The main goal to satisfy the stakeholders
benefits with the company’s information will still the basis of arguments. The following section
will discuss the Islamic view pertaining voluntary disclosure and the concept of Maslahah on the
web-based risk disclosure issue.
4. The Islamic view and maslahah concept

The perfection of Islam covers every aspects of life. As a holistic religion, the purpose of the
law and guidance of Islamic teaching is to create the good norms to men and to prevent them from
any harm. The Holy Quran had clearly stated the need for all Muslim not to endanger them self and
other in the Surah Al-Qasas:
‫ك َو ََل تَب ِْغ‬ ‫ك ِمنَ ال ُّد ْنيَا َوأَحْ ِسن َك َما أَحْ سَنَ ه‬
َ ‫َّللاُ إِلَ ْي‬ ِ َ‫نس ن‬
َ َ‫صيب‬ ‫ك ه‬
َ َ‫َّللاُ ال هدا َر ْاْل ِخ َرةَ َو ََل ت‬ َ ‫َوا ْبتَ ِغ فِي َما آتَا‬
َ‫َّللا ََل يُ ِحبُّ ا ْل ُم ْف ِس ِدين‬
َ ‫ض إِ هن ه‬ ْ‫ر‬َ ْ
‫اْل‬ ‫ي‬ ‫ف‬
ِ ‫د‬
َ ‫ا‬ ‫س‬
َ َ ‫ف‬ ْ
‫ل‬ ‫ا‬
ِ
Translation: But seek, with that (wealth) which Allah has bestowed on you, the
home of the Hereafter, and forget not your portion of legal enjoyment in this world,
and do good as Allah has been good to you, and seek not mischief in the land. Verily,
Allah likes not the Mufsidun (those who commit great crimes and sins, oppressors,
tyrants, mischief-makers, corrupts). (QS 28:77)
Given the above verse, Islam requires all mankind to be responsible in ensuring the security
of themselves and others as well. Human are instructed to search for permissible and lawful (halal)
food and activities and to leave the otherwise. This instruction is further strengthen by the word of
the Prophet Muhammad (pbuh):
ُ‫حَدَّﺛَنَا أَبُﻮ نُﻌَيْﻢٍ حَدَّﺛَنَا ﺯَكَرِيَّاﺀُ ﻋَنْ ﻋَامِرٍ ﻗَاﻝَ ﺳَمِﻌْﺖُ النُّﻌْمَانَ بْنَ بَﺸِيرٍ يَﻘُﻮﻝ‬
ِ‫ﺳَمِﻌْﺖُ رَﺳُﻮﻝَ الﻠَّﻪِ ﺻَﻠَّﻰ الﻠَّﻪُ ﻋَﻠَيْﻪِ وَﺳَﻠَّﻢَ يَﻘُﻮﻝُ الْحَﻠَاﻝُ بَيِّنٌ وَالْحَرَاﻡُ بَيِّنٌ وَبَيْنَﻬُمَا مُﺸَبَّﻬَاﺕٌ لَا يَﻌْﻠَمُﻬَا كَﺜِيرٌ مِنْ النَّاﺱ‬
‫فَمَنْ اتَّﻘَﻰ الْمُﺸَبَّﻬَاﺕِ اﺳْتَبْرَأَ لِدِينِﻪِ وَﻋِرْﺿِﻪِ وَمَنْ وَﻗَﻊَ فِي الﺸُّبُﻬَاﺕِ كَرَاﻉٍ يَرْﻋَﻰ حَﻮْﻝَ الْحِمَﻰ يُﻮﺷِكُ أَنْ يُﻮَاﻗِﻌَﻪُ أَلَا‬
‫وَإِنَّ لِﻜُﻞِّ مَﻠِكٍ حِمًﻰ أَلَا إِنَّ حِمَﻰ الﻠَّﻪِ فِي أَرْﺿِﻪِ مَحَارِمُﻪُ أَلَا وَإِنَّ فِي الْﺠَسَدِ مُﻀْﻐَﺔً إِﺫَا ﺻَﻠَحَﺖْ ﺻَﻠَﺢَ الْﺠَسَدُ كُﻠُّﻪُ وَإِﺫَا‬
ُ‫فَسَدَﺕْ فَسَدَ الْﺠَسَدُ كُﻠُّﻪُ أَلَا وَﻫِيَ الْﻘَﻠْب‬
Translation: On the authority Abi ‘Abdillahi al-Nu’man ibn Basheer (ra) who
said: I heard the Messenger of Allah (peace be upon him) say: “That which is
lawful is clear and that which is unlawful is clear and between the two of them are
doubtful [or ambiguous] matters about which not many people are knowledgeable.
Thus, he who avoids these doubtful matters certainly clears himself in regard to his
religion and his honor. But he who falls into the doubtful matters falls into that
which is unlawful like the shepherd who pastures around a sanctuary, all but
grazing therein. Verily every king has a sanctuary and Allah’s sanctuary is His
prohibition. In the body there is a morsel of flesh which, if it be sound, all the body
is sound and which, if it be diseased, all the body is diseased. This part of the body
is the heart. (Shahih Bukhari:50)
As referred as the word of Allah, all instructions laid down in the Holy Quran must be
followed. In order to detail how the action will be carried out, there is a need to have a sound
guideline which will cover all aspects al life inclusive the personal, social, political, economic and
intellectual matters, called as shariah. Spelling out the true path and correct ways of processes and
decisions should be made, Imam al-Ghazzali (1322 H) describe the objective of Shariah is to
promote the well-being of all mankind, which lise in safeguarding their faith (din), their human self
(nafs), their intellect (‘aql), their posterity (nasl) and their wealth (mal).
In line with the theories of social contract and normative stake holders from the west, argued by
Al-Shatibi (2000) that to determine what is beneficial and harmful to the human, it must be based
on Shariah instead of on human reasoning. One theory that may lead to such understanding is the
concept of Maslahah, or public goods.
There are number of jurists had provided some definition to Maslahah. For example, Mohd
Akram (2010) explain Maslahah as a cause or a goal which is good and brings benefit and
prosperity. Al- Shawkani (1992) provide the definition given by Al Khawarizmi, as the preservation
of objective in Islamic law. Ibn Ashur (2006) claims Maslahah as the utmost righteousness and

goodness through acts which always benefits the public or individual. The prominent jurist whom
frequently cited in literatures pertaining to Maslahah are Al Ghazali and Al-Shatibi.
Defined by Al-Ghazali (1322 H), describe Maslahah is the consideration which secures the
benefits or prevents harms and at the same time harmonious with the aim of Shariah. On the other
hand, al-Shatibi define Maslahah as a principle that concerns the substance of human life and
acquisition of person emotional and intellectual qualities in absolute sense (Al-Shatibi, 1997).
The definition provided had clearly stated that a part of maslahah concept is to prevent any evil
action which may cause trouble to other beings in the world. It can be concluded as a system which
belong to different grades and with definable relationship with one and another, and represents one
of the core subject matters of maqasid al-Shariah, and it must always be discussed and understood
within that framework and its parameters (Masud,1995)
Al-Shatibi’s (1997) analize the relationship between shariah and Maslahah. He stated that
the primary objective of the Lawgiver is the Maslahah of the people. Thus maqasid and Maslahah
become interchangeable terms and the legitimacy of Maslahah for maqasid syar’iyah is indicated in
the Holy Quran as follows:
(i). “Allah does not wish to place any burden upon you; He only wishes to cleanse you and
perfect His favor upon you so that you may be grateful” (QS, 5:6).
(ii).“Verily, this is My way, leading straight, so follow it, and do not follow (other) paths for
they will scatter you about from His (great) path. Thus does He command you that you
may be righteous” (QS: 6:153).
(iii). “We have not sent you but as a mercy for all creatures” (QS, 21:107).
(iv). “And He has imposed no difficulties in your religion” (QS, 22:78).
Through the Sunnah, the evidence are as follows:

(i). “Whenever the Prophet (pbuh) had a choice between two alternatives, he would always
choose the easier of the two, as long as it did not amount to a sin” (Al-Bukhari, 1987).
(ii).“Allah loves to see His concessions (rukhsah) being observed, just as He loves to see. His
strict laws being observed” (Al-Albani, n.d).
From the Usul al-Fiqh books, there are various methods to classify the Maslahah. It may be
based on its legitimacy (based on Quran and Sunnah), coverage (benefits the majority or the whole
Ummah, or it may only benefits individual) or strength (it is identified by human intellect, prior to
the reference to Shariah for validation and acceptance). This paper will focus on the classification
suggested by Al- Shatibi. He classified Maslahah based on its weight namely, essentials
(darurriyat), needs (hajiyyat) and embellishment (Tahsiniyyat).
4.1. Al Masalih al-daruriyyah (Essentials)
The first level of Maslahah is essentials. It is defined as those activities and things that are
essential to the preservation of the five foundations of individual and social life according to Islam
such as Religion, Life, intellectual, posterity and property (Abdullah Jalil, 2006). These five
foundation is a must as it is considered as the fundamental needs of human kind and to maintain the
harmonization of the world. Additional, freedom is to be asserted in the list as another foundation
apart of the five (Khan and Ghifari, 1992). In other word, this level of Maslahah is for the proper
function of a person religion and everyday affairs.
Embellish
ment
(Tahsiniyyat)
Convenience
(Hajiyyat) ICAMESS 2016 page 312
Essentials
(Daruriyyat)
Figure 1: the Maslahah Pyramid.
4.2. Al-Masalih al-Hajiyyat (Conveniences)
This category supplement the essentials. It comprises all activities and things that are not vital
to the preservation of the five foundations, but are necessary to ease and improve the betterment in
life, and minimize the hardship. Although it may not cause a total disruption of human life, still, the
neglect will create unstable human life and the social order may not functioning well.
4.3. Al-Masalih al-Tahsiniyyat (Embellishment):
The final classification refers to the interest, if they are realized, would lead to refinement
and perfection of human life. al-Ghazali (1322H) define embellishment as the element that
facilitating the ahivement of virtues and fine ways in manners and dealings. on the other hand, Ibn
Ashur (2006) added, Thasiniyyat comprises of “things that lad to perfection on community’s
condition and social order so that it leads a peaceful life and realizes the splendor and beauty of
human society in the sight of nations.
The concept of Maslahah and the doctrine of Shariah objectives are quite similar at the first
glance. However, in a more detailed analysis, the two concepts are actually complement and
interdependent between each other. The Shariah objectives doctrine is related with the protection of
the human basic elements while Maslahah is the level of protection of those elements.
5. Applying the Maslahah concept into web-based voluntary risk disclosure
As mentioned earlier, the definition of risk information includes ‘any opportunity or prospect,
or of any hazard, danger, harm, threat or exposure, that has already impacted upon the company or
may impact upon the company in the future or of the management of any such opportunity,
prospect, hazard, harm, threat or exposure’. Hence, the type of risk disclosure in the websites can
be categorized into two major group which are good and bad news, and will further sub-categorized
as historical and future events. In the current practice, information about web-based risk disclosure
is voluntary in nature. The decision whether to include such information is totally depending to the
corporation managements.
As discussed in the stakeholder theory, decision for voluntary disclosure is to satisfy the need of
the parties effected by the business, Islam takes the voluntary disclosure in a more holistic view. It
serve a better guidance to organization to exercise their business and social responsibility as the
teachings is based on Quran and Sunnah. The ethical coverage are more eternal, absolute and
devine (Ahmad, 2002; S.F. Ahmad, 2003). Hence, the web-based risk voluntary disclosure policies
should be based on the two main Shariah values which are obligatory (wajib) and recommended
(Mandub) (Darus et al., 2013).
The Maslahah pyramid reveals the degree of importance in terms of responsibility fulfillment.
The higher the pyramid goes, the less fundamental the type of decision and information will be, and
vice versa. The three levels of the pyramid is not mutually exclusive but rather interdependent
between each other. Depending on how the decision will affect the public as a whole, the type of
decision will move from one level into another. The companies’ top management need to redefine

the five basic fundamental of essentials namely, religion, life, intellectual, lineage and property in
the process of their decision making and the type of information to be disclosed.
In this instance, any risk information which affect the faith and religion sensitivity of the
stakeholders is considered in the category of essentials and must be provided in the company’s
websites. As essentials level concern on the ones basic needs for survival, information such as
investment in non-permissible projects, activities which may destruct the environment and quality
of life must be provided. Although it was argued earlier that company may refuse to provide such
transparent information, eventually being transparent will build a better trust and confidents by the
stakeholders. Apart of that, historical risk information which explained any major incidents or loss
faced by the company which resulted a huge loss to the stakeholder also considered as essentials.
Besides protecting the faith elements, protecting stakeholders properties is one of the most
important elements as well.
For the second level of Maslahah, is the convenience (hajiyyat) which concern on how to
ease the life of human being, the top management may provide detail risk management plan to the
stakeholder. As web-sites provide the ability for direct communication between the company and
their stakeholders, the creation of “frequently asked question” section and the customer support
center link in the corporate website will assist the audience in information acquisition and further
clarification. They may further enrich this initiatives by continuously update the web-sites with the
latest information and provide real time risk information to assist the stakeholders decision making
process.
The next Maslahah level is the embellishment (tahsiniyyat), which is actually giving more
than is required to help or please others. At this level, the action taken is to add more values to the
organization. For example, providing the international market condition and analysis may asiist the
investor to evaluate current opportunity for investment. Another initiatives is by involving in the
campaign on the green awareness to the stakeholders and public as a whole. The green campaign
will portray the initiatives of the company in reducing the risk of future pollution problems. On the
other hand, providing a special tutorial for investment decision making is another embellishment
attempt. This initiatives will assist the young investors to reduce their potential risk of loss in an
investment in the future. Hence, the embellishment level of disclosure may not directly affect the
stakeholders faith, life and property, however it will further assist and create more values to the
stakeholders.
The following table is the suggested classification of web-based risk disclosure which may
be applied by top management of the companies.
Table 1: Maslahah concept for Web-based risk disclosure

Type of risk Risk category Element Maslahah Level Shariah value
Religion Essentials
Obligatory
Life
Historical
Intellectual Convinient
lineage Recommended
Embelishment
Property
Opportunity
Religion Essentials
Obligatory
Life
Future Intellectual Convinient
lineage Recommended
Embelishment
Property
Religion Essentials
Obligatory
Life
Historical
Threat Intellectual Convinient
lineage Recommended
Embelishment
Property
Religion Essentials
Obligatory
Life
Future Intellectual Convinient
lineage Recommended
Embelishment
Property
CONCLUSION
This study is to incorporate the Islamic values of maslahah concept in the web-based risk
disclosure issues as an additional merit to overcome the weaknesses of Stakeholder theory. The ajor
contribution of this incorporation is the different perspective which require the management to put
their attention on. Instead of fulfilling the requirement of stakeholders as discuss in stakeholder
theory, the maslahah concept put the importance of the effect of such disclosed information to the
public. It was argued that stakeholders theory may not be able to assist the management as it is
difficult to satisfy the stakeholders different requirement, Maslaha concept shift the concentration to
the effect of the information instead of what is required.
In view of Islam, providing disclosure is merely the concept of amanah (trust) to tell the truth
to the public. Responding to Shariah requirement, the trust is placed on the shoulder of the board of
directors and managers, and they are responsible to maintain the health of the organization and at
the same time conforming to the human well-being. Any action or decision that might harm the
human wellness is prohibited by Shariah and to gain more realistic understanding of the Shariah
requirement, the concept of Maslahah should be understood which can be defined as the action of
removing harm (mafsadah) and practicing and promoting good. Discussed by al-Shatibi, the three
level of Maslahah namely daruriyyat (essentials), hajiyyat (complementary) and tahsiniyyat
(embellishment), the concept is not only applicable for Islamic discussion, but they are appropriate
in the management and reporting issues.
This study only focus on the thoeritical aspects of both the stakeholder theory and Maslahah
concept. Future research could be extended by applying the conceptual framework to empirically
examine the current practice of web-based risk disclosure through the view of Maslahah concept.
Reference
Abraham, S., & Cox, P. (2007). Analysing the Determinants of Narrative Risk Information in UK
FTSE 100 Annual Reports. The British Accounting Review, 39(3), 227–248.
http://doi.org/10.1016/j.bar.2007.06.002
Abraham, S., & Shrives, P. J. (2014). Improving the Relevance of Risk Factor Disclosure in
Corporate Annual Reports. The British Accounting Review, 46(1), 91–107.
http://doi.org/10.1016/j.bar.2013.10.002
Akerlof, G. a. (1970). The Market for “Lemons”: Quality Uncertainty and the Market Mechanism.
The Quarterly Journal of Economics, 84(3), 488–500. http://doi.org/10.2307/1879431
Amran, A., Manaf, A., Bin, R., Che, B., & Mohd, H. (2009). Risk Reporting An Exploratory Study
on Risk managementDisclosure in Malaysian Annual Reports. Managerial Auditing Journal,
24(1), 39–57.
Ashbaugh, H., Johnstone, K. M., & Warfield, T. D. (1999). Corporate reporting on the internet.
Accounting Horizons, 13, 241–257. http://doi.org/10.2308/acch.1999.13.3.241
Barakat, A., & Hussainey, K. (2013). Bank Governance,Regulation, Supervision, and Risk
Reporting: Evidence from Operational Risk Disclosures in European Banks. International

Review of Financial Analysis, 30, 254–273. http://doi.org/10.1016/j.irfa.2013.07.002
Beretta, S., & Bozzolan, S. (2004). A Framework for The Analysis of Firm Risk Communication.
The International Journal of Accounting, 39(3), 265–288.
http://doi.org/10.1016/j.intacc.2004.06.006
Beretta, S., Bozzolan, S., Shevlin, T., & Botosan, C. A. (2004). A Framework for The Analysis of
Firm Risk Communication. The International Journal of Accounting, 39(3), 265–288.
Board, I. F. S. (2013). Disclosure Requirements for Islamic.
Botosan, C. a. (1997). Summary Disclosure Level and the Cost of Equity Capital. The Accounting
Review, 72(3), 323–349.
Botosan, C. A. (2004). Discussion of a Framework for The Analysis of Firm Risk Communication.
The International Journal of Accounting, 39(3), 289–295.
Castelo Branco, M., Delgado, C., Sá, M., & Sousa, C. (2014). Comparing CSR communication on
corporate web sites in Sweden and Spain. Baltic Journal of Management, 9(2), 231–250.
http://doi.org/10.1108/BJM-10-2013-0151
Darus, F., Yusoff, H., Abnag Naim, D. M., Mohamad Zain, M., Amran, A., Fauzi, H., & Purwanto,
Y. (2013). Islamic Corporate Social Responsibility ( i -CSR ) Framework from the Perspective
of Maqasid al- Syariah and Maslahah. Issues in Social and Environmental Accounting, 7(2),
102–112.
Debreceny, R., & Gray, G. L. (2001). The production and use of semantically rich accounting
reports on the Internet: XML and XBRL. International Journal of Accounting Information
Systems, 2(1), 47–74. http://doi.org/10.1016/S1467-0895(00)00012-9
Debreceny, R., Gray, G. L., & Rahman, A. (2002). The determinants of Internet financial reporting.
Journal of Accounting and Public Policy, 21(4-5), 371–394. http://doi.org/10.1016/S0278-
4254(02)00067-4
Deller, D., Stubenrath, M., & Weber, C. (1999). A survey on the use of the Internet for investor
relations in the USA, the UK and Germany. European Accounting Review, 8(2), 351–364.
http://doi.org/10.1080/096381899336087
Deumes, R., & Knechel, W. R. (2008). Economic Incentives for Voluntary Reporting on Internal
Risk Management and Control Systems [Electronic Version]. Auditing: A Journal of Practice
& Theory, 27(1), 35–66. http://doi.org/10.2308/aud.2008.27.1.35
Dobler, M. (2008). Incentives for Risk Reporting — A Discretionary Disclosure and Cheap Talk
Approach. The International Journal of Accounting, 43(2), 184–206.
Domínguez, R. L., & Gámez, N. L. C. (2014). Corporate Reporting On Risks: Evidence From
Spanish Companies. Revista de Contabilidad. http://doi.org/10.1016/j.rcsar.2013.10.002
Elsayed, A. N. M. E. (2010). Corporate internet reporting and its consequence on Firm Value:
Evidence from Egypt. Unpublished Thesis.
Elshandidy, T., Fraser, I., & Hussainey, K. (2014). What Drives Mandatory and Voluntary Risk
Reporting Variations Across Germany, UK and US? The British Accounting Review.
http://doi.org/10.1016/j.bar.2014.06.001
Ettredge, M., Richardson, V. J., & Scholz, S. (2001). The presentation of Financial Information at
corporate Web sites. International Journal of Accounting Information Systems, 2(3), 149–168.
http://doi.org/10.1016/S1467-0895(00)00017-8
Freeman, R. E., & Mc Vea, J. (2001). A Stakeholder Approach to Strategic Management.
Handbook of Strategic Management, (01), 32.
Gordon, L. A., Loeb, M. P., & Sohail, T. (2010). Market Value of Voluntary Disclosure Concerning
Information Security. MIS Quarterly Vol., 34(3), 567–594.
Khlifi, F., & Bouri, A. (2010). Corporate Disclosure and Firm Characteristics : A Puzzling
Relationship. Journal of Accounting – Business & Management, 17, 62–89.
Lajili, K., & Zéghal, D. (2005). A Content Analysis of Risk Management Disclosures in
CanadianAnnual Reports. Canadian Journal of Administrative Sciences, 22, 125–142.
Retrieved from http://www.scopus.com/inward/record.url?eid=2-s2.0-
25144483471&partnerID=tZOtx3y1
Liao, L., Luo, L., & Tang, Q. (2014). Gender diversity, board independence, environmental
committee and greenhouse gas disclosure. The British Accounting Review.
http://doi.org/10.1016/j.bar.2014.01.002
Linsley, P. M., & Shrives, P. J. (2005). Transparency and the Disclosure of Risk Information in the
Banking Sector. http://doi.org/10.1108/13581980510622063
Linsley, P. M., & Shrives, P. J. (2006). Risk Reporting: A Study of Risk Disclosures in the Annual
Reports of UK Companies. The British Accounting Review, 38(4), 387–404.
http://doi.org/10.1016/j.bar.2006.05.002
Marston, C., & Polei, A. (2004). Corporate reporting on the Internet by German companies.
International Journal of Accounting Information Systems, 5(3), 285–311.
http://doi.org/10.1016/j.accinf.2004.02.009
Miihkinen, A. (2012). What Drives Quality of Firm Risk Disclosure?. The Impact of a National
Disclosure Standard and Reporting Incentives under IFRS. International Journal of
Accounting, 47, 437–468. http://doi.org/10.1016/j.intacc.2012.10.005
Mohobbot, A. M. (2005). Corporate Risk Reporting Practices in Annu - al Reports of Japanese
Companies.
Mokhtar, E. S., & Mellett, H. (2013). Competition,Corporate Governance, Ownership Structure and
Risk Reporting. Managerial Auditing Journal Vol., 28(9), 838–865.
Ntim, C. G., Lindop, S., & Thomas, D. A. (2013). Corporate Governance and Risk Reporting in
South Africa: A study of Corporate Risk Disclosures in thePre- and Post-2007/2008 Global
Financial Crisis Periods. International Review of Financial Analysis, 30, 363–383.
http://doi.org/10.1016/j.irfa.2013.07.001
Oliveira, J., Rodrigues, L. L., & Craig, R. (2011). Risk-Related Disclosures by Non-Finance
Companies Portuguese Practices and Disclosure Characteristics. Managerial Auditing Journal
Vol., 26(9), 817–839.
Pérignon, C., & Smith, D. R. (2010). The Level and Quality of Value-at-Risk Disclosure by
Commercial Banks. Journal of Banking & Finance, 34(2), 362–377.
http://doi.org/10.1016/j.jbankfin.2009.08.009
Probohudono, A. N., Tower, G., & Rusmin, R. (2013). Risk Disclosure During the Global Financial
Crisis. Social Responsibility Journal, 9, 124–137. http://doi.org/10.1108/17471111311307859
Souissi, M., & Khlif, H. (2012). Meta-Analytic Review of Disclosure Level and Cost of Equity

Capital. International Journal of Accounting and Information Management, 20(1), 49–62.
http://doi.org/10.1108/18347641211201072
Sternberg, E. (1997). The Defects of Stakeholder Theory. Corporate Governance: An International
Review, 5(1), 3–10. http://doi.org/10.1111/1467-8683.00034
Al-Bukhari, (1997), Sahih al-Bukhari,3,Beirut: Dar Ibn Kathir.
Al-Qur’an al-Kariem
Al-Shatibi, Abu Ishaq Ibrahim Ibn Muhammad,(1997), Al-Muwafaqat fi Usul al-Shariah, (3rd
edition), Beirut: Dar al Ma’rifah
Ibn Ashur, (2006), Treaties on Maqasid al-Shari;ah, Virginia: International Institute of Islamic
Thoughts
Jalil, Abdullaah,(2006), The Significances of Maslahah Concept and Doctrine of Maqasid
(Objectives) Al-Shariah in Project Evaluation (March, 14 2011). The Journal of Muamalat and
Islamic Finance Research (JMIFR), Vol. 3, No. 1, pp. 171-202, 2006
Khan, M.F., and Ghifari, N.M. (1992). Shatibi’s Objectives of Shariah and Some Im- plications for
Consumer Theory, In AbulHasan M.Sadeq & Aidit Ghazali (Ed.,) Readings in Islamic
Economic Thought, 176-202. Selangor: Longman Malaysia
al-Ghazali, A.H.M.B.M (1322 H), al-Mustasfa min ‘Ilm al-Usul, al-Matbaàt al- Amiriyah:
Bulaque, Egypt.Vol. I.
Akram, Laldin Mohamad, (2010), Understanding The Concept Of Maslahah And Its Parameters
When Used In Financial Transactions ISRA International Journal of Islamic Finance, 2(1):
61-84.
Masud, M. K. (1995), Shatibi’s Philosophy of Islamic Law. Kuala Lumpur: Islamic Book Trust.

Accountability Understanding on Cooperative Organization
(Interpretive study at Cooperatives Department and SMEs in Jombang)
Masiyah Kholmi
Universitas Muhammadiyah Malang
Abstract: Accountability Understanding on Cooperative Organization (Interpretive

study at Cooperatives Department and SMEs in Jombang). The research aims to
understand the meaning of accountability in cooperative organization. The research uses
interpretive paradigm and etnometodology as analysis methods. Data is collected by
interviews of the informants. The results of this research show three meanings of
accountability in cooperative organization, namely program accountability, managerial
accountability, and financial accountability. The Accountability program is used to
achieve the goals and objectives of the cooperative. Managerial accountability is
accountable on management to business development and improvement of human
resources. Financial accountability is responsibility for cooperative financial.
Cooperative financial reporting as a form of accountability to the cooperative members is
reflected in the submission of annual financial statements on the Annual Meeting of
Members (RAT). Cooperative can be said to be accountable if has done RAT.
Abstrak: Memahami Akuntabilitas pada Organisasi Koperasi (Studi Interpretif

pada Dinas Koperasi dan UMKM di Kabupaten Jombang). Tujuan penelitian ini
adalah untuk memahami makna akuntabilitas bagi organisasi koperasi. Penelitian ini
dilakukan pada Dinas Koperasi dan UMKM di Kabupaten Jombang. Penelitian ini
menggunakan paradigma interpretif dengan metode etnometodologi. Pengumpulan data
melalui wawancara informan. Hasil penelitian menunjukkan bahwa adanya tiga makna
akuntabilitas bagi organisasi koperasi yaitu akuntabilitas program, akuntabilitas
manajerial, dan akuntabilitas keuangan. Akuntabilitas program digunakan untuk
mencapai sasaran dan tujuan koperasi. Akuntabilitas manajerial, yaitu
pertanggungjawaban manajemen terhadap pengembangan usaha dan peningkatan sumber
daya manusia. Akuntabilitas keuangan merupakan tanggungjawab keuangan koperasi.
Laporan keuangan koperasi sebagai bentuk pertanggungjawaban koperasi kepada
anggotanya yang tercermin dari penyampaian laporan keuangan pada Rapat Anggota
Tahunan (RAT). Koperasi dapat dikatakan akuntabel apabila telah melakukan RAT.
Kata Kunci: Akuntabilitas, koperasi, keuangan, Dinas Koperasi dan UMKM
Requirement of accountability intensified implementation followed by the

development of the public sector in the democracy era. Accountability becomes
the norm and value systems that applied the state on the basis of public
institutions in carrying out its functions as described in Law RI No. 32 of 2004
about local government, paragraph 20 (1.g). Governance based on accountability
and financial management carried out in an efficient, effective, transparent and
accountable. The important role of accountability is evidenced by several posts
such as the World Bank (1992), UNDP (1997), Sedarmayanti (2003) and Raba
(2006) which states that accountability is a key element in achieving good
governance.

Patton (1992) explains that true accountability is closely related to the
legitimacy or validity of the existence of the organization as well as its appearance
due to the relationship (relational), individual, group, company, government, and
the organization should be responsible to others. In a relationship of
accountability is very important to distinguish between principal and agent. Agent
is an individual, group or organization as the party who accepts the responsibility
and obligation to account for the acceptance of responsibility. Principal is an
individual, group, or organization as the party entitled to receive the
responsibilities and accountability of the agent. Principal, in the accountability
relationship can interrogate (check) agent and can impose sanctions if the action
or agent answer was not satisfactory (Raba, 2006: 28) .
Mardiasmo (2009: 20) defines that public accountability is the obligation of
a fiduciary (agent) to provide accountability, serving, reporting, and disclose all
activities. That are its responsibility to the donor mandate (principal) who has the
right and authority to hold accountable the. Messner (2009:918) states that the
demand for public accountability is more often a requirement for managerial
control of the company and the corporate scandals seem to suggest that managers
should be subject to managerial accountability towards (vis-à-vis) friends and
superiors. The notion of accountability is as an ability to account on the tasks that
have been run against the parties who should or should accept responsibility
(Suardana, 2011). Cooperative accountability is accountability of all parties
involved in co-operative or accountability for the entire management team of the
cooperative to the public, because the public has the right publicly to accept
responsibility for the cooperative ( Hafiluddin, 2012).
Accountability is one of five (5) good governance principles of
transparency, accountability, responsibility, independence and fairness. The
principle of accountability has a major element in structuring the proper
management including cooperatives. In order to perform its functions to increase
the empowerment of cooperatives and SMEs and run the trust Decree No. XI /
MPR / 1998 on the organization of the State are clean and free from corruption ,
collusion and nepotism arranged Performance Report Department of Cooperatives
and SMEs in East Java province as a form of transparency accountability society
and promote a system of good governance, clean and dignified (good
governance).
System performance accountability of government agencies is an instrument
used by them to meet obligations to account for achievement - performance
achievements in implementing the vision and mission of the organization. In such
a system includes an assessment of the extent of planning, measuring, reporting,
evaluation and performance achievement (Department of Cooperatives and SMEs,
2015). This performance report is made as a form of accountability to
stakeholders on the gains related to the empowerment of Cooperatives, Micro,
Small and Medium Enterprises (MSME) has been done by the Department of
Cooperatives and Micro, Small and Medium Enterprises in East Java province in
2014.
In the public perspective, the term accountability in the context of policy
and public administration should include at least five (5) dimensions of
accountability (Jabra and Dwivedi, 1989) namely (1) administrative or
organizational accountability; (2) legal accountability; (3) political accountability;
(4) professional accountability; (5) moral accountability. Ellwood (1993) explains
four (4) dimensions of accountability that must be met by public sector
organizations namely (1) Accountability for probity and legality; (2)
accountability process, (3) program accountability, (4) policy accountability. The
results of interviews with 15 (fifteen) executives Australian public sector
organizations provide dimensions of accountability in context there are five (5)
forms of accountability that have been identified, namely political accountability,
public accountability, managerial accountability, professional, and personal
accountability (Sinclair, 1995).
Biodiversity forms of accountability above show that accountability as a
concept while the term accountability requires a more in-depth explanation again
so it is not easy to make the concept of accountability because it is difficult to
understand. Patton’s (1992) view that the meaning and implications of the concept
of accountability is often less clear and the concept of accountability is variously
interpreted according to the context (the precise meaning and implications of the
concepts of accountability are often left unclear). An analyst (Sinclair, 1995)
mentions that accountability "like a chameleon". That is, subjectively
accountability is constructed and change according to the context. That parable
about the concept of accountability, everyone gives a different sense depending on
their points of view respectively. This can be understood in various ways ranging
from a sense of personal responsibility and obligation of the group or organization
that is a consequence of authority or power.
Based on the above mentioned, the cooperative accountability is interesting
to be studied because all the researches have not explained on the accountability
of the organization of cooperatives. The purpose of this research is to understand
what is the meaning and form the of accountability in the cooperative
organization from the perspective of Chairman of Department of Cooperatives
and SMEs in Jombang.
METHOD
This study uses qualitative research. A qualitative approach aims to
understand the phenomenon of what is experienced by research subjects, such a
behaviors, perceptions, motivations, actions holistically and by way of description
in the form of words and language in a natural context (Moleong, 2008:6). With a
qualitative approach, the research data is set in a natural. That is study is a natural
phenomenon or what their taking into account the context in which the
phenomenon occurs. In this study, the researchers themselves are the primary data
collection tools so that researchers can easily adjust to the reality on the ground
which cannot be done other than humans and able to understand the reality in the
field by participating in study sites (Moleong, 2008). Interpretation of results,
obtained, negotiated and agreed upon by the study subjects were used as the data
source (Moleong, 2008: 13).
This study aims to understand the meaning in accordance with the
information provided by informants, for this study is an analysis of subjectivity
social approach which seeks to understand the situation as it is. Although the
paradigm that is more suitable for use in this study is the interpretive paradigm.
The use of this interpretive paradigm has provided a deeper understanding of the
"accountability" from the perspective of the informant in his life as a research
subject. The method in this research is ethnometodology. Ethnometodology seeks
to understand how the public perceives, explains and illustrates the layout of their
own lives.
Informants in this study as many as three (3) members as key informants
and three (3) as an additional informant deemed relevant and can provide the
information needed in the context of this study. The key informant was the Head
of Department of Cooperatives and SMEs (Mr.A) for Institutional and
Cooperative Enterprises ( Mr. B), Section of Business Development Cooperative
(Mr. C) who knows and understands well the activities which are the focus of the
research (object of study). Additional informant namely: 1) Mrs. D as the
Secretary, 2) Mr. E as the sub bag of Finance, and 3) Mr. F as Section SME
Empowerment.
Data has been collected through interviews of the leaders of the Department
of Cooperatives, SMEs and documentation. Instruments in this study are the
researchers themselves. The process of data collection is done starting in January
to April 2014. Interviews were conducted using an unstructured interview.
Analysis of the data in this study used descriptive qualitative method, to provide
an explanation, interpret and provide the best possible perception of the object
under study. In this process, the data recorded on the field is noted then sorted
,and grouped based on concepts, categories, and themes that have been revealed
by research subjects related to accountability cooperative organizations.

The management of a business organization requires the ability to
constantly adapt to the requirement of ever-changing environment. The
environmental changes that occur at this time also would be an inevitable part of
the cooperative organization. Establishment of the cooperative from the outset
intended to improve the welfare of members in particular and society in general,
as well as an integral part of the national economic order that is democratic and
fair (Article 4, Chapter II, in Law RI No. 17 of 2012). In its development, the
arrangement of accountability is an objective requirement for cooperatives to
develop into an organization that can compete with other business actors
(Sarwani, 2012).
Based on Law RI No. 17 of 2012 (Article 5, Section III) on Values and
Principles, one of the underlying values of the cooperative activities and values
that members of the cooperative is a certain sense of responsibility. Some of the
statements relating to the responsibilities of the cooperative, as described in the
following article: Article 37 (1) In Member Meeting as referred to in Article 36
paragraph and (2) The Board shall submit an annual accountability report. Article
38 (1) The annual accountability report as referred to in Article 37 signed by all
Managers and (2) If an administrator does not sign the annual accountability
report, the Board is concerned should explain the reasons in writing. Article 39
Approval of the annual accountability report is the acceptance of responsibility by
the Board Member Meeting. Article 40 (1) The financial report referred to in
Article 37 paragraph (1) letter c shall be audited by a public accountant.
Institutional Deputy Ministry of Cooperatives and SMEs (Setyo Heriyanto), said
the accountability of management professionalism, creating credibility and trust in
the eyes of the cooperatives. Including partners, governments and stakeholders or
stakeholder.
Accountability in Research Subjects Interpretation

Basic concept of cooperative accountability in general are cooperative board
on its work in implementing the program and activities of the cooperative
members and the government as trustee principal.
Mr. A explained that,

... that accountability are held accountable for what is assigned by the government
to carry out programs and activities. In making the program must meet the
expectations of society and meet the target, the result of a program conducted by
the Department of Cooperatives and SMEs can be felt by the public. Programs that
include: 1) training, 2) capital increase and grants, and 3) facilitation.
Related to the field of cooperative training on accounting and facilitate for

cooperatives that have not made the financial statements, in order to create an
accountability report. Mentoring programs conducted by the Department of
Cooperatives and SMEs in cooperation with universities as a source of skilled
labor. Assistance in this regard to facilitate cooperative unhealthy, if not
impossible to continue the existence of the cooperative, the cooperative was
dissolved because it was afraid that another party can misappropriate the name of
the cooperative (cooperative management is not clear).
Furthermore, Mr. A, explaining that the financial statements of the cooperative is

a necessity as a form of responsibility (accountability). This indicates that the
financial statements could be used as a measure in determining the existence of
healthy cooperatives.
Mrs. D revealed that,

... cooperative management of carrying out his duties is in accordance with the
decision of the ministry of cooperatives. Implementation of the cooperative has
its own rules of local jobs directly from the Regent as head of the local area. The
cooperative made responsibility report annually to the Regent. Office of fostering
technical cooperation for the improvement of human resources is associated with
the Tool Device Cooperative Organisation (APOK) and financial reporting.
Furthermore, informant B, explaining that Annual Members Meeting (RAT) is
the key to the success of the cooperative. RAT conducted three months after
closing the books and RAT serves to account for the cooperative's financial
statements and as a vehicle for cooperative management election turnover.
“RAT is clear evidence of accountability and transparency in the

management of businesses and organizations of a cooperative to its members as
the owner and user of the cooperative business services," said Regional Secretary
(Secretary) Pontianak,while opening RAT KPN Bina Sejahtera (Jimmy, 2015).
At the time of the RAT, the board informed of special products to member
cooperatives. The three (3) criterias for the condition of the cooperative that the
cooperative healthy, less healthy cooperative, and the cooperative is not healthy.
Cooperative to provide guidance through training based on the results of
monitoring and information obtained from cooperative management. In general,
members are less aware of the importance of cooperatives, so buy goods outside
of the cooperative.
Accountability cooperative understood as management responsibility, the
responsibility of enterprises, human resource development, and its responsible for
the products produced by the cooperative. Cooperative is accountable if the
cooperative has conducted the Annual RAT, guidance and mentoring. While
SMEs are accountable if the provision of information development data, the
amount of capital, labor, and others.
Comprehension D similar to A, that the financial statements are
cooperative mandatory and used as a form of accountability during the Annual
Meeting of Members (RAT). This is confirmed in Article 36 paragraph (2) The
Board shall submit an annual accountability report. In order for the cooperative
financial reports, the Department of Cooperatives and SMEs continuously
perform accounting training and facilitate the preparation of reports for the
cooperative.
Mr. C gives understanding the accountability of the financial side as

follows:
Accountability is defined as financial accountability in accordance with accounting
(Balance Sheet), the result showed a significant and could Sisa Hasil Usaha (SHU)
welfare of all members of the cooperative. To encourage cooperative responsible,
in cooperatives there are supervisors and supervisors must be familiar with the
financial statements contained in the cooperative and the report should be based on
applicable accounting standards, the financial accountability will be realized.
Mr. F revealed that :

Accountability SMEs related to financial accountability to donors (LG) District,
Regional and Central governments. Accountability progam, accountability of
development, as well as bertanggungawab training and coaching to Human
Resources. In view of the informant F, SMEs are encouraged to make financial
reports as a form of accountability and, if necessary coaching in financial reporting.
.
Mr. E revealed that :

...cooperative accountability as responsibility of each agency / institution in
managing or conducting business both from a management and finance. To
improve accountability of cooperatives need their Standard Operating
Management (SOM) and Standard Operational Procedure (SOP).
Mr. B revealed that,

Accountability is the accountability of the institution or agency to agency or the
agency itself. Accountability cooperatives include financial accountability.
Accountability is its members not to the public interest. Financial accounting
standards cooperatives are using SAK ETAP (Accounting Standards Financially
Entities Without Public Accountability).
In the Law of the Republic of Indonesia Number 17 Year 2012 concerning

Cooperatives, Article 37, the board is required to submit annual accountability
report. And Article 38, (1) The annual accountability report as referred to in
Article 37 signed by all Managers. (2) If an administrator does not sign the annual
accountability report, the Board is should explain the reasons in writing. Referring
to Article 38 of Law RI No. 17 Year 2012 about Cooperative, provide
reinforcement to the demands of accountability in the organization of cooperatives
that exist in Indonesia. Cooperative management is fully responsible for the
management of the cooperative's interests and objectives of cooperatives, as well
as cooperative representing both inside and outside the court in accordance with
the provisions of the Articles of Association. Member Meeting is the cooperative
organization that holds the highest authority in the cooperative.
Cooperative Efforts to Improve Accountability

Based on interviews of six (6) informant research on what is being pushed
to increase the accountability of cooperatives can be grouped as follows:
1. The board conduct cooperative financial statement based on the Financial
Accounting Standards (GAAP) and it was audited by a public accountant.
2. The Departement of Cooperatives and SMEs training and mentoring
accounting report generation cooperatives.
3. Cooperative perform Annual Members Meeting (RAT) with its members.
4. There are supervisors who are familiar with the financial statements of the
cooperative.
5. The existence of Standard Operational Management and Standard
Operational Procedures (SOP).
Some of the parties involved in improving the accountability of

cooperatives, are the government, the Department of Cooperatives and SMEs,
public accountants, cooperative management and cooperative members. The
central government acted to make the rules in the Act more assertive for every
cooperative and provides sanctions against violations committed by cooperatives
and cooperative reward for good performance and timely report. The Department
of Cooperatives and SMEs takes a firm stand and require the cooperative to report
the financial and cooperative programs. Terms cooperative tightened and
reinforced not as easy to set up cooperatives like growing mushrooms in the rainy
season.
The role of the Department of Cooperatives and SMEs are very influential
to encourage the growth of cooperatives and encourage compliance with the
cooperative in terms of accountability. Department of Cooperatives and SMEs
have the power to impose administrative sanctions cooperatives. While the role of
the public accountant made a policy of systematic financial reporting system,
strengthen and clarify the cooperative financial flow. The public accountant to
make a financial accounting standards particularly for cooperatives. In addition,
public accountants have its own policy in the audited financial statements of the
cooperative. Parties have awareness of cooperative organizations in implementing
the rules, fair and adequate human resources.
Reeves is the director of the "Center for Performance Assessment and the
International Center for Educational Accountability" at Harvard University, USA.
(Sairin, et al., 2005), said that there are 6 (six) principles for the implementation
of accountability, namely: (1) the appropriateness, (2) specification, (3) relevance,
(4) diversification, (5) sustainability, and (6) focus on success.
1) Suitability (congruence) that became the theme of accountability to control
and determine, then there must be compliance with the strategic plan,
performance indicators to the personnel evaluation system, includes the
recognition, rewards and sanctions.
2) Specification (specificity) that accountability needs to be described in
detail and specific and clear, not just as a policy and slogan.
Implementing, employees should know exactly what has been and will be
carried out in accordance with his duties, not only the expectations of the
other party. This requires clarity of program that should be known by
those who have to work.
3) Relevance (relevance), that accountability is expected to build meaningful
relationships with strategic relevance and measures taken towards learning
in the classroom, can be done in ways best (best practice) based on the
stakes guessing (benchmarking).
4) Diversification (respect for diversity), that accountability does not conflict
with diversity. Each institution has different contexts and situations
(uniqueness) that must be dealt with different learning process.
5) Increased continuous (continuity of improvement), that accountability
impact of sustainability in its efforts to improve the quality, there is no
feedback, objective, and timely and focused energy and mind to
continually seek improvement / upgrading.
6) Focus on success (achievement), that accountability is inseparable from
success in its efforts to increase learning achievement in a broad sense and
correct. The criteria used, the data obtained, the analytical model is used
and applied, should not obscure the commitment and consistency for
quality improvement.
As a cooperative organization, structuring accountability is an objective

requirement for cooperatives to develop into an organization that can compete
with other business actors. The Setup program accountability are expected to
increase credibility and trust cooperatives, thereby building a higher
competitiveness again. The steps of coaching, an outline is done with the
implementation of managing human resources and organization, as referred to
above.
Conclusion, Limitations, and Suggestions

The conclusion that can be drawn from the results of this study is
cooperative research informants understand accountability in general as follows:
First, accountability is held accountable for the duty of the government to
implement programs and activities. Second, accountability is widely understood,
that accountability is not only financial, but also the accountability of
management, accountability, human resources, program accountability. Third,
efforts to encourage cooperatives improve accountability, among other things:
The existence of an act to assert the accountability of cooperatives, the financial
statements of the cooperative by the Financial Accounting Standards (SAK),
Department of Cooperatives and SMEs perform accounting training and
assistance to cooperatives, cooperative perform Annual Member Meeting ( RAT)
with members. There is a supervisor who is acquainted with the financial
statements of the cooperative, and the Standard Operational Management and
Standard Operational Procedure (SOP) for the cooperative.
Researchers are well aware that the results of this research, there are some
drawbacks. Some important things, which are a limitation of this research are the
research process-incomplete information (data) about accountability, data
collection is limited to the results of interviews; the researchers did not do
observation and documentation. The number of informants is relatively small (6
informants). The next study is expected to continue this research with attention to
some things that could be considered in future research, namely: Increase the
number of informants, data documentation and observation .
REFERENCES
Hafiluddin, 2012. Sosialisasi-akuntabilitas-koperasi. http://hafil-askad.blogspot.
co.id/2012/11/
Jimmy. 2015. RAT Bukti Akuntabilitas dan Transparansi Pengelolaan Koperasi.

ww.volarefm.com/rat-bukti-akuntabilitas-dan-transparansi-pengelolaan-
koperasi/
Moleong, J. 2008. Metodologi Penelitian Kualitatif. PT Remaja Rosdakarya,
Bandung.
Messner, M. 2009. The Limits of Accountability. Accounting, Organizations, and
Society 34: 918-938.
Mardiasmo, 2009. “Otonomi dan Manajemen Keuangan Daerah”. Yogyakarta,
Andi Offset
Patton.1992. Accountability and Governmental Financial Reporting, Financial
Accountability dan Management, Vol. 8 No. 3.
Raba, M. 2006. Akuntabilitas , Konsep dan Implementasi. UMM Press, 2006.
Sarwani, Muhammad. 2012. KOPERASI: Penataan Akuntabilitas Jadi Kebutuhan
Objektif. Tanggal akses 2 Maret 2016.
http://industri.bisnis.com/read/20120923/87/97020/koperasi-penataan-
akuntabilitas-jadi-kebutuhan-objektif
Sinclair, Amanda.1995. The Chameleon of accountability: Forms and Discourses,
Accounting Organizations and Society, Vol. 20, No. 2//3 pp.219-237.
Sedarmayanti. 2003. Good Governance (Kepemerintahan yang Baik) dalam
Rangka Otonomi Daerah. Mandar maju, Bandung
Undang - Undang Perkoperasian Nomor 17 Tahun 2012.
www.depkop.go.id. Diakses 20 Januari 2014.
UNDP, 1997. Governance for sustaibanle Development – A Policy Documen.
UNDP, New York.
World Bank. 1992. Governance and Development. World Bank, Washington.
... ..... Laporan Kinerja Tahun 2014. Dinas Koperasi dan Usaha Mikro, Kecil dan
Menengah Provinsi, Jawa Timur.

The Effect of Brand Awareness, Brand Perception and
Brand Trust Schools Towards Decision To Enroll in
Private Junior and Senior High School at Bekasi
Maydian Sunarlie1) Masruchin Zuhairi2)
Magister Manajemen, Institut Teknologi dan Bisnis Kalbis, Jakarta

Pulomas Selatan Street Kav. 22, Jakarta 13210
Email: maydian.sunarlie@live.com
Email: masruchin@gmail.com
Abstract: This research determine the effect of school brand awareness and
brand perception towards brand trust and its implications to decision to
enroll in junior and senior high school in Bekasi City. Using quantitative
methods through surveys with samples of 51 junior and 46 senior high
students. The questionaire results are tested the validity and reliability, the
classical assumption test such as normality, heteroscedasticity,
multicollinearity, autocorrelation, correlation with Pearson correlation
coefficient, collinearity with t and F test. Results are: (1)there is no
significant colleration between brand awareness and brand trust in junior
high but a significant colleration in senior high; (2)there is a significant
colleration between brand perception and brand trust in junior and senior
high; (3)there is a significant correlation between brand trust with
registering decision in junior and senior high ; (4)simultaneously brand
awareness and perception has a significant colleration towards brand trust
in junior and senior high.
Keywords: brand awareness, brand perception, brand trust and decision to

enroll.
I.Preliminary
Secondary education sector in the city of Bekasi offers exciting opportunities for the
private sector to invest. In 2014, Bekasi city education department noted there were 42.672
primary school students were passed. The capacity owned public schools only 15.636 seats,
or only 32% of students who graduated from elementary school are able to be accommodated
by the junior high schools. It means that the private sector has the opportunity to hold about
68% or about 27.036 students that aren’t accommodated by the public junior high school.
We have more interesting fact in junior high school, from junior high wheter its public or
private, there were 33.716 students, the capacity of state senior high school and vocational
secondary schools only 6.378 seats for public senior high school and 3,284 seats for public

vocational high school there are about 72% or 24,054 graduates of junior high school
students who are not accommodated by vocational high schools and senior high schools
(source:http://wartakota.tribunnews.com).
If you look at the number, it is a fantastic number or it is an opportunity of a very large
market, but when you see again the number of vocational high schools and senior high
schools is quite a lot based on information from www.kesekolah.com website accessed on 16
June 2015, the number of private schools amounted to 468 schools. For senior and vocational
high schools based on website ministry of education and culture,
http://psma.kemdikbud.go.id an official website of the Ministry of Education and Culture that
i am visit on 16 June 2015 private schools in Bekasi total of 86 private secondary schools.
Problems began to arise here the numbers of schools compared with the number of students
from less worth, if 27,036 prospective students are distributed evenly in each school to 468
junior high schools of course it will very small and the results will be every private junior
high schools only has 57,7 students or around 58 students. Then for private senior high
schools, prospective students are divided 86 from 24,054 students around 279.7 students
rounded up to 280 students, average per senior and vocational high schools.
We can say that it is a big market, but we can’t deny the fact that graduating from
national exam it’s a scary things for students. Even a female student wanted to commit
suicide by hanging herself as news from http://megapolitan.kompas.com written at may
13rd, 2013. FW(17) students from junior high in Pondok Petir, Depok. She chose to ending
her life by hanging herself in her house, around 06.15 am in Saturday, may 18th, 2013 cited
at october 18th 2015.
The number of graduate students and national exam already fairly complicated
problem compounded by the number of competitors are quite a lot of schools. For example
the area of East Bekasi District has a tight competition, there are six public junior high
schools namely SMPN 1 Bekasi, SMPN 2 Bekasi, SMPN 3 Bekasi, SMPN 11 Bekasi, SMPN
18 Bekasi and SMPN 32 Bekasi, while for public junior high school, there are 27 other
private junior high schools , Then to senior high school there is only one ie SMA Negeri 1
Bekasi, while for the private high school in East Bekasi region there are 11 other private high
school. Source: http://bekasikota.siap.web.id/data-sekolah/data-daftar/ cited dated October
18, 2015.
Judging from the number of competitors that pretty much would have created a fierce
competition between private school, it needs to be a hallmark of the school to be easily

remembered by the people. In the quotation from Kotler, Keller (2008:332), American
Marketing Association defines a brand (brand) as the "name", term, sign, symbol, or design,
or a combination thereof, are intended to identify the goods or services, the seller or group of
sellers and to make the differentiation of the goods or services of a competitor. "thus, a brand
is a product or service adder dimensions in a certain way to differentiate of other products or
services that are designed to satisfy the same needs. Like Kotler and Keller said in a
statement earlier, we can said that the name of the school is the brand. This study is also
consistent with research by Azwar Anas (2010), he conducted a study entitled "The Effect of
Brand Awareness Product Purchase Decision Against Indomie In Bandar Lampung". The
results of his research is the Brand Awareness is one variable that is very powerful in
influencing the consumer's decision to purchase a product, especially a product Indomie in
his research.
In addition, this research is in line also with the study by Adi Putra (2011), he did a
study entitled "Analysis of Effect of Perception brands Rexona Against Interests Buy
Consumer (Studies in Faculty of Economics, University of Andalas)", which concluded that
the perception of the brand has an influence on the variable interest consumer spending in
particular deodorant brand Rexona.
Currently consumers lives become more complicated, busy, and lack of time, the
ability of the brand to simplify decision making and reduce the risk becomes priceless.
Strength in the form of consciousness, perception and trust in the name/brand in the minds of
consumers (prospective students) is the main capital and fundamental, and now there are well
identified, namely the perception of students to the high school of their shelter at this time,
when they were still a candidate when students enroll in school so that in the end choose to
enroll in school.
By choosing these issues, researchers want to identify existing problems above, the
researchers took the title of the study: The influence of brand awareness, brand perception
and Brand Trust School against the wishes of parents enroll their children as a high school
student in Bekasi.
Junior high and senior high school that are in a period of growth perform continuous
promotion for its existence can be known to the general public. The media campaign today to
convey information that is done through brochures, visits to schools, in magazine ads, making
an open house monthly, and many others things. The expected level of brand awareness,

brand perception and brand trust from existing schools become better known could be
improved so as to attract the interest of students to enroll the school. Therefore, this study
wanted to know how big the influence of brand awareness, brand perception, as well as the
trust of existing brands in the minds of consumers the school so that they want to sign up,
especially junior and senior high schools in Bekasi.
The identification of problems that can be described in this study are:

1. How big is the effects of brand awareness to brand trust in junior and senior high school at
Bekasi?
2. How big is the effects of the perception of your brand to brand trust in junior and senior
high school at Bekasi?
3. How big is the effects of brand awareness and brand perception together to brand trust in
junior and senior high school at Bekasi?
4.How big is the effects of brand trust on the decision to enroll in junior and senior high
school at Bekasi?
The purpose of this study is:

1.Knowing the influence of brand awareness to brand trust in junior and senior high school at
Bekasi,
2. Knowing the influence brand perception on brand trust in junior and senior high school at
Bekasi,
3. Knowing the influence of brand awareness and brand perception together to brand trust in
junior and senior high school at Bekasi, and
4. Knowing the level of influence of brand trust on the decision to enroll in junior and senior
high school at Bekasi.
II.Research Methodology
A.Supporting Theory
Quoted from Kotler, Keller (2008:265) Branding is to provide products and services
in the form of the power of a brand. It is all about how to make a distinction between
products. Marketers need to teach consumers how to idenficate what products they sell by
providing a name and other brand elements. Branding make a mental structure that help
consumers to maintain their knowledge about products and services.

Quoted from Kotler, Keller (2008:332), the association of American marketing
defines brand as the "name", term, sign, symbol, or design, or a combination thereof, are
intended to identify the goods or services, the seller or group of sellers and to differentiate
their goods or services from competitors. Brand is a product or service adder dimensions in a
certain way to differentiate of other products or services that are designed to satisfy the same
needs.
In Durianto, et al. (2004:6), he quotes from David A. Aaker (1997) explains that the
awareness describes the presence of the brand in the mind of the consumer, which could be
decisive in several categories, and usually has a key role in brand equity. Raising awareness
is a mechanism to expand the brand market. Awareness also affects perception and behavior.
So if this awareness is very low then it is almost certain that the brand equity is also low. The
role of brand awareness in the overall brand equity is depending on the extent of the level of
consciousness achieved by a brand.
Kotler, Keller (2008: 228). Mention that people can form different perceptions of the
same stimuli for three perceptual processes, namely:
1.Selective Attention
For example, people have very much stimuli every day most people could be flooded with
more than 1,500 ads per day. A person may not be able to respond to all stimuli, most of the
stimulus will be filtered process called selective attention.
2.Selective Distortion
Selective distortion is the tendency to interpret the information so that it complies with our
preconceptions. Consumers will often twist the information so that it becomes consistent with
their initial trust on the brand and product.
3. Selective Retention
People will forget a lot of things they learn, but people are likely to remember information
that supports their views and beliefs. Because of their selective memory, we tend to
remember the good things mentioned about the products that we like and forget the good
things mentioned about competitors' products. Selective memory explains why marketers use
drama and repetition in sending messages to the market they target to ensure that their
messages are not underestimated.
In Ferrinadewi (2008: 152) said that there are three activities that can be done to increase
consumer trust companies, namely:
1.Achieving Result

Consumer expectations is nothing but a promise that must be met if you want to earn the trust
of consumers. In fulfilling its promise to consumers, every employee in the company should
fulfill its responsibility to cooperate respectively.
2.Acting with integrity
To act with integrity means consistency between words and actions in every situation. Lack
of integrity is a key factor for either party to believe in the sincerity of the other party.
3.Demonstrate concern
The ability of the company to express concern to consumers in the form of understanding
consumer attitudes indicate if the consumers facing problems with the product, it will make
the trust grown.
According to Kotler and Keller (2012: 234) there are five stages in the decision to buy, these
stages are as follows:
1.Knowing The Problem
The purchase process begins when the buyer recognizes a problem or need. These needs can
be triggered by internal or external stimuli. Marketers need to identify circumstances that
trigger a particular need, by gathering information from consumers. After that they can draw
up a marketing strategy that can trigger consumer interest. It is very important to the purchase
with the freedom to choose, for example on luxury items, vacation packages, and
entertainment options. Consumer motivation needs to be improved so that potential buyers
giving serious consideration.
2. Searching for information

Consumers who aroused his need to be encouraged to seek more information. We can divide
it into two levels of stimulation. The first level is reinforcement attention. At this level, the
person may begin to actively search for information: looking for reading material, call a
friend, and visit the shop to learn about a particular product.
Sources of consumer information classified into the following four groups:

1. Source from personal, family, friends, neighbors, acquaintances.
2. Sources from commercial, advertising, sales representatives, distributors, packaging,
displays in stores.
3. Sources from public, mass media, organizational determinants of consumer ratings.
4. Sources from experience, handling, assessment and use of the product.

3. Evaluation of Alternatives
There are several evaluation process decisions, and the latest models that looked at the
evaluation process as a consumer-oriented cognitive processes. Namely, the model assumes
consumers form judgments on a product with a very conscious and rational.
Some basic concepts will help us understand consumer evaluation process. First, consumers
trying to make ends meet. Second, consumers are looking for certain benefits from the
product solution. Third, consumers view each product as a set of attributes with different
capabilities in delivering the benefits are used to satisfy that need. Attributes that are in
demand by buyers vary depending the type of product, for example, as follows:
a. Camera for image sharpness, speed cameras, camera size, price.

b. Hotel fot the location, cleanliness, atmosphere, price.
c. Mouthwash for colour, effectiveness, ability to kill germs, price, flavor / aroma.
d. Tire for safety, service life, quality while driving, price.
The consumer will pay great attention to the attributes that provide the benefits that they
sought. Market of certain products often can be segmented based on attributes that stand out
in every different of consumer groups.
4. Purchase Decision
In the evaluation phase, consumers formed a preference for brands that are in the collection
of choice. Consumers also can form the intention to buy the most preferred brand. In carrying
out the purpose of the purchase, the consumer can take five sub-decisions: brand, dealer,
quantity, time and method of payment. In purchasing daily products, decisions making aren’t
so big. For example, when buying sugar, a lot of consumers do not think about a supplier or a
method of payment.
5. post purchase behaviour

After the purchase, consumers may have noticed a discrepancy due to certain features that are
disturbing or hear things that are unpleasant neighbor other brands, and will always be alert to
information that supports decision. Marketing communications must supply the evaluation
confirmed the conviction and consumer choice and help him feel comfortable with the brand.
Marketer's job does not end just like that when the product is purchased. Marketers must

monitor the satisfaction post-purchase, post-purchase action, and post-purchase product
usage.
Knowing the Problem
Searching for information
Evaluation of alternatives
Purchase decision
Post purchase behaviour
Picture 1: Consumers purchasing process Five-Stage Model

Source: Kotler, Keller (2008: 235)
B. Type of research
Quoted from Sugiyono (2012: 4), the types of research methods can be classified based on
the objectives and the level of naturalness or natural setting of object studied. Based on the
objectives, research methods are classified into basic research, applied research and research
and development. Furthermore, based on the level of naturalness, research methods can be
grouped into experimental research methods, survey and naturalistic.
According to Gray (1997) cited in the book Sugiyono (2012: 4), Gay stated that it is difficult
to distinguish between pure research (basic) and applied separately, as they both lie on the
same continuum line.
Jujun Suriasumantri S. (1985) cited in the book Sugiyono (2012: 4), Jujun stated that basic or
pure research is research aimed at discovering new knowledge that has not previously been
known, whereas applied research is aimed at solving the problems of practical life.
For research and development, Borg and Gall (1988) states that research and development is
a method of research to develop or validate the products. research and development used in
education and learning.

Research and development is a "bridge" between basic research with applied research, basic
research which aims to "discover new knowledge about fundamental phenomenon" and
applied research aimed at finding practical knowledge that can be applied even if there are
times when an applied research as well as to develop the product. Research and development
aims to discover, develop and validate a product.
Borg and Gall (1989) cited in the book Sugiyono (2012: 5) said that one way to bridge the
gap between research and practice in education is to Research and Development (R & D). In
general, research R & D are longitudinal (several stages). To study the needs analysis that is
able to produce products that are frequently used hypothetical basic research methods.
Furthermore, to test the product that is still hypothetical, used by experiments. Once the
product is tested, it can be applied. Once the product is tested, it can be applied to the process
of testing the product with the experiment, called the study.
Experimental research methods are very unnatural / natural because the research under
controlled conditions so that there is no influence from the outside, the experimental method
is the research methods used to find the effect of specific treatment example: ac room
influence on work productivity. Then, the survey method used to obtain data from a particular
place is natural (not artificial), but the researchers did treatment in data collection, for
example by circulating questionnaires, tests, structured interviews, and so on.
Quoted from Sugiyono (2012: 7), he types of research that is on top, it can be argued that it is
included in the quantitative method is experimental and survey research methods. Included in
the qualitative method is naturalistic method. Research for basic research. In general, using
experimental methods and qualitative, experimental and applied research using surveys, and
R & D can use surveys, qualitative and experimentation.
According Sugiyono (2012: 8) Method of quantitative research can be interpreted as a

method of research that is based on the philosophy of positivism, is used to examine the
population or a particular sample, data collection using research instrument, the analysis of
quantitative data / statistics, with the aim to test the hypothesis that has been set. Qualitative
research methods according Sugiyono (2012: 9) is a research method that is based on the
philosophy postpositivisme, is used to examine the condition of the object that is natural, (as
his opponent was an experiment) where the researcher is a key instrument, data collection
techniques as triangulation (combined) , data analysis is inductive / qualitative and qualitative
research results further emphasize the significance rather than generalization.

C. Location and Time of Research
Researchers based the title of the research paper that wants to examine the effects of brand
awareness, brand perception and brand trust on the decision to enroll in junior and senior high
schools in Bekasi, the researchers conduct their own research and study in the city of Bekasi
will be carried out in June 2015.
D. Population
In this study, the research population is the students of junior and senior high school by
choosing forces entered in 2014 or the most recent generation so that what is presented before
them in and what they feel after entry still not biased by other things.
E. Research Design
The research variables, quoted Sugiyono (2012: 38), he quotes from Hatch and Farhady
(1981) theoretically variables can be defined as an attribute, a person, or an object, which has
a "variation" from one person to another or one object with the object other. Kerlinger (1973)
states that there are variables construct or properties that will be studied. Then, Kidder (1981)
says that the variable is a quality where researchers study and draw conclusions from it.
III. DISCUSSION
A.Identity Respondents Descriptive Analysis
By distributing questionnaires to all students first grade junior high school and senior high
school that became the sample of this study. In this descriptive analysis, the respondent data
described through some single table. Data of respondents in this study is needed to determine
the background of the respondents were able to provide input to explain the results obtained
from the study. The process of distributing questionnaires as described previously distributed
on June 9, 2015 for high school students and June 10, 2015 For junior high school students.
B.Regression Analysis
Linear regression analysis is to analyze the influence of the independent variable on the
dependent variable. The first variable brand awareness (X1), as the dependent variable and
brand trust (Y1) as the independent variable, The regression formula is as follows:

Y1 = a + b1 X1
Then the brand perception of both variables (X2), as the dependent variable and brand trust
(Y1) as the independent variable, The regression formula is as follows:
Y1 = a + b2 X2
For the third variable brand trust (Y1), as well as the decision to enroll the dependent variable
(Y2) as the independent variable, The regression formula is as follows:
Y2 = a + by1 Y1
Regression Analysis of Brand Awareness (X1) with the Brand Trust (Y1) in junior high
school
1.
Table 1. Regression table X1 by Y1 on Junior High School
Coefficientsa
Unstandardized Standardized
Model B Std. Error Beta T Sig.
1(Constant) 22,338 6,175 3,617 ,00
1
TotalKesadaranMerk ,125 ,162 ,110 ,771 ,44
4
a. Dependent Variable: TotalKepercayaanMerk
Source: The results of the test data processing SPSS ver.19
2.From the output results in Table 1 are the result of brand awareness t variable (X 1) of 0.771,
Getting t table for α = 0.05 t distribution table sought at a = 5%: the degrees of freedom (df) =
nk- 1 or df = 51-1-1 = 49 (n is the number of cases and k is the number of independent
variables), obtained t table of 2.00958.

3. Rule of decision if t> t table then reject H0 or significant. Tcount independent variable X1
used> t table (0.771 <2.00958) then H0 is accepted, that would mean there was not a
significant difference between brand awareness (X1) to trust (Y1) at the junior level.
4. Based on the linear regression equation of table 1 on the significance of the column, the
result is that: Of the independent variables included in the regression model, the variables
used that brand awareness is very insignificant. It can be seen from the significance (sig) for
brand awareness variable (X1) of 0.444 was far above 0.05 (sig. <.05). This indicates that
brand trust dependent variable (Y1) there was no significant effect of brand awareness by
independent variables (X1).
5. Retrieved figures standardized regression coefficients (beta coefficient) brand awareness
variable (X1) of 0.110. Meaning: the influence and contribution of independent variables
brand awareness (X1) to the Brand Trust (Y1) of 0.110 in junior high school.
6. In Table 1, the coefficient in column B, constant (a) is 22.338, while the total value of the
brand awareness (b) is 0.125, so the formula of Equality regression can be written as follows:
Y1 = 22,338 + 0,125 X1
Or
Brand Trust = 22,338 + 0,125 Brand Awareness
The meaning of this formula is the constant of 22.338 states that if there is no awareness of
the value of the brand, the brand value of the trust at 22.338. Then X1 regression coefficient
of 0.125 states that each additional one value of brand awareness then brand trust increases
by 0.125.
Regression Analysis of Brand Perception (X2) with the Brand Trust (Y1) in junior high
school
1.
Table 2, regression X2 with Y1 junior high school

Coefficientsa
1 (Constant) 8,783 4,283 2,051 ,046
TotalPersepsiMerk ,857 ,198 ,526 4,325 ,000
a. Dependent Variable: TotalKepercayaanMerk
2. From the output results in Table 2 the results obtained t count brand perception variable
(X2) is 4.325, Getting t table for α = 0.05 t distribution table sought at a = 5%: the degrees of
freedom (df) = nk- 1 or df = 51-1-1 = 49 (n is the number of cases and k is the number of
independent variables), obtained t table of 2.00958.
3. rule of decision if t> t table then reject H0 or significant. T count independent variable X2
used> t table (4.325> 2.00958) then H0 is rejected, it means that there is a significant
difference between brand perception (X2) on brand trust (Y1) at the junior high school.
4. The linear regression equation, Based on table 2 on the significance of the column, the
used are very significant towards brand perception. It can be seen from the significance (sig)
for brand perception variables (X2) of 0.000 is well below 0:05 (sig. <0.05). This indicates
that brand trust dependent variable (Y1) is influenced by brand perceptions independent
variable (X2).
5.Diperoleh figures standardized regression coefficients (beta coefficient) brand perception
variable (X2) is 0,526. Meaning: the influence and contribution of independent variables
brand perception (X2) on Brand Trust (Y1) of 0,526 in junior high school.
brand perception (b) is 0.857, so the formula of Equality regression can be written as follows:
Y1 = 8,783 + 0,857 X2
Or
Brand Trust = 8,783 + 0,857 Brand Perception
The meaning of this formula is constant at 8.783 states that if there is no value perception of
the brand, the brand trust value are 8.783. Then the regression coefficient of 0.857 X2 stated
that each additional 1 the value of the brand perception then brand trust increases by 0.857.
Regression analysis of Brand Trust (Y1) with Decisions Enroll (Y2)

1.
Table 3. Regression of Y1 to Y2 in Junior High School
Coefficientsa
1 (Constant) 19,343 7,495 2,58 ,013
1
TotalKepercayaanMer 2,339 ,271 ,777 8,63 ,000
k 2
a. Dependent Variable: TotalKeputusanMendaftar
2. From the results in Table 3 output results obtained t count variable brand trust (Y1) of
8.632, Getting t table for α = 0.05 t distribution table sought at a = 5%: the degrees of
3. Rule decision if thitung> t table then reject H0 or significant. Tcount independent variables
Y1 used > t table (8.632> 2.00958) then H0 is rejected, it means that there is a significant
difference between brand trust (Y1) of the decision to enroll (Y2) at the junior level.
4. The linear regression equation, table 3 Based on the significance of the column, the result
is that: Of the independent variables included in the regression model, the variables used that
brand trust is very significant. It can be seen from the significance (sig) for brand trust
variables (Y1) of 0.000 is well below 0:05 (sig. <0.05). This suggests that the decision to
enroll the dependent variable (Y2) is influenced by independent variables brand trust (Y1).
5. Obtained figures standardized regression coefficients (beta coefficient) brand trust
variables (Y1) of 0.777. Meaning: the magnitude of the relationship and the contribution of
independent variable brand Trust (Y1) to the Decision enroll (Y2) of 0.777 in junior high
school.
6. In Table 3, the coefficient in column B, constant (a) is 19.343, while the total value of
brand trust (b) is 2.339, so the formula of Equality regression can be written as follows:
Y2 = 19,343 + 2,339 Y1
Or
Decision to Enroll = 19,343 + 2,339 brand trust

The meaning of this formula is the constant of 19.343 states that if there is no brand trust
value, then the value of the decision to enroll amounted to 19.343. Then the regression
coefficient of 2.339 Y1 states that each additional 1 values of brand trust, the decision to
enroll increased by 2,339.
Regression Analysis of Brand Awareness (X1) with the Brand Trust (Y1) in senior high
school
1.
Table 4. Regression table X1 by Y1 on Junior High School
Coefficientsa
1 (Constant) ,909 3,298 ,276 ,784
KesadaranMerk ,610 ,109 ,645 5,604 ,000
a. Dependent Variable: KepercayaanMerk
2. From the output results in Table 4 the results obtained t count brand awareness variable
(X1) is 5.604, Getting t table for α = 0.05 t distribution table sought at a = 5%: the degrees of
3. rule of decision if t> t table then reject H0 or significant. T count independent variable X 1
used> t table (5,604> 2.01537) then H0 is rejected, it means that there is a significant
difference between brand perception (X2) on brand trust (Y1) at the junior high school.
4. The linear regression equation, Based on table 4 on the significance of the column, the
used are very significant towards brand perception. It can be seen from the significance (sig)
for brand awareness variables (X1) of 0.000 is well below 0:05 (sig. <0.05). This indicates
that brand trust dependent variable (Y1) is influenced by brand awareness independent
variable (X1).
5. Retrieved figures standardized regression coefficients (beta coefficient) brand awareness
variable (X1) of 0.645. Meaning: the influence and contribution of independent variables
brand awareness (X1) to the Brand Trust (Y1) of 0.645 in senior high school.
6. In Table 4, the coefficient in column B, constant (a) is 0,909, while the total value of the
brand awareness (b) is 0,610, so the formula of Equality regression can be written as follows:
Y1 = 0,909 + 0,610 X1
Or
Brand Trust = 0,909 + 0,610 Brand Awareness
The meaning of this formula is the constant of 0,909 states that if there is no awareness of the
value of the brand, the brand value of the trust at 0,610. Then X1 regression coefficient of
0.610 states that each additional one value of brand awareness then brand trust increases by
0.610.
There is difference between junior and senior high school, in junior high there is no
significant effect but in senior high school we find that brand awareness having a significant
effect toward brand trust. The basic difference between junior and senior high school is their
age. In Ferrinadewi (2008: 119) said that personality is a psychological concept, which is
influenced by biological processes and human needs. Aging is a biological process, because
of the age difference in high school students so it will be different personalities. Personality is
the psychological characteristics of a person that determines and reflects how the
environment responds quoted from Schiffman & Kanuk in Ferrinadewi (118: 2008). It is said
that the consumer personality differences will clearly illustrate differences in consumer
behavior quoted from Ferrinadewi (126: 2008). Consumer behavior according to Schiffman
& Kanuk in marketing management journal petra, (2007: 74), said consumer behavior is
behavior that indicated consumers in search of the purchase, use, evaluation, and replacement
of products and services are able to satisfy the needs of consumers. As consumer behavior
influenced by four factors namely social, personal, psychological, and cultural. Social factors
consist of a group, family influence, then roles and status, while personal factors existing
economic situation, lifestyle, personality, seflconcept and the last is age and lifecycle. For
psychological factors influenced, motivation, perception, learning and beliefs and attitude.
Recently there subcultural cultural and social class.
So the difference in results between the junior and senior high schools, starting from the most
fundamental difference of both the age. Age causes the two different personalities,
personalities make them have a different behavior when it becomes the consumer. Factors
affecting their behavior can be of social, personal, psychological, or cultural.

Regression Analysis of Brand Perception (X2) with the Brand Trust (Y1) in Senior High
School
1.
Table 5 Table linear regression X2 with Y 1 in Senior high School
Coefficientsa
1 (Constant) 1,739 1,869 ,931 ,357
PersepsiMerk 1,187 ,121 ,829 9,843 ,000
a. Dependent Variable: KepercayaanMerk
2. From the output in table 5 the results obtained t count brand perception variable (X 2) is
9.843, Getting t table for α = 0.05 t distribution table sought at a = 5%: the degrees of
3. Rule decision if t> t table then reject H0 or significant. T value the independent variable
X1 used> t table (9.843> 2.01537) then H0 is rejected, it means that there is a significant
correlation between brand awareness (X2) on brand trust (Y1) at the high school level.
4. Based on the linear regression equation of table 5 on the significance of the column, the
result is that: Of the independent variables included in the regression model, the result of
brand perception variables are very significant. It can be seen from the significance (sig) for
brand perception variables (X2) of 0.000 is well below 0:05 (sig. <0.05). This indicates that
brand trust dependent variable (Y1) is influenced by brand perceptions independent variables
(X2).
5. Obtained figures standardized regression coefficients (beta coefficient) brand perception

variable (X2) is 0,829. That is: the strong relationship senior high school brand perception
independent variable (X2) Brand Trust (Y1) of 0,829 on senior high school.
brand perception (b) is 1.187, so the formula of Equality regression can be written as follows:
Y1 = 1.739 + 1.187 X2

Or
Brand Trust = 1.739 + 1.187 Brand Perception
The meaning of this formula is constant at 1.739 states that if there is no value perception of
the brand, the brand trust value of 1.739. Then the regression coefficient of 1.187 X2 stated
that each additional 1 then the value of the brand perception of brand trust increased by
1,187.
Regression analysis of Brand Trust (Y1) with Decisions to Enroll (Y2) in senior high school
1.
Table 6 Table regression Y1 to Y2 in senior high school
Coefficientsa
Standardized
Unstandardized Coefficients Coefficients
1 (Constant) 14,025 3,635 3,858 ,000
KepercayaanMerk 2,154 ,176 ,879 12,255 ,000

a. Dependent Variable: KeputusanMendaftar
2. From the results in table 6 outputs the result count variable t trust the brand (Y1) amounted
to 12.255, Getting t table for α = 0.05 t distribution table sought at a = 5%: the degrees of
freedom (df) = nk-1 or df = 51-1-1 = 49 (n is the number of cases and k is the number of
3. Rule decision if t> t table then reject H0 or significant. Tcount independent variables Y 1
used> t table (12.255> 2.01537) then H0 is rejected, it means that there is a significant
difference between brand trust (Y1) of the decision to enroll (Y2) at the high school level.
4. The linear regression equation Based on table 6 on the significance of the column, the
used that brand trust is very significant. It can be seen from the significance (sig) for brand
trust variables (Y1) of 0.000 is well below 0:05 (sig. <0.05). This suggests that the decision to
enroll the dependent variable (Y2) is influenced by independent variables brand trust (Y1).

5. Obtained figures standardized regression coefficients (beta coefficient) brand trust
variables (Y1) of 0,879. That is the strong relationship between independent variable of brand
trust (Y1) to the decision to enroll (Y2) amounted to 0,879 in senior high school.
6. In Table 6, the coefficient in column B, constant (a) is 14.025, while the total value of
brand trust (b) is 2.154, so the formula of Equality regression can be written as follows:
Y2 = 14.025 + 2.154 Y1
Or
decision to enroll = 14.025 + 2.154 Brand Trust
The meaning of this formula is the constant of 14.025 states that if there is no value of brand
trust, then the value of the decision to enroll amounted to 14.025. Then the regression
coefficient of 2.154 Y1 states that each additional 1 brand values of trust, the decision to
enroll increased by 2,154.
IV. Conclusion
A.Conclusion
After a thorough discussion with the data analysis of respondents junior high school in Bekasi
drawn the following conclusions:
1.Brand awareness does not have a positive and significant impact on brand trust.
2.Brand perception has a positive and significant impact on brand trust.
3.Brand trust has a positive and significant influence on the decision to enroll.
4. Brand awareness and brand perception together have a significant and positive impact on
brand trust.
5. Perception brand contributes a greater influence on brand trust as compared to brand

awareness.
6. Brand trust on junior high school has contributed a considerable influence on the decision
to enroll.

After going through the process of discussion with senior high school students in Bekasi
respondents can be concluded as follows:
1. Brand awareness has a positive and significant effect on confidence.
2. Perception brand has a positive and significant impact on brand trust
3. Trust brand has a positive and significant influence on the decision to sign up.
4. Brand awareness and brand perception together have a significant and positive impact on
brand trust.
B.Suggestion for managerial
Suggestions for Junior High School, are:
a.make a special uniform that different from any other junior high school.
b.make a website for the school
c. create open-house which wrapped in National Exam simulation try out for free.
d. made a member get member program for junior high students.
Suggestions for senior high school, are:
a. Make jersey, jacket, hat or accessory with senior high school logo aligned with current
trends,
b. Creating a learning program for students who aren’t performing,
c. made a member get member program for senior high school students.
C. Suggestions for futher research
Suggestions for further research, as follows:
1. For students of Junior High seventh grade, in this study perceived maturity level is still less
should if you want to do the survey respondents were more mature. In addition, the futher
researcher might be able to survey the parents as well, and
2. Future studies could examine other variables such as the strength, weakness, opportunity
and threat (SWOT) of the decision to enroll, and with the bigger research object

EFFECT OF BRAND RECOGNITION AND PRODUCT ATTRIBUTES ON
CUSTOMER LOYALTY WITH QUALITY OF SERVICE AS A MODERATING
VARIABLE (CASE STUDY USERS SIMCARD MENTARI BRAND IN PADANG )
Mery Trianita, Surya Dharma

Lecturer Bung Hatta University in Padang
merytrianita@yahoo.com, sdharma3005@gmail.com
Abstract
This study aims to determine the effect of brand recognition and product attributes on
customer loyalty with Quality of Service as a moderating . This research was conducted in
Padang using 93 respondents simcard users Mentari brand . Primary data were collected by
questionnaires . This study only found a product attribute an effect on loyalty. In addition to
the test results Moderating Regression Analysis / MRA does not provide support for the
hypothesis that the quality of service can moderate the influence of branding and product
attributes on customer loyalty .
Keywords : Brand recognition , Product Attributes , Service Quality and Customer

Loyalty
1. Introduction
Mobile phone users in Indonesia is growing rapidly in the last two years . The use
of mobile phones were initially a basic function hitherto modern functionality is a lifestyle
that can not be avoided in communication . Although noting the increase in the number of
subscribers ( the number of active SIM -card ) , but the value of mobile operator revenues in
the industry did not follow the growing number of users. It encourages providers of
communication services provider for a range of business strategies to achieve customer
loyalty with business development through the strengthening of digital business services as
well as a variety of innovative services to meet customer needs . Telecommunications
providers must expand the types of services of mobile and data services , to value-added
services ( value added service ) .
Product providers that first appeared in Indonesia is Indosat . Along with the
increase in the number of providers to create product sales decreased Indosat into this to
happen until 2013. Thus, push down the market share of products in the various regions .
Simcard of the number of customers in the city of Padang Resources PT Indosat Tbk in 2014
Padang branch known sympathies still leads the market , while the sun comes out to 3 after
XL . Information Paketantinternet.com Telkomsel subscribers reached 132.7 million , XL
62.29 million people, while Indosat was ranked third to as much as 59.7 million subscribers
Not growing market share , especially Indosat Mentari caused people to have a
higher knowledge on other providers . If consumers believe that a certain brand is physically
different from competing brands , the brand image will be attached continuously so as to
form a certain brand loyalty , which in turn will create customer loyalty ( Rangkuti , 2004) .
According Marhaeni and Trimanah (2011 ) one of the objectives of the company creates a
superior product range is formed loyalty .
According to Kotler and Keller (2010 ) showed an increase in the quality of service
quality of services provided to all customers , management believes that through consistent
service will create a commitment of consumers to continue using the brand product .
Siskawati (2011 ) found that the quality of services have a significant effect on consumer

loyalty . The stronger the provider of services provided Simcard service providers encourage
a stronger commitment to consumers using Simcard , these circumstances lead to greater
customer loyalty perceived .
Kotler (2008) states that the product attributes is the development of a product or
service which involves the determination of the benefits to be provided. Increased customer
loyalty perceived in using a brand of course also be affected by product attributes. According
Durianto et al (2003) is a unitary product attributes visible items on a brand. Product
attributes can be seen from the color, packaging, package size, and moisture content of the
packaging. Dewi research results and Junaidi (2013) found that the attributes contained on the
brand, such as color, size up the form of packaging to encourage increased commitment to
continue to use the brand. This happens because when the consumer is required certainly will
remember the brand's first product that he uses (awareness). While understanding the product
attributes according to Fandy Tjiptono (2001: 103) is "Elements products are considered
necessary by the customer and serve as the basis for a decision". Attributes attached to the
packaging and the type of products offered indosat sun or IM3 with 4G facility also was not
able to increase its market share in particular indosat sun.
According to Kotler and Keller (2010 ) the brand recognition is an activity carried
out a company to introduce a product made by a company brand . Branding can be done by
utilizing a variety of media ranging from electronic media , print media , billboards to online
media . Indosat market share decline due to lack of activity below the line or above the line
that changes the perception and the public image of the freeway . According Marhaeni and
Trimanah (2011 ) one of the objectives of the company creates a superior product range is
formed loyalty . The formation occurs because loyalty is influenced by several variables:
brand recognition , the ability to remember the brand , and product attributes . Increased
brand recognition activities conducted by the company , to improve the quality attributes of
the product .
2. Theoretical
2.1 Definition of Loyalty
Loyalty demonstrate a commitment not to switch in using a brand . Loyalty is
formed because of the desire or hope the consumer before using a product or service can be
met . Consistency comfort and satisfaction in using a brand for their learning process ,
knowledge and experience in using a brand within a specified period Kertajaya (2005 ) .
Loyalty to encourage the emergence of high trust to a brand , a positive impression and
compatibility between the desire ( hopes ) with performance (performance ) will drive
satisfaction . Conformity will provoke desire or desire of consumers to continue to use the
same brand of product when it is needed .
2.2 Customer Loyalty
Customer loyalty is a strategic asset of the company that if managed properly has the
potential to provide added value such as a reduction in marketing costs, luring new
customers, increased trade and provide a defense against competition (Taylor et al., 2004)
According to Durianto et al (2003) levels consumer perceived loyalty to a brand consists of
five levels, namely switcher, like the brand, satisfied buyers, buyers and commited habitual
buyers. Each level of loyalty shape of an inverted pyramid. The highest levels of loyalty
which is a switcher at the bottom and has a smaller number of individuals. According
Bendapudi and Berry in Tjiptono (2005) customer loyalty (customer loyalty) can be defined
as a response that is closely associated with a pledge or a promise to uphold the commitment
of the underlying sustainability of relationships, and are usually reflected in the consistent
purchase.

2.3 Definition of Brand
According to Kotler in his book entitled The American Marketing Association : the
brand is a name, term, sign symbol or design or a combination of these things are intended to
identify the goods or services of a person or group of sellers and to differentiate them from
competitors' products. Brand plays an important role , one of which is to bridge the
expectations of consumers when we promise something to the consumer . Thus it can be seen
an emotional bond that is created between the consumer and the company producing the
product through its brand .
2.4 Definition of Branding
According Durianto et al (2003 ) revealed that brand recognition is a way that is
developed by the company to introduce the brand of the products they produce . Brand
recognition is done in various ways ranging from the use of media promotion or utilizing a
variety of media. According Tjiptono et al (2010 ) the brand recognition is an activity of the
company to introduce the brand of the products they produce . The higher activity developed
brand recognition will certainly increase the knowledge and references that consumers have
Branding becomes very important in maintaining the existence of a product .
2.5 Product Attributes
Kotler (2008) states that the product attributes is the development of a product or
service which involves the determination of the benefits to be provided. While understanding
the product attributes according to Fandy Tjiptono (2001: 103) is "Elements products are
considered necessary by the customer and serve as the basis for a decision". Product
attributes include branding, packaging, warranty (warranty), services, and so forth. According
to Kotler (2008) "Product attributes are characteristics that complement the basic functions of
the product". Grifin and Hauser (1993) states that the attributes of a product is one of the
considerations in assessing customer satisfaction after consuming a product, it is important to
know the customer assessment of the attributes of the products produced by the company.
Moreover, given the increasingly fierce competition in which more and more similar products
with various brands have been circulating in the market, for the attributes of a product
become a very important part of a product. According Durianto et al (2003) is a unitary
product attributes visible items on a brand. Product attributes can be seen from the color,
packaging, package size, and moisture content of the packaging.
2.6 Quality of Service
There are several opinions regarding the quality of service (quality of service) .The
quality of service is a long-term cognitive evaluation of the customer on the delivery of the
services of a company (Lovelock & Wright, 2002). Grönroos (2000) adds that in order to
measure the quality of service is the best and the right approach should be used in accordance
with the service attribute what happened and let cool customer. Quality is the overall
characteristics and properties of a product or service that affect its ability to satisfy stated or
implied needs. According to Kotler and Keller (2010) there are five determinants of quality
of services that can be in the following rincikan reliability, responsivness, beliefs, ansurance
and tangible. Reliability (reliability), the ability to perform the promised services with
accurate and trustworthy. Responsive (responsiveness) willingness to help customers and
provide services quickly or responsiveness. Confidence (confidence), knowledge and
courtesy of employees and their ability to generate trust and confidence. Empathy
(ansurance), the requirement for care, paying attention to the customer and intangibles
(Tangible), the appearance of physical facilities, equipment personnel and media
communications.

2.7 Framework for Thinking
Brand Recognition
Customer Loyalty
Product Attributes
Service Quality
2.8 Hypothesis
Based on theory and previous research to come hypothesis :
H1 : Branding positive effect on customer loyalty
H2 : Product Attributes positive effect on Customer Loyalty
H3 : The quality of service brand recognition moderating influence on customer loyalty
H4 : Quality of service moderating influence of product attributes on customer loyalty
3. RESEARCH METHODS
3.1 Population and sample
In this study population is all simcard Mentari customers residing in the city of Padang ,
using purposive sampling in the sampling . Criterion sampling is sun simcard customers who
use more than 3 years and domiciled in the city of Padang at the age of 18 years and older .
The data used is primary data that is processed from the questionnaire respondents who meet
the criteria .
3.2 Variable Operational Definition and Measurement

The variables were observed in this study are :
1. Brand recognition ( X1 )
2. Product Attributes ( X2 )
3. Customer Loyalty ( Y )
4. Quality of service ( X3 )
Tabel 3
Table Variable Operational Definition and Measurement
The Indicator
Measured
variables
- Customer a. Switcher , customs of the people to get used to change the
Loyalty dressing brand products used
b. Like the brand liking owned by consumers when using a brand
c. Satisfied buyer is a consumer-perceived sense of fasting when
using a brand
d. Habitual buyer a tendency to use the same brand has become a
habit
e. Committed buyer is a commitment that appears within themselves
consumers to use the same brand of product.
- brand a. Promotion Media , is a promotional tool that have to use a brand.
recognition b. The frequency of promotions , promotional activities conducted
routine

c. Quality is a perceived value by consumers when using the
products.
d. Price is the sacrifice consumers to obtain the product .
- Product a. Packaging is a packaging material products
Attributes b. Colors , is a distinguishing attribute of brand products with one
another
c. The actual content is a lot of content or severe levels of a brand .
d. The type of product is the variety of products offered to
consumers
- Service a. Tangible is a form of services provided to consumers
quality b. Reliability is the value perceived reliability of consumers in using
a service
c. Assurance is the best guarantee that services will be provided
d. Responsibility is a level of speed , precision and accuracy of the
service provided
e. Empathy is the value of the attention given to customers Atua
consumers
3.3. Data Analysis Techniques

3.3.1 Validity Test
Validity test aims to determine whether each statement can actually reveal the variables
studied, the analysis of the validity of statements made . In this model the invalidity of each
item is determined by the statement that the loading factor should be above or equal to 0.40.
Each row in the rotation matrix can not have a double loading factor or have a marked
negative factor loading ( Ghozali , 2011) .
3.3.2 . Reliability Test
Reliable questionnaire is a questionnaire which, if attempted repeatedly to the same group
will generate data tend to be different (same ) . Reliability test is intended to determine
consistency someone answers to a question from time to time Idris (2006 : 2 ) . This test is
used to determine the extent to which the measurement data can provide relative results .
Each variable that has been supported by a valid statement when the item has a Cronbach
alpha above or equal to 0.60, after each - each variable is declared reliable , then the further
stages of data processing can be immediately implemented .
3.3.3 . Hypothesis testing
1. The statistical analysis method used is multiple linear regression method . The regression
model in this study is stated as follows :
Y = α+ b1 X1 + b2 X2 + b3 X3 +ε
Information:
Y : Customer Loyalty
X1 : Brand Recognition
X2 : Product Attributes
X3 : Quality of Service
B1 , b2 , b3 : coefficient of determination
ε : Variable disorder
Hypothesis testing is done by using a regression model to determine the effect of independent
variables individually , so that the test used was t test . If t <t table then Ho is accepted , this
means that the independent variable has no effect on the value of the dependent variable .
Whereas if t > t table then Ho is rejected and Ha accepted , this means that the independent
variables affect the dependent variable .
2. Moderated Regression Analysis

Y = α+ b1 X1 + b2 M + b3 X1 M +ε
Information:
Y : Customer Loyalty
X1 : Brand Recognition
M : Quality of Service
b1 , b2 , b3 : coefficient of determination
ε : Variable disorder
To test the hypothesis with moderating variable regression model used to test the
interaction . According Ghozali ( 2011), the interaction test is often called the Analyisis
Moderated Regression ( MRA ) is a specific application of multiple linear regression where
the regression equation contains elements of interaction ( multiplication of two or more
independent variables ) . MRA dilakulan through simultaneous significance test ( Test F ) and
Significance Parameters.
Individual (t test ) with the following provisions :
1. Significant Simultaneous Test ( Test Statistic F )
If the Anova test or F test produces a value of F calculated with a significant level smaller
than the specified level of significant , the regression model can be used to predict the
variable Y ,
2. Individual Parameter Significant (t test statistics )
If the independent variable , moderating and provide interaction coefficient values of
parameters with a significant level of less than the specified significance level , it can be
concluded that the variable is moderating variables . ( Liana , 2009)
4. RESULTS AND DISCUSSION

4.1. RESULT
4.1.1 Test Validity
According Ghozali (2011 ) validity testing is done to find out the truth of what is actually
measured. In testing the validity of the models varimax invalidity of each item is determined
from the value of KMO statement . Each variable must have a value of KMO > 0.50 while
each item statement declared invalid if it has a factor loading above or equal to 0.40. Based
on the results of testing the validity of which has been done obtained a summary of the results
shown in the table below:
Table 4.1
Calculation Results Validity Instruments
No Validity With Indicator Loading Cutt Off Conclusion
factor
1 Customer Loyalty (LP)
- LP1 0,951 > 0,40 Valid
- LP2 0,941 > 0,40 Valid
- LP3 0,815 > 0,40 Valid
- LP4 0,700 > 0,40 Valid
- LP5 0,835 > 0,40 Valid
- LP6 0,798 > 0,40 Valid
- LP7 0,775 > 0,40 Valid
- LP8 0,764 > 0,40 Valid
- LP9 0,822 > 0,40 Valid
2 Brand recognition (PM)
- PM1 0,670 > 0,40 Valid
- PM2 0,481 > 0,40 Valid
- PM3 0,531 > 0,40 Valid
- PM4 0,698 > 0,40 Valid

- PM5 0,708 > 0,40 Valid
- PM6 0,610 > 0,40 Valid
- PM7 0,660 > 0,40 Valid
- PM8 0,856 > 0,40 Valid
- PM9 0,823 > 0,40 Valid
3 Product Attributes (AT)
- AT1 0,554 > 0,40 Valid
- AT2 0,676 > 0,40 Valid
- AT3 0,716 > 0,40 Valid
- AT4 0,692 > 0,40 Valid
- AT5 0,512 > 0,40 Valid
- AT6 0,649 > 0,40 Valid
- AT7 0,687 > 0,40 Valid
- AT8 0,621 > 0,40 Valid
4 Service Quality (KP)
- KP1 0,665 > 0,40 Valid
- KP2 0,670 > 0,40 Valid
- KP3 0,698 > 0,40 Valid
- KP4 0,765 > 0,40 Valid
- KP5 0,585 > 0,40 Valid
- KP8 0,680 > 0,40 Valid
- KP9 0,758 > 0,40 Valid
- KP10 0,833 > 0,40 Valid
Sources : Primary data The processed
Based on the table above items KP6 and Kp7 on service quality variables that have a factor
loading below 0.4 and experiencing the ambiguous and should be eliminated from the data
processing stage . Therefore all items valid question can continue to be used into the further
stages of data processing .
4.1.2 Test Reliability
Reliability test is used to determine a reliable measuring instrument using Cronbach alpha
formula . A construct or variable said to be reliable if the value α > 0.6 ( Idris , 2006) From a
reliability test is obtained as follows
Tabel 4.2
Reliability Testing Results
Research variable Cronbach Conclusion
Cut Off
Alpha
Customer loyalty 0,774 0,60 Reliable
Brand Recognition 0,849 0,60 Reliable
Product attributes 0,787 0,60 Reliable
Service quality 0,686 0,60 Reliable
Sources : Primary data are processed
Based on the above table it can be seen that all variables have an alpha value above 0.6 so
that all variables is reliable .
4.1.3. Hypothesis testing

Tabel 4.3
Results of Multiple Regression Analysis
ANOVAb
Sum of
Model Squares df Mean Square F Sig.
1 Regression 1865.718 3 621.906 1059.552 .000a
Residual 52.239 89 .587
Total 1917.957 92
a. Predictors: (Const ant), AtributProduk, Pengenalan Merek, Kualitas Pelay anan
b. Dependent Variable: Loy alitas
ANOVA test or F tests produce 1059.552 with a significance level of 0.000 . Since the
probability of significance is much smaller than 0.05 , it can be said that the introduction of
the brand, product attributes and service quality significantly influence customer loyalty
Coeffi ci entsa
Unstandardized St andardized
Coef f icients Coef f icients
Model B St d. Error Beta t Sig.
1 (Constant) -1.965 .818 -2.403 .018
Pengenalan Merek .017 .014 .021 1.191 .237
Kualitas Pelay anan 1.004 .032 1.075 31.728 .000
At ribut Produk -.002 .001 -.107 -3.137 .002
a. Dependent Variable: Loy alitas
Multiple linear regression equation as follows Y = -1,965+ 0,017X1 + 1,004X2 – 0,002X3.

Testing three main hypothesis with multiple regression get interesting findings . The
introduction of the brand has a slope of 0.017 with significance value 0.237 which is
significantly larger than 0.05 . Thus , this study failed to obtain evidence that the introduction
of the brand a positive effect on customer loyalty .Hipotesis second stating that service
quality has positive influence on customer loyalty obtain convincing evidence . Slope of
1.004 with a significance value of 0.000 indicates that the hypothesis is proven . In contrast to
previous hypotheses . Attributes of products not proven positive effect on loyalty , but found
a negative effect .
Table 4.4
Result Moderated Regression Analysis
Model Summary
Change Statistics
Adjusted St d. Error of R Square
Model R R Square R Square the Estimate Change F Change df 1 df 2 Sig. F Change
1 .815a .664 .661 2.65960 .664 180.147 1 91 .000
2 .986b .972 .972 .76791 .308 1001.581 1 90 .000
3 .986c .973 .972 .76315 .001 2.126 1 89 .148
a. Predictors: (Constant), AtributProduk
b. Predictors: (Constant), AtributProduk, Kualitas Pelay anan
c. Predictors: (Constant), AtributProduk, Kualitas Pelay anan, IAtKp
Moderating influence between product attributes of service quality with customer

loyalty, tested with MRA through significant changes were calculated koefiesien
determination gradually. In accordance with the steps that have been defined, product
attributes is inserted into the equation with customer loyalty as the dependent variable. At this
stage, it was found that the model gets the determination coefficient of 0.664.
In the second stage, the service quality variables inserted after the variable product
attributes. At this stage the model obtain a coefficient of determination of 0.972. In other
words, a change in the coefficient of determination for 0308 from the first stage. The changes
are significant because it has a value of F for 0000 are significantly smaller than 0.05.

At stage third, interaction variables (x product attributes of quality of service) is
inserted after the last attribute of the product and service quality into the equation. At this
stage there was an increase coefficient determination of 0.001 so that turned into 0.973. The
increase in gain significance value of 0.148 which is significantly larger than 0.05. thus it can
be concluded that the quality of service not found moderating.
4.2 DISCUSSION
4.2.1 The Effect of Brand Recognition on Customer Loyalty
Of calculation t test significance value 0.237 > 0.05 . These results failed to prove that the
positive effect on the brand recognition of loyalty. It turns out the more routine activities and
higher brand recognition of the company at the Simcard Mentari not make the sun simcard
users remain loyal to use it . As a result of the increasing number of providers are introducing
their products to make mobile users can choose the best one in the use of this simcard .
4.2.2 The effect of Services quality on Customer Loyalty
The second hypothesis testing singer can prove that the positive effect with quality Services
significance value 0.000 < 0.05 . From the findings in the singer can be more Good quality of
services provided by Customer service simcard gallery mentari So will more loyal customers
using Products singer . Emphaty their customer service From the hearts respond to customer
complaints , then be more loyal users simcard singer .
4.2.3 The effect of Product Attribute on Customer Loyalty
In this third hypothesis to obtain product attributes not proved to be positively but otherwise a
negative effect . Can we conclude from the more attributes that are offered on the Mentari
simcard will make customers become loyal . Competition providers in offering attributes
possessed simcard product makes it easier for users to choose according to their needs.
4.2.4 Quality of Service Moderating Effect of Brand recognition and product attributes
on customer loyalty
By using MRA test , it does not strengthen the influence of the quality of service brand
recognition and product attributes on customer loyalty is evidenced by the significant value
of 0148 is greater than 0.05 . Users Simcard sun do not actually need the service quality but
they prefer the convenience and according to the needs of the products they buy . Because
they have more confidence after the use of the expressions uncertain accordance with the
offer.
5. CONCLUSION
Based on the research results can be concluded :
1. Brand recognition is not proven positive effect on customer loyalty
2. Quality of service a positive effect on customer loyalty
3. Product attributes not proved a positive influence , but rather a negative effect
4. Quality of service is not found moderating influence brand recognition and product
attributes on customer loyalty .

Reference
Dewi Harianti dan Junaedi Ivan. 2013. Faktor Faktor yang Mempengaruhi Loyalitas
Konsumen Menggunakan Pasta Gigi Merek Pepsodent. Jurnal Ekonomical Nomor 1
Volume 3. Universitas Sumatera Utara, Medan.
Durianto, Darmodi, Toni Sitinjak, Ibrahim dan Fandhy Tjiptono. 2003. Analisis Efektifitas
Komunikasi Periklanan yang Efektif. BPFE, Yogyakarta.
Ghozali, Imam. 2011. Dasar Dasar Ekonometrica dengan Menggunakan SPSS. Badan
Penerbit Universitas Dipenegoro, Semarang.
Grifin and Hauser. 1993.The Voice of the Customer. Marketing Science. 12. 1-2.
Jacques-Francois Thisse. 1992. Discrete Choice Theory of Product. MIT Press.
Kertajaya Hermawan. 2005. Consumer Behavior. Badan Penerbit Universitas Indonesia,

Jakarta.
Kotler Philips dan Kevin Keller. 2010. Marketing 13th. Salemba Empat, Jakarta
Kotler, Philp, 2008. Principles of Marketing.12 Edition. Pearson Education.
Marheni Dian K dan Trimanah. 2011. Faktor Faktor Determinan yang Mempengaruhi
Loyalitas Konsumen Indomie di Wilayah Jawa Tengah. Majalah Agung. Universitas
Unnissula. Jember.
Santoso, Singgih. 2010. Dasar Dasar Ekonometrica (Teori dan Aplikasi dengan
Menggunakan SPSS). Gramedia Pustaka, Jakarta
Sekaran, Uma. 2006. Metode Penelitian Untuk Riset Bisnis. Erlangga, Jakarta.
Simon P. Anderson, André De Palma, Simon P. Anderson Andre De Palma William J.

Stanton, Michael J. Etzel. Bruce J. Walker. 1994. Fundamentals of marketing.
McGraw-Hill.
Siskawati. 2011.Pengaruh Nilai yang di Persepsikan dan Kualitas Pelayanan Terhadap

Loyalitas yang di Mediasi Kepuasan Konsumen. Jurnal Ekonomi dan Bisnis
Volume 3 Nomor 2. Universitas Kristen Petra, Surabaya.
Sumber : http://mutiaralumpur.blogspot.com/2011/10/pengertian-atribut-
produk.html#ixzz41htbj4jX
Suryadi Wibowo. 2013. Market Coverge Indosat di Sumatera Barat. www.indosat.co.id
Tjiptono, Fandy & Chandra, Gregorius. 2010. Service Quality and Satisfaction,
Andi Offset, Yogyakarta.

THE MODEL OF CORPORATE CUSTOMER SATISFACTION :
An Empirical Study In Telecommunication Companies At Indonesia
Mimi Marlina1
Hamdy Hady2
1
The Multi Media Company, General Manager PT. Infomedia Telkom Jakarta Indonesia
2
The Professor of UPI-YAI Doctoral Management Science Program. Jakarta Indonesia.
ABSTRACT
Income and ebitda increased from the telecommunications industry in Indonesia, but net
income decline, this could be said that the performance of relatively declining the Indonesian
telecommunication industry. The decline in net income in 2012 the Indonesian
telecommunication industry including experienced by PT Telkom Indonesia tending caused by
the corporate customer loyalty is still relatively low, because the corporate customers provide a
significant contribution, 25 percent on average increase in net income of the telecommunications
industry in Indonesia.
The purpose of this research was to find out in partial and simultaneously influence of
the product performance, delivery system, and value proposition to customer satisfaction of
corporate the telecommunications industry in Indonesia and its implication for customers
loyalty. The method used in this research was descriptive and explanatory survey.The samples
were 200 director and the data were analyzed with SEM (structural equation model).
The Results in this research is product performance, delivery system, and value
proposition had positive and significant influence simultaneously on customer satisfaction with
contribution of 82%, 18% are influenced by other factors like promotion, distribution, serivice
quality, but partially, the delivery system of dominant influence on customer satisfaction.
Product performance, delivery system, value proposition, and customer satisfaction had positive
and significant influence simultaneously on customer loyalty with contribution of 64%, 36% are
influenced by other factors like promotion, distribution, serivice quality.
Findings in this research are to increase corporate customer satisfaction dimensions of
the corporate dominated by technical satisfaction, telecommunication services companies in
Indonesia must be able to improve the delivery systems dominated by the dimensions of the
process of service. To increase customer loyalty is dominated by dimension of action loyalty, the
telecommunication services companies in Indonesia are required to increase customer
satisfaction is dominated by the dimension of technical satisfaction, as well as to increase
customer satisfaction, the company must be capable of repairing system delivery dominated by
the dimensions of the process of service.
Keywords: Product Performance, Delivery System, Value Proposition, Customer Satisfaction,

Customer Loyalty.

Introduction
Customer loyalty play an important role in a company, retain customers who are
old and new especially in the era of free trade.It is because with customer loyalty would
have an impact on the company performance and can retain the survival of companies.
This being the main reason for the company to attract and retain customers. Effort to
acquire customers loyal cannot be done at once , but through several phases starting
from looking for potential customers to obtain partners .Loyal customers who want to do
because the relationship with the company , customer loyalty is a measure of proximity
of customers at company , including the possibility of renewing the contract will come
in the future brand , how many customers change their support for the contract with the
company financing, how the possibility of the desire of customers to increase a positive
image of a company. If the company not able to satisfy customers, then consumers will
react by means of exit (customers said cease to be the customer).
In general, research on customer loyalty that has been done before , was focused
on efforts to analyze the factors that affect customer satisfaction (Bramlett and Bolton
.2000; Fornell and Wernerfelt, 2002 ). The research stated that the higher the level of
customer satisfaction against the company, hence the level of loyalty will also be higher.
Based on the results of research from Bolton and Bramlett ( 2000), Fornell and
Wernerfelt (2002), and the lack of customer loyalty in the Indonesian
telecommunication industry tends to caused by the lack of customer satisfaction.
But a number of studies also revealed that pleasure customers do not always
have a relationship with customer loyalty.In other words that a level of satisfaction that
high not always ensure customers to remain loyalty.Proven that 65 - 85 per cent of
customers it will drift off, if they do have a level of satisfaction that high even the very
high (highly satisfied) (Reichheld, 2001). Other facts also disclosed that discontent also
not always make users into disloyal.
Despite there is dissatisfaction, a regular customer using from the company that
became a source ketidakpuasannya (Hennig-Thurau & Alexander, 2002 ). Based on the
facts, then comes word that explain the trend of the reason the occurrence of these things
as opinion Dabholkar and Walls (1999) found that satisfaction factors alone is not
enough for researched the aspects of customer loyalty. In relation to this, other studies
tried to include other variables that become antesenden customer loyalty. For example,
Zeithmal & Bitner, (2003) who examines about the perceptual effect the quality of the
service for satisfaction and customer loyalty, perception of an increase in the quality of
the service will be causing the customers loyal.
Is another opinion as delivered by the Hunt, 2001; Reichheld, 2001 examines
how the perception of the quality of services delivered to customers by the company
concerned .It means, the better the quality of relational relations between companies and
customers, hence the level of satisfaction and loyalty of customers will be more high.
Thus, the quality of relations relational good also affect satisfaction and loyalty of
customers.

Based on the statement above and the lack of customer loyalty in the indonesian
telecommunication industry in this telecom provider, traffic of Arta, of Indosat, XL,
Biznet, Plus Icon, CBN) tending caused by low perception of quality of services
(Perceive Service Index/PSI).
According to the Mai Ngoc Khuong and Hoang Thi Hoang (2013: 285) with her
research stated “that in order to achieve a high customer satisfaction, stores PNJ should
increase the level of service and product quality, improved physical representation of the
service (tangibles), promote staff‘s inspiration of trust and confidence (assurance),
provide more empathy to customers, and offer better price”. That to achieve the
satisfaction of customers high, we must raise the level of service and product quality,
increase physical representation of the service (tangibles), promoting the inspiration of
the staff of trust and confidence assurance, provides more empathy to customers, and
offers the price of better.
Then afshar et , al (2011: 259) with the results of his research stated “that the
quality of customer service and the performance of products in promotes customer
satisfaction, and also there is a positive relationship between customer satisfaction and
customer loyalty”. The results of research Stephen Sondoh et, al has shown that the
importance of service quality and performance products to the satisfaction and loyalty. It
is very important to understand the assessment of service quality and performance
products from the point of view of customers, and whether that parallel to their
perception, hope, needs and objectives .Based on both the statement and the level of
perceived fluktuasinya service index pounds and the lack of customer satisfaction index
csi) tending caused by the performance of products is still relatively low
telecommunications industry in Indonesia.
Then other factors in quality a waiter is a system the delivery of services (service
delevery) system .In the system the delivery of services with regard to decisions relating
to the stage of the delivery of services, the level of the delegation, the company
relationship with customers, the process of service, the allocation of capacity, the
atmosphere and facilities services. This important role in helping customers understand
and evaluate the services which are intangible .A system of the delivery of these services
play important roles in plays the role of vital in the design and delivery of services,
especially in telecommunications services industry more containing the values of
service.
According to Kumar, Batista, and Maull (2010 : 158) in his research findings
stated “that system of service delivery can positively affect customer satisfaction, further
extending this verdict to point out system of service delivery the us of a direct
determinant of customer loyalty”. That system of the delivery of services in a positive
way can affect customer satisfaction, further extending the award this for shows that the
system in the delivery of service as a determining direct customer loyalty. So based on
the statement and the low level of customer satisfaction index ( csl ) and customer
loyalty index (CLI) telecommunication industry in indonesia tending to caused by the
low level of customer satisfaction index (CSI) on aspects of still relatively low system in
the delivery of services.
The perspective of other customers about the perception of quality of services is
the value of customers who can be seen as more personal and a holistic view on the
quality of which was formulated as a proposition capture the essence of the company.
Where this subjective assessment of positive and negative consequences of the use of
products or services. While companies from the point of view, motives buy to be caught

in a proposition value customers, make it into the issue of strategic priorities in fields
like segmentation, the development of services, marketing and communication.
According to Rintamaki, Kuusela and Mitronen (2007: 621) in their research
findings “stated that the competitive advantage of successful service providers and
retailers is as often as explained with a logic wherein service quality contributes to
customer value proposition, resulting in increased satisfaction and behavioral intentions ,
eventually creating loyalty that manifests itself in enhanced profitability”. That
competitive advantage from providers and retailers often explained with logic where the
quality of services contribute to customer value proposition , so that the intention of
satisfaction and improve behavior, finally creating loyalty which manifests itself in
improving the profitability .So referring to the statement and the lack of customer
satisfaction and customer loyalty in the telecommunications industry in indonesia caused
by tended to customer value proposition is still relatively low.
The low value proposition customers in the telecommunications industry in
Indonesia indicated some problems customers value proposition in the perception of
service quality telecommunications industry in indonesia .Based on the problems in
over, and if this condition went then will get worse again in the telecommunications
industry in indonesia .So that the writer interested to do research by taking the title “The
antecendent and consequence analysis of the corporate customer satisfaction at the
telecommunication companies in Indonesia” .
Problems Formulation
Based on problems in over, hence the problems formulation are as follows:
1. Is there the influence of product performance on customers satsfaction at
telecommunication industry in Indonesia ?
2. Is there the influence of delivery system on customers satsfaction at
3. Is there the influence of value proposition on customers satsfaction at
4. Are there the influence of product performance, delivery system, and value
proposition on customers satsfaction at telecommunication industry in Indonesia ?
5. Is there the influence of product performance on customers loyalty at
6. Is there the influence of delivery system on customers loyalty at telecommunication
industry in Indonesia ?
7. Is there the influence of value proposition on customers loyalty at
8. Is there the influence of customer satisfaction on customers loyalty at
9. Are there the influence of product performance, delivery system, value proposition,
and customer satisfaction on customers loyalty at telecommunication industry in
Indonesia ?
The Purpose of Research

Based on the problems formuation, then the purpose of research done this a
dissertation to understand and analyze how large:
1. The influence of product performance on customers satsfaction at

telecommunication industry in Indonesia.
2. The influence of delivery system on customers satsfaction at telecommunication
3. The influence of value proposition on customers satsfaction at telecommunication
4. The influence of product performance, delivery system, and value proposition on
customers satsfaction at telecommunication industry in Indonesia.
5. The influence of product performance on customers loyalty at telecommunication
6. The influence of delivery system on customers loyalty at telecommunication
7. The influence of value proposition on customers loyalty at telecommunication
8. The influence of customer satisfaction on customers loyalty at telecommunication
9. The influence of product performance, delivery system, value proposition, and
customer satisfaction on customers loyalty at telecommunication industry in
Indonesia.
Theoretical Fraimworks
Afshar et al ( 2011 ) and Rita Alfin et.al (2013) explaining that good products
performance can increase customer satisfaction. A direct revelation given above
strengthened also by Jahanshahi, Gashti , Mirdamadi, Nawaser, and Khaksar (2011) that
the performance of products can be increase customer satisfaction .
Similarly Asthma Saleem, Abdul Ghafar, Muhammad Ibrahim, Mohammad
Yousuf, and Naveed Ahmed, Lien May (2015) and Li, Robert D .Green (2011) found
that there is the influence of the performance of products on customer satisfaction .So
good in performance products product diversity, the quality, service, the warranty, and
in return will increase the value and benefits in accordance with the hope of customers,
so that alone will increase customer satisfaction. Because it was obvious that the
performance of products alleged influence customer satisfaction.
The value of a product set by the buyer based on the benefits that they would
receive from the product. The performance of the product is is the performance of a
product consisting of the diversity of products, the quality, service, the warranty, and in
return. Customers have the perception of the company, about their experience to receive
products and services from companies, whether in accordance with the hope of their
customers or not. Then system delivery of services is is a system which unite all the

elements service was an element services intact, and delivered to customers to identify
when, where, and how these services can be delivered to customers.
Dimensions delivery stage of the system includes the delivery of services, the
level of the delegation, relationships with customers, the process of service, the
allocation of a limited capacity. Is the design of the value proposition value is made by
companies in the predicted value wanted by any customers who adapted to the election
of the target of its consumer, competitor, and rival target resulting from the analysis of
targeting marketing situation marketing. The dimensions of the cost of covering
kepemimipinan value proposition and differentiation.
The customer satisfaction is evaluation process to buy back or the decision to
make the purchases and experienced so far, not just on the subject.A customer
satisfaction includes customer satisfaction on the product, customer satisfaction on the
function, customer satisfaction tehnikal in the process, and customer satisfaction
emotionally. The customer loyalty is the customers of chances to continue to use
products / services that use the current and the time will come.A customer loyalty
includes cognitive loyalty, affective loyalty, loyalty conative loyalty and action.
Kumar, Batista and Maull (2011) found that the performance of the product is
positive and significant effect against customer loyalty. Afshar, et al. (2011) also
mentioned that products have an effect on customer loyalty. Jahanshahi, Gashti,
Mirdamadi, Nawaser, and Khaksar, (2011) tells us that customers will be loyal in poduk
earned in accordance with kebituhan and wishes of the consumer. May the Lien Li,
Robert d. Green (2011) found that the product can enhance customer loyalty. Kumar,
Batista and Maull (2011) explained that when the products supported by good delivery
system, then customers will be loyal. Suryaman (2007) found there is a positive
influence and significant between system deliveri against customer loyalty.
Bolton, Kannan and Bramlett (2000) found in his research that the promise of
value given the company can make the company loyalty, when in accordance with what
is received by customers. Suryaman (2007) explained that customer loyalty can be
formed by the value proposition. Tinik Sugiati, Armanu Thoyib, Djumilah Hadiwidjoyo,
and Margono Setiawan (2013) found that value to customers dberikan increase customer
loyalty. While Pooja Jain, Anil Kumar K, (2015) explained that the value given the
customer can increase customer loyalty indirectly via customer satisfaction.
Inamullah (2012) found that there is a positive relationship between satisfaction
and loyalty of customers. Wan A Cask, (2015) also menyebutuan in his research that
affects the satisfaction of customer loyalty. Dib Hayan, Samaan Al-Msallam, (2015)
mentioned that a customer loyalty because they are satisfied .
So the good performance in a variety of products, the quality, service,
guarantees, and return.Then supported by system deliveri in conveying well for
customers, the service delivered by the same with service accepted by clients and its
propositions can meet the needs of customers and good, good products and good image
in characteristic manner characteristic of a distribution and of his promotion.

And supported is also the case with the high customer satisfaction, good
customer satisfaction at a price of the product customer satisfaction on merit functional,
customer satisfaction to the process tehnikal, and customer satisfaction emotionally then
customer loyalty will increase, either in do purchases in online stores recurring; buy a
product line the other from the firm, recommended to others and will show immunity to
the pull competitors. Therefore the performance of the product system deliveri, a
proposition of value and customer satisfaction taken together could allegedly
meningkakan customer loyalty.
Based on above can then be made schematic thinking of research that can be
shown in figure 1 as follows:

Figure 1 Conceptual Fraimwork
Product
Performance
H5
H1
H4 H9
Customer Customer
Delivery System Satisfaction Loyalty
H2 H8
H6
Value Proposition H3
H7

The hypothesis
Based on the framework of the same can be arranged hypothesis research as

follows :
1. Thers is the influence of product performance on customers satsfaction at
2. Thers is the influence of delivery system on customers satsfaction at
3. Thers is the influence of value proposition on customers satsfaction at
4. Thers are the influence of product performance, delivery system, and value
proposition on customers satsfaction at telecommunication industry in Indonesia.
5. Thers is the influence of product performance on customers loyalty at
6. Thers is the influence of delivery system on customers loyalty at telecommunication
7. Thers is the influence of value proposition on customers loyalty at
8. Thers is the influence of customer satisfaction on customers loyalty at
9. Thers are the influence of product performance, delivery system, value proposition,
and customer satisfaction on customers loyalty at telecommunication industry in
Indonesia.
The Methods

The object of research being variable free in this research is the performance of
products, system deliveri and value proposition. While the bound to be variable is
customer satisfaction and loyalty of customers.
Of the nature of this research is descriptive in nature and verifikatif .Descriptive
research is that research was aimed to obtain his description of the characteristics of
variables .Of the nature of research verifikatif basically want testing the truth of a
hypothesis implemented through data collection in the field. Where in this research is
the performance of products will be tested , deliveri a proposition value system and of its
effect on customers customer satisfaction and loyalty .Considering the nature of this
research is descriptive and verifikatif implemented through data collection in the field,
then research methodology that is used is descriptive method survey and a method of
explanatory survey.
A unit of the analysis in this research is the customer corporate product data
users and the internet from telecommunication companies in indonesia by a unit
observation is that the director or manager appointed by president director of.Time
horizon in this research was crossectional, where the research was done at the same of
time at once.
The time of the survey will be conducted in april to june until 2015.The research
conducted by the board of directors of the company or at a corporate customers
segmentasi dives (telecommunication) the industry in indonesia.The total population of
dives (segmentation) industrial corporations in the country’s telecommunications
industry for 200 companies.So this is a research in the data, 200 director of the
company.
To test hypotheses in this research was as follows: hypothesis 1 through 9
hypothesis tested with use the model equation structural or structural equation modeling
(SEM) , namely one technique multi variat who inspects a series of dependence relations
between variables .Usually used if even one of the dependent variable for being an
independent variable in dependency relations next .
Research Result
Full model equations SEM with using program lisrel 8.70 obtained two models
trajectory, diagram namely standardized model and the model t-values, as each model
shown in figure follows:

Figure 1. Model Hybrid SEM (Standardized Corfficient)
Figure 2.
Model Hybrid SEM (t-value Model)
Based on figure 1 and picture 2, above these calculations will be presented next
testing parameters and the coefficients ( loading factor on the model of an exogenous )
structural dimension and endogenous .Testing is intended to find causal relationships or
the influence of one variable latent to other latent variables, an indicator of each variable
of latent (construct).
Of the results obtained by the use of the program lisrel 8.70 to model structure,
equation in accordance with hypothesis advanced by can be seen as an equation
structural below.
CS = 0.21*KP + 0.55*SD + 0.54*PN, Errorvar.= 0.18 , R 2 = 0.82
LO = 0.76*CS + 0.25*KP + 0.59*SD + 0.09*PN, Errorvar.= 0.36 , R 2 = 0.64
Indirect effect between the performance of the product against the corporate
customer loyalty through customer satisfaction as variable mediation is 0.21 x 0.76 =
0.16 or 16 %, but the direct effect the performance of the product against the corporate
customer loyalty is as much as 0,0625 or 6.25 %, so that the performance of products

can be increase customer loyalty if, through the corporate customer satisfaction by 16 %,
(full mediating).
Indirect effect on corporate for delivery system, customer loyalty by customer
satisfaction as variable mediation about 0.76 = x is 0,55 0,418 or indirectly affect
delivery system, customer loyalty corporate via customer satisfaction have contributed
about 41,8 %, while the direct effect on corporate delivery system for customer loyalty
about 0,35 or have contribution about 35 % are smaller than its operational, no
influence to say that the delivery indirectly is the dominant corporate increase customer
loyalty (partial mediating).
Value proposition not directly influence on the corporate customer loyalty as
customer satisfaction through mediation is variable about 0,54 x 0.76 = 0,41 or 41
percent, while a direct influence on the value proposition of 0.0081 the corporate
customer loyalty, so can increase the value proposition for 41 percent of the corporate
customer loyalty through customer satisfaction (full mediating).
Conclusion
1. There is positive and significant influence of product performance on customers

satisfaction in telecommunication industries in Indonesia.
2. There is positive and significant influence of delivery system on customers
3. There is positive and significant influence of value proposition on customers
4. There are positive and significant influence of product performance, delivery
system, and value proposition on customers satisfaction in telecommunication
industries in Indonesia.
5. There is positive and significant influence of product performance on customers
loyalty at telecommunication industries in Indonesia.
6. There is positive and significant influence of delivery system on customers loyalty
in telecommunication industries in Indonesia.
7. There is positive but no significat influence of value proposition on customers
loyalty in telecommunication industries in Indonesia.
8. There is positive and significant influence of customer satisfaction on customers
loyalty in telecommunication industries in Indonesia.
9. There are positive and significant influence of product performance, delivery
system, value proposition, and customer satisfaction on customers loyalty in
telecommunication industryies in Indonesia.
Managerial Implication
1. The performance of products which is dominated by the dimensions of warranty,

supported by deliveri system dominated by the dimensions of the process of

service , as well as strengthened with a proposition the value of which is
dominated by the dimensions of differentiation could increase customer
satisfaction business telecommunications industry in indonesia which is
dominated by the dimensions of the technical satisfaction.
2. Likewise the performance of products which is dominated by the dimensions of
warranty , supported by deliveri system dominated by the dimensions of the
process of service, value proposition which is dominated by the dimensions of
differentiation, and customer satisfaction is dominated by technical satisfaction
dimension can improve customer loyalty business telecommunications industry
in indonesia , but if viewed as partial , then customer satisfaction the dominant in
improving the customer loyalty that is dominated by acion loyalty.
Suggestion
Managerial Suggestion
1. To increase customer satisfaction that dominated by a technical dimension

satisfaction, publicly listed telecommunications services in indonesia should be
able to increase the dimensions of deliveri system dominated by the ministry.
2. To improve customer loyalty dominated by dimension action loyalty, and
telecommunications services companies in indonesia is expected to increase
customer satisfaction that dominated by a technical dimension satisfaction, and
to menimgkatkan customer satisfaction, the companies have to fix the system
dominated by deliveri of the service.
LITERTURE
Afshar et, al., 2011. Study the Effects of Customer Service and Product Product on
Customer Satisfaction and Loyalty. International Journal of Humanities and
Social Science Vol. 1 No. 7.
Arikunto, Suharsimi. 2002. Prosedur Penelitian Suatu Pendekatan Praktek, Jakarta:

Rineka Cipta.
Aronu CO, 2014. Determining the Equality of Customer Loyalty between Two
Commercial Banks in Anambra State-Nigeria. Business and Economics
Journal. Aronu CO, Bus Eco J 2014, 5:2.
Bachrudin, Achmad & Harapan L Tobing. 2003. Analisis Data untuk Penelitian Survey
dengan Menggunakan Lisrel 8 Dilengkapi Contoh Kasus, Jurusan Statistika,
FMIPA UNPAD, Bandung.
Barnes, James G. (2001(. Secrets of Customer Relationship Management: it’s All About
How You Make Them Feel. McGraw-Hill: New York.

Bergeron, Bryan. 2002. Essentials of CRM: A Guide to Customer Relationship
Management. John Wiley & Sons: New York.
Bolton, Ruth N, Kannan, and Bramlett. (2000). Implications of Loyalty Program

Membership and Service Experiences for Customer Retention and Value.
Brown, Stanley W. 2000. Customer Relationship Management. Singapore: John Wiley

and Sons Canada, Ltd.
Dabholkar and Walls (1999). Customer Satisfaction And Its Effects On Customer
Loyalty, London College of Management Studies, UK,
Fornell, John E and Wernerfelt. (2002). Customer Relations & Rapport: Professional
Development Series. South Western Thomson Learning: Australia.
Godes, David & Dina Mayzlin, (2004), Firm Created Word of Mouth Communication :
A Field Based Quasi Experiment, July, No. 04-03
Griffin, Jill. 2002. Customer Loyalty: How to Earn It, How to Keep It. New and Revised
Edition. McGraw-Hill: Kentucky.
Gronroos, Christian, (2001), The perceived service quality concept – a mistake?,

Journal of Managing Service Quality, Volume 11 No. 3, pp. 150-152, MCB
University Press, London.
Hair et al., 2006, Multivariate Data Analysis, Fifth Edition, Prentice Hall, Upper Saddle
River : New Jersey.
Haksever, Cengiz, Berry Render, Roberta S Russel, and Robert G Murdick 2000,
Service Management and Operation, Second Edition,Prentice Hall International,
USA.
Hennig Thurau, Thorsten & Klee Alexander, (2002) . The Impact of Customer
Satisfaction and Relationship Quality on Customer Retention: A Critical
Reassessment and Model Development. Psychology & Marketing, John Wiley
& Sons, Inc.
Hermawan Kertajaya dkk..2003 . Mark Plus On Strategy: 12 Tahun Perjalan - an Mark

Plus & Co Membangun Strategi Perusahaan. Jakarta: Pener- bit Gramedia
Pustaka Utama.
Hill, Nigel. 1996. Handbook of Customer Satisfaction Measurement. Gower: England.
Hoffman, Douglas K. & John E.G. Bateson. (1997). Essentials of Services Marketing.
The Dryden Press: Fort Worth.

Hollensen, Svend. (2003). Marketing Management: A Relationship Approach. Prentice
Hall: England.
Hunt, John, (2001), Important factors in the sale and pricing of services, Management
Decision; Volume 33 No. 7, MCB University Press, London.
Johnson, C., William, Richard J.Chalva. 2001. Total Quality In Marketing.

Singapore: St.Lucia Press.
Jöreskog, Karl G. and Dag Sörbom. 2001. LISREL 8: User's Reference Guide.
Lincolnwood, IL: Scientific Software International, Inc.
Kazemi, Ali, Vahid Moradi PaEmami. 2013. Impact of Brand Identity on Customer
Loyalty and Word of Mouth Communications, Considering Mediating Role of
Customer Satisfaction and Brand Commitment. (Case Study: Customers of
Mellat Bank in Kermanshah). International Journal of Academic Research in
Economics and Management. July 2013, Vol. 2. No. 4.
Khan, Inamullah. 2012. Impact of Customers Satisfaction And Customers Retention on

Customer Loyalty. International Journal of Scientific & Technology Research
Volume 1, Issue 2, March 2012 ISSN 2277-8616
Kotler, Philip dan Amstrong, (2008), Principle of Marketing, , Prentice Hall

International, Inc. A Division of Simon & Scuster, Englewood Cliffs, Nj07632.
_____________ dan Kevin Lane Keller. 2012. Marketing Management, , Prentice Hall
International, Inc. A Division of Simon & Scuster, Englewood Cliffs, Nj07632.
____________, (2003), Marketing Management: Analysis, Planning, Implementation,

and Control, Millenium Edition, Prentice Hall International, Inc. A Division of
Simon & Scuster, Englewood Cliffs, Nj07632.
Kumar, Batista and Maull. 2011. The Impact of Operations Performance on Customer
Loyalty. Service Science 3(2), pp. 158-171, © 2011 SSG.
Lovelock, Christopher dan Lauren Wright. (2002). Principles of Service Marketing and
Management. Second Edition. Pearson Education, Inc: Upper Saddle River, New
Jersey.
Munusamy, Jayaraman., Chelliah, Shankar and Wai, Hor Mun. 2010. Service Quality
Delivery and Its Impact on Customer Satisfaction in the Banking Sector in
Malaysia. International Journal of Innovation, Management and Technology,
Vol. 1, No. 4, October 2010 ISSN: 2010-0248
Ngoc, Mai Khuong and Thi Hoang, Hoang Anh. 2013. Direct and Indirect Effects of
Customer Satisfaction through Product and Service Quality–A Study of Phu
Nhuan Jewelry Stores in Ho Chi Minh City, Vietnam. Journal of Economics,
Business and Management, Vol. 1, No. 3.

Nguyen, Nha, Andre Leclerc, and Gaston LeBlanc. 2013. The Mediating Role of
Customer Trust on Customer Loyalty. Journal of Service Science and
Management, 2013, 6, 96-109
Oliver, Richard L. 1999. Whence Consumer Loyalty?. Journal of Marketing Vol. 63.
pp. 33-34
Payne, Adrian,2000, The Essence of Service Marketing, USA: Mc.Graw- Hill.

Reichheld, Frederick F. (2001). Loyalty Rules – How Today’s Leaders Build Lasting
Relationships. Harvard Business School. USA
Richard, F Gerson. 2003. Mengukur Kepuasan Pelanggan (Measuring Customer

Satisfaction), Crisp Publication, PPM, Jakarta.
Rintamaki, Kuusela and Mitronen. 2007. Identifying competitive customer value

propositions in retailing. Managing Service Quality Vol. 17 No. 6.
Rita Alfin et, al. 2013. Effect of Service Quality and Product Performance To Corporate
Image, Customer’s Satisfaction and Customer’s Trust. IOSR Journal of
Business and Management (IOSR-JBM) e-ISSN: 2278-487X, p-ISSN: 2319-
7668. Volume 9, Issue 6 (Mar. - Apr. 2013), PP 01-09
Sugiyono, 2010, Statistika untuk Penelitian, Bandung :Alfabeta.
Upamannyu, R. Nischay K, Chanda Gulati, and Garima Mathur. 2014. Effect Of Brand
Trust, Brand Image On Customer Brand Loyalty In Fmcg Sector At Gwalior
Region. SCHOLARS WORLD-IRMJCR. Volume. II, Issue II, April 2014 [83]
Zeithaml, V.E & M.J. Bitner. (2003). Service Marketing: Integrating Customer Focus
Across the Firm. 3rd Ed. Boston: McGraw – Hill/Irwin
081381111770 mimi

The impact of Perceived Risk on Consumer Purchase
Intention in Indonesia; A Social Commerce study
Muhammad Ashoer, Syahnur Said
Departement of Management, Moslem University of Indonesia, Makassar, Indonesia
gmail: muhammad.ashur@umi.ac.id
Abstract
The social networking sites (SNSs) phenomenon around the world fundamentally have
given birth to a new shape of e-commerce, called social commerce (s-commerce).
Sustained by a SNSs technology, s-commerce provides a new channel to enable buying and
selling directly from SNSs platform. However, the rapid growth of s-commerce is yet
overshadowed by the risks of uncertainty that drive consumers to avoid shopping in social
media. Numerous study has proved that perceived risks negatively affect consumer
behavior in e-commerce. Thus, this paper attempt to analyze seven dimensions of perceived
risk towards intention to purchase in s-commerce. An online electronic questionaire was
designed, and a total of 175 SNSs users were participated in this survey. The result
provides important managerial reducing risk strategy for adapting in the ever-changing
online business environment.
Keywords: Perceived Risks, Purchase Intention, S-commerce, Social Media, Consumer Behavior.
1. Introduction
The social networking sites (SNSs) rapid development establish an interesting and
enticing experience to the users. The massive adoption of SNSs technology then drives
online shopping to the new level, from product-oriented to a social-oriented environment
(Wigand et al., 2008). In the perspective of electronic commerce (e-commerce), the
phenomenon has given rise to a new paradigm called social commerce (s-commerce)
(Huang and Benyoucef, 2013; Liang and Turban, 2011). S-commerce is internet-based
trading that utilizes the social media platform as a new channel to facilitate the commercial
transaction (Kim and Park, 2013). Sustained by social media, s-commerce creates
consumers-to-consumers (C2C) business (people-to-people), in other words, sellers are
individuals instead of firms (Stephen and Toubia, 2010). They interact, participate,
collaborate and jointly creating economic value in s-commerce.
Shopping through SNSs (Facebook, Twitter, and Instagram, and so forth) began to
gain its popularity due to the various usefulness. In Indonesia, APJJI (Indonesian Internet
Service Providers Association) and PUSKAKOM UI noted that 64.9% of the internet users
mostly purchase via SNSs, and most of the transactions (67%) using sms and internet
banking (Dailysocial, 2015). It is reasonable, considering s-commerce is executed directly
between users. Unfortunately, on the other hand, this process potentially produce loss from
the buyer’s side, such as the report from Cybercrime Team in POLRI stated that fraud
modus in SNSs as follows: products are not delivered after purchasing, discrepancy in
advertising, carding fraud (transfer using other people debit/credit cards) (reskrimsus, polri
2015). Moreover, misuse of consumer’s personal data and long-time buying process
engender customer’s anxiety so that cancel the transaction. These circumstances affect on

customer’s psychology, they begin to feel unsafe to perform s-commerce. Consequently
(especially, those who do not have enough experience), creating customer’s risk perception
(Hong and Cha, 2013). The higher they perceive the risk (even when they do not know
whether it will ensue or not) become one of the main obstacles in the customer online
purchase decision
Numerous studies have examined how perceived risk’s dimension influence
customer’s decision. However, those studies (Pavlou, 2003; Forshyte and Shi, 2003; Naiyi,
2004; Forsythe et al., 2006; Hong dan Cha, 2013; Masoud, 2013; Zhou et al., 2008; Zhang
et al., 2012; Almousa, 2014; Yokoyama et al., 2014; Demirdogen, 2010; Hong dan Yi,
2012; Dai et al., 2014; Vos et al., 2014) are yet found inconsistencies of the testing results.
Furthermore, those studies is also only investigate risks in online shop sites/websites (e-
commerce), instead of SNSs (s-commerce), whereas the explanation above have
emphasized that the business risks in s-commerce cannot be ignored. Hence, perceived risk
in the s-commerce context is need to probed, considering the less of review in s-commerce
context, especially in Indonesia. It is conceivable that s-commerce is a new research field in
marketing, therefore we adopt and then elaborate earlier e-commerce studies (Hong and
Cha, 2013; Almousa; 2014; Bansal and Chen, 2011; Zhang et al., 2012; Forsythe et al.,
2006). Finally, we classify the perceived risk into the dimension that refers to the literature,
and empirically would analyze how each dimension affecting purchase intention of s-
commerce users in Indonesia.
2.1. Social Commerce
Along with the popularity of SNSs around the world, s-commerce emerge and
transform into a new promising virtual business alternative. Marsden (2010) defined s-
commerce as a subset of e-commerce using social media to facilitate social interactions and
enhance the online shopping experience. Kim and Park (2013) state s-commerce as a new
e-commerce business model supported by social media to facilitate business transaction.
Dennison et al., (2009) briefly interpret s-commerce as the word-of-mouth of the online
shopping. Based on the above explanations, this study simply define s-commerce as a new
trading channel drived by the social media platform.
S-commerce is categorized as the part of e-commerce, however it has a unique
characteristic that differentiate it compared to the other internet-based business. According
to Wang and Zhang (2012), to improve sales, e-commerce maximize website/ online store
technology (advance search, one-click purchase, user interface and display), while s-
commerce is “social” oriented (expanding the network, collaboration and sharing
information). Baghdadi (2013) added that in the value creating system, e-commerce is
restricted by the company itself (such as business design, improving product quality), while
value creation process in s-commerce is independent, since it comes from customer
interaction and engagement in SNSs. Hence, s-commerce sellers are critically demanded to
adopt and acquire some new capability such as listening, and conducting a dialogue with
customers in social media.
2.2. Perceived risks

The concept of risk has been accepted as one of the main considerations in customer
decision making. Bauer (1960) affirm that it is NOT the risks in “the real world” which
affecting customer’s behavior, their subjective perception on the risks that might be happen
is. The customers are starting to perceive it when they are facing two factors which are
uncertainty and (negative) consequences (Cox and Rich, 1964). The higher the uncertainty
and negative consequences are, the higher the perceived risks (Hong and Cha, 2013). The
higher the perceived risk drives the customers need more information about a product so it
will influence the customer’s decision on the purchase that tends to be more complex and
long, and it will cause the customer to cancel their purchase. Therefore, perceived risk
become one of the most important and strong concepts in explaining customer’s behavior.
Risks perceived by the customers has been study as the subject in the last four
decades (Mitchell, 1999). In traditional busniness, several prior research only focused on 5
risk dimensions, such as financial risk, product risk, psychological risk, social risk, and
time risk (Jacoby & Kaplan, 1972; Roselius, 1971; Stone and Gronhaug, 1993). However,
the rise of new commerce, which is internet, reinvite the experts to discuss risk depthly and
discover a way to eliminate or mitigate it.
Customer’s perception on risk in the e-commerce is quite higher than the offline
business (Lee and Tan, 2003). They could not see, touch, or try the products/services that
they would buy. For example, internet-based transation require delivery, hence the damage,
fault, late or loss during the shipping is highly possible (Hong dand Cha, 2013). Besides,
the transaction safety risk and privacy might be faced by the customers because of the
anxiety on the possibility that their personal data when purchasing product will be abused
by other irresponsible parties (Zhou et. al., 2008). Another customer doubts is when they
manage to purchase in social media, they have difficulties to address a complain related to
damaged products, service guarantee, and promotional frauds (Yu et. al., 2007; Zhang et.
al., 2012). Previous explanations have shown a theoretical evidence that perceived risks in
internet could involved delivery, security and privacy, and after-sale risk. Therefore, along
with the traditional trading risks, this research proposes 7 s-commerce risk dimensions
based on literature (Hong and Cha, 2013; Hajli, 2014; Kim and Park, 2013; Zhang et. al.,
2012; Stone and Gronhaug, 1993; Hong and Cha, 2013; Forshyte and Shi, 2003; Bansal and
Chen, 2011; Zhang et. al., 2012; Yu et. al., 2007; Almousa, 2014). Financial Risk was
defined as the possibility of financial loss due to the high sale price, online fraud, or
additional costs. Time Risk was defined as the possibility of time loss due to various
inconvenience during transaction process. Social risk was defined as the possibility of the
purchased product affecting others’ view of the consumer. Product Risk was defined as the
possibility that the purchased product does not performing as it was expected. Delivery
Risk was defined as the possibility of loss during delivery process. Security and privacy
risk was defined as the possibility of loss associated with personal data will be abused or
misused without the owner’s permission. After-sale risk was defined as the possibility of
loss suffered by the customer after purchasing (such as damaged product, fraud and service
guarantee claim). Finally, Purchase intention was defined as customer’s tendency to shop
through the social media.

3. Research Model and Hypothesis Development
Conceptual framework model is developed to answer scientifically the research
questions which is described by the inter-variable relationship. Based on the theoretical
reviews and earliers research, this study aim to examine the perceived risk dimension
(financial, time, social, product, delivery, payment and privacy, and after-sale risks) on
consumer’s purchase intention in Indonesia. The research model is presented as Fig. 1.

Perceived Risk
Financial Risk
Time Risk
Social Risk
Product Risk
Purc
Delivery Risk
Security and
Privacy Risk
After-sale Risk
Figure 1. The Conceptual framework model.
Some researches have shown that the perceived risk has negative effect on online
purchase intention. The risk is subjective (Bauer, 1960), which means that the possibility of
loss suffered by the customer is influenced by the lack of their knowledge and experience

in the decision they are about to make. The more risks they perceived, the less their
intention to perform the purchase. Psychologically, people are quite worry of doing mistake
in purchase rather than maximizing the benefit from the purchase itself (Mitchell, 1997).
Hence, the perceived risk is considered as one of the main barriers in the purchasing
decision (Forsythe and Shi, 2003).
Financial risk, product risk, privacy risk, and time risk were studied by some
researchers (Forsythe and Shi, 2003; Hong & Cha, 2013; Masoud, 2013; Almousa, 2014;
Naiyi, 2004; Ling et al., 2011; Yokohama et al., 2014). Furthermore, Naiyi (2004) also
found that delivery risk has a negative impact on online purchase. Yokohama (2014)
studied that the social risk influence purchase intention through brain neuron system and
proved that social risk has a positive impact, while Hong and Cha (2013) found the
contrary. The result of Bansal and Chan (2011) which claims that the security and privacy
system in the online store is much better than in social media, which is interesting to be
proved further. Zhang et. al., (2012) also stated that after-sale risk also has a negative
impact on customer’s purchase decision.
Based on the discussion, this research propose hypotheses as following:
H1: Financial risk has a negative impact on purchase intention
H2: Time risk has a negative impact on purchase intention
H3: Social risk has a negative impact on purchase intention
H4: Product risk has a negative impact on purchase intention
H5: Delivery risk has a negative impact on purchase intention
H6: Security and Privacy risk has a negative impact on purchase intention
H7: After-sale risk has a negative impact on purchase intention
3. Research Methodology
3.1. Questionnaire Development
To test the hypotheses, a survey is designed to measure perceived risk and
customer’s purchase intention in Indonesia. The items in this questionnaire have been
elaborated through deep investigation on literature and previous research. Each item in this
research is measured using Likert scale with 1 (Strongly Disagree) to 5 (Strongly Agree).
Before the distribution, a pilot study on 30 respondents is conducted to ensure that the
question items is valid and reliable to enter the measurement step. In addition, to minimize
bias in items, a back-translation method (Brislin, 1986) is adopted in this research. First, the
questionnaire is conducted in English, then translated into Indonesian so that respondents
could be understand the meaning of the items. Finally, when the data collection is
completed, it would be translated back into English again.
3.2. Data Collection

This research apply electronic questionnaire using Google Drive application from
Google. The items links was deployed via online through the social media (facebook,
twitter, instagram) and email. The survey was starting to posted from November 2015 to
January 2016. A The total of 248 responses was received from SNSs users in Indonesia,
who had experience and knowledge about s-commerce. Responses that are considered
appropriate and fit with the criteria was 175 respondents. The brief description of the
respondents are presented in table 1.
Table 1. Demographic of respondents (n=175).

Attribut Value Frequnecy Percentage
Gender Male 78 44.5%

Female 97 55.5%
Age 19-25 79 45.1%
26-35 44 25.1%
36-45 31 17.8%
46+ 19 10.8%
SNSs account Facebook 74 42.2%
(multiple responses) Twitter 30 17.1%
Instagram 36 20.6%
Kaskus 10 5.9%
Messengers (Line, BBM, WA) 25 14.2%
Length of SNSs usage ≤ 2 hour/day 19 10.8%
2-5 hour/day 37 21.1%
≥ 5 hour/day 119 68%
S-commerce frequency Only once 85 48.5%
More than once 21 12%
Never 69 39.4%
3.3. Data analysis
This study aim to predict and developing the s-commerce theory, so the most
suitable analysis method to explain the relation between the variables in this research is
SEM (Structural Equation Model) – PLS (Partial Least Square) (Bacon, 1999; Hair et al.,
2011). One of the privilege of SEM-PLS method compared to the other methods is that the
data used in SEM-PLS is not required to fulfill the normality asumption, SEM-PLS gives
looseness in the data which are normally distributed. Besides, this method also has been
applied in various social researches, such as social sciences (Bass et al., 2003), and S-
commerce (Hajli, 2014). In specific, the model was tested using SmartPLS software with
bootstrapping (Ringle et al., 2005).
4. Results
4.1. Measurement model (outer model)
Outer model is assessed by reliability and validity value. Firstly, To measure the
consistency reability, Cronbach’s Alpha (α) was evaluated. This value reflects how well the
reliability coefficient in a set are positively correlated to one antoher. To be considered as a
good realibility, α value should be > 0,7 (Zikmund et al,. 2009). Table 2 illustrates that all
items for each construct are showing the greater value than 0.7, indicates that the survey
data are reliable.
Further, there are two types of validities in SEM-PLS analysis, which are
convergent validity and discriminant validity. Convergent validity are expected to be
related are, in fact, related. To establish it, Average Variance Extracted (AVE) is
evaluated. Table 2 show that AVE values are greater than the cut-off values of 0.5 (Bagozzi
and Yi, 1988), so convergent validity is confirmed. Lastly, the discriminant validity
represents how unique or distinct is a measure, evaluated by the cross loading of all
indicator items in relation to their respective latent constructs Based on the table 3 and 4,
The result shows that discriminant validity is well established.
Tabel 2
Convergent validity and reliability test.
Latent Variables
No. of
items
AVE α C.R

Financial Risk 3 0.75 0.861 0.906
Time Risk 3 0.77 0.806 0.886
Social Risk 3 0.78 0.820 0.881
Product Risk 3 0.74 0.885 0.916
Delivery Risk 3 0.76 0.795 0.880
Security and Privacy Risk 3 0.70 0.863 0.855
After-sale Risk 2 0.73 0.882 0.863
Purchase Intention 3 0.79 0.872 0.890
Results of reliability test.
Table 3 Discriminant validity test.
Latent Variable 1 2 3 4 5 6 7 8
Financial Risk 0.86
Time Risk 0.23 0.87
Social Risk 0.34 0.24 0.88
Product Risk 0.30 0.32 0.32 0.86
Delivery Risk 0.21 0.37 0.35 0.17 0.87
Security and Privacy Risk 0.49 0.40 0.26 0.24 0.38 0.83
After-sale Risk 0.57 0.26 0.54 0.38 0.14 0.29 0.85
Purchase Intention 0.33 0.52 0.25 0.30 0.40 0.22 0.49 0.88
Note: Values in bold type along the diagonal indicate the square root of the AVE. For discriminant validity,
these values should exceed off-diagonal correlations.
Tabel 4
Cross loading of the measurement model
Items 1 2 3 4 5 6 7 8
FR1 0.74 0.21 0.34 0.36 0.40 0.49 0.21 0.20
FR2 0.90 0.23 0.44 0.31 0.26 0.21 0.65 0.58
FR3 0.85 0.43 0.22 0.34 0.51 0.43 0.32 0.40
TR1 0.21 0.86 0.69 0.49 0.26 0.31 0.43 0.43
TR2 0.34 0.87 0.25 0.44 0.34 0.37 0.28 0.64
TR3 0.38 0.82 0.19 0.27 0.38 0.20 0.35 0.34
SR1 0.41 0.62 0.83 0.19 0.22 0.41 0.11 0.32
SR2 0.43 0.25 0.77 0.40 0.12 0.30 0.51 0.38
SR3 0.27 0.36 0.81 0.51 0.17 0.53 0.27 0.59
PR1 0.39 0.29 0.28 0.83 0.48 0.55 0.30 0.31
PR2 0.37 0.28 0.64 0.83 0.58 0.22 0.26 0.29
PR3 0.38 0.38 0.38 0.83 0.47 0.48 0.52 0.38
DR1 0.51 0.40 0.39 0.52 0.85 0.63 0.33 0.12
DR2 0.30 0.55 0.38 0.39 0.80 0.18 0.19 0.34
DR3 0.23 0.28 0.31 0.45 0.83 0.33 0.27 0.42
SPR1 0.65 0.20 0.42 0.20 0.28 0.83 0.24 0.38
SPR2 0.22 0.25 0.49 0.21 0.42 0.86 0.31 0.49
SPR3 0.68 0.29 0.49 0.27 0.36 0.83 0.34 0.31
AR1 0.21 0.50 0.39 0.22 0.34 0.78 0.82 0.29
AR2 0.40 0.35 0.38 0.49 0.14 0.33 0.81 0.43
PI1 0.43 0.48 0.51 0.65 0.32 0.48 0.58 0.79

PI2 0.45 0.60 0.22 0.40 0.58 0.23 0.43 0.88
PI3 0.32 0.50 0.39 0.41 0.39 0.55 0.15 0.86
Note: 1.FI:Financial Risk, 2.TR:Time Risk, 3.SR:Social Risk, 4.PR:Product Risk, 5.DR:Delivery Risk, 6.SPR:Security and Privacy Risk,
7.AR:After-sale Risk, 8.PI:Purchase Intention
*Indicators on a construct higher that all its cross loading with other constructs
4.2. Structural Model (inner model)

Inner model is intended to predict the causality relation between latent variables.
The inner model is evaluated by investigating the variance defined by the R2 value for
dependent variable. Based on Fig. 2, the R2 values of purchase intention was 0.334 or 34%,
which reflect that the purchase intention variable variance can be explained by the 33.4% of
perceived risk dimensions. Subsequently, calculation of the path coefficient (β), which
indicate the influence between two variables. The analysis found that financial risk (β= –
0.269, (t-statistic=2.473)), social risk (β= – 0.319 (2.866)), product risk (β= – 0.357
(3.274)), delivery risk (β= – 0.284 (2.395)), security and privacy risk (β= – 0.226 (2.031)),
after-sale risks (β= – 0.175 (1.974)) negatively and significantly affecting the purchase
intention. Unfortunately, time risk (β= – 0.103 (1.452)) was found insignificant on purchase
intention. Therefore, H1, H3, H4, H5, H6, and H7 is supported, while H2 is rejected. Fig. 2
shows p-value from each dimensions measurement.

Perceived Risk
Financial Risk
– 0.269 (2.473)*
Time Risk
– 0.103 (1.452)
Social Risk
– 0.319 (2.866)**
Product Risk – 0.357 (3.274)** Purc
– 0.284 (2.395)*
Delivery Risk
– 0.226 (2.031)*
Security and *
Privacy Risk *
– 0.175 (1.974)*
After-sale Risk
Figure 2. The results of the research model.
5. Conclusion
5.1. Discussion

Risk is one of the most pervasive concept in human choice theory (Dowling, 1986).
Spreading rapidly and widely thorougout in a community, the impact is likely to be
negative on consumer’s perception, particularly customers in social media. Previous studies
have reviewed the risk in the e-commerce, but those studies have not explore deeply on
how perceived risks plays the significant role in s-commerce context. Considering that s-
commerce is a new mode in online shopping, the findings in this research will enrich the
study in internet-based trading, especially s-commerce’s concept.
In general, this study review the dimensions of perceived risk affecting (financial,
time, social, product, delivery, payment and privacy, and after-sale risks) s-commerce
customer’s purchase intention in Indonesia. The outer model analysis result (measurement
model) demonstrate that all validity and reliability value constructions are fulfill the
assessment criteria. The analysis result for inner model (structural model) reveals that six
(H1, H3, H4, H5, H6, and H7) of seven hypotheses are supported, while one is rejected
(H2). The research model testing result is shown in Fig. 2.
In SNSs, simply by owning (sign up) an account, everyone are free to offer their
products. This kind of freedom potentially turn the sellers in social media into a
irresponsible one. Product risk is found as the greatest barrier for the respondents in this
research to intrigued their purchase intention. Products in social media, if advertised
without displaying the real condition (in real world) image tend to make the customer think
that the physical condition might be not as good as the ads. The seller may consider to
reduce the discrepancy level between the ads in SNSs and the real appereance, so that the
customer can imagine (depiction) how the product will be used or wear in the real world.
For example, Zappos.com consistently posting the real version (original appereance) and
commercial version (edited) of their shoe in facebook page, alternately.
To overcome the social risk, the s-commerce seller can maximize the positive
testimony from others customers (as comparison of social judgement) to ensure them that
the quality products is good. The sellers may sincerily ask consumers to post good review
in SNSs store page as a guarantee (quality) after purchasing a product. Users in SNSs might
be realize that the social judgement is not always true. Delivery risk is considered also
could hamper the customer’s purchase intention, especially in Indonesia, which is
geographically separated by the islands. To solve it, the s-commerce sellers may attempt to
cooperate with the trustworthy and credible expedition/ delivery company to reduce the
customer’s doubts. Next, financial risk may decreased by providing ratings and review in
social media store,which is the valuable information for customers in reducing their
worries. Privacy and safety risk in s-commerce context has significant impact, the sellers
can assure the customers that their private data is secured, and convinced them that they
will take responsibilities if there were any unwanted conditions. Finally, the sellers
probably can give guarantee card to reduce after-sale risk, it could be used as a assurance
when the product is damaged.
Meanwhile, it is interesting to noted that time risk is not significant affecting the
customer behavior in s-commerce. The reason that might underlie this result is the
excessive customer’s activities in social media (which is more than 5 hour/day). Imagine
how much information is transferred (shared) in SNSs, so it means that most of them
accidentally “find” what they are needing for, instead of searching the products
intentionally. Although they feel worry about the time, it is not a concern for customer
because there are many other things/activities that can be done in social media while
waiting the feedback from the seller, such as chatting, and so on. Based on the arguments, it

can be concluded that reducing risk in s-commerce is quite different compared to e-
commerce. The result offering a new insight for s-commerce both in concept and
managerial.
5.2. Implications
Implications is divided into two parts, which are practical and theoretical
implications. This study provides a new field for develop the s-commerce concept in
Indonesia, which is considered as a rising mode of online shopping. The finding also
suggests a managerial contribution for the s-commerce strategy; the sellers should become
social in SNSs, establish a collaboration and interaction, creating relationship with the
customer, not only focus in content. Therefore, developing s-commerce strategy to attract
more customer to access business store in SNSs is essential, that is one of critical reducing
risk strategy in the current s-commerce environment.
5.3. Limitation and Future Research

This study has been conducted following to the scientific research steps, however,
there are some limitations was identified. Firstly, the number of respondents is considered
not enough to cover the total amount of SNSs users in Indonesia, so the generalization
scope might be limited to represent the real s-commerce in Indonesia. Finally, regarding a
lower of R2 value, future research should develop the s-commerce model by adding some
new variables and/or indicators (such as trust and/or subjective norm) in order to enhance
purchasing through SNSs.
Appendix A. List of items survey.
Dimension Items
Financial Risk The price of the products in social media is not compatible with the quality
Shopping in social media is prone to fraud
I may incur additional charges if I shop in social media
Time Risk Communicating with the seller in social media requires a long time
I might spend a lot of time for searching products in social media
Shopping in social media might be a waste of time
Social Risk If I purchased a product in social media, I would be demeaned by my friends or family
If I purchased a products in social media, I would probably be ridiculed by my friends or
family
Product purchased in social media may not be accepted by my friends or family
Product Risk Products offered in social media may be low-quality
Products promoted in social media may be counterfeit / imitation
Products advertised in social media may be different from the original/physical appearance
Delivery Risk Products purchased in social media may be damaged during shipping
Products purchased in social media may be lost during delivery
Products purchased in social media may be sent to the wrong adresss
Security and Sellers does not guarantee the security of my private information
Privacy Risk My personal data is likely to be exposed or abused by the sellers in social media
Social media may not be a reliable place to shop online
After-sale Risk If the products is in trouble, I might be difficult to complain to the sellers
After purchasing, warranty/ maintenance service process is likely to be slow or long-
winded
Purchase Intention I would like to purchase a product from social media
I would like to recommend my friends or family to purchase a product from social media

If there is a product that I want to purchase, I would like to use the social media
References
Almousa, M. (2011). Perceived Risk in Apparel Online Shopping: A Multi-Dimensional

Perspective. Canadian Social Science, Vol.7, No.2, pp.23-31.
Bacon, L. D. 1999. Using LISREL and PLS to Measure Customer Satisfaction, Sawtooth Software
Conference Proceedings, La Jolla, California, Feb 2-5, 305-306.
Bagozzi, R. P., & Yi, Y. (1988). On the evaluation of structural equation models. Journal of the
Academy of Marketing Science, Vol. 16, No.1, pp.74–94.
Baghdadi, Y. 2013. ‘From e-commerce to social commerce: a framework to guide enabling cloud
computing’. Journal of Theoretical and Applied Electronic Commerce Research, Vol 8, No.
3, pp. 12–38.
Bansal, G dan Chen, L. 2011. ‘If they trust our e-commerce site, will they trust our social commerce
site too? Differentiating the trust in e-commerce and scommerce: The moderating role of
privacy and security concerns’.
Bauer, R. A. (1960). Consumer behavior as risk taking. In Cox, D. (Ed.), Risk taking and
information handling in consumer behavior (pp. 389–398). Cambridge, MA: Harvard
University Press.
Bass, B., Avolio, B., Jung, D., & Berson Y. (2003). Predicting unit performance by assessing
transformational and transactional leadership. Journal of Applied Psychology, Vol. 88 (2),
pp.207–218.
Brislin, R.W. (1980). Translation and content analysis of oral and written material. In H.C. Triandis
& J.W. Berry (Eds.), Handbook of cross-cultural psychology (Vol. 1, pp.389-444). Boston:
Allyn & Bacon.
Bass, B., Avolio, B., Jung, D., & Berson Y. (2003). Predicting unit performance by assessing
transformational and transactional leadership. Journal of Applied Psychology, Vol. 88 (2),
pp.207–218.
Cox, D. F., and Rich, S. U. 1964. Perceived risk and consumer decision making-the case of
telephone shopping. Journal of Market Research, Vol.1, No.4, pp.32-39.
Dai, B., Forsythe, S., & Kwon, W. (204). The Impact of Online Shopping Experience on Risk
Perceptions and Online Purchase Intentions: Does Product Category Matter? Journal of
Electronic Commerce Research, Vol.15, No.1, pp.13-24.
Demirdogen, O., Yaprakli, S., Yilmaz, M.K., and Husain, J. 2010. Customer risk perceptıons of
internet bankıng: A study in Turkey. The Journal of Applied Business Research, Vol.26,
No.6, pp.57-68.
Dennison, G., Bourdage-Braun, S. dan Chetuparambil. 2011. ‘Social commerce defined’. IBM
Corporation. Retrieved October 17 2014,
http://www.ibm.com/vrm/eNurture_30362_S_4120_4IN/DThompson243272871.
Direktorat Reserse Kriminal Khusus. (n.d). Jenis Kejahatan Media Sosial. Retrieved January 7,
2015 Retrieved January 7, 2015, from http://www.reskrimsus.metro.polri.go.id/
Dowling, G. R. 1984. Perceived Risk: The Concept and It’s Measurement. Pschology & Marketing,
Vol. 3, pp.193-210.
Fornell, C., & Larcker, D.F., (1981). Evaluating structural equation models with unobservable
variables and measurement error. Journal of Marketing Research, Vol.18, No.1, pp.39-50.
Forsythe, S., Liu, C. L., Shannon, D., & Gardner, L. C. (2006). Development of a scale to measure
the perceived benefits and risks of online shopping. Journal of Interactive Marketing,
Vol.20, Iss.2, pp.55-75.
Forsyhte S. M., and Shi, B. 2003. Consumer patronage and perceptions in Internet shopping.
Journal of Business Research, Vol. 56, No.11, pp. 867-875.

Hair, J. F., Ringle, C. M., & Sarstedt, M. (2011). PLS-SEM: Indeed a silver bullet. Journal of
Marketing Theory and Practice, Vol. 19, No. 2, pp.139–151.
Hong, B. dan Cha, S. H. 2013. ‘The mediating role of consumer trust in an online merchant
inpredicting purchase intention’. International Journal of Information Management,
Vol.33, pp.927– 939.\
Hong, Z and Yi, L. 2012. Research on the Influence of Perceived Risk in Consumer On-line
Purchasing Decision. Physics Procedia, Vol.24, Part B, pp.1304-1310.
Huang, Z. dan Benyoucef, M. 2013. From e-commerce to social commerce: A close look at design
features. Electronic Commerce Research and Applications, Vol.12, No.4, pp. 246-259.
Jacoby, J., and B. Kaplan. 1972. The components of perceived risk. In Proceedings of the Third
Annual Conference of the Association for Consumer Research, ed. M. Venkatesan, 382–93.
Ann Arbor, MI: Association for Consumer Research.
Kaonang. G., 2015. 5 Fakta Menarik Tentang Kegiatan Jual-Beli Online di Indonesia. Retrieved
January 7, 2015, from https://dailysocial.id/post/5-fakta-menarik-tentang-kegiatan-jual-beli-
online-di-indonesia/
Kim, S dan Park, H. 2013. Effects of various characteristics of social commerce (s-commerce) on
consumer’s trust and trust performance. International Journal of Information Management,
Vol.33, pp.318–332.
Lee, K. S. and Tan, S. J. (2003), E-retailing versus physical retailing: A theoretical model and
empirical test of consumer choice, Journal of Business Research, Vol. 56, No. 11, pp. 877-
885.
Liang, T. P. dan Turban, E. 2011. Introduction to the special issue social commerce: A research
framework for social commerce. International Journal of Electronic Commerce, Vol.16,
No.2, pp. 5-5.
Masoud, E.Y (2013). The Effect of Perceived Risk on Online Shopping in Jordan. European
Journal of Business and Management, Vol.5, No.6, pp.76-87.
Marsden, P. 2009. ‘Simple definition of social commerce (with word cloud & definitive definition)’.
Digital Innovation Today. Retrieved October 17 2014.
http://digitalinnovationtoday.com/social-commerce-definition-word-cloud-
definitivedefinition-list/
Mitchell, V. W. (1999). Consumer perceived risk: conceptualization and models. European Journal
of marketing, Vol. 33(1/2), pp.163-195.
Naiyi Ye, (2004) “Dimensions of consumer‟s perceived risk in online shopping”, Journal of
Electronic Science and Technology of China, vol. 2, no.3, pp. 177-182.
Pavlou, P. A. (2003). Consumer acceptance of electronic commerce: Integrating trustand risk with
the technology acceptance model. Int. J. Electron. Commer., 7(3),69–103.
Ringle, C., Wende, S., & Will, A. 2005. SmartPLS 2.0 (Beta). Hamburg, (www.smartpls.de).
Roselius, T., 1971. Consumer rankings of risk reduction methods. The Journal of Marketing.
Vol.35. No.1, pp.56-61.
Stephen, A. T. dan Toubia, O. 2010. ‘Deriving value from social commerce networks’. Journal of
Marketing Research, Vol.47, No.2, pp.215–228.
Stone, R. N., and Gronhaug, K. (1993). Perceived Risk: Further Considerations for the Marketing
Discipline. European Journal of Marketing, Vol.27(3), pp.39-50.
Zhang, L., Tan, W., Xu, Y. & Tan, G. (2012) , “Dimensions of Consumers‟ Perceived Risk and
Their Influences on Online Consumers‟ Purchasing Behaviour”, Communications in
Information Science and Management Engineering, Vol.2, No.7, pp.8-14.
Vos, A., Marinagi, C., Trivellas, P., Eberhagen, N., Skourlas, C., Giannakopoulos, G. 2014. Risk
Reduction Strategies in Online Shopping: E-trust perspective. Procedia - Social and
Behavioral Sciences, Vol.147, pp.418.

Wang, C. N. dan Zhang, P. 2012. ‘The evolution of social commerce: the people, management,
technology, and information dimensions’. Communications of the Association for
Information Systems, pp.1–23.
Wigand, R. T., Benjamin, R. I. dan Birkland, J. L. H. 2008. Web 2.0 and beyond: implications for
electronic commerce, International Conference on Electronic Commerce.
Yokoyama R, Nozawa T, Sugiura M, Yomogida Y, Takeuchi H, Akimoto Y, Shibuya S, and
Kawashima R. 2014. The neural bases underlying social risk perception in purchase
decisions. NeuroImage, Vol.91, pp.120–128.
Yu, D., Dong, T, Liu. R. 2007. Study of Types, Resources and Their Influential Factors of
Perceived Risks in Purchase Online. Journal of Dalian University of Technology. Vol. 28,
No.2, pp.13-19.
Zhou, L., L. Dai, and D. Zhang. 2007. Online Shopping Acceptance Model – A Critical Survey of
Consumer Factors in Online Shopping. Journal of Electronic Commerce Research, Vol. 8,
No. 1, pp.41-62.

STRATEGIC SHIFT FOR IMPROVING COMPETITIVENESS IN COAL MINING
BUSINESS TO REMAIN COMPETITIVE ON THE FACE OF SLUMPING
INTERNATIONAL COAL PRICES
Naresh Anchalia* & Dr. Yos Sunitiyoso

School of Business and Management
Institut Teknologi Bandung, Indonesia
*naresh.anchalia@sbm-itb.ac.id
ABSTRACT
Every business wants to be successful. At its simplest level, success may mean survival. A firm
is successful when it has the ability to create positive net economic profit on sustainable basis
as an entity. Most coal businesses in Indonesia are right now struggling for survival. The
entire industry is going through business turbulence and challenges. Hardly any Individual
firm is exception.
To cope with the turbulences in the business ecosystem where a firm operates, it must
continually innovate and re-invent itself to survive and prosper. The firm is always under
pressure to continuously improve its performance in both financial and product markets. In
order to do so, it needs to look back on its strategies and analyze the efficacies, effectiveness
and relevance of them in the given situation. Though there may be plethora or causes for the
current situation, one reason clearly stands out is – the industry is not able to remain
competitive against its peers else where in the world. Partly due to the fact that it has already
pushed to the limit in operational efficiency by cost cutting and partly due to improvement in
the competitiveness of its peers for various reasons including softer currency exchange rates
and lower interest costs.
The objective of this paper is to explore and examine an alternative business strategy for
performing better and achieve sustainable improvements of performance.
For this project, a systematic and structured model has been chosen for finding optimal
solution to the business challenges faced by BAM. This model is known as “McKinsey
Approach (7 steps model) to Problem Solving”, introduced in 2007 by Ian Davis, David
Keeling, Paul Schreirer and Ashley Williams.
Having studied several possible alternative solutions and making quick analysis, it was found
that producing coal by owned equipment would take BAM’s cost efficiency to a higher level
and put in better position as against its competitors. The firms in coal sector in Indonesia in
past decade have moved lots of its activities to contractors as outsourcing business model.
That had benefited it by reducing the payroll size, trimming the business operations and
having healthier balance sheets with good ROI and ROE. It was the right decision at that time
when the margins were fat enough to share with many business partners. In the changed
scenario, that is no more the case. The time is to do more activities, mainly the core activities
by the firm itself. The strategic shift towards outsourcing has gone too far. The firms need to
shift back to its core operations by correcting the strategic drift.
Keywords : Outsourcing, business strategy, strategic shift, strategic drift, business model, and
competitive advantage.

1 INTRODUCTION
1.1. Background
Batubara Abadi Mines (BAM) is the holder of coal mining concession (opencast mine) in
Kabupaten Muara Teweh, Kalimantan Tengah since 2009. The coal quality falls under
Thermal Coal of GAR 5000 kcal/Kg, which is considered mid to high calorie coal having
strong demand for coal fired power plants all over the world.
The first decade of the current millennium saw increased demand of energy to fuel the
ambitious economic growth targets of governments from all developing countries led by
China. Coal was considered to be cheapest and easiest source of energy for these countries.
Despite its blemish as polluting fund resource of energy, it remained in the forefront of
energy source.
Indonesia with its abundant good quality of coal resources and enterprising business houses
seized the opportunity by quickly starting production and capturing the growing markets of
China, India, Japan, South Korea etc. PT. BAM and its promoters, albeit little late the
bandwagon of coal industry, were amongst one of them. Hence, BAM faced the low end of
the business cycle sooner than many of its peers who started the business a little early forcing
it to temporarily suspend production due to cash loss.
1.2. Coal Industry

Coal is concentrated form of prehistoric biomass under the top crust of earth in the form of
plant life. It is found and mined in many countries in the world and is the most used primary
source of producing energy worldwide. It is the cheapest energy source with stable quality,
which can be used in very large volume at any place having transportation facility. There are
many type of coals, the broad categories are, coking coal, anthracite, bituminous and sub-
bituminous coal. The focus in this article is only on bituminous and sub-bituminous coal,
grouped together as thermal or steam coal having main use in producing steam by burning it
to be used for generating power or use steam as such. Thermal coal can also be effectively
used to produce various useful and valuable chemicals and gas for burning and heating.
“It has been estimated that there are over 861 billion metric tons of proven coal reserves
worldwide. This means that there is enough coal to last us around 112 years at current rates of
production. In contrast, proven oil and gas reserves are equivalent to around 46 and 54 years
at current production levels.” Source : BP Statistical Review of World Energy June 2013
http://www.worldcoal.org/coal/where-is-coal-found/.
1.3. Indonesia in the World coal Map

Indonesia’s coal reserves estimated to stand at 31.96 billion tons, of which 8.9 billion tons are
proven, according to figures from the ESDM ministry. Indonesia possess only 3.20% of the
world’s total thermal coal reserve but it contributes in the world export by roughly 42% in
2013 according to IEA data, which makes it the largest exporter of thermal coal. In 2014, it
exported 359 MT or 83 % of total production. The major coal producing areas provinces are
South, East and Central Kalimantan, Jambi, South Sumatra, The objective of coal mines is to
create maximum value for coal that they produces. Most of the coalmines in Indonesia are
open cast mines as compared to tunnel mining in China and India.

Fig. 1.1. Indonesia Coal Reserve Areas
Mines located in South Kalimantan and East Kalimantan hold an advantage in terms of lower
transportation cost over mines in Central Kalimantan or mines in Sumatra due to their
proximity to sea.
1.4. Company’s Business Processes

The following diagram shows the sequence of activities and processes involved in coal
mining activities during the life of the mine.
Figure : 1.2 Thermal Coal Mining Stages (open cast)
The business of BAM is to produce, process, prepare and sell coal. Since, it owns the
coalmine and produces directly from the mine, it is the first actor in the supply chain. Produce
of BAM is thermal coal used mostly by power plants to generate electricity. Coal fired power
plants, are actually end users or the last actors in the thermal coal supply chain. The supply
chain is not very long. It comprises of Coal Production – Preparation – Transportation –
Power Plants. More clearly depicted with the associated processes and outcomes in diagram
below :

Figure : 1.3. Thermal Coal Supply Chain (used in power generation)
1.5. Changing Coal Business Scenario

Market price of coal peaked in 2011. BAM started operation at that time. When coal price
started sliding in 2012, BAM found it increasingly difficult to cope with the slide of market
price and could not match it by cutting costs because many of the input costs were very firm
which irrespective of conditions of coal industry remained relatively unchanged because they
had alternative use and market.
Many of the coalmines in Indonesia managed to sail through the sliding prices of 2012 and
2013 by aggressively increasing production volume and relying on long term fixed price
contracts. BAM could not resort to both of those because of its location on the upper stretch
of Barito River where lack of water in the months of dry season is the major challenge.
Therefore, BAM is faced with a serious business challenge when market prices started sliding
to the point that it started suffering cash losses, which demanded hard decision by the
management for its survival.
2. BUSINESS ISSUE EXPLORATION

Starting from 2006, when the market price was good and demand was growing due to un-
satiable demand of all resources from super fast growth of Chinese manufacturing sector,
every player in the coal industry shared and enjoyed the large pie of profit. This went on till
mid 2011 barring some temporary setback on the wake of world financial crisis of 2008-09
emerging from subprime loan crisis of the US. By the end of 2011, the spectacular growth of
Chinese economy started moderating. The earliest casualties included resource sector, more
specifically coal supplies from Indonesia.
The international market price of thermal coal from the peak of USD 82 per metric tons in
2011 and dropped to USD 57 in July 2013 a fall of $25 or 29%, BAM had to take some
serious decision about its operations.

Fig. 2.1. Quarterly Avg. Thermal Coal Price for GAR 5000 (USD/Ton) FOB MV
On the face of relentless drop of price, BAM continued to suffer strains on its margins. But it
continued its business and made all possible efforts to reduce cost by operational efficiency
and cost cutting, practically in all functions. Soon it hit the wall.
As was prevalent practices in the industry, BAM outsourced most of its activities including
the production, transportation and shipment activities to third party contractors. Generally, the
mine assets are owned and managed by the mine companies but most of the operations are
outsourced to third parties or contractors. The smaller the size of the company and its
mineable reserve, the more is the degree of outsourcing.
Main operations that are outsourced are :
1. Overburden removal,
2. Coal Getting,
3. Coal transport from mine pit to ROM to port and finally to mother vessel,
4. Infrastructure maintenance.
While, this practice results in the following benefits :
1. Low investment requirements,
2. Lower working capital requirement,
3. Quicker start of production,
4. Using expertise of contractors,
5. Less number of employees on roll,
6. Keeping the operation for the company simple.
The main disadvantages are :
1. High cost of financing for investment and working capital,
2. High cost of production as contractors add their profits,
3. Higher taxes (PPn),
4. Inefficiency in operations,
5. Unable to take advantage of investment for long term business,
6. Unviable work culture,
7. Challenges in coordinating amongst various contractors,
8. Adverse environmental impact,
9. Not able to build the core-competency in vital operations.
3. BUSINESS SOLUTION
3.1 Methodology Used
In order to find the most appropriate business solution the author has chosen a very modern,
systematic and structure model for finding optimal solution to the business challenges faced
by BAM. This model is known as “McKinsey Approach (7 steps model) to Problem Solving”

introduced in 2007 by trio of by Ian Davis, David Keeling, Paul Schreirer and Ashley
Williams.
The 7 steps are :
1. Define the problem,
2. Structure the problem,
3. Prioritize the issues
4. Plan Analysis and work,
5. Conduct analysis
6. Synthesize findings,
7. Develop recommendations.
Figure : 3.1. Seven Steps Structured Problem Solving Model

Source: McKinsey Approach To Problem Solving by Ian Davis, David Keeling, Paul
Schreirer and Ashley Williams.
In order to find proper business solution, there is need to study, analyze and determine the
following :
Perspective / Context : The Industry and the firm,
Stakeholders and processes : Who makes the decision and who supports the study.
Strategic intent / Criteria for success : Measurable parameter of success that must be
shared by the team.
Scope of solution space : Determining what will be and will not be included.
Barrier to Impact / Constraint within solution space : Defining the limits of solutions
that can be considered. That is to focus on realistic and actionable alternatives.
Criteria for Success / Key sources of insight : Identify where the knowledge, best
practice expertise and useful information exists.
3.2.1. Defining the Problem

The production of coal and transportation of that to sea borne vessel are the important primary
activity of coal industry value chain. Exercising more control on these operations through
effective and proper management are expected to yield heavy savings of underlying costs,
which would improve business margin.
In order to reduce the cost of production substantially on sustainable basis BAM has to take a
strategic decision of moving away from outsourcing to insourcing of core mining activity of
overburden removal and coal production. In order to do so, it is required to procure some
heavy equipment, recruit people and realign the business model and organization structure.
Most of the cost components are decided by external forces such as royalty by Government,
interest by banks and barging by barge owners who can provide such services to a plethora of

industries therefore giving by narrow room for deep negotiation. That leaves mainly the coal
production costs, land transportation and overheads, which could be economized by the firm.
Outsourcing when not based on strategic benefits of building competitive advantage over
competitors but more to reduce business complicacies or make the business simpler, such
may not be sustainable in the long term.
Benefits of outsourcing which are of strategic in nature are :
1. Strategic cost reduction,
2. Over coming capacity limitations,
3. Sourcing key skill deficiency,
4. Achieving sustainable economies of scale,
5. Legal requirements fulfillment,
Typically, the coal production costs including overburden removal costs constitute some 35 –
50 % of the total FOB mother vessel costs depending upon stripping ratio and distance of
mine from the anchorage where the mother vessel could be loaded. By using a root cause
analysis method the problem is identified.
Fig. 3.2. Root Cause Analysis.
The problem, therefore, is defined as “how to be competitive in the current challenging

market in producing and selling coal and make profit on sustainable basis?”
3.2.2. Structure the problem and develop the Hypothesis to Solve Problem
There are many probable solutions available to BAM to resolve the problem. In this process
the concept of MECE is very important. It is contracted form of “Mutually Exclusive” and
“Collectively Exhaustive”.
As the MECE concept is applied, the research needs to look at all the alternative probable
solutions to the problem required to be resolved. The table below lists probable alternative
available and the recommendation the most appropriate alternative for detail analysis here :
Table : 3.1. Summary of alternatives available and recommendations

No. Alternative Options Recommendation
1 Wait until market price improves NO
2 Changing Business Model (reduce outsourcing) YES
3 Finding new markets NO
4 Mine mouth power plant NO
5 Improvement of Coal quality NO
6 Production of Gas and Chemicals NO
7 Give on Lease NO
8 Moth balling NO

9 Sell the business as going concern NO
10 Closing the mine and returning to Government NO
However, in order to avoid waste of time and valuable resources, it is not necessary to carry
out real detailed analysis of all the alternatives. It is an accepted established practice to carry
out a quick and dirty test to find the fundamentally most relevant alternative solution from the
basket of several alternatives and take that as hypothesis for further deeper analysis.
Hypothesis: Changing the Business Model :
1. Redesign Strategy – from outsourcing to insourcing
2. Adjust the Organization Structure
3. Adjust the Business Model – Value proposition, Revenue and profit model, Core
Procedures, Core resources.
4. Improving on Sustainable basis the Operational and Financial Efficiency of Coal
Mine caused by too much Outsourcing
3.2.3. Prioritizing the Issues

The problem is how to be competitive on the face of falling market price and remain
profitable. This can be achieved in many ways, strategically, by making different choices or
operationally by improving operations. As avenues of operational efficiencies have already
been exhausted. Management has to go for strategic decisions to be more competitive. At the
core, being more competitive in a commodity like coal is mainly mean lower costs because in
a given situation there is hardly any means to differentiate one’s produce from another of
same category in order to be able to demand higher price.
Therefore, the issues that are to be addressed are the components of major costs. The point is
that the cost components are to be analyzed and re-structured in different way than simple
cost cutting objectives i.e. by changing business strategies.
The chart below gives the decided priority of issues. The basis is the size of the impact of
each of these issues on the probable solution.

Fig. : 3.3. Issue tree for prioritizing issues
3.2.4. Plan analyze and work

The most important components when the company does most of the tasks in house are heavy
equipment and people to run and manage the additional business tasks. Heavy equipment are
very easily available in Indonesia as its mining and infrastructure industry is very large and
well developed.
There are plenty of financing options are available for such equipment as they have reputation
of good performance and high re-sell value. Finance leasing is by far the most popular
financing option. But for BAM, being subsidiary of the listed company enjoying high credit
rating, bank financing is a cheaper option.
Trained manpower to operate and maintain these equipment is in good supply in the mine
sites. Moreover, with some limited initial trainings, new pool of operators can be developed in
relatively short time.
All these equipment are powered by diesel fuel. Several large distributors of diesel oil
including state owned firm Pertamina supplies diesel on regular basis even to the remotest
mine. Therefore, it can be procured at quite competitive prices and smooth supply can be
ensured. All these related data and information are collected and used for full analysis.
3.2.5. Conduct Analysis :
In the restructured business operation model, the new costs components and the revised
overall production costs as detailed in the table below :

Table : 3.4. Showing revised cost per ton of coal production using own equipment :
3.2.5.1. Financial Feasibility :

For making investment in a new project the management and investors would need to know
the financial viability of the investment and its associated risks. The future returns should
justify investment in the project. Financial Feasibility using the well established analytical
tools reflects the financial benefits of the new investment.
Financial Feasibility is also essential for suitable financing for the project. Though after
analyzing the project objectively, it should be tested with qualitative tests and related risks
should also be analyzed.
For this research, in order to evaluate the financial feasibility of the new proposed project,
accepted criteria are to be set. Remer and Nieto (1995) categorize the evaluation methods into
five basic types:
1. Net present value methods(NPV);
2. Rate of return methods(IRR);
3. Payback methods;
4. Ratio methods (financial);
5. Accounting methods.
In this article, the first 3 methods are used for evaluation. Ratio analysis is more relevant
when comparing two or more mutually alternative project for choosing amongst them.
Accounting method is not much relevant as it ignore time value of money. If a project is
acceptable under NPV method, it will also be viable under accounting method. In some cases
benefit-cost ratio is also used in evaluating viability of a project. But its relevance is more on
public projects.

Table : 3.5. Showing Financial Feasibility Analysis by NPV, IRR and Payback methods
Financial feasibility evaluation clearly shows the financial viability of the hypothesis.
Therefore, the next step is to proceed with synthesize the outcome which will lead to
recommendation of solution for implementation.
3.2.5.2. Price Change Sensitivity Analysis :

In order to understand the impact of downward changes in selling price of coal on margin,
sensitivity analysis is carried out in the table below. The analysis shows that BAM can
sustain the operations as long as the FOB MV price is not lower than $33/MT.
Table 3.14. : Price Change sensitivity Analysis
3.6. Synthesize
Synthesis in this 7 steps problem solving model developed by McKinsey is very important in
the process of developing the recommendation of business solution for its implementation.
Here synthesis is not merely summarization of important finding through analysis but is a
summary of summary. Stating the findings in one complete sentence, which will convey
entire meaning of findings is the process synthesizing.

Fig. : 3.6. Synthesizing the findings.
From the detail analysis, the following facts emerged :

1. By carrying out some of the core activities like mining will give good sustainable
benefit to PT. BAM,
2. Investment financing can be well serviced,
3. Shareholders will be rewarded from the additional benefits derived from
implementation of the solution,
4. The solution is scalable,
5. The solution is applicable and replicable across the firm and across the industry with
similarity of operation,
6. The solution is sustainable,
7. Scaling up of operation will allow satisfy customers demand,
8. Product quality can be maintained and even be improved,
9. Employees are happier when they work for the mines directly,
10. Environmental requirements are taken care of,
11. The solution does not go against any existing law rather it enables fuller and proper
compliance.
Therefore, the final statement of the analysis would be that BAM will significantly benefit
and be competitive by carrying out some of the core activities in house and be able to restart it
stalled operation with sustainable profits. This would mean and result into shift in some of its
business strategies.
3.7. Develop Recommendations :

After considering all the alternatives available to BAM to restart operations and comeback to
profitability, and the analysis carried out so far, it is clearly evident that producing coal by
owned equipment and own team will give substantial financial benefit over the previously
followed outsourcing contract model. Therefore, it is recommended that BAM does the
following :
1. Buy the required equipment with bank financing as per implementation schedule,
2. Recruit personnel as per table of Manpower,
3. Train personnel after carrying out TNA (Training Need Analysis),
4. Prepare complete SOP for operations,

5. Implement necessary internal control mechanism and reporting system for proper
functioning and control.
By implementing the recommendations developed by this study could turn the loss making
business into a profitable one, which in necessary to re-start the stalled business. The cost of
production of one ton of coal for BAM when using outsourcing contractor for overburden
removal and coal getting was $ 33.29. The revised cost for the same coal using owned
equipment and team would be only $ 28.84. This gives a cost reduction of $ 4.45 per ton.
Assuming the planned output of 120,000 tons per month the savings could $ 534,272 or for
one full year $ 6,411,259. This $ 6.5 Million saving in full year will enable PT BAM to restart
production and subsequently ramp up production gradually and reap even higher annual
profit.
The solutions recommended here are scalable and replicable across the industry and also to
other mineral mining industries where similar operations are employed for production.
4. CONCLUSION AND IMPLEMENTATION PLAN

After due analysis it is possible to come to the conclusion that PT. BAM will be better off by
shifting its strategy away from outsourcing many of its core activities to doing those with its
owned resources and people. It will no doubt enhance the scope of management’s functions
and responsibilities but the benefits far outweigh those increased workload.
4.1. Implementation
No plan is meaningful if it can not be implemented under the given circumstances and within
reasonable business parameters. The key requirements of this plan implementation are :
1. Detailed Implementation plan,
2. Top management’s commitment,
3. Analysis of stakeholders’ feedback (survey),
4. Project Risk Assessment,
5. Manpower (technical and operational) requirement assessment,
6. Managerial capability development,
7. Finance (investment) for equipment,
8. Purchase of equipment,
9. Recruitment of personnel,
10. Training,
11. Deployment and production,
12. Follow up, Review and corrective measure.
Table 4.1. Implementation schedule.

of the project. By doing so, it is also possible to make plan for mitigation. Preparation to
handle risks is important function of any professional management of a business. The table
below lists out all the associated risks, the impact of the same in success of the project, the
source of such risks and key risk mitigation action required.
Table 4.2. : Price Change sensitivity Analysis
In order to independently verify the practical relevance and acceptability of various important
assumptions and hypotheses considered in this research, a detailed survey was conducted by
direct interview with 5 stakeholders groups (Mine owners, Mine contractors, Employees with
mine contractors, Local government officials, Leaders in the local society and People
entrusted to protect environment.). It was also intended to assure that author’s hypothesis that
reducing outsourcing will improve its competitive advantage and will be taken well by all the
stakeholders. The survey result has validated the same.
References
1. Remer, D.S. and Nieto, A.P., (1995). A compendium and comparison of 25 project
evaluation techniques. Part 1: Net present value and rate of return methods. International
Journal of Production Economics. 42, 79-96.
2. BP Statistical Review of World Energy June 2013
http://www.worldcoal.org/coal/where-is-coal-found/
3. Coal Terminologies : Source : http://www.worldcoal.org/coal/where-is-coal-found/.

Do Woman Entrepreneurs Face Discrimination in accessing Credit?
Evidence from Indian SMEs
By
Nirosha Wellalage and Stuart Locke

This study investigates gender balance in the credit market for small and medium enterprises
(SME) finance in India. In many countries, the SME sector is seen as a means of rejuvenating
the economy and developing sustainable growth. Probit estimation and nonlinear
decomposition methods are employed in the analysis. We find that enterprises owned by
female entrepreneurs are on average 4% less likely to be credit constrained compared to
their male counterparts However, when females lead the firm, they face greater obstacles
accessing credit compared with male-led businesses. This result is partially consistent with
prior SME research where endogeneity issues resulted in biased estimators. A key outcome
of the study reflects the moral hazard market failure of introducing policies that favour
female owners of small businesses, which is prevalent in the microfinance sector, as that
creates an incentive to stay small.
Keywords: SME, Women Entrepreneurs, Credit access, India.
JEL Classification: G32, G21, J16, L25
1. Introduction
Potential imbalances in the cost of credit for small and medium enterprises (SMEs) relating to
the gender of the principal are investigated in this study using World Bank Enterprise
Surveys for India. In recent decades, credit constraints have been identified as one of the
major issues inhibiting the growth and sustainability of SMEs in emerging market countries
(EMC), particularly women-owned enterprises ("Improving Access to Finance for Women-
owned Businesses in India," 2014). Although there are approximately the same number of
men and women in the population, India ranks 206 out of 335 on the World Economic
Forum’s Gender Gap Index ("The Global Gender Gap Report ", 2014).
Firm-level data for 7180 SMEs in India are used to examine credit constraint differentials
between male and female entrepreneurs. Rather than analysing the extent of formal financing,
we apply a direct approach to measuring credit constrained firms, using specific credit
questions in the World Bank Enterprise Survey conducted by the World Bank in 2014 (see

www.enterprisesurveys.org). Our analysis of the credit constraints consists of three parts.
First, we use a probit model to investigate the association between gender and the probability
of being credit constrained. We find that enterprises owned by female entrepreneurs are on
average 4% less likely to be credit constrained compared to their male counterparts.
Nevertheless, when a firm is led by a woman, the firm is, on average, 4% more likely to face
credit constraints. Second, we show how firm size has differential impact on the probability
of being credit constrained in firms owned by men or women. We illustrate the importance of
size dependence by splitting the sample into small and medium-sized enterprises,
demonstrating that the credit constraint gender gap differs for medium-sized firms compared
to small-sized firms.
This study contributes to the literature in several ways. First, it is pertinent to note that most
gender and credit access studies use a Sub-Saharan African dataset. This study uses Indian
data which is more country-specific, richer, more recent and less examined compared to Sub-
Saharan Africa data. This is the first investigation of gender discrimination in SMEs in India
from the perspective of owners and top managers. The micro-econometric robustness of the
analysis is considerably more robust than prior studies. The dataset used in prior studies is
small with data collection limited to one small area that may not be representative of the
characteristics of all India.
An important issue omitted in previous work relates to the treatment of endogeneity which
arises as a serious issue in gender and credit constraints’ studies. If endogeneity is high and
present in a large sample, such as Hansen and Rand (2014), then this may not lead to robust
estimates. Our subsample is carefully selected to minimise possible endogeneity and reverse
causality, providing robust and reliable results. Also, in their methodology, Hansen and Rand
(2014) use a generalised Oaxaca–Blinder decomposition to identify and quantify the separate
contributions of group differences in credit access. The technique cannot be used directly

where the outcome is binary and the coefficients are from a logit or probit model. The Fairlie
Nonlinear Decomposition (1999, 2003) to identify the underlying causes of gender
differences in credit constraints is theoretically correct.
The next section provides a brief description of Indian SMEs. Section 2 of the paper reviews
prior research. It is followed by discussion of the data, variables, methods and procedures
used in the empirical study. The results and conclusion follow.
2. Literature Review and hypothesis development
Prior anecdotal evidence relating to gender and credit access studies can be categorised into
two groups, viz., statistical and prejudicial. Statistical discrimination occurs in situations
characterised by imperfect information, where data on important indicators, such as business
sustainability and creditworthiness, is difficult and costly to obtain directly. In pursuit of cost-
savings, a financial institution may be tempted to infer these data from easily observable
demographic characteristics of individuals (Orser, Riding, & Manley, 2006). As a
consequence, the evaluations will be dependent on the preconceptions of the decision-maker;
however decision-makers may not necessarily be motivated by antagonism towards minority
groups or a particular gender. Instead, their motivation is likely to be rooted in economic
considerations and, as a consequence, statistical discrimination, in contrast to ordinary
prejudice, can be used when a bank pursues profit-maximisation (Muravyev, Talavera, &
Schafer, 2009).
Prejudicial forms of discrimination are taste-based and can be defined as lack of adherence to
objective criteria when formulating judgments on individuals. Becker (1971) carries out
pioneering research on this issue and considers a wide range of economic ramifications that
arise in this context. According to his theoretical formulation, those who are biased would be
willing to forgo potentially profitable market transactions in order to avoid interaction with

members of a minority group. As an example, recently Hu and Liu (2011) find that black-
owned and Hispanic-owned SMEs pay significantly higher interest rates on approved loans
than do equally creditworthy firms owned by whites. What is of great importance to our
empirical inquiry is whether the gender of the owner manager and / or gender of the top
leader is a factor that determines the severity of credit rationing.
Entrepreneurial activities by women have attracted a considerable amount of interest among
policy makers and researchers who have recognised the potential of female entrepreneurship
for increasing economic growth and job creation. Studies investigating whether the gender of
the entrepreneur affects the performance of the enterprise yield mixed results. The first
stream of literature explains that women are marginalised in the credit market. Cross-country
studies have shown that women are less likely to get financing from a formal financial
institution or are charged higher interest rates than men (Muravyev et al., 2009) and they
generally raise less formal and informal venture capital than men (Brush, Carter, Gatewood,
& Hart, 2004). In many developing countries and transition economies, women entrepreneurs
report facing greater and more systemic access barriers to formal financial services; and they
cite finance as a major challenge when starting and growing their businesses (Klapper &
Parker, 2011; Wellalage, Duppati, & Fouzi, 2013). Richardson, Howarth and Finnegan (2004)
find for Sub-Saharan Africa women entrepreneurs are more likely than male entrepreneurs to
rely on internal or informal financing. Zimmerman and Scott (2006) found gender to be
related to the application for bank loans as well as the size of the loans, while Cavalluzzo,
Cavalluzzo, and Wolken (2002) find evidence of a credit access gap between firms owned by
white males and while females, with female denial rates increasing with lender concentration.
These results suggest discrimination against female entrepreneurs, and the authors suggest
that this discrimination is found to be higher in the least financially developed countries in
the region. Anecdotal evidence points to a variety of factors, including the various

limitations for and characteristics of women owned business, such as women’s
entrepreneurship skewed towards smaller firms and riskier ventures (Coleman, 2000),
young firms (Riding & Swift, 1990) and they are tend to be concentrated in less profitable
industries (Minniti, 2009). Also women owned-SMEs are more likely to be in the informal
sector (Hallward-Driemeier, 2013) or home-based, which leads to financial institutions
not lending to women-owned SMEs. It is suggested that in addition to the greater likelihood
that women are more likely to be working part-time and earning less than men, they find it
more difficult to accumulate personal savings (Marlow & Patton, 2007). It is also noted that
women typically try to access smaller amounts of funding because so-called ‘‘feminine’’
occupations are less capital-intensive (D’Espallier, Guérin, & Mersland, 2010; Guérin &
Palier, 2006). Nevertheless, a perception of higher risk and cultural bias amongst loan
officers is often reported among local banks which limit female SME owners’ access to
external finance (Muravyev et al., 2009). A consequence of the uneven playing field in terms
of access to funds is that the average quality of the businesses run by women is lower, leading
to a self-reinforcing discrimination mechanism (Scalera & Zazzaro, 2001). Banks prefer to
finance larger projects that are already established, a point that works in favour of men.
The second stream of literature finds that there is no statistically significant effect of gender
in access to finance (Borghans, Golsteyn,Heckman & Meijers, 2009; Cavalluzzo &
Wolken,2005). The studies confirm that women applying for funding generally do not face
arbitrarily higher denial rates than men, suggesting that gender differences in the use of credit
might be explained by differences in the demand for external financing (Aguilera-Alfred,
Baydas, & Meyer, 1994; Buvinic & Marguerite, 1990; Coleman, 2000). The third stream of
literature finds female favouritism in credit access. Using Sub-Saharan African SMEs Hansen
and Rand (2014) and Hewa-Wellalage and Locke (2016) find that the credit constraint gap is
caused by favouritism towards smaller enterprises with female ownership. Similarly, using a

Sri Lankan survey, de_Mel, McKenzie, and Woodruff, ( 2009) find that the returns to capital
shocks are significantly higher for men than for women, suggesting that it is the
microenterprises run by men, not women, that are more credit constrained. Similarly, a recent
study by Baafi (2015) revealed that small firms owned by female entrepreneurs are less
affected by credit constraints compared to male counterparts in Ghana.
Given that the prior empirical findings do not suggest a clear outcome for the female SME
owners and credit access nexus. Hence, we proposed our two hypotheses as follows:
H1: Female-owned SMEs are less likely to face credit constraints than male-owned SMEs in
India.
H2: Female-led SMEs are less likely to face credit constraints than male-owned SMEs in
India.
3. Methodology
3.1 Data
Data are collected from the World Bank, 2014 Enterprise Surveys1, which collect data from
formally registered firms. These surveys comprise representative random samples of firms
with data collected across the world, using the same core questionnaire and same sampling
method. Enterprise Surveys incorporate interviews with business owners and top managers in
7,006 micro, small and medium enterprises from June 2013 through December 2014
(Enterprise Surveys, 2014).
3.2 Dependent variable
1 The World Bank’s Enterprise Surveys offer an expansive array of economic data on 130,000 firms in 135
countries. The World Bank Enterprise Survey website provides details as to how the surveys are conducted.
(http://www.enterprisesurveys.org). An Enterprise survey is a firm-level survey of a representative sample of an
economy’s private sector. The surveys cover a broad range of business environment topics including access to
finance, corruption, infrastructure, crime, competition, and performance measures.

The dependent variable CONSTRAINTS (credit constraints) captures the credit constraints of
firms. We adopted and modified the approach used by Hansen and Rand (2014), which
extends the works by Bigsten et al., (2003) and Nwosu et al., (2014) with constraints deemed
as operative when a firm either (A) applied for and was denied credit (applicants) or (B) did
not apply for credit due to application procedures being complex, collateral requirements too
high/did not have guarantor, or size of loan and maturity offered were not sufficient (non-
applicant). Following these earlier works we did not classify firms which responded that they
thought interest rates were not favourable; the loan would be approved; or no need for a loan-
establishment as the firm had sufficient capital. Firms that already have credit or overdraft
may contribute to a reverse causality issue, because an owner’s/ top manager’s gender may
have had reverse causality with firm access to credit. Hence, we exclude those firms that
already had an existing line of credit such as overdraft or loan, and those that financed their
purchase of fixed assets with formal credit in the previous periods. Though our study follows
Bigsten et al., (2003), Hansen and Rand (2014) and Nwosu et al., (2014) in defining credit
constraint, our sample is carefully chosen in order to minimise selection-based endogeneity
probability2. Neglecting selection represents a specification error that is akin to the omitted-
variable bias endogeneity (Antonakis, Bendahan, Jacquart, & Lalive, 2010). The basic insight
behind selection bias being a form of omitted variable bias is that the selection process
represents an excluded variable that manifests in the error term and correlates with the
endogenous choice construct and the outcome variable.
3.3 Explanatory variables
Firm owner’s characteristics
2
Selection-based endogeneity manifests in two main forms: sample-selection and self-selection
biases. Heckman’s (1976, 1979) foundational work was principally motivated by sample-selection
problems, as samples can be non-representative of a true population and thus threaten both internal
and external validity—see Berk (1983) for an excellent review of this issue. Yet Heckman (1979) was
also conscious of the analogous self-selection problem.

This study uses two explanatory variables to check the gender discrimination and credit
constraints:
(i) FEMALE as a main explanatory variable which determines access to credit.
FEMALE captures an owner’s gender; a dummy variable equal to 1 if any of the
firm’s owners are female, otherwise 0.
(ii) FEMALE_TOP is another important variable taking value 1 if the firm’s top manager
is female, otherwise 0.
The security of property rights
Firm-related general characteristics
3.4 Method
The aim is to examine SME owner gender and firm characteristics affecting the accessibility
of external credit for SMEs. Given the dichotomous nature of the credit constraints, a
qualitative response model is appropriate. Qualitative response models relate the probability
of an event for various independent variables. Such models are often useful when assessing
firm characteristics that are associated with credit access decisions. We apply a discrete
choice probit model for binary choice (yes, no) responses to the credit constraints question. In
the binary probit model, credit constraints is shown as 1, while access to credit is 0. The
Probit
4. Results
<<Insert Table 1: Descriptive Statistics here>>
Table 1 provides a list of the variables included in the regression analysis and shows their
respective descriptive statistics. Differing from previous studies (Beck & Demirguc-Kunt,
2006; Hewa-Wellalage & Locke, 2016), this study finds that only 21% of SMEs report

having credit constraints. However, the high standard deviation value indicates that there is
significant variability of credit constraints among our sample.
A potential determinant of a firm’s credit access is owner characteristics (Aga & Reilly,
2011). We utilise an owner’s gender, top manager’s gender, and experience as main
characteristics that can determine credit accessibility. Only 13% of SMEs in our sample are
predominantly owned by females. Furthermore, only 6% of SMEs are led by a female
manager. The results for the variable EXPE show that the mean value of experience is
approximately 10 years. However, the values for manager experience range from less than
one year to 50 years.
Property rights are a potential determinant of a SME’s access to credit and
EXPROPRIATION captures the property rights of the firm. Our results show that the
variable EXPROPRIATION has a mean of 0.28, indicating the existence of a lower level of
government expropriation where SMEs make some form of payment to obtain micro-finance
and/or pay a regular fee to begin and remain in business in these countries. A plausible reason
for the low value of EXPROPRIATION could be that most of the smaller firms are home-
based and they do not need any registration or other activities that require government or
other third party authorisation. On the other hand, a low figure for EXPROPRIATION also
suggests that SME owners are reluctant to provide expropriation details of their businesses.
Our sample consists of approximately 44% of small firms and 56% of medium-sized firms.
Approximately 15% of the sample SMEs are operating as part of large firms and 54% of
SMEs belong to sole proprietor groups. The firms are small in terms of employment, with an
average of 4.5 individuals working in these businesses. The mean value of the firm age
variable is 19 years, which varies between 1 and 41. Our results show that 77% of the SMEs
in our sample belong to the manufacturing industry, 11% from service industries and 12%
represent other industries. Only 6% of SMEs are from State and Union territory capitals of

India3 and 55% of the sample SMEs are located in an export-oriented zone. Approximately
4.4% of SME owner/ managers’ time is spent dealing with the government and regulatory
authorities.
<<Insert Table 2: Probit estimation results of credit constraints of SMEs in India

here>>
The probit estimation results for credit constraints are reported in Table 2. Column 2 provides
the results for probit estimates for the full SME sample and column 3 provides marginal
effects results for the full SME sample.
Firms with female owner-managers are negatively and significantly affected by credit
constraints. SMEs with a predominant female owner decrease the standardised IV probit
index by about .2674 of a standard deviation. As shown in column 3 of the table, SMEs with
female owners face 4% fewer obstacles to access to credit, on average and all other things
remaining constant. This may be due to preferential treatment of female entrepreneurs in
developing countries’ micro-credit markets (Fafchamps, McKenzie, Quinn, & Woodruff,
2011) where female owners have high access to external financing. On the other hand, this
may be due to female-owned enterprises having less demand for external credit compared to
their male counterparts (Wellalage et al., 2013), or perhaps reflecting a gender difference in
risk aversion (Borghans, Golsteyn, Heckman, & Meijers, 2009; Yesuf & Bluffstone, 2007).
Firms which are led by a female increase the standardised IV probit index by about .2302 of a
standard deviation. Further, considering the marginal effect, as shown in column 3 of the
table, female-led SMEs face, on average, 4% more obstacles than male-led SMEs when
seeking to access credit, all other things remaining equal. This indicates that when female
ownership switches to female leadership SMEs face extra constraints when accessing credit.
3
India consists of 29 states and 7 union territories. National Capital Territory of Delhi is the administrative
capital territory of India and Mumbai is the financial, commercial and entertainment capital of India.

Surprisingly, government expropriation negatively and significantly impacts on SMEs’ credit
constraints. Although a standard characteristic of developing countries is bribery and
unofficial payments that add to pecuniary costs, in column 3 of the Table 2, expropriation
accounts for approximately 12.1% fewer credit constraints. A likely explanation is that when
expropriation is high, firm owners may be disenchanted with processes, believing that the
government could unfairly extract resources from the firm. Consequently this would lead to
firms with high government connections only applying for loans, which in turn would show
high success rates for banks accepting loan applications and lead to a negative relationship
between expropriation and credit constraints.
As shown in column 3 of Table 2, manufacturing (service) firms face approximately 10.3%
(6.20%) more credit constraints than firms from other sectors. This may be because banks
tend to show bias towards certain industries (Rajan & Zingales, 1998) or the manufacturing
industry incurs higher up-front costs and requires more external capital. Therefore, high
volumes of loan requests can come from manufacturing-sector firms. This increases the high
probability of loan rejections for the manufacturing sector. Consequently, manufacturing
SMEs are much more vulnerable to financial frictions than firms in other sectors. As
expected SMEs from the capital city face lower firm credit constraints. Firms from the capital
city are 15.3% more likely to have access to credit than a firm from outside the capital city.
There are other explanations for this, including population density, ability to get suppliers,
firm maturity and larger firm size, (Brinkmann & Horvitz, 1995), contributing to a low risk
from a lender’s perspective.
The coefficient of LOCATEEXPO is negative and statistically significant at 1% level,
indicating that SMEs located in export oriented zones face fewer credit constraints. As shown
in column 3 of Table 2, SMEs face approximately 6% fewer obstacles when accessing credit
should they be located in an export oriented zone.

We split the sample of enterprises into small firms (5-19 employees) and medium-sized firms
(20-49 employees), and decompose the gender differences in the probability of being credit
constrained for these firm sizes. Column 4 reports probit regression results for only small-
sized firms and column 5 reports marginal effect results for small firms only. Column 6
reports probit regression results for the medium-sized firm sample and column 7 reports
marginal effect results for medium-sized firms. Figures in Table 2, suggest that there is no
relationship between the gender of the owner/gender of the leader and credit constraints in
small-sized firms. However, medium-sized firms with female ownership face on average 5%
fewer obstacles to access finance but female-led medium-sized enterprises face 7% more
obstacles when accessing finance. We conclude that firm size makes a substantial difference
in financing when considering the gender impact.
Regression summary statistics explain the robustness of our study. The Wald test of
exogeneity suggests that the unobserved covariates that determine both the gender and credit
constraints are uncorrelated. Hence, we accept the null hypothesis of no endogeneity.
Wooldridge (2002), while affirming this interpretation, observes that in presence of
heteroscedasticity and non-normality, the probit estimates are inconsistent. Therefore, we
checked the homoscedasticity and normality for the probit regression and results accepting
normality and homoscedasticity. We can have confidence in the robustness of our probit
model.
In order to test for the robustness of our probit estimates of no gender bias in credit
constraints among entrepreneurs in SMEs in India, we carried out the Fairlie-type
decomposition test by owner gender (FEMALE) and top manager gender (FEMALE_TOP).
5. Conclusion

In reaching these conclusions, access to more recent data and use of more robust quantitative
micro-econometric methods is important for supporting the veracity of these conclusions.
The additional insights offer a timely signal to India to promulgate rules to enhance the
opportunities for growth and development of all SMEs and not impel financial intermediaries
to channel more money to female-owned SMEs. The argument for gender equality may be
presented from many perspectives. The discussion in this paper relates to finance and makes
no assumptions about ethical rights to equality. The effective pricing of risk in capital
markets for both equity and debt is essential to raise living standards. Artificial constraints
based on gender result in less than optimal growth and promote additional market failure
through adverse selection and moral hazard market failures, which impede growth and
efficient allocation of scarce funds. Mispricing risk is significant in SMEs as witnessed in the
high churn factor in many countries. Care needs to be taken when introducing policies that
favour only small female businesses, as that might create unwanted incentives to stay small
and direct resources towards lower value creation opportunities.
Table 1: Descriptive Statistics
Variables Observations Mean Std dev Min Max

Dependent variable
CONSTRAINTS 7180 .2138 .4100 0 1
Explanatory variables
FEMALE 7180 .1334 .3400 0 1
FEMALETOP 7180 .0604 .2383 0 1
EXPE 1507 9.624 7.933 0 50
ln(EXPE) 1507 1.929 .8746 0 3.912
Property rights
EXPROPRIATION 5863 .2831 2.868 0 100
Firm characteristics
SMALL 7180 .4345 .4957 0 1
MEDIUM 7180 .5654 .4957 0 1
LARGEPART 7180 .1466 .3537 0 1
SOLEPROP 7180 .5384 .4985 0 1
Firm Age 7168 19.01 13.41 1 41
ln(AGE) 7168 2.945 2.596 0 3.715
MANUFACT 7180 .7659 .4234 0 1

SERVICE 7180 .1113 .3145 0 1
OTHER 7180 .1228 .3282 0 1
CAPITAL 7180 .0617 .3251 0 1
LOCATEEXPO 7180 .5537 .4971 0 1
Business environment 6848 4.390 14.359 0 100
BGRELATION
Table 2: Probit estimation results of credit constraints of SMEs in India.
Variable Probit-All Marg. Probit- Marg. Probit- Marg.

Probit-All Small Probit- Medium Probit-
Small Medium
FEMALE -.2674*** -.0407*** -.1465 -.0237 -.3342*** -.0488***
(.0968) (.0138) (.1504) (.02353) (.1271) (.0172)
FEMALETOP .2302* .0394* -.1841 -.0292 .4093*** .0712**
(.1240) (.0224) (.2391) (.0361) (.1462) (.0280)
ln(EXPE) .0943 .0131 .4724 .1585 .3280 .1205
(.6143) (.1107) (.0843) (.7224) (.8933) (.7999)
EXPROPRIATION -.1701** -.1204** -.6589 -.1032 -.2310** -.1644**
(.0075) (.0001) (.0053) (.1534) (.1610) (.2109)
LARGEPART .1094 .0181 .0806 .0136 .1059 .0169
(.0833) (.0141) (.1416) (.0245) (.1033) (.1601)
SOLEPROP -.0250 -.0040 -.0319 -.0053 -.0053 -.00082
(.0631) (.0102) (.0967) (.0162) (.0834) (.0131)
ln(AGE) -.0033 -.0005 -.0082* -.0013** .0009 .0001
(.0022) (.0004) (.0034) (.0006) (.0031) (.0005)
MANUFACT .7148*** .1029*** .7784*** .1174*** .6107*** .0856***
(.1054) (.0133) (.1561) (.0209) (.1442) (.0180)
SERVICE .3543*** .0620*** .2102 .0366 .5019*** .0890**
(.1326) (.0249) (.1879) (.0339) (.1907) (.0374)
CAPITAL -.1614*** -.1530*** -.1351*** -.1562*** -.1713*** -.1656***
(.0127) (.2177) (.3031) (.0213) (.3134) (.0153)
LOCATEEXPO -.3770*** -.0617*** -.6513*** -.1082*** -.1352 -.0214
(.0629) (.0104) (.0939) (.01537) (.0876) (.0140)
BGRELATION .5082 .1107 .1580 .1145 .3060 .1256
(.9213) (.1115) (.5784) (.6386) (.0356) (.0725)
Regression
Summary
Pseudo-R squared .2509 .3613 .2140
Log likelihood -362.2 -160.2 -201.9

Sample size 7168 3116 4052
Diagnostic score
tests
Wald test of 2.72 6.55 3.19
exogeneity

Chi(1)
Normality ~ X22 7.91** 8.96*** 8.79***
Homoscedasticity 19.8*** 21.5*** 20.5*

~ X(12)2
Note: Probit regressions. The dependent variable is a dummy variable taking 1 if the SME faces credit
constraints and zero otherwise. Column 2 reports first stage probit regression results, column 3 reports marginal
effects, column 4 reports probit regression results for small size firm sample and column 5 reports marginal
effect results for small firms. Column 6 reports probit regression results for medium sized firm sample and
column 7 reports marginal effect results for medium sized firms. These models provide standard errors, which
are in parentheses. The Wald test of exogeneity is reported in the last row as a chi-squared statistic with 1
degree of freedom. * Significant at 10% level, **Significant at 5% level, ***Significant at 1% level.

APPLICATION OF SHARIAH PRINCIPLES
IN ISLAMIC FOREIGN EXCHANGE OPTIONS
Nor Fahimah Mohd Razif1, and Ahmad Sufian bin Che Abdullah2
1 Department of Fiqh and Usul, Academy of Islamic Studies, University Malaya, 50603 Kuala Lumpur,
Malaysia, E-mail: norfahimah@um.edu.my
2 Department of Syariah and Management, Academy of Islamic Studies, University Malaya, 50603 Kuala
Lumpur, Malaysia, E-mail: sufyan@um.edu.my
ABSTRACT
In accordance with the dire need for derivative-like products, Islamic financial institutions eventually
initiated their efforts to design a product with suitable contracts. Option-like Islamic products began to be
offered by Islamic financial institutions a few years ago. Today, the products have proven to gain wider
recognition, and several contracts are being used to construct an option-like effect and outcome. This study
aims to evaluate the compliance of Islamic foreign exchange options with shariah principles. This study
involves the collection and analysis of primary and secondary data from various sources. It also undertakes
content analysis of the rulings of jurisprudence scholars on several shariah principles. This study found that
this Islamic FX option is still debatable on its permissibility from shariah perspective.
Key Words: forex, option, Islamic FX option,
INTRODUCTION
In accordance with the dire need for derivative-like products, Islamic financial institutions eventually
initiated their efforts to design a product with suitable contracts. Option-like Islamic products began to be
offered by Islamic financial institutions a few years ago. Today, the products have proven to gain wider
recognition, and several contracts are being used to construct an option-like effect and outcome. In this part,
we will divulge the underlying shariah principles that are currently being used in Shariah-compliant FX
Option. Of course, a hybrid process is involved to create quite a similar effect at the same time, complying
with Islamic commercial law.
The Shariah-compliant FX Option is the product replicating the effect of the FX options, where the
product gives the owner (writer) the right to buy or purchase the indicated amount of foreign currency at a
specified price before a specific date. That is the intended effect of the IFIs; hence, they have initiated the so-
called Sharīʿah-approved ‘option-like’ products.
There are three common methods of doing a Shariah-compliant FX Option:

 Using Urbun
 Using Commodity Murabaha
 Using Wa’d
Structure One: Bay’ al-Ùrbun
Ùrbun has been defined as a deposit given by the buyer to the seller in a buying and selling contract. If the
sale proceeds, the deposit will be part of the price of the goods. Otherwise, it will be considered as hibah
(gift) from the buyer to the seller (Nazih, 2008; al-Zuhaily, 1985; al-Zarqa, 2004). However, Imam Malik
gives a somewhat more general definition of 'urbun. He writes in al-Muwatta’ as cited by al-Baji, "It is when
a person buys a slave or rents an animal and says to the seller or the owner; of the animal," "I will give you
one dinar or one dirham or more or less and if I ratify the sale or the rent contract, the amount I gave will be
part of the total price. And if I cancel the deal, then what I gave-will be for you without any exchange." The
above definition of Imam Malik shows that 'urbun is not only possible in a sale contract but also in a rent or
leasing contract (al-Baji, 1914).
Two traditions of the holy prophet have been reported in this regard. A hadith quoted by Imam Malik
says that the holy Prophet forbade ùrbun sale (Abu Dawud, t.t). According to another hadith, Zaid Ibn
Aslam asked the holy Prophet about ùrbun as a part of a sale; the Prophet permitted it (al-San’ani, 1972).
The majority of traditional jurists were of the opinion that bay` ùrbun is not permissible as it
contained elements of gharar, gambling and unlawful acquisition of property. However, Some tabiìn,
among them, Mujahid, Ibnu Sirin, Nafi’ b. Haris, Zaid b. Aslam and the Hanbali Mazhab considered it
permissible based on the practices of Saidina Ùmar Al-Khattab. He once appointed Nafi’ to be his
representative to buy a house from Safwan b. Umaiyyah in Mecca to be converted into a prison. Safwan
asked Ùmar for a deposit and laid down the condition that the deposit would be his if Ùmar terminated the
contract. Ùmar agreed to the condition (Ibn Qudamah, 1997). This opinion was strengthened by Qadhi
Shuraih who said that whoever caused taàttul (delay) and intizar (waiting) had to pay compensation to the
party affected by the termination of the contract (al-Zarqa, 2004). Qaradawi also observes that “the issue
should consequently be determined on rational grounds... This ruling (of Ibn Hanbal) is more suitable to our
own times and in greater harmony with the spirit of shari’ah, which seeks to remove hardship and facilitate
convenience of the people (al-Qaradawi, 1973).
Some scholars have attempted to justify the permissibility of options by drawing a parallel with bay’
al-ùrbun (Obaidullah, 2000; Kamali, 2002; al-Amine, 2008; Kotby, 1996). AAOIFI also recognizes the
need for shariah-compliant substitutes for conventional options and permits partial payment through ùrbun
(Hay’ah al-Muhasabah, 2010). In fact, ùrbun does provide risk management. Without ‘urbun, an investor in
stocks or commodity, must have agreed to pay a certain fixed price to the seller to have an ownership right.
Should the market price decrease, the investor’s loss could be excessive. The OIC Academy under
Resolution No: 72 (3/8) [1] at its eighth session in Brunei in 1993, has also endorsed the opinion of the
Hanbali school. The OIC Fiqh Academy decided that bay’ al-‘urbun is permitted if a time limit is specified
for exercising the option (International Islamic Fiqh Academy, http://www.fiqhacademy.org.sa/qrarat/8-
3.htm.). With regard to the deposit paid by the buyer to the seller in a buying and selling contract, the OIC
Fiqh Academy decided that it is considered a part of the purchase price already negotiated if the sale
proceeds. Otherwise, the earnest money will be forfeited as a gift (hibah) from the buyer to the seller if the
buyer defaults or decides not to proceed.
However, ùrbun differs from conventional option contract in that the partial payment paid is
considered as earnest money; as such, if the buyer does not revoke the contract and continues, the earnest
money would form part of the purchase price. However, if the contract is revoked within the specified time,
the partial payment will be forfeited to the seller. Thus the partial payment is not a fee or premium, as in an
option contract, but more of deposit. As can be seen, ùrbun is similar to a call option, except that in the call
option the down payment is not subtracted from the contract price.
Example: Investor has purchased a basket of compliant shares at USD1,000,000 in anticipation the
market will increase. However, the market price of shares decreases to USD900,000. The investor would
have suffered USD100,000 for this scenario.
Using ‘urbun, Islamic investor can limit the exposure of the loss. Suppose the Islamic investor has
paid USD20,000 as the down payment to purchase these shares at USD1,000,000 within one month, and the
market goes down, the loss is limited to USD20,000. However, if the market goes up, the investor can
‘exercise’ the right to purchase by paying the remaining USD980,000 and may subsequently sell the shares
to the market at e.g. USD1,200,000.
Though the use of ‘urbun to replace a conventional option seems easily implementable, there are some
shariah issues that need to be addresses carefully. First, in a conventional option, during the call’s option
holding period, the securities still belong to the securities seller, hence entitling him to the dividend
generated from the securities during the period. In an ‘urbun transaction, by virtue of ‘urbun contract, the
‘urbun holder is in fact the owner of the securities. He is entitled to all the dividends gained during that
period.
One may answer to this query by highlighting that the issue of dividend is not important, since the
seller of the securities may not own the securities when he contracted to sell the securities using the ‘urbun
concept. Though this answer solves the problem of ownership over the dividend gained during the period, it
creates a more complicated issue on selling something that one does not own (ISRA, 2015).
As a matter of fact, once the ‘urbun contracts is concluded, the rights and liabilities of the subject
matter are deemed to have been transferred to the buyer. The parties may agree on who will keep the subject
matter during the ‘urbun period, but the rights and liabilities attached to the subject matter are vested with
the buyer already. If the subject matter needs to be taken care of, like feeding and so forth, the expenses will
be incurred for his account. When it comes to shares, the right to benefit from the dividend cannot be ignored
simply by saying that the ownership of the shares will not be transferred to the buyer because the seller
would not own the securities yet when contracting the option; rather he will only buy to deliver the shares
when the option holder decides to exercise the option, so no dividends have to be passed to the buyer when
contracting. This argument is unacceptable if the opinion of the majority of scholars and that of AAOIFI-
which requires ownership of the subject matter before it can be sold to somebody else- is to be applied.
Because of this reason and others, it is argued that the structuring of ‘urbun to replicate the conventional call
option is complicated, and if not considered carefully, will violate various shariah principles relating to
ownership and liability in contract.
Structure Two: Hybrid of Ùrbun and Commodity Murabahah
In the present day, we are seeing a growing number of Islamic financial institutions utilizing the concept of
ùrbun and commodity murabahah to replicate the conventional plain-vanilla options product. Under the
ùrbūn concept, a prospective buyer will make a deposit payment for the subject matter, which he may
purchase at a later time. Should the buyer not complete the purchase, the deposit will be forfeited. This
contract has been used as a justification for Islamic options by some writers who argue that the deposit can
be seen as the premium paid by the buyer of a call option.
To illustrate the plain-vanilla structure, let us say that Setia Company, which is a Malaysian company,
concludes a future purchase with Maju (an American company) on 1 March 2014, the payment for which
needs to be settled at a future date, say 31 May 2014. By executing the contract, Setia Company has an
obligation to pay Maju Company the price of $1,000,000 on 31 May 2014. However, the company is looking
to protect itself from the currency rate volatility. To formulate the contract in a Sharīʿah-compliant manner,
both parties will have to buy and sell a commodity from an independent broker or seller in the desired
currencies. In order to seek the protection, Maju Company will approach Islamic bank Q, asking for an
Islamic option instrument. The product could be transacted as follows:
1. Both parties will agree on the rate of exchange, say USD1/RM 3.20.
2. The bank will purchase a commodity from broker A with the spot price of USD 1 million.
3. Maju will purchase the commodity from the bank with the ʿurbun payment of RM 10,000. The
commodity will remain in the bank’s ownership during the period.
4. During the tenor, Maju will have the option either to conclude the purchase by paying the rest of the
price or to retreat from the purchase and lose its ʿurbun payment money.
5. If at the exercise date, which is 31 May 2014, the exchange rate is confirmed to be higher than the
exercise price, assumed USD 1 to MYR 3.40, Maju will be in an in-the-money (ITM) position and
will definitely conclude the purchase contract. Consequently, Maju will pay the balance of the
purchase price less the ʿurbun amount.
6. However, if the market rate is below the agreed rate, Maju will retreat and lose the ʿurbun payment.
7. In the event that Maju decides to withdraw from the contract, it will sell the asset to a third party,
employing it’s pre-organized and separate hedging arrangement with the other institution.
At the end of the transaction, Maju Company will be able to pay the seller in USD currency notes;
additionally, it will be able to hedge from the fluctuation of the exchange rate between the US dollar (USD)
and the Malaysian ringgit (RM). Although the structure may comply with the shariah requirements, it might
not be achievable as the risks exposed to the bank will be intensely increased. The biggest problem for the
bank in this transaction is to keep the asset safe for a period of time. Basically, the Islamic financial
institution tries to replicate the conventional derivatives nature, which is off-balance-sheet transactions;
hence, the above structure might not be suitable as it will be an on-balance sheet transaction. It may fully
comply with the shariah but would definitely be discarded by the bank’s management (Zaharuddin. 2011).
That is probably one of the most significant constraints in theʿurbun concept, because the nature of the
ʿurbun (deposit) is that the sale and purchase contract must already have been executed and theʿurbun
payment must be part of the price.
Structure Three: Wa`d
Apart from above structures, the other shariah principle that can be adopted in structuring Islamic FX option
is wa’d which is also known as undertaking. Wa’d in the context of commercial dealings, is generally
accepted to mean that of a unilateral promise as it occurs when only one party gives a promise to the other
party that he will perform a certain action in the future (al-Masri, 2002). The acceptance of the promise is
merely an approval to benefit from the promise but not a promise to do something in exchange for it. The
difference is obvious between the contract, which is initiation, and the promise, which is information. While
contract is a legally binding upon the contractual party once it fulfills all the requirements needed, promise
on the other hand depends on the acceptance of its applicability and to the opinion of jurists whether they are
legally or religiously binding or both or it is a mere a question of morality. The scholars are in agreement on
this point (Khorafa, 2002).
SAC–CBM approves foreign currency option. In its 79th meeting dated 29 October 2008, it resolved
that the structure of the proposed foreign currency option product based on waʿd and two independent
tawarruq transactions is permissible, provided that the following conditions are satisfied:
i. The option product shall only be undertaken for hedging purpose;

ii. Waʿd shall be made independently from the tawarruq transaction and shall not form part of the
condition to perform the tawarruq transaction;
iii.The Islamic financial institution shall ensure that every transaction is conducted independently from
each other in terms of documentation and sequence of transactions; and
iv. The underlying asset used in the tawarruq transactions shall be Sharīʿah compliant.
There are two structures of Islamic option that have been developed using wa’d. In both structures, a
fee is paid, one through the mechanism of a commodity murabahah or tawarruq and the other with direct
payment of fees (ISRA, 2015). The second structure where a fee is imposed on wa’d is prohibited by SAC-
SBM.
Wa’d in the context of commercial dealings, is generally accepted to mean that of a unilateral promise
as it occurs when only one party gives a promise to the other party that he will perform a certain action in the
future (Rafiq, 2002). The acceptance of the promise is merely an approval to benefit from the promise but
not a promise to do something in exchange for it. The difference is obvious between the contract, which is
initiation, and the promise, which is information. While contract is a legally binding upon the contractual
party once it fulfills all the requirements needed, promise on the other hand depends on the acceptance of its
applicability and to the opinion of jurists whether they are legally or religiously binding or both or it is a
mere a question of morality. The scholars are in agreement on this point (Kharofa, 2002).
The OIC Islamic Fiqh Academy has ruled that a promise may be binding in its Resolution No. 40-41
(2/5 & 3/5): According to the Shariah, a promise (made unilaterally by the purchase orderer or the seller), is
morally binding on the promisor, unless there is a valid excuse. It is, however, legally binding if made
conditional upon the fulfilment of an obligation, and the promisee has already incurred expenses on the basis
of such a promise. The binding nature of the promise means that it should be either fulfilled or compensation
be paid for damages caused due to the unjustifiable breach of the promise. Thus the OIC Fiqh Academy has
stipulated the following requirements for a wa’d to be binding:
a) It must be unilateral.
b) It must have caused the promisee to have incurred some costs/liabilities.
c) If the promise is to purchase something, then the actual sale must take place at the appointed time by
the exchange of offer and acceptance. A mere promise should not be considered a concluded sale.
d) If the promisor reneges, the court may force him to either purchase the commodity or pay actual
damages to the seller. The actual damages will include the actual losses suffered by the promise and
will not include the opportunity lost.
Since the wa’d is a unilateral promise, it does not have to satisfy the requirements of a bilateral
contract (aq’d) under Sharia (i.e. (i) knowledge of the price and (ii) possession or ownership of the subject
matter of the contract). To illustrate the Islamic FX option -like instrument, which uses the wa’d principle,
say that US-based clients are seeking protection from the currency exchange rate fluctuation, as they will
have the obligation to pay for goods purchased from the European seller on a future date. In ensuring that
their exposure to the exchange rate risk is reduced, they execute an undertaking to purchase and the further
processes will be as below (Priya et.al):
Promise to purchase a specific amount

of USD for a specific amount of EUR
Client Bank
Figure 1: Promise to purchase
a. The client promises the bank to sell a particular amount of a currency (say USD) against another
currency (say the euro) on a pre-determined date (settlement date) and at a predetermined rate.
b. The bank accepts the client’s promise but makes no promise to the client so as to avoid the bilateral
promise
c. The customer pays a non-refundable fee (like a premium) to the bank to acquire the right to exercise
the promise to sell or not to sell dependent upon whether the option is in the money when the
maturity date arrives. The customer, therefore, has the right either to execute the promise or to
cancel it by sending a cancellation note.
Scenario A: If the customer exercises the option (by purchasing the EUR at the agreed exchange rate
and settlement date):
Figure 2: Customer exercises the option
Scenario B: If the customer sends a cancellation notice to the bank and therefore does not exercise the
option:

Figure 3: Customer does not exercise the option
From these scenarios, we can see that almost every single feature of the conventional option is present
in this structure. As a result of the transaction, the US-based clients would have the ability to settle the
purchased price in Euros without a single anxiety about the currency exchange rate, as they have been
protected. Furthermore, they also have the opportunity to make a profit, if the market rate of the EUR is
higher than the agreed exercise price, meaning that the client could easily obtain the same amount of
Eurodollars at a lower cost. Concurrently, the bank may suffer a loss as it has to purchase the USD at a
higher rate or sell its USD notes at a lower price. Notwithstanding this fact, the determination of a loss
amount still depends on the premium amount, as it would provide a cushion to the bank to compensate for
any potential loss. For that reason, the longer the tenor of the option, the more expensive the option fee will
be.
In the event that charging a fee is unfavourable, there are several other means to formulate the
intended effect for Islamic financial institutions. Among others is the usage of a hybrid wa’d and commodity
murabahah concept.
To illustrate the Islamic FX option-like instrument, which uses the wa’d and commodity murabahah
concept, say that:
Strike: USD1.00 = RM3.10 (the prevailing exchange rate is RM3.15)

Premium: US$5000
Maturity: 3 months (contract date is January 2015 and maturity date is March 31 2015)
Based on Shariah principles which are applicable in the structuring of the Islamic FX options, here are
the steps to be followed:
1. A customer will appoint bank as agent for any future trades (Bank will continue acting as an agent
without having to enter into this agreement each time a new trade is executed).
2. A customer will make wa`d that it shall purchase a specific amount of commodity from the bank
and pay the relevant deferred sale price on the premium payment date. The reason for this
undertaking is to ensure that the customer agrees to make a payment to the bank which is effectively
the premium that the bank charges for offering the Islamic option.
3. A bank undertakes that it shall purchase the underlying commodity and pay the relevant sale price
arising from a murabahah transaction on the option maturity date. The exercise of this undertaking is
at the sole right of the customer and will only be exercised if the customer is ‘in the money’. If the
customer is ‘out of the money’, customer will waives their right.
4. At the initiation date of the option contract, the customer and the bank will conduct the first
tawarruq transaction to receive profit from the sale of which is equivalent to the amount of premium
in a conventional option transaction.
5. On the maturity date, if customer is ‘in the money’ i.e the US Dollar has depreciated against the
Ringgit and the prevailing exchange rate is lower than the strike price of RM3.10, it is economical
for customer to exercise their put option of selling their proceeds of their US Dollar receivables.
Customer notifies the bank of their intention to proceed in exercising the option, following which the
bank will provide an Offer to Purchase US Dollars on spot basis at the strike price.
6. Following the acceptance by the customer of the Offer to Purchase by the bank, the second tawarruq
transaction will be conducted. The customer purchases commodities from Broker 1 via bank as an

agent. The purchase is denominated in US Dollars, which is the currency which the customer wish to
exchange in return for their base currency, Ringgit.
7. The customer enters in to a murabahah sale of the same commodities at the sale price which is
denominated in Ringgit at the strike price that was pre-agreed in the terms of the option agreement.
8. The bank makes a spot payment of the sale price in Ringgit.
9. The bank on-sells the commodities to Broker 2 and receives the USD cash proceeds from the sale.
Figure 4: Diagram of Islamic option contract
The other structure is FXOP-i. In 2008, CIMB Islamic Bank Berhad launched the Islamic Foreign
Exchange with Shari’a-Compliant Option Features or FXOP-i. The FXOP-i by way of wa’d enables
customers to lock in a foreign exchange rate in advance by engaging in a shariah-compliant financial
transaction with CIMB Islamic. The net proceeds from this transaction which is similar to the premium paid
for option instruments in conventional finance grants customers the right, but not the obligation, to exercise
the option at the agreed rate on the maturity date. Hence, customers can protect the value of their future
foreign currency proceeds, fix their hedging cost at premium even earn a profit if foreign exchange rates
move in their favour (https://islamicfinanceupdates.wordpress.com/2008/10/13/cimb-islamic-offers-syariah-
compliant-forex-product/ 1 July 2015).
FXOP-i is based on several Islamic finance concepts namely tawarruq by way of commodity
murabahah, bay’ al-‘inah, wa’d and bay’ al-sarf. An exciting feature of FXOP-i is that customers can
choose to undertake the transaction using either the commodity murabahah or bay’-al’inah concepts, thus
making it an attractive solution to a wider range of customers.
FXOP-i which is offered by CIMB Islamic in Malaysia consists of two different transactions and
legs. The transactions are done by promisor who sell the option and promisee who buy the option. At the

first stage, both buyer and seller will exercise al-‘inah or commodity murabahah contract in order to get
option premium. For al-‘inah contract, the Mudarabah Interbank Investment (MII) or any other suitable asset
is used. On the other hand, commodity murabahah contract uses commodity such as crude palm oil (CPO) or
London Metal Exchange (LME).
Figure 1 below shows an example of al-‘inah contract in order to get option premium. Bank sell
MII at par price, RM1000. Then, the bank buys back MII at discount price, which is RM900.
1. Sell MII RM1000
Clients pays RM100

2. Sell back MII at RM900 option premium
Figure 5: al-‘Inah contract to get option premium
The other way to get option premium is by doing commodity murabahah contract. At second stage,
after getting option premium, the client will gives wa’d to exchange currency on a future date by way of sarf.
The undertaking is done separately with ‘inah/ commodity murabahah, so wa’d is independent with
premium payment. This transaction is in accordance with resolution by SAC-SBM which states that no fees
for wa’d currency hedging. The SAC warns that no consideration (or fee) is allowed to be charged on the
promisee in view of the fact that upfront cash payment for forward currency transactions would lead to a
bilateral wa'd which is not allowed by the Shariah. Only wa'd without any consideration is permissible in a
forward currency transaction (Arab News, 2010).
At the maturity date, the exchange of currency contract is done by spot basis (sarf). The price,
depending on which position is in-the-money. This transaction allows client to enter into option contract in
order to manage currency risk associated with investment. This contract allows client (investor) who hold
currency 1 and need to invest in currency 2 in shariah compliance.
Although the above arrangement seems to be feasible for the bank, the shariah issue still surfaces, and
that is fee payment. In fact, majority of scholars do not allow the charging of a fee for giving a wa’d. An
option is a promise, and such a promise is itself permissible and normally binding on the promisor (the
person who makes the promise). However, shariah principles do not allow for such promise to be charged or
bear any transaction fees. Thus, using commodity murabahah to permit the fee in exchange of wa`d is deem
as hiyal (trick).
CONCLUSION
To conclude, it cannot be denied that option contract plays an important role in risk management as it can
provides a flexible hedging tool to hedge risk. As Islamic finance exposed to the risk of market volatility and
fluctuation in the currency rate market, thus FX option contract is a dire need in order to hedge against risk
of fluctuation in currency exchange rate risk. Because of its flexibility, the contract has given many benefits
to some particular group of people. However, Islamic financial transaction is bound by strict rules and
regulation of Islamic Law. Any Islamic financial transaction must be free from riba, no gharar involved, no
gambling features and must be fair and just to the parties to the contract. In contrast, conventional FX option
is impermissible as it involves the element of leverage, gambling, trading of right and riba. All these
elements are totally prohibitted in Islam. Therefore, altering and modifying conventional product is required
in the current market in order to fulfil the need of hedging.
As Islamic banks and financial institutions are now highly aware of the need for a rigorous approach to risk
management, thus hedging products such as Islamic FX option based on principle of wa’d, al-‘urbun,
commodity murabahah had been developed. The development of Islamic FX option is merely to provide an
innovative sharia-compliant risk management tool against currency risks. Although Islamic FX option gives
similar economic effect of FX option conventional, the contract must strictly be used only for hedging when
there is a clear underlying transaction. Nontheless, this study found that the existing shariah Islamic forex
option are still debatable and controversial. Therefore a definite need for shariah advisory bodies to revisit
their resolution on the approved Islamic FX structures. This initiative will indeed give confidence in the
islamic financial industry thus giving assurance that adequate and effective resolutions are produced.
REFERENCES
Abu Bakr ‘Abd al-Razzaq b. Hammam al-San’ani, 1972, al-Musannaf, Beirut: Majlis ‘Ilmi, vol. 8.
Abu Dawud Sulayman b. al-Ashàth al-Sajastani, Sunan Abi Dawud. t.t. al-Riyad: Maktabah al-Maàrif li al-
Nashr wa al-Tawzi`.
Al-Amine, Muhammad al-Bashir Muhammad. 2008. Risk Management in Islamic Finance: an Analysis of
Derivative Instrument in Commodity Markets, Netherlands: Brill.
Al-Baji, Abu al-Walid. 1914. al-Muntaqa Sharh al-Muwatta’, Egypt: Mathba’ah al-Sa’adah, vol. 4.
Al-Qaradawi, Yusuf 1973, Shariah al-Islam Salihah lil-Tatbiq fi Kulli Zaman wa Makan, Cairo: Dar al-
Sahwah.
Al-Zarqa, Mustafa Ahmad. 2004. al-Madkhal al-Fiqh al-Àm. Damshiq: Dar al-Qalam, vol. 1.
Al-Zuhayli, Wahbah. 1985. al-Fiqh al-Islami wa Adillatuh. Damshiq: Dar al-Fikr, vol. 4.
Hammad, Nazih. 2008. Mu`jam al-Mustalahat al-Iqtisadiyyah fi Lughah al-Fuqaha’. Damshiq: Dar al-
Qalam.
Hay’ah al-Muhasabah wa al-Murajaàh li al-Muassasat al-Maliyyah al-Islamiyyah, 2010. al-Maàyir al-

Sharìyyah, Bahrayn: Hay‟ah al-Muhasabah wa al-Murajaàh li al-Muassasat al-Maliyyah al-Islamiyyah.
Ibn Qudamah, Abu Muhammad Àbd Allah b. Ahmad b. Muhammad. 1997. Al-Mughni.. Al-Riyad: Dar
Àlim al-Kutub,. vol. 6.
International Shari’ah Research Academy for Islamic Finance. 2015. Islamic Capital Markets: Principles
and Practices, Kuala Lumpur: ISRA.
Kamali, Mohammad Hashim. 2002. Islamic Commercial Law; an Analysis of Futures and Options.
Selangor: Ilmiah Publisher.
Kharofa, Ala’ Eddin, 2002. The Loan Contract In Islamic Law (Shariah), A Comparison with Positive Law,
International Islamic University Malaysia, Kuala Lumpur
Kotby, Hussein. 1996. Financial Engineering for Islamic Banks: The Option Approach, J.KAU: Islamic
Econ, vol. 8, pp: 63-71.
Obaidullah, Mohamed 2000. Islamic Risk Management: Towards Greater Ethics and Efficiency,
International Journal of Islamic Financial Services, vol. 3, no. 4, pp. 1-18.
Rafic Yunus Al-Masri, 2002. The binding unilateral promise (wa’d) in Islamic Banking operations: Is it
possible for a Unilateral Promise to be binding as an Alternative to a Proscribed Contract?, J.KAU: Islamic
Econ., Vol. 15, p.29.

Zaharuddin Abd. Rahman. 2011 .Islamic Perspectives Of Derivatives: An Appraisal Of Options, Swaps and
The Merits of The Shariah Compliant Alternatives. Thesis PhD, David’s University College, Lampeter,
United Kingdom.
Priya Uberoi, Rahul Chatterji and Dany Bidar, ‘The Wa'ad: a promise or a contract?’, Allen and Overy Areas
of Expertise Page,
http://www.allenovery.com/AOWEB/AreasOfExpertise/Editorial.aspx?contentTypeID=1&contentSubType
ID=7944&itemID=52775&aofeID=304&practiceID=30727&prefLangID=410 , pp 3-4, [ Accessed at : 26
July 2010]
See the Official Website of the International Islamic Fiqh Academy, available at:
http://www.fiqhacademy.org.sa/qrarat/8-3.htm. [ Accessed at : 26 July 2010]

Strategic Planning Template
Macro Environment Analysis

Identifying a Potential Target Market for BNP Paribas: Macro-Environment and SWOT Analysis
Peyman Bashar Doost
SalfordWhatmakesagoodleader.com
Business School, University of Salford, Manchester, UK
P.bashardoost@edu.salford.ac.uk
Abstract:
Leading financial institutions are always trying to find new products and find new markets. BNP Paribas
is involved with two different types of services namely Corporate and Institutional Banking & Retail
Banking and Services. While it plays as an active corporation for some services in Norway, this article
surveys the Norwegian market by using Environmental and SWOT analysis.
1.1- Retail Banking
Banks try to be different in their scope of work and also the quality of services. In fact they strategically
decide to involve in specific kind of activities. Hence there are different types of commercial banks and
financial institutions. Researchers have tried to classify commercial banks to different categories. Ayadi
and De Groen (2014) categorize European banks into four business models that they entitle as investment
banks, wholesale banks, diversified retail and focused retail. In comparison, Roengpitya et al (2014)
identify 3 different business models for the commercial banks and labeled them as a retail-funded
commercial bank, a wholesale-funded commercial bank and a capital markets-oriented bank. The main
difference about a retail-funded commercial banks and wholesale-funded banks are about the funding
mix. It means that in the retail –funded business model, bank provide services to the individual customers
via working with their credit cards, loans, savings, mortgages etc. While wholesale- funded banks work
with the corporates and companies via engaging in capital financing and trade transactions. The main
specification of the capital markets-oriented banks is their major engagements in trading and investment.
Normally, retail-focused commercial banks show the least volatile earnings, on the other hand wholesale
funded commercial banks is the most efficient category.
1.2- BNP Paribas retail banking in Norway
BNP Paribas as an international banking group is one of the European leaders for banking and financial
services and also one of the best rated banks in the world. It employs 185,000 employees in 75 countries
across the globe (BNP annual report, 2014). BNP Paribas 5 major strategic priorities are:
1. Enhance client focus and services
2. Simplify our organization and the way we function
3. Continue improving operating efficiency
4. Adapt certain businesses to their economic and regulatory environment
5. Successfully implement business development initiatives
BNP Paribas is mainly involves in two categories of services: Corporate and Institutional Banking &
Retail Banking and Services. “BNP Paribas Corporate & Institutional Banking” provides clients
financing, advisory and capital markets services to its client in Europe and Asia. On the other hand “BNP
retail banking and services” as a key player in retail banking is present in domestic markets of 20
countries including France, Italy, Belgium, Luxemburg and also its subsidiaries provide wide spread
services in insurance, real estate, wealth management and investment in those countries.


This essay identifies Norway as a potential target market for BNP Paribas’ retail banking’s future
international expansion strategy. Although “BNP Paribas Corporate & Institutional Banking” is present as
Whatmakesagoodleader.com
a player in Norwegian market since 1985, providing corporate and Institutional Banking, Insurance and
Asset Management to the companies in the region. One of the reasons Norway is chosen for this
assignment is that according to Atkearney (2012) retail banking in Scandinavia is profitable comparing to
the other regions of Europe. In the Atkearney survey, retail banks in different European countries were
compared based on the following indexes: Income per customer, Income per employee, Cost to income
ratio, Profit per customer, Risk provision relative to total income and interest income relative to total
income. The result of the survey showed that Scandinavian banks were high in most of the indexes.
According to that survey Nordic banks had the highest income per employee and lowest cost to income
ration. Indeed, besides Nordic banks, the rest of European banks experienced yearly decrease in their
profit.
The rest of essay will go through Identification of the macro-environmental characteristics of Norwegian
market for BNP retail banking, analysis of SWOT and recommendation of actions to be taken in order to
be successful in this market.
1- Macro-Environment Analysis
In order to survey the business environment, three different layers could be analyzed: Macro-
environment, Industry (including suppliers, buyers, competitors etc.) and organization layer. Normally,
macro-environment analysis is the initial step of the strategic analysis. In this method, broad trends and
influences that may affect business strategies will be reviewed. In fact during doing this analysis, these
vital questions will be answered: what will influence to the business and what are the consequences of
those influences. Macro-environmental or external analysis can be done alone or in a brainstorming
meetings.
To simplify the macro-environment analysis PESTEL framework will be used. PESTEL is the
abbreviation of below six headings: Political, Economic, Social, Technological, Environmental and Legal.
In the PESTEL framework, the positive and negative impacts under these six categories will be listed.
Even most of those impacts are not under control of the organization, but they need to be understood. The
importance ranking of these six headings could be different company by company. PESTEL analysis is
applicable for business and strategic planning, marketing planning, business and product development and
research reports. It also helps corporations to make sure whether their performance are in line with the
changing forces in the business environment (Porter, 1985). For instance in the below situations, using
PESTEL method could be beneficial: Releasing a new product or service, entering to a new market or
region, exploring a new route to the market and working a s part of strategic project team.
In this section the Norwegian macro-environment for retail banking will be analyzed by taking into
account PESTEL framework.
Political factors:
Political factors Effect Remarks

Political stability Positive Power structure in Norway is quite stable and
democratic
Labor/ employment laws Positive/negative Labor unions have great power in Norway.
Reducing the staff in Norway is very difficult, time
consuming and have complex procedures.

Safety rules MacroPositive

Environment Analysis
Rigid regulations for more safety
Trade regulations Positive
Taxation policies Whatmakesagoodleader.com
Negative Norwegian tax rate already is one of the highest in
the world. Increasing the tax could Increase the
company costs and reduce customer funds in the
bank.
Government’s attitude to Positive Encouraging rules for entrepreneurs and or new
Business and competition entrants to the market
Implementation of E-Government Positive It will cause more reduction of paper works
Corruption perception Index Positive Norway is a country with minimum bureaucracy
corruption, Rank 5th of transparency in the world
(1)
Privatization/ Government Positive/negative
Cutbacks
Impacts of shifts in power Negative Although it’s quite rare, but in the worst case if it
happens, may cause changing in some of the rules
or diplomatic relations between countries
Table 1.1 PESTEL Framework- Political factors
(1)Transparency international 2014
Economic factors:
Norwegian Economy is mainly dependent to the Oil and gas industry. Therefore the recent crisis in the oil
and gas industry, had obvious consequences in the Norwegian economy. Comparing to the last year, Oil
price has fallen down to half and it impacts was shown in losing the Norwegian currency value and
increasing unemployment and inflation rates. Although listed influences in the below table are indicating
negative trends comparing to last year, but Norwegian economy is still strong and government is taking
effective actions to control the crisis impacts in the short future. According to the World Bank report
(2014) Norwegian GDP is equal to 0.81% of world economy, then working in this market with still great economic
indexes should be too attractive for foreigner banks.
Economic factors Effect Remarks

GDP Positive Norwegian GDP has been reduced from 522
Billion USD in 2013 to 500 Billion USD in 2014
(1)
Personal income Positive Norwegian GDP per capita is 97,363 USD (1)
Disposable household income Positive 9.2% (2)
rate
Household debt level Negative 2,185 billion NOK in 2014, increasing trend
Personal saving rate Positive It has increased to 44232 Million NOK in the first
quarter of 2015 from 42145 Million NOK same
period of last year (3)
Unemployment rate Positive It has increased to 4.3% in June 2015 comparing to

3.3% in June 2014 (3)
Inflation rate Positive It has increased to 2.6% in June 2015 comparing to
2.2% in June 2014 (3)
Cost of living Negative Norway is one of the most expensive countries in
the world
Interest rate Positive Bank Norge had reduced the interest rate from 1.25
to 1% in 19 June 2015 (4)
Currency value Negative Comparing Norwegian Krone to Euro, NOK value


has fallen 0.6% between July 2014 and 2014.
Tax and duties Negative Norwegian taxation policy is one of the highest in
the world.
Oil Price Negative Brent crude oil price has reduced from 106.8 to
54.7 USD between July 2014 and 2015 (6)
Table 1.2 PESTEL Framework- Economic factors
Sources:
(1) World Bank report 2014

(2) OECD Economic Outlook 2014
(3) Statistics Norway
(4) Norges Bank
(5) European Central Bank
(6) Energy Information Administration
Social factors:
Norwegian society is changing very fast. It is changing from one of the most ethnically homogenous
countries to a globalized society with diverse nations. Based on the Norwegian statistics organization
(Statistics 2015) the total population of Norway was 5 165 800 at January 2015. Foreign citizens are 9.9%
of this population. Population growth rate was 0.2% in 2014 and Oslo as the European fastest growing
capital, had the greatest growth rate among the all counties in Norway. Forbes insight (2012) ranked
Norway as the first rank for having the most diverse workforce in the world. Taking into account age,
gender, language, country of birth, education, part time and income Norway is the best country regarding
diversity. The attitudes of Norwegian people are almost homogenous all over the country.
Social factors Effect Remarks

Human resource diversity Positive Based on Forbes Insight (2012), Norway ranks
first in the world as the most diverse work force
country
Religion Positive 82% of Norwegians are Christians and 2.98% have
non-Christian religions. Norway is a secular state
(1)
Economic growth rate Positive 2.2% for 2014 (1)
Relationships to other counties Positive Citizens of foreign countries including neighbor
countries live and work in Norway.
Cheap/expensive labor Negative Workforce in Norway is expensive
Education Positive 44.7% of men and 38.7% of women in Norway
have upper secondary education (1)
Internet penetration rate Positive 95%, 4th rank in the world (2)
Demographic Effect
Population growth Positive 0.2% in 2014 (1)
Age mixture Positive See table 2.1 for age mixture (1)
Multi-cultural population rate Positive 9.9 % of the population are foreigner citizens.
Urbanization Positive 79.4% of total population live in the cities. 1.03%
urbanization rate
Table 1.3 PESTEL Framework- Social factors
Source:
(1)Statistics Norway


(2) Retrieved from www.internetworldstats.com
Table 2.1 Age mixture in Norway- Jan 2015
Age percentage
0-12 Years 15.63%
13-20 years 8.74%
20-44 years 34.06%
45-66 years 27.58%
67 and older 13.99%
Source: Statistics Norway, Retrieved from www.ssb.no
Technological Factors:
In the fast changing technology era, banks need to incorporate new technology for providing banking
services. According to Gareth Lodge et al. (2015), European banks will increase their investments in IT
by 4.4% per year and it will reach to 70 billion USD in 2017. Nikel (2015) have described that 600,000
Norwegians are using mobile bank ID in order to login to their bank accounts. According to his report,
Norwegian biggest bank, DNB, has changed its IT service provider, Evry, to a non-Norwegian company
to get better data security and quality. Evry is a leading IT service provider for banks in Norway.
Technological factors Effect Remarks

Technology for the products Positive Efforts on using finger print technology for master
card in Norway as the pilot country (Nikel 2015)
Technology for the process Positive Tendency to move to more secure IT services
Electronic communications Positive
Table 1.4 PESTEL Framework- Technological factors
Environmental Factors:
Environmental factors Effect Remarks

Weather condition in different Negative Weather may make logistical issues in the far and
locations cold areas especially during the winter.
People tendency to environment Positive
Table 1.5 PESTEL Framework- Environmental factors
Legal factors:
Legal factors Effect Remarks

Labor laws Positive/negative
Taxation rules Positive/negative
Advertising rules Positive/negative
Table 1.6 PESTEL Framework- Legal factors


2- SWOT Analysis
SWOT provides a framework to sum up the key subjects that organization will face in the
changing environment. (Johnson et al. 2008). The purpose of SWOT analysis is knowing the
markets advantages and also companies capabilities and finally make differentiation form other
competitors. In this part, firstly opportunities and threats, which are positive and negative
impacts of the external environment to the organization, have been listed in the table No. 3. Then
strengths and weaknesses, which are organization’s internal factors, have been listed in the table
No.4.
Opportunities Threats
Opportunities of market development from Risk of subprime especially for house loans.
Norway to the other Scandinavian countries Household debt level has an increasing trend.
Access to the potential customers: Existence of Norway could be attractive for the global
BNP Paribas customers (other parts of business competitors of BNP Paribas too.
model such as insurance and Hello bank) in the
Norwegian market
Having already a base in Norway, because of Expensive development of retail banking in the
presence in the Norwegian Market for corporate country with a small population
banking, Insurance and asset management
Owning BNP Paribas security services for Norwegian people’s tendency to use Norwegian
providing IT security services, more secure and and or Nordic brands
cheaper data processing comparing to domestic
banks in the market
High demand for a well reputed bank, because of Young generation’s tendency to invest money in
Norwegians high saving rates the share market instead of investing in a bank
Great ICT infrastructures in Norway, especially  Trend of lowering exchange rate make the cost of
in the banking industry foreigner suppliers more expensive for the bank.
Tendency to invest in the bank instead of making Falling interest rates together with increasing
a new business, more than 41% of the population inflation will reduce the bank’s income
are over 45 years old.

Having the best banking app in the world together Expensive human resources and complexity of
with wide use of smart phones in Norway terminating their contracts in Norway
Working in a homogenous and peaceful society  Impact of the Oil price to investments in the bank
with a stable and supportive government is great
for banking
Development of Hello bank in the Euro zone as a
by-product of BNP Paribas retail banking
Table 3 - Opportunities and Threats – External environment


Strengths Weaknesses
Having a comprehensive and integrated business Weak control over money laundry and transactions
model for retail banking, corporate banking and related to countries subject to US sanctions
financial services
Long presence as leading Non-Nordic bank for Lower revenues in the retail banking in France and
corporate banking in the Norwegian market Italy
Experience of working as a leading bank in 4 Lower operating income
domestic European markets
Strength in the management team
The bank is well capitalized, it has strong cash
flow and Balance sheet
Market leadership and global reputation
Emphasis on effective training and human
resource development
Having the best mobile banking application in the
world
Table 4 - Opportunities and Threats – External environment


3- Recommended actionsWhatmakesagoodleader.com
After identification of Strengths, Weaknesses, Opportunities and Threats, in the next step needed actions
for ensuring the success of strategy should be recommended. In the first section, emphasize is on the
opportunities that are matching with companies’ strengths. Then company weaknesses will be addressed
by recommending corrective actions. Finally a few more actions have been defined to protect the strategy
against the threats.
Opportunities:
 Selection of a team including experienced managers and staff of BNP Paribas corporate banking
and insurance of Oslo office. Assigning them as the core team for establishing retail banking in
Norway.
 Getting supporting services from corporate banking office in Oslo for the subjects such as Hiring,
Human resources management and Legal services in the initial stages.
 Start to attract the customers with focus to the existing customers of BNP Paribas Insurance and
corporate banking in Norway. Preparing an especial marketing package for them for informing
about starting retail banking services and sending the package to their emails and addresses.
 Establishing an office for BNP Paribas security services to support BNP retail banking and also
for presence in the local banking IT services market and competing with the Norwegian
companies like Evry.
 Providing a version of BNP Paribas mobile app in Norwegian language in the first stage and later
in Swedish and Danish languages.
Weakness:
 Strengthen the controlling procedures for avoiding Fraud and money laundry.
 Performing organizational diagnosis process to find solutions for lower revenues in retail banking
and operating income.
Threats:
 Focus on the middle age Norwegians, who don’t have preconception about the Non-Nordic
brands and also don’t tend to take risk of investment in the share market. As mentioned above,
Older Norwegians tend to select Norwegian brands and younger people tend to invest in share
market instead of banks.
 Building good relationships with the suppliers via having long term and reasonable contracts.
 In accordance to the company strategy, simplifying the processes, evaluating and optimizing the
human resource requirements. Establishing the bank offices with the minimum number of
employees.

4- References Macro Environment Analysis

 Ayadi, R, De Groen, W.Whatmakesagoodleader.com
P. (2014). Banking Business Models Monitor. 2014. Centre for
European Policy Studies and International Observatory on Financial Services Cooperatives.
Retrieved from http://www.ceps.eu/system/files/Banking%20Business%20Models%202014.pdf
 Roengpitya, R., Tarashev, N., Tsatsaronis, K. (2014). Bank business models in BIS Quarterly Review.
Retrieved from http://www.bis.org/publ/qtrpdf/r_qt1412g.pdf
 Atkearney. (2012). Retail Banking Radar: Change looms in Europe. Retrieved from
http://www.atkearney.no/paper/-/asset_publisher/dVxv4Hz2h8bS/content/2012-retail-banking-
radar-change-looms-in-europe/10192
 BNP Paribas annual report. (2014). Retrieved from
https://invest.bnpparibas.com/sites/default/files/documents/bnp_paribas_ra_2014_en_02.pdf
 Porter, M.E. (1985) Competitive advantage: creating and sustaining superior performance. New
York: Free Press.
 Forbes insight. (2012). Diversity & Inclusion: Unlocking Global Potential Global Diversity
Rankings by Country, Sector and Occupation. Forbes insight and Oxford economy
 Nikel, D. (2015). Changing IT trends power banking in Norway. Retrieved from
http://www.computerweekly.com/news/4500244960/Changing-IT-trends-power-banking-in-
Norway
 Lodge, G., Ahang, H., Jegher, J. (2015). IT Spending in Banking: A Global Perspective,
Retrieved from http://www.celent.com/reports/it-spending-banking-global-perspective-0
 Johnsen, G., Scholes, K., Wittington, R. (2008). Exploring corporate strategy. Essex, UK:
Pearson Education Limited

External Debt Sustainability and Economic Growth in Malaysia
Qaiser Munir
Winnie Abdul Nasir
Kok Sook Ching
Faculty of Business, Economics and Accountancy,

Universiti Malaysia Sabah
Abstract
Our main interest in this contribution is focusing on the sustainable level of external debt and
the empirical assessment of external debt and economic growth relationship in Malaysia. This
present study yields important findings over the period 1970-2013. We highlight that the
estimated threshold value of the country’s external debt is about 54.86 percent of economic
growth, and the estimated threshold value using robustness test is in the range between 50
and 60 percent. This threshold level is at the lower end of the range of standard international
threshold level of 60-90 percent suggested by Reinhart and Rogoff (2010). Above this level,
external debt may have an adverse impact on economic growth. In addition, external debt and
economic growth are cointegrated in the long-run. In the short-run, there is a unidirectional
causality running from economic growth to external debt. It may be possible that external
borrowings are important to fill the savings-investment gap in the domestic economy. There
is no evidence of debt-overhang in the country but crowding out effect does exist in the upper
external debt regime. Thus, the level of external debt should be in controlled and maintained
at the sustainable level.
JEL classification:
Keywords: External debt; Economic growth; Debt sustainable level; Threshold value;
Cointegration; Causality
1. Introduction
European sovereign debt crisis or more generally known as the Eurozone crisis had erupted in
the late 2009, reflecting serious government defaults which heightened global awareness on
the hazards of external debt. In Malaysia, external debt accumulation has recently increased
to RM284.7 million at end-June 2013 from RM264.4 million in the previous quarter. This
amount is equivalent to 29 percent of gross national income (GNI) of the country. In more
details, the country’s medium and long-term external debt has increased to RM170.3 million,
as the net drawdown of external borrowings by the private sector offsetting the net repayment
by the public sector. Thus, it is clear that the main source of external debt accumulation is
unlimited to the public debt component. Further, short-run external debt has also resulted in a
higher external debt accumulation. During this quarter, short-run external debt has reached
RM114.4 million due mainly to the net drawdown of interbank borrowings (Quarterly
Bulletin, Second Quarter, 2013: 50). According to the Economic Report 2014/2015 of Bank
Negara Malaysia, the external debt position of Malaysia is relatively higher than other major
economies in the Asia-Pacific region. As at end-June 2014, Malaysia’s total external debt to
GDP ratio is approximately 67.6 percent, as compared to Philippines about 20 percent,

Indonesia 32.3 percent, Korea 32.5 percent, and Thailand 37.5 percent. External debt is one
of the potential risks that can impair economic growth in Malaysia. Hence the impact of
external debt on economic growth has remained as a critical concern especially from the
standpoint of policy makers. The country is currently facing great challenges with a
slowdown in its economic growth which may intensify the external debt burden. Under such
challenging environment, it is indeed unavoidable to consider the obstacle related to external
debt sustainability.
Motivated by the foregoing issue, the purpose of this present study is three-fold: First,
to investigate the long-run and short-run relationships between external debt and economic
growth in Malaysia; Second, to examine their causal relations; Third, to identify the threshold
or sustainable level of the country’s external debt. Our analysis includes a sufficiently long
period spanning from 1970 to 2013 which allows us to capture the insight of possible
structural breaks corresponding to the shocks from Asian financial crisis in 1997-1998 and
the United States (U.S.) subprime mortgage crisis in 2008-2009.
We organise the remaining of this paper as follows: Section 2 provides the literature
review; Section 3 discusses the datasets and methodology used; Section 4 presents the results
and findings; Section 5 is conclusion.
2.1 External Debt and Economic Growth
Butts (2009) study the nexus between external debt and economic growth in 27 Latin
American and Caribbean countries over the period 1970-2003. Based on the analysis using
Granger conventional approach, he found unidirectional causality running from economic
growth to short-term external debt in ten countries, two in the short-run, and eight in the long-
run. In addition, long-run causality running from short-term external debt to economic growth
is confirmed for one country namely, Uruguay. Based on the results of Johansen-Juselius
approach, long-run causality from economic growth to short-term external debt exists in three
countries. In four countries, the long-run relationship is reversed. Moreover, short-run
causality from economic growth to short-term external debt exists in four countries, and
inversely in two countries. Bidirectional causality is found in three countries, one in the short-
run, and the remaining in the long-run.
Jayaraman and Lau (2009) examines whether external debt contributes to economic
growth in Pacific Island Countries (PICs) by undertaking a study on six major PICs. Real
GDP, external debt-to-GDP, export of goods and services-to-GDP, and budget deficits are
found to be cointegrated in multi-countries panel setting. From the FMOLS estimates, the
coefficients of external debt and export are positive and significant. The signs of external
debt coefficients with real GDP as dependent variable in all countries studied are consistent
with a priori expectations and statistically significant. This implies that an increase in external
debt would trigger a rise in economic growth rate. Further, in the long-run, there is no
evidence of causality between real GDP and external debt, export, and budget deficit.
However, in the short run, there is significant causal link from external debt, export and
budget deficit to real GDP. There is no evidence of causality from the aforementioned
variables towards external debt.
Butts et al. (2012) focus on the case of Thailand for the period 1970-2003 when
looking into the relations between external debt and economic growth. The results of ARDL-
bounds test procedure to cointegration show that real short-term external debt and real GDP
are positively correlated as well as co-integrated, for both production (GDP deflator) and
consumption (CPI deflator) effects. There is evidence of Granger causality running from real
GDP to real short-term external debt for consumption effect.

In Malaysia, Abdul Rahman (2012) examines the impact of Federal government’s
debt, both domestic debt and external debt on the level of economic growth over a short time
span from the first quarter of 2000 until the fourth quarter of 2011. The findings of the study
only confirm the negative impact from federal government domestic debt on economic
growth in the long-run. The short-run impact is not being detected. Furthermore, there is no
evidence found in supporting the significance impact of external debt on economic growth
either in the short-run or long-run.
2.2 External Debt Sustainability

Pattillo, Poirson, and Ricci (2002) investigate the nonlinear impact of external debt on
economic growth using panel data for 93 developing countries. The findings show a
nonlinear, hump shaped debt-growth relationship. As implied by the findings, doubling the
debt ratio in a country with average indebtedness would reduce its economic growth by one
third to a half percentage point after controlling for endogeneity. The findings also suggest
that the average impact of external debt becomes negative at around 160-170 percent of
exports and 35-40 percent of GDP. The marginal impact of external debt is about half of
these values.
Clements et al. (2003) study a sample of 55 low income countries for the period 1970-
1999 to examine the effect of external debt on economic growth. The findings suggest that
beyond a certain threshold level, higher external debt is associated with lower economic
growth rates (GDP per capita). A threshold level of around 20-25 percent of external debt to
GDP is found.
Adegbite et al. (2008) investigate the linear and nonlinear effects of external debt
burden on economic growth in Nigeria over the period 1975-2005 based on debt overhang
theory and crowding out effect of debt. The estimations are based on Ordinary Least Squares
(OLS) and Generalized Least Squares (GLS). The authors found evidence of negative impact
of external debt and the debt servicing requirements on economic growth. External debt
contributes positively to economic growth up to a point after which the impact is reversed.
This reflects nonlinearity in the relationship.
Reinhart and Rogoff (2010) find that some emerging markets have low external debt
sustainable levels. When external debt reaches 60 percent, annual economic growth rate
declines by two percent. For higher threshold levels, economic growth rates are roughly cut
in half. The external debt sustainable level determined for advanced economies is 90 percent
while for emerging markets is 60 percent.
Osinubi et al. (2010) confirm the existence of debt Laffer curve and nonlinear effect
of external debt on economic growth in Nigeria over the period 1970-2003. Based on the
findings of the study, low debt levels contribute positively to economic growth. High debt
levels such that over the threshold level can inversely affect economic growth.
Chang and Chiang (2011) examine the relationship between real GDP per capita ratio
and external debt to GDP ratio in 21 developing American and Caribbean countries for the
period 1992-2006. The method used for analysis is based on a panel smooth transition
regression model. The results show there are two threshold values thus dividing the panel into
three regimes. The middle regime is consistent with the stimulus view (Eisner, 1984) and
both the outer regimes are consistent with the crowding-out view (Friedman, 1977, 1985).
3. Data and Methodology

3.1 Datasets
This study utilizes a balanced datasets for the period 1970-2013 which consist of the annual
data of selected variables as follows: gross domestic product (GDP) growth (LGDP); external
debt to GDP (LEXTDGDP); gross fixed capital formation (LGFCF); general government

final consumption expenditure (LGGFCE), export-to-GDP (EXPGDP), and debt service-to-
GDP (LDSGDP). The data are extracted from World Development Indicator (WDI) of World
Bank 2015.
3.2 Methodology
3.2.1 Unit Root Tests
Prior to modeling the time series data, we determine the order of integration of the variables
and ensure that it is equal for all series. The classical unit root test, namely Augmented
Dickey and Fuller (Dickey and Fuller, 1979) (ADF) unit root test and Phillip Perron unit root
test are used to test for the nonstationarity of the series.
The ADF test constructs a parametric correction for higher-order correlation by
assuming that the series follows an AR(k) process and adding lagged difference terms of the
dependent variable to the right-hand side of the regression;
∆𝑦𝑡 = 𝑐 + 𝛼𝑦𝑡−1 + ∑𝑘𝑗=1 𝑑 ∆𝑦𝑡−𝑗 + 𝜀𝑡 (1)

𝑘
∆𝑦𝑡 = 𝑐 + 𝛼𝑦𝑡−1 + 𝛽𝑡 + ∑𝑗=1 𝑑 ∆𝑦𝑡−𝑗 + 𝜀𝑡 (2)
The first equation tests the null of a unit root against a mean stationarity in yt (y is the
time series we examine each time). The second equation test the null of a unit root against the
alternative of trend stationarity (∆𝑦𝑡−𝑗 is lagged first differences).
An important practical issues for the implementation of the ADF test is the
specification of the lag length, p. If p is too small, then the remaining serial correlation in the
errors will bias the test. If p is too large, then the power of the test will suffer. There are
several ways of choosing how many lags need to be added. But, a reliable and often-used
criterion is the Schwartz criterion. ADF does not suffer from size distortions, but it is not
powerful as the Phillip-Perron test. For comparison purpose, we also perform the Phillip and
Perron test unit root test (PP, 1988) and report the test results.
The Phillips-Perron test (PP) is also performed. It differs from the ADF tests mainly
in how they deal with serial correlation and heteroscedasticity in the errors. It can be more
robust than ADF tests if there would be the autocorrelation and heterskedasticity in the data
sets. In essence, ADF test use a parametric autoregression to approximate the ARMA
structure of the errors in the test regression, PP test ignore any serial correlation in the test
regression and makes the semi-parametric correction for autocorrelation and it is more
powerful in the case we have weakly autocorrelation and heteroskedastic regression residuals.
In other words, the PP test made a non-parametric correction to the ADF statistics to
overcome the autocorrelation problem in the data (Phillips and Perron, 1988). The modified
ADF-statistic (Zδ) can be expressed as (Greene: 2003):
c0 (a  c0 )Tv
Z   t 
a 2 as 2 (3)
where Zδ is the PP statistics, tδ is ADF statistics, C 0 is an estimate of the error variance, a is

an estimate of the residual spectrum, T is the number of observation, v is the standard error of
the coefficient (δ), s is the standard error of the test regression.
Perron (1989) shows that in the presence of a structural break, conventional testing
procedures such as the ADF and PP unit root tests may erroneously fail to reject the null
hypothesis that a series is integrated of higher order. To allow for the possibility of a
structural break, we use the Zivot and Andrews (ZA, 1992) one break test. The main idea
behind this exercise is to check whether, in the presence of a structural break in the data, the

time series are integrated of order one or otherwise. Hence, the following testing equation is
used.
Zivot and Andrews (1992) have presented two versions of the sequential trend break
model, Model A and Model C. Model A allows for a change in intercept, while Model C
allows for a change in both the intercept and slope.
(1) Model A permits a one-time change in the level of a series:

k
yt  k  yt 1  t   DUt   d j yt  j   t (4)
j 1
(2) Model C combines one-time change in the level and slope of the trend function of a
series:
k
yt  k  yt 1  t  1 DUt   1DTt   d j yt  j   t (5)
j 1
Here, Δ is the first difference operator, Yt denotes the gross domestic product in
country i, time t =(1,…,T) is index of time.  t is a white noise disturbance term. The Yt  j
terms on the right-hand-side of Equation 1 and 2 allow for serial correlation and ensure that
the disturbance term is white noise. The null hypothesis in Equations 4 and 5 is that α=0,
which implies that there is a unit root in yt. The alternative hypothesis is that α<0, which
implies that yt is breakpoint stationary. Finally, DUt is an indicator dummy variable for a
mean shift occurring at time TB, and DTt is the corresponding trend shift variable, where
1 if t  TB
DUt  
0 otherwise
and
t  TB if t  TB
DTt  
0 otherwise
In the Zivot and Andrews (1992) test, region must be chosen as the end points of the
sample are not included. In the presence of end points, the asymptotic distribution of statistics
diverges to infinity. Zivot and Andrews (1992) suggest the ‘trimming region’ be specified as
(0.10T, 0.90T). We follow this procedure and the break points are selected by choosing the
value of TB for which the ADF t-statistic (the absolute value of the t-statistic for α) is
maximized. The test essentially amounts to testing the null hypothesis that Yt is an integrated
process without a structural break, against the alternative hypothesis that the series Yt is trend
stationary with a structural break in the trend function which occurs at an unknown time.
Although asymptotic critical values are available for this test, Zivot and Andrews
warn that with small sample sizes the distribution of the test statistic can deviate substantially
from its asymptotic distribution. To circumvent this distortion, ‘exact’ critical values for the
test are computed following the methodology advocated in Zivot and Andrews (1992, p.
262). Once this test has identified the presence of possible break points, we then proceed to
the test which can determine multiple structural breaks. The Zivot and Andrews (1992) test
can only detect one structural break.
3.2.2 Cointegration Tests

For the series that are integrated of same order, the next step is to perform cointegration tests.
The traditional cointegration tests have limitations especially when dealing with a long data
span when the data generating process may be affected by major economic events such as

financial and economic crises, shifts in industrial structure and productivity growth. These
events could alter the equilibrium relationship. Several studies have shown the sensitivity of
the outcome of the traditional tests to structural breaks. To examine further the robustness of
our results to structural breaks, we apply the Gregory and Hansen (1996) cointegration tests
that account for an endogenously-determined break. It is important to consider the possibility
of a shift in the equilibrium relations that occurs at an unknown point in time. The results of
Gregory and Hansen (1996) approach could be especially insightful when the null hypothesis
of no cointegration is not rejected by the traditional tests. When it is rejected by the Gregory
and Hansen (1996) test, we receive an important indication that a cointegration relation in
fact exists, with the parameters of the cointegration relations being subject to change.
The Gregory and Hansen (1996) test assumes the null hypothesis of no cointegration
against the alternative hypothesis of cointegration with one structural break. The timing of the
structural change is not known a priori but is determined by the data. Gregory and Hansen
(1996) present three models, whereby the shifts can be either in the intercept alone (C):
yit  1  2t   T y2t  et t  1,2,..., n (6)
or, in both trend and level (C/T)
yit  1  2t  t   T y2t  et t  1,2,..., n. (7)
or, allows a change in the intercept, the trend as well as slope coefficients (C/S/T)
yit  1  2t  1t  2tt  1T y2t   2T y2t  et t  1,2,..., n. (8)
Where μ1, β1 and α1 represents the intercepts, trend coefficients and slope coefficients
respectively before the regime shift and μ2, β2 and α2 are the corresponding changes after the
breakift. y1t and y2t are of I(1) and y2t is a variable or a set of variables. t represents a time
trend. The dummy variable φtτ that captures the structural change is defined by:
0, if t  [ ]
t    (9)
1, if t  [ ] 
Where the unknown parameter   (0,1) denotes the timing of the structural change
point and [ ] denotes the integer part. The non-stationarity of the residuals under the null
Hypothesis is then tested based on a procedure that trims a small Percentage of the data at
two ends and calculates the ADF, and the Phillips (1987) Zα and Zt statistics for each of the
remaining observations as being the potential break point. Gregory and Hansen (1996) tests
choose the break point that gives the least support for the null hypothesis of a unit root in the
residuals and hence no cointegration. Hence the three test statistics suggested are as follows
(Gregory and Hansen, 1996):
Z*  min Z ( ),
 T
Z t*  min Z t ( ),
 T
ADF  min ADF ( ).

*
 T
These test statistics based on the minimal values of overall possible breakpoints.

3.2.3 Causality Tests
We further examine the causal relationship between the variables. In the presence of long-
term equilibrium relations between external debt and GDP growth, an analysis of long-term
interaction is in order. Hence, we use Granger causality tests to determine the direction of the
short and long-run relationship.
The existence of a long-run relationship among the variables suggests that there must
be causality at least in one direction. Thus, the next step is to examine causal relationship
among the variables. In this study, the Granger-causality testing procedure developed by
Toda and Yamamoto (1995) is adopted. Unlike the aforementioned approaches, the Toda and
Yamamoto approach is applicable irrespective of whether the variables are stationary,
integrated of an arbitrary order or cointegrated of an arbitrary order, as long as the order of
integration does not exceed the optimal lag length. As such, one is able to test linear or
nonlinear restrictions on the coefficients by estimating a vector auto regression (VAR) in
levels, paying little attention to the integration and cointegration properties of the time series
at hand (see Toda and Yamamoto, 1995). VAR can be estimated without true lag order k but
it is applicable with (k  d ) lag order where d indicates possible order of integration for
variables. The Toda and Yamamoto (1995) causality test is examined by performing
hypothesis exercise disregarding the additional lags k  1,..., k  d in vector auto regression
(VAR). The Toda-Yamamoto causality technique involves the estimation of the following
models:
𝑚 𝑚+𝑑𝑚𝑎𝑥 𝑚 𝑚+𝑑𝑚𝑎𝑥
𝑌𝑡 = 𝜑0 + ∑ ψ𝑖 𝑌𝑡−𝑖 + ∑ ψ𝑖 𝑌𝑡−𝑖 + ∑ 𝜑𝑖 𝐸𝑡−𝑖 + ∑ 𝜑𝑖 𝐸𝑡−𝑖 + 𝑣1𝑡 (10)

𝑖=1 𝑖=𝑚+1 𝑖=1 𝑖=𝑚+1
𝑚 𝑚+𝑑𝑚𝑎𝑥 𝑚 𝑚+𝑑𝑚𝑎𝑥
𝐸𝑡 = 𝑥0 + ∑ ɳ𝑖 𝐸𝑡−𝑖 + ∑ ɳ𝑖 𝐸𝑡−𝑖 + ∑ 𝜁𝑖 𝑌𝑡−𝑖 + ∑ 𝜁𝑖 𝑌𝑡−𝑖 + 𝑣2𝑡 (11)

𝑖=1 𝑖=𝑚+1 𝑖=1 𝑖=𝑚+1
Where 𝑌𝑡 = 𝑒𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑔𝑟𝑜𝑤𝑡ℎ𝑡 , 𝐸𝑡 = 𝑒𝑥𝑡𝑒𝑟𝑛𝑎𝑙 𝑑𝑒𝑏𝑡𝑡 , 𝜑, ψ𝑖 , ɳ𝑖 , and𝜁𝑖 are the

parameters of the model; 𝑑𝑚𝑎𝑥 is the maximum order of integration suspected to occur in the
system; 𝑣1𝑡 ~ 𝑁(0, 𝛴𝑣1 ) and 𝑣2𝑡 ~ 𝑁(0, 𝛴𝑣2 ) are the residuals of the model and 𝛴𝑣1 and 𝛴𝑣2 is
the covariance matrices of 𝑣1𝑡 and 𝑣2𝑡 respectively.
In the models, each variable is regressed on each other with lag order starting from 1
towards k  d max , 1 and  2 are the error terms, k indicates the maximum number of lags
to be taken while d shows order of integration of running variables. Since the procedure
requires a VAR only in levels, it does not lead to a loss of information as it would happen in
the case of differencing. For this reason, the procedure can be used only as a long-run test.
3.2.4 Threshold Analysis

Hansen (2000) has developed a statistical estimation theory for threshold estimation in cross
section regression, but the procedure can also be used in time series analysis. In particular,
Hansen (2000) has developed new tests for threshold effects, estimate the threshold
parameter, and construct asymptotic confidence intervals for the threshold parameter. The
primary idea behind the Hansen (2000) threshold estimation is that an exogenously given
variable, called “threshold variable”, is used to split the sample in two groups or regime,
which can or cannot be a regressor. This theory derives the asymptotic distribution of the
Ordinary Least Squares (OLS) estimates of the threshold parameter. We also estimate the

threshold model following the approach of Caner and Hansen (2004) who develop an
estimator and an inference theory for models with endogenous variables and an exogenous
threshold variable. We consider the following linear regression equation:
𝐺𝐷𝑃𝐺𝑅𝑡 = 𝛼 + 𝛽0 𝐸𝑋𝑇𝐷𝐺𝐷𝑃𝑡 + 𝛽2 𝐺𝐹𝐶𝐹𝑡 + 𝛽3 𝐺𝐺𝐹𝐶𝐸𝑡 + 𝛽4 𝐸𝑋𝑃𝐺𝑅𝑡 + 𝛽5 𝐷𝑆𝐺𝐷𝑃𝑡

+ 𝜀𝑡 (12)
Where 𝐺𝐷𝑃𝐺𝑅𝑡 denotes GDP growth rate, 𝐸𝑋𝑇𝐷𝐺𝐷𝑃𝑡 denotes external debt-to-GDP,
𝑃𝐷𝐸𝐵𝑇𝑡 denotes public debt-to-GDP, 𝐺𝐹𝐶𝐹𝑡 denotes growth rate of gross fixed capital
formation used as a proxy for investment, 𝐺𝐺𝐹𝐶𝐸𝑡 denotes general government final
consumption expenditure, 𝐸𝑋𝑃𝐺𝑅𝑡 denotes annual growth rate of export-to-GDP and
𝐷𝑆𝐺𝐷𝑃𝑡 denotes debt service-to-GDP. 𝑢𝑡 denotes the error term.
The regression equation (12) represents the standard linear growth model. The nature
of the threshold effects in previous studies of external debt to GDP growth has yet been
conclusive as it can be more or less than some critical value. For instance, serial papers by
Reinhart and Rogoff (2010, 2012) claim that there is a threshold effect where dramatically
worse growth outcomes is associated with debt above 90 percent of GDP, but, debt is
unrelated to economic growth as long as it does not exceed 90 percent of GDP. Similarly,
study by Caner, Grennes and Koehler Geib (2010) estimate a public debt threshold at 77
percent of GDP, which imply that below the threshold, the public debt to GDP helps to
expand investment and translates in faster growth, while additional debt above the threshold
will reduces output growth. This non-linear effect, which is difficult to point out with
standard linear regression model may present in the Malaysian case. Thus, it is important to
develop suitable methods to conduct estimation. In this part, we provide a brief and non-
technical outline of the methodology used to estimate threshold value in this study.
The optimal threshold value can be determined by obtaining the threshold value that
minimizes the sum of the squared error (detailed explanation provided in Hansen, 1996,
2000). Hansen (2000) further provides the relevant tests such as F-test, Lagrange multiplier
(LM) and likelihood ratio statistics for testing the hypothesis. In particular, consider a two-
regime structural equation in threshold autoregressive (TAR) model;
𝑦𝑡 = 𝜃1′ 𝑥𝑡 + 𝑒1𝑡 𝑖𝑓 𝑞𝑡 ≤ 𝛾, (13)
𝑦𝑡 = 𝜃2′ 𝑥𝑡 + 𝑒2𝑡 𝑖𝑓 𝑞𝑡 ≤ 𝛾, (14)
Where 𝑞𝑡 represents the threshold variable, that split all the observed values into two
classes or regimes. 𝑦𝑡 and 𝑥𝑡 are dependent variable and explanatory variable (m vector)
respectively. 𝑒𝑖𝑡 is the error term of property white noise 𝑖𝑖𝑑 and 𝛾 denotes the threshold
value. The model could be easily estimated by OLS if we knew 𝛾. Since the threshold is
unknown a priori, so it should be estimated in addition to other parameters.
Notice that, when the threshold variable is smaller than the threshold parameter, the
model will estimate equation (2), while when the threshold variable is larger than the
threshold parameter, the model estimates equation (3). Define a binary variable, 𝑑𝑡 (𝛾 ) =
{𝑞𝑡 ≤ 𝛾)} where {. } is the indicator function, with 𝑑 = 1 if 𝑞𝑡 ≤ 𝛾 occurs or 𝑑 = 0
otherwise, and setting 𝑥𝑡 (𝛾 ) = 𝑥𝑡 𝑑𝑡 (𝛾 ), then equation (13) and (14) can be formulated as a
single equation as follow:
𝑦𝑡 = 𝜃 ′ 𝑥𝑡 + 𝛿 ′ 𝑥𝑡 (𝛾 ) + 𝑒𝑡 (15)

Where 𝜃 = 𝜃2 , 𝛿 = 𝜃1 − 𝜃2 , and 𝜃, 𝛿 𝑎𝑛𝑑 𝛾 are the regression parameters to be
estimated. The residual sum of squares as a result of estimating the regression parameters can
be written as follows:
𝑆1 (𝛾 ) = 𝑒̂𝑡 (𝛾 )′𝑒̂𝑡 (𝛾 ) (16)
To estimate 𝛾, Hansen (1996, 2000) recommends estimating 𝛾 by least squares

technique. The easiest way to employ this procedure is via minimization of the sum of
squared residuals as a function of expected threshold value. Thus, the optimum threshold
value can be written as follows:
𝛾̂ = arg min 𝑆1 (𝛾) (17)
Conditional on 𝛾̂, the regression equation is linear in 𝜃, 𝑎𝑛𝑑 𝛿 ′ , yielding the

conditional OLS estimates of 𝜃̂(𝛾) and 𝛿̂(𝛾) by regression of dependent variable on
explanatory variables. Following the foregoing procedure, linear equation (12) can be
expressed as a nonlinear equation under a two-regime threshold autoregression (TAR) model
as follows:
𝐺𝐷𝑃𝐺𝑅𝑡 = (𝛼10 + 𝛽11 𝐸𝑋𝑇𝐷𝐺𝐷𝑃𝑡 + +𝛽12 𝐺𝐹𝐶𝐹𝑡 + 𝛽13 𝐺𝐺𝐹𝐶𝐸𝑡 + 𝛽14 𝐸𝑋𝑃𝐺𝑅𝑡 + 𝛽15 𝐷𝑆𝐺𝐷𝑃𝑡 )𝑑[𝑞𝑡
≤ 𝛾]
+(𝛼20 + 𝛽21 𝐸𝑋𝑇𝐷𝐺𝐷𝑃𝑡 + 𝛽22 𝐺𝐹𝐶𝐹𝑡 + 𝛽23 𝐺𝐺𝐹𝐶𝐸𝑡 + 𝛽24 𝐸𝑋𝑃𝐺𝑅𝑡 + 𝛽25 𝐷𝑆𝐺𝐷𝑃𝑡 )𝑑 [𝑞𝑡
> 𝛾] + 𝑒𝑡∗ (18)
From equation above, the optimal threshold value can be determined by obtaining the
threshold value that minimizes the residual sum of squares (RSS). Since the main objective of
this paper is to investigate the external debt threshold effects in the relationship between
external debt and economic growth in Malaysia, the annual growth rate of external debt is
used as the threshold variable in the analysis.
The main question in equation is whether or not there is a threshold effect. The
examination between the linear model vis-à-vis the two regime model (equation 7) is
required. The null hypothesis of no threshold effect (𝐻0 : 𝛽1𝑡 = 𝛽2𝑡 , 𝑤ℎ𝑒𝑟𝑒 𝑖 = 0, … 5) is
tested against the alternative hypothesis where threshold effect is present (𝐻0 : 𝛽1𝑡 ≠ 𝛽2𝑡 ).
Traditional procedures of hypothesis testing cannot be applied, because under the null
hypothesis of no threshold effect exist; the threshold parameter 𝛾 will be unidentified.
Hansen (1996) therefore suggests a standard heteroscedasticity-consistent Lagrange
Multiplier (LM) bootstrap method to calculate the asymptotic critical value and the p-value.
To accomplish this, a test with near-optimal power against alternatives distant from H0 is the
standard F-statistics:
𝑆0 − 𝑆1 (𝛾̂)
𝐹1 = (19)
𝜎̂ 2
Where 𝑆0 𝑎𝑛𝑑 𝑆1 denotes the residual sum of squares under the null hypothesis and
1
the alternative of 𝐻0 : 𝛽1𝑡 = 𝛽2𝑡 . 𝜎̂ 2 represents the residual variance defined as = 𝑇 𝑒̂ 𝑡 𝑒̂𝑡 =
1
𝑆 (𝛾̂ ).
Hansen (1996) shows that a bootstrap procedure achieves the first-order asymptotic
𝑇 1
distribution, so p-values constructed from the bootstrap are asymptotically valid.
After estimating the threshold effect, the next step is to determine whether the
estimate is statistically significant, i.e 𝐻0 : 𝛽1𝑡 ≠ 𝛽2𝑡 . In this case, the estimate 𝛾̂ is consistent

for the true value of 𝛾, say 𝛾0 . Since the asymptotic distribution of the threshold estimate 𝛾̂ is
highly non-standard, Hansen (2000) uses the likelihood ratio statistics for the tests on 𝛾 to
form confidence intervals for 𝛾. The null hypothesis of the threshold value is 𝐻0 = 𝛾 =
𝛾0 and the likelihood ratio statistics is given by:
𝑆1 (𝛾 ) − 𝑆1 (𝛾̂)
𝐿𝑅1 (𝛾 ) = (20)
𝜎̂ 2
Where 𝑆1 (𝛾 ) 𝑎𝑛𝑑𝑆1 (𝛾̂) are the sums of the squared residuals from equation (15)
given the true and estimated value, respectively. The null hypothesis is rejected for large
values of 𝐿𝑅1 (𝛾0 ). Hansen (2000) showed that there is an asymptotic distribution of 𝐿𝑅1 (𝛾0)
to form valid asymptotic confidence intervals for 𝛾. Hansen (2000) demonstrates that the
distribution function has the inverse 𝑐 (𝛼 ) = −2 ln(1 − √(1 − 𝛼) from which it is easy to
calculate critical values1. Where 𝛼 is a given asymptotic level; and the no-rejection region of
the confidence level is 1- 𝛼. i.e, if 𝐿𝑅1 (𝛾0) ≤ (𝛼) than the null hypothesis of 𝐻0: 𝛾 = 𝛾0
cannot be rejected. In order to examine more than one threshold value, foregoing procedures
are applied until the null hypothesis can no longer be rejected (see Munir and Mansur, 2009).
4. Empirical Results
4.1 Traditional Unit Root Test
It is essential to conduct unit root tests to examine the stationarity properties and the order of
integration of the variables employed in this study. The reason is to ensure that no incorrect
inferences are made due to spurious regression. For this, all the series used are tested using
the Augmented Dickey-Fuller (ADF) unit root test, Phillip Perron (PP) unit root test.
Traditional unit root tests that do not incorporate structural breaks are suffering from
loss of power. Perron (1989) claims that the ability of simple tests such as ADF will be
reduced to reject the null hypothesis of unit root when it is actually false because the tests do
not allow for structural breaks. Thus, the series used in this study will be tested with unit root
tests that take into account structural break. The tests include the Zivot and Andrews (1992)
unit root tests that incorporate one structural break.
The unit root test results of ADF, PP, are tabulated in Table 1. We present the results
which contain an intercept term and both intercept and trend for the series in levels and first
differences. The null hypothesis of these tests for both ADF and PP is that a time series
contains a unit root. The rationale of using more than one traditional unit root tests is to
ensure robustness of our result. The lag length selection of ADF on Schwarz Bayesian
information criterion (SIC) with a maximum lags of 9, while PP is using the Bartlett Kernel
for Spectral estimation method with a Newey-west bandwidth automatic selection.
As is evident, in the level form, the tests statistics obtained are clearly less than the
critical values even at 10% significant level. Therefore, the null hypothesis of a unit root
cannot be rejected for the series studied, implying that the series are having a unit root, except
for LEXTDGDP in ADF unit root test and LGGFCE in DFGLS unit root test, where the
series are not having a unit root or in other words, the series are actually stationary at levels.
In the first difference, all the variables used in this study are said to be integrated of
order one, that is I(1). The implication behind these findings is that we can proceed to
investigate the long-run relationship with respect to the main variables including is LGDP
and LEXTDGDP using cointegration test as we have confirmed the order of integration of the
series studied.
1
E.g. the 5% critical value is 7.35 and 1% critical value is 10.59 Hansen (2000: 582, Table 1).

Table 1: Results of traditional unit root tests
Test
Statistics
ADF PP Conclusion ADF PP Conclusion
A: Level B: First Difference
Model Specification: Intercept Model Specification: Intercept

LGDP -1.855 -1.797 I(0) ∆LGDP -5.467* -5.441* I(1)
-
LEXTDGDP -2.278 I(0) ∆LEXTDGDP -5.693* -4.895* I(1)
3.198**
LGFCF -2.484 -2.401 I(0) ∆LGFCF -4.711* -4.656* I(1)
LGGFCE -1.984 -1.812 I(0) ∆LGGFCE -7.826* -8.837* I(1)
LEXPGDP -1.551 -1.319 I(0) ∆LEXPGDP -4.797* -4.799* I(1)
LDSGDP -1.925 -1.848 I(0) ∆LDSGDP -7.679* -7.679* I(1)
Model Specification: Trend and intercept Model Specification: Trend and intercept
LGDP -1.368 -1.445 I(0) ∆LGDP -5.802* -5.808* I(1)
LEXTDGDP -3.132 -2.279 I(0) ∆LEXTDGDP -5.733* -4.808* I(1)
LGFCF -2.51 -2.379 I(0) ∆LGFCF -4.645* -4.584* I(1)
LGGFCE -2.727 -2.718 I(0) ∆LGGFCE -7.788* -9.364* I(1)
LEXPGDP -0.088 -0.273 I(0) ∆LEXPGDP -5.028* -4.980* I(1)
LDSGDP -1.691 -1.539 I(0) ∆LDSGDP 8.274* -9.780* I(1)
Notes: ∆ denotes the first difference operator. Asterisks (*), (**), (***) denote the statistically
significant at 1%, 5% and 10% significance levels respectively.
4.2 Unit Root Test with Structural Break

In an attempt to determine the unit root characteristics of the series with the presence of
structural breaks, we use two forms of the Zivot and Andrews (1992) sequential trend break
model. As suggested by Perron, most economic time series considered adequately modeled
using either model A or C in Zivot and Andrew unit root test. However, Sen (2003) shows
that there will be substantial loss in power when one uses model A, but the breaks occur
according to model C. But, the loss of power is considered minor when the break is found
through model A as the user uses model C, suggesting that model C is superior to model A.
Thus, based on this claim, we choose model C in our analysis of unit root with one structural
break.
The result of Zivot and Andrew unit root test are presented in Table 2. The result in
Model A suggest that we can reject the null of unit root for LEXTDGDP and LGFCFGDP at
1% level of significance in level; while on the other hand, we fail to reject the unit root
hypothesis for the remaining series. Specifically, we find that LGDP, LPDEBT, LEXPGDP,
LGGFCE, and LDSGDP are non-stationary in the presence of structural breaks in levels,
while LEXTDGDP and LGFCFGDP are stationary in the presence of structural breaks. The
break dates are 1981 and 1998 in LEXTDGDP and LGFCFGDP, respectively. However, in
the first difference, the result suggests that we can reject the null hypothesis of unit root for
all the series at 1% level of significance for all the series in Model A.
In Model C, at level, the stationarity of the series are mixed. We find that only
LEXTDGDP can reject the null hypothesis of unit root at 5% level of significance with the
presence of structural break, while other series are non-stationary at level. At first difference,

all the series are stationary. Therefore, we can conclude that the Zivot and Andrews unit root
test given the corresponding break points does not change the results of the conventional unit
root tests, and that both series can still be treated as I(1).
At the same time, the test also identifies endogenously the point of the single most
significant structural break (TB) in every time series examined in this paper. The break dates
are also reported in Table 5.4. The information of the break dates has important implications.
As suggested by Piehl et al. (1999), knowledge of break point is central for accurate
evaluation for any program intended to bring about structural changes, such as regime shifts,
tax reforms, banking sector reforms, and so on.
In one-break case, Dolmas et al. (1999) justify using Model C over Model A on the
basis where Model C encompasses Model A. The break dates in first difference is our
concern since the series are stationary. The structural breaks for economic growth (LGDP),
external debt-to-GDP (LEXTDGDP), public debt-to-GDP (LPDEBT) and export-to-GDP
(LEXPGDP) series occurred in year 1988, 1987, 1988, and 1987 respectively. These break
dates correspond to important historical event, for instance, the 1985-1986 Global Recession
caused by the commodity price shock around the world. The Global recession was caused by
the “Volker Shock” essentially the US high-interest rate policy that led to massive collapse of
world commodity trade and the decline of commodities earnings in Malaysia by the mid-
1980s (Athukorala, 2010). For gross fixed capital formation-to-GDP (LGFCF) and general
government final consumption expenditure-to-GDP (LGGFCE) series, the break date on year
1998 corresponds to the Asian Financial Crisis of 1997-1998. For debt service-to-GDP
(LDSGDP), the break date on year 1979 coincides with the second oil shock in 1978-1979
due to strong global oil precautionary demand and booming of global economy.
Table 2: Results of Zivot and Andrew unit root test

Model A: Break in intercept Model C: Break in intercept and trend
t-statistic k TB t-statistic k TB Conclusion
Level
LGDP -2.430 0 1989 -3.519 0 1993 I(0)
LEXTDGDP -5.545* 5 1981 -5.408** 5 1981 I(1)
LGFCFGDP -5.492* 1 1998 -4837 1 1998 I(1)
LEXPGDP -1.585 2 2007 -3.812 2 1998 I(0)
LGGFCE -3.868 0 2009 -4.969 0 1996 I(0)
LDSGDP -2.684 1 1982 -3.844 1 1985 I(0)
1st Difference
LGDP -6.557* 0 1988 -6.614* 0 1988 I(1)
LEXTDGDP -7.484* 1 1987 -7.454* 1 1987 I(1)
LGFCFGDP -5.039* 0 1996 -5.665* 0 1998 I(1)
LEXPGDP -7.868* 1 1987 -7.661* 1 1987 I(1)
LGGFCE -8.355* 0 1999 -8.223* 0 1999 I(1)
LDSGDP -8.748* 0 1989 -8.647* 0 1979 I(1)
Notes: The 1%, 5% and 10% critical values obtained from estimating Model A are -65.34, -4.80, and -
4.11 respectively. The 1%, 5% and 10% critical values obtained from estimating Model C are -5.57, -
5.08, and -4.82 respectively. *, **, and *** imply rejections of the null hypothesis of non-stationary at
1%, 5% and 10% significance levels respectively. TB is the estimated break year and k stands for the
endogenously selected lag order for the minADF test. The lag is selected using Akaike Information
Criteria (AIC).

4.3 Cointegration Test
The equations (1), (2), (3), and (4) in the preceding discussion of methodology are estimated
for the entire sample by trimming end points as suggested by Zivot and Andrews (1992). A
trimming value of 0.10 is adopted, and the model with the minimum t statistic associated with
the null hypothesis chosen. For each possible break date, k is estimated and an upper bound of
kmax=12 is used initially. If the last lag included is significant, k=12 is set, otherwise k is
reduced by 1 until the last lag becomes significant. If no lags are significant, the k=0 is used.
The estimated test results for cointegration with one unknown structural break and the
critical values are presented in Table 3. This test examines the presence of a cointegrating
relationship under a structural shift between external debt and economic growth, controlling
for gross fixed capital formation, export-to-GDP, and general government final consumption
expenditure. All three statistics obtained from the C, C/T, C/S, and C/S/T models are reported
for comparison.
The empirical results show that the rejection of the null hypothesis of no cointegration
at 10% significance level occurs on modified 𝐴𝐷𝐹 ∗ statistics in Model C, and C/S at 5%
significance level, while modified 𝑍𝑡∗ statistics confirms the cointegration existence in Model
C/T and model C/S/T at 10% and 5% significant levels respectively. The existence of a
cointegration relationship between external debt and economic growth indicates that the
series are moving together in the presence of structural breaks, and share common stochastic
trends although the trends may deviate from each other in the short run.
Table 3: Results of Gregory-Hansen (1996) cointegration test

for external debt and economic growth
Asymptotic Critical Values
Estimated 1% Critical 5% Critical 10% Critical
Test statistic test value Break Dates value Value value
(i) Model: Change in Level, C
𝐴𝐷𝐹 ∗ *-5.33 1989 -6.05 -5.56 -5.31
∗
𝑍𝑡 -4.87 2000 -6.05 -5.56 -5.31
∗
𝑍𝛼 -31.58 2000 -70.18 -59.40 -54.38
(ii) Model: Change in Level and Trend, C/T

𝐴𝐷𝐹 ∗ -5.10 1984 -6.36 -5.83 -5.59
∗
𝑍𝑡 *-5.78 1983 -6.36 -5.83 -5.59
𝑍𝛼∗ -40.51 1983 -76.95 -65.44 -60.12
(iii) Change in Regime, C/S

𝐴𝐷𝐹 ∗ **-6.60 1999 -6.92 -6.41 -6.17
𝑍𝑡∗ -5.67 1999 -6.92 -6.41 -6.17
𝑍𝛼∗ -37.78 1999 -90.35 -78.52 -75.56
(iv) Change in Regime and Trend, C/S/T

𝐴𝐷𝐹 ∗ **-7.19 1987 -7.31 -6.84 -6.58
𝑍𝑡∗ **-7.28 1987 -7.31 -6.84 -6.58
𝑍𝛼∗ -49.52 1987 -100.69 -88.47 -82.30

Notes: The asymptotic critical values are from Gregory and Hansen (1996a). Gregory-Hansen (1996)
test was performed using "ghansen", a STATA module available in the statistical software
components archive. The lag length was selected using downward t-statistics with a maximum lags of
8. *, *, and *** denote rejections of the null hypothesis at 10%, 5% and 1% levels respectively.
Concerning the dates of structural breaks, the significant breaks found on model C
corresponds to year 1989 confirmed by modified 𝐴𝐷𝐹 ∗ statistic with 10% significance level,
on Model C/T corresponds to year 1983 confirmed by the 𝑍𝑡∗ statistics with 10% significance
level, on Model C/S corresponds to year 1999 with 5% significance level showed by the
𝐴𝐷𝐹 ∗ statistic and on Model C/S/T corresponds to year 1987 confirmed by the 𝐴𝐷𝐹 ∗ and 𝑍𝑡∗
statistics. The possible explanation of the break points on year 1983, 1987 and year 1989 is
the Global Recession. The break points identified are concentrated around the events. On the
other hand, the break point of regime model, Model C/S, identified on year 1999 corresponds
to the Asian financial crisis in 1997-1998.
In sum, the break points identified using Gregory-Hansen cointegration test with one-
structural breaks reflects the financial crises experienced by Malaysia such as the Global
Recession on the fall of the world commodity prices, and also the Asian financial crises
which began in July 1997.
4.4 Causality Test Results

The test of Toda-Yamamoto procedure is done on the entire sample to explore the possible
causality between external debt and economic growth. The modified WALD test (MWALD)
statistics is used for the causality test. According to Zapata and Rambaldi (1997) and Wolde-
Rufael (2004, 2005), the MWALD test prevents the problem of ignoring any possible non-
stationary or co-integration between series that exists in the ordinary Granger causality test.
The Toda-Yamamoto test results are reported in Table 4.
Table 4: Results of Granger non-causality test for external debt and GDP
Direction of
Null Hypothesis MWALD p-value Conclusion Causality
LGDP does not Granger LGDP →

cause LEXTDGDP **14.358 0.0259 Reject H0 LEXTDGDP
LEXTDGDP does not

Granger cause LGDP 8.919 0.1781 Do not reject H0 No Causality
LDSGDP does not LDSGDP →

Granger cause LGDP *24.581 0.0004 Reject H0 LGDP
LGFCFGDP does not LGFCFGDP

Granger cause LGDP *18.609 0.0049 Reject H0 → LGDP
LGGFCE does not LGGFCE →

Granger cause LGDP *12.150 0.0587 Reject H0 LGDP
Notes: *, **, and *** denote rejections of the null hypothesis of no causality at 1%, 5% and
10% significance levels. All the variables are taken natural logarithm.
Based on the Toda-Yamamoto causality test results as shown in Table 5.17, the
MWALD statistics of 14.358 is significant at 5% level indicating that there is a strong

evidence of causality running from economic growth (LGDP) to external debt
(LEXTDGDP). There is more evidence of a causal relationship running from economic
growth to external debt as the non-causality null hypothesis is rejected, implying that there
exist causal relationship between external debt and economic growth in both econometric
techniques. On the other hand, the results also do not reveal any causality running from
external debt (LEXTDGDP) to economic growth (LGDP). Therefore, we can conclude that
there is a unidirectional direction of causality that runs from economic growth to external
debt in Malaysia for the period of 1970 until 2013. This result suggests that the growth in
Malaysia increased external debt. This finding is similar to studies of Jayaraman and Lau
(2009).
Another finding from this test is that we found a unidirectional causality that runs
from debt service, gross fixed capital formation and general government final consumption
expenditure towards economic growth. This finding clearly indicates that debt service, gross
fixed capital formation and general government final consumption give impact on economic
growth. This findings is consistent with Shabbir (2013), and Jayaraman and Lau (2009).
In sum, the main findings of the causality analysis, both the pairwise Granger
causality and Toda-Yamamoto (1995) causality, show a unidirectional causal relationship
running from economic growth to external debt. This is due to the fact that economic growth
is affecting external debt in a way such that a rapid economic growth also reflects
improvement in the quality of living. In addition, the saving-investment gap in a country may
increase when there is relatively high level of investment in the country, thus, increasing the
tendency towards relatively high level of external borrowing in order to fill the saving-
investment gap (Erçel, 2006; Ghosh and Ramakrishnan, 2012).
4.5 Threshold Analysis

4.5.1 Test Statistics for the Existence of Threshold Effect
The results of the threshold analysis and asymptotic p-values obtained through 5000
bootstrap replications are summarized in Table 5.18. We employ Hansen’s (2000) testing
procedure to determine the number of external debt threshold. The statistics of F1 is 80.95,
which is significant at 1% level in one threshold testing and the bootstrap p-value is 0.0000,
implies that threshold exists. The calculated threshold value is 54.86%, which suggests that
one threshold exists.
Table 5: Results of the test for threshold effect on external debt and economic growth
Bootstrap Threshold 95% Confidence
Test Hypothesis F1 test
P-Value Estimates (%) Interval
H0 : No threshold *80.95 0.0000 54.86% [ 54.21%, 54.86% ]

Notes: Tests of null of no threshold against alternative of threshold. The threshold is found by the
minimized sum of the squared residual. * represents significance at 1% level.
Once the threshold is found, it is important to figure out the precise the threshold
value. In order to check for the precision, we employ LR test to examine the confidence
interval around the threshold estimate. The 95% asymptotic confidence region is as [54.21%,
54.86%]. Figure 5.4 shows the normalized likelihood ratio sequence 𝐿𝑅 𝑛∗(𝛾) statistics as a
function of the external debt (𝐸𝑋𝑇𝐷𝐸𝐵𝑇) threshold. The least squares estimate of the
threshold (𝛾) is the value that minimizes the function 𝐿𝑅 𝑛∗(𝛾) and occurs at 𝛾̂ = 54.86%.
The asymptotic 95% critical value 7.35 which is significant at 5% levels is shown by the
dotted line that crosses 𝐿𝑅 𝑛∗(𝛾) where it displays the confidence interval of [54.21%,

54.86%]. This result indicates that the threshold estimate is very precise. Thus, it is confirmed
that there is one threshold in the relationship between external debt and GDP growth.
Figure 1: Confidence interval constructions for threshold of external debt
Table 6 summarises the estimation results of the relationship between external debt
and growth rate of GDP for Malaysia from 1970 to 2013. For comparison purpose, the first
column presents the estimates of a linear regression equation (1) that ignores the threshold
effect. Columns two and three provide the estimates of a two-regime TAR model (18).
Table 6: Regression results of external debt and GDP growth

Linear Model Threshold Model
Variables (OLS without threshold) Regime 1 ≤ 54.86% Regime 2 > 54.86%
Constant 0.0614*** 0.0686*** 0.0655***
(0.0614) (0.0030) (0.0032)
EXTDEBT -0.0628** -0.0249 -0.1648**
(0.0237) (0.0206) (0.0199)
GFCFGR 0.1780*** 0.0834*** 0.1910**
(0.044) (0.0252) (0.0419)
EXPGR 0.0202 0.1064** -0.0835**
(0.0619) (0.0512) (0.0090)
GGFCEGR -0.1156** -0.0949** -0.1611**
(0.056) (0.0456) (0.0225)
DSGDPGR -0.0692*** 0.0167** -0.0497**
(0.0135) (0.0061) (0.0074)
Observations 43 35 8
2
R 0.58 0.58 0.99
Notes: The dependent variable is the GDP growth rate from 1970 until 2013. Standard errors in
parentheses are white noise corrected for heteroscedasticity. The estimation results correspond to
trimming percentage of 15%. ***, **, and * represent significance at 1%, 5%, and 10% levels.
The empirical results from the linear model estimation show that external debt has
significant negative impact on GDP growth rate, with the coefficient of -0.0628 for 43

observations. In the two-regime models, the estimated coefficient of external debt has similar
negative impact on economic growth, where, in the first regime (≤ 54.86%), it is not
significantly negative at p>10%, but found highly significant with p<5% at the second regime
(>54.86%) with negative relationship.
Specifically, in the low external debt regime, where external debt is below 54.86%,
the marginal impact of external debt on growth is negative but not significant (-0.0628). This
illustrates that under the low external debt regime, on average, a 1% increase in external debt
will decrease economic growth by 6.28%. Similarly, in the upper regime of external debt,
where it is more than 54.86%, external debt has negative and significant impact on economic
growth, with coefficient of -0.1648. This implies that under high external debt regime, on
average, a 1% increase in external debt leads to a decrease in the economic growth by
16.48%.
The estimated non-linear relationship between external debt and economic growth is
consistent with the empirical and theoretical conclusion derived in some past studies like
Cordella et al. (2005), in the first regime, there is no significant relationship of debt-growth in
HIPC. In the second regime, external debt negatively affects economic growth. This finding
is consistent with Patillo et al. (2002), Clements et al. (2003), and Sen et al. (2007).
Note that other variables included in the regression such as, gross fixed capital
formation used as a proxy for investment (GFCFGR) and export of goods and services
(EXPGR) show significant positive relationship with economic growth regardless of the
external debt regimes. This result confirms that gross fixed capital formation contributes to
economic well-being of Malaysia and it also relies heavily on trade.
The coefficient of debt service to GDP (DSGDPGR) is negative in the upper external
debt regime. This is mainly due to the resources that are used to finance other than
infrastructure, health and education, thus driving the resources away and thereby reducing
growth. Previous studies such as Adegbite et al. (2008), Abdelhadi (2013), Sheikh et al.
(2010) and Shabbir (2013) found the negative impact of debt and debt service payments on
economic growth. However, in the low external debt regime, debt service variable contributes
positively towards economic growth, while in the upper external debt regime, it reduces
economic growth.
5 Conclusion
The objective of this study is to determine the long-run and short-run relationships between
external debt and economic growth in Malaysia, to examine their causal relations, and to
identify the threshold or sustainable level of the country’s external debt.
As the stationarity of the variables are confirmed to be integrated at one I(1), we then
carry out cointegration analysis to determine the long-run relationship between external debt
and economic growth. To provide insight of possible external shock in the long-run, the
cointegration test of Gregory-Hansen (1997) for one structural break is employed. The test
results suggest that there exists a long-run relationship between external debt and economic
growth, and significant break points in 1983, 1987, 1989, and 1999 which correspond to
major events as in the preceding discussion. The cointegration results reflect shifts in the
long-run relationship between external debt and economic growth around the break dates.
The results of Pairwise Granger causality and Toda-Yamamoto (1995) non-causality
analysis suggest a unidirectional causality from economic growth to external debt. It may be
possible that external borrowing is an important source of funding for economic growth in
Malaysia, especially when there is a need to fill the saving-investment gap in the economy.
Next, the estimated threshold value of Malaysia’s external debt is approximately
54.86% of the country’s GDP. Using robustness test, the estimated threshold value is in the
range between 50 and 60 percent. This threshold value is at the lower end of the range of

standard international threshold level 60-90% suggested by Reinhart and Rogoff (2010). This
means that external debt tends to lower economic growth once its amount exceeds the
threshold. However, there is no evidence of any significant impact of external debt on
economic growth in the lower external debt regime. This finding is somewhat inconsistent
with the finding of Patillo et al. (2002) that indicating the existence of a nonlinear
relationship between external debt and economic growth. In the study, the authors found an
inverted U-shape relation between the two variables. A positive relationship exists below the
threshold level, but it turns to be negative when passing the threshold. In this present study,
we provide insight of the significant adverse impact of external debt on economic growth
only in the upper external debt regime.
Further, the regression analysis based on threshold model suggests that gross fixed
capital formation has positive and significant impact on economic growth in each of the two
regimes. Regardless of rising external debt, we have seen that economic growth is still
supported by investment. Debt-overhang hypothesis posits that at high level of debt in a
country, government has no incentive to carry out macroeconomic reforms and to implement
policies as the returns on the reforms will only be used to service debt outstanding. However,
the external borrowings in Malaysia possibly are transformed into greater investment
opportunities which in turn stimulate economic growth. Our finding indicates that the country
has not encountered debt-overhang throughout the study period.
Lastly, our finding allows us to infer on the crowding-out effect of debt service
payments on economic growth in Malaysia. The crowding-out hypothesis predicts that debt
service payments may adversely affect the rate of economic growth, by reducing investment
as well as altering the composition of public spending. In the regression analysis, debt
service-to-GDP ratio is added as an explanatory variable of economic growth in order to
capture the crowding-out effect. In our finding, the crowding-out effect is valid in the upper
external debt regime, that is when external debt exceeds the threshold level. Since crowding-
out is evident, the level of external debt in the country should be in controlled so that to keep
it at the sustainable level.
References
Abd Rahman, M. H. 2012. “How Federal Government’s Debt Affect the Level of Economic
Growth?’’ International journal of Trades, Economics and Finance, 3(4):323-326.
Abdelhadi, S. A. 2013. External Debt and Economic Growth: Case of Jordan (1990-2011).
Journal of Economics and Sustainable Development, 4(18):26-33.
Adegbite, E. O., Ayadi, F. S., and Ayadi, O. F. 2008. “The Impact of Nigeria’s External Debt
on Economic Development”. International Journal of Emerging Markets, 3(3):285-301.
Athukorala, P. 2010. Malaysian Economy in Three Crises. The Australian National
University, Working Paper, 12,:3–4,9.
Ben-David, D., Lumsdaine, R., and Papell, D.H. 2003. Unit Root, Postwar Slowdowns and
Long-Run Growth: Evidence from Two Structural Breaks. Empirical Economics,
28(2):303-319.
Butts, H.C. 2009. Short Term External Debt and Economic Growth-Granger Causality:
Evidence from Latin America and the Caribbean. Rev Black Polit Econ, 36:93-111.
Butts, H.C., Mitchell, I., and Berkoh, A. (2012). Economic Growth Dynamics and Short-
Term External Debt in Thailand. The Journal of Developing Areas, Vol. 46(1):91-111.
Caner, M., and Hansen, B. E. 2004. Instrumental Variable Estimation of a Threshold
Model. Econometric Theory 20:813-843.
Caner, M., Grennes, T., and Koehler-Geib, F. 2010. Finding the Tipping Point-When
Sovereign Debt Turns Bad. Policy Research Working Paper, 5391.

Central Bank of Malaysia. Quarterly Bulletin, Second Quarter Report 2013. Kuala Lumpur:
Central Bank of Malaysia, 2013.
Chang, T., and Chiang, G. 2011. Regime-Switching Effects of Debt on Real GDP Per Capita:
The case of Latin American and Caribbean countries. Economic Modelling, 28:2404-
2408.
Clements B., Bhattacharya R., and Nguyen, T. Q. 2003. External Debt, Public Investment,
and Growth in Low-Income Countries. IMF Working Papers, 03(249), 1.
doi:10.5089/9781451875904.001.
Cordella, T., Ricci, L.A. and Ruiz-Arranz, M. 2005 “Debt Overhang or Debt Irrelevance?
Revisiting the Debt-Growth Link”, IMF Working Paper No. WP/05/223:1-53.
Dickey, D.A and Fuller, W. A. 1979. Distributions of the Estimators for Autoregressive Time
Series with a Unit Root. Journal of American Statistical Association, 74(366):427-481.
Dolmas, J., Beldav, R., and Slotje, D. 1999. The U.S. Productivity Slowdown: A Peak
Through The Structural Break Window. Economic Inquiry, 37:226-241.
Eisner, R. 1984. Which Budget Deficits? Some Issues of Measurement and Their
Implications. Am. Econ. Rev., 74:138-143.
Erçel, G. 2006. Globalization and The Turkish Economy. Vanderbilt University, (November),
1–11.
Friedman, B. 1977. Crowding Out or Crowding In? Economic Consequences of Financing
Government Deficits. Brookings Pap. Econ. Activ, 9(3):593-641.
Friedman, B. 1985. Crowding Out or Crowding In? Evidence on Debt-Equity Sustainability.
NBER Working Paper No. 1565.
Ghosh, A., Ramakrishnan, U. 2012. Current Account Deficits: Is There a Problem?
International Monetary Fund Publication. Retrieved from
http://www.imf.org/external/pubs/ft/fandd/basics/current.htm
Gregory, A. W and Hansen, B. E. 1996a. Tests for Cointegration in Models with Regime and
Trend Shifts. Oxford Bulletin of Economics and Statistics, 58:555-560.
Hansen, B. 1996.Inference When a Nuisance Parameters is Not Identified Under the Null
Hypothesis.Econometrica, 64:413-430.
Hansen, B. E. 2000. Sample Spilitting and Threshold Estimation. Econometrica, 68(30):575-
603.
Jayaraman, T. K., and Lau, E. 2009. Does external debt lead to economic growth in Pacific
island countries. Journal of Policy Modeling, 31(2):272–288.
doi:10.1016/j.jpolmod.2008.05.001
Lumsdaine, R. L and Papell, D. H. 1997. Multiple Trend Breaks and the Unit Root
Hypothesis. Review of Economics and Statistics, 79(2):212-218.
Maddala, G.S. & Kim, I.M. (2003). Unit Root, Cointegration and Structural Change,
Cambridge University Press, Fifth Edition, UK.
Munir, Q., and Mansur, K. 2009. Non-Linearity between Inflation Rate and GDP growth in
Malaysia. Economics Bulletin, 29(3):1555–1569.
Osinubi T.S., Dauda, R.O.S., and Olaleru, O.E. 2010 “Budget Deficits, External Debt and
Economic Growth in Nigeria”, The Singapore Economic Review, 55(3):491-521
Pattillo, C., Poirson, H., and Ricci, L. 2002. External Debt and Growth. Internatioanl
Monetary Fund, IMF.
Perron, P. 1989. The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis.
Econometrica, 57:1361-1401.
Piehl, A. M., Cooper, S. J. Braga, and A. A. Kennedy, D. M. 1999. Testing for structural
breaks in the evaluation of programs. NBER Working Paper 7226.
http://www.nber.org/papers/w7226

Phillips, P. and Perron, P. 1988. Testing for a Unit Root in Time Series Regression.
Biometrica 75(2):335-346.
Reinhart, B. C. M., and Rogoff, K. S. 2010. Growth in a Time of Debt. American Economic
Review, 100:573–578.
Reinhart, C. M., Reinhart, V. R., and Rogoff, K. S. 2012. Public Debt Overhangs: Advanced-
Economy Episodes Since 1800. Journal of Economic Perspectives, 26(3):69–86.
doi:10.1257/jep.26.3.69
Sen, A. 2003. On Unit Root Tests Whtn The Alternative is a Trend Break Stationary Process.
Journal of Business and Economic Statistics, 21(1):174-184.
Sen, S., Kasibhatla, K.M., and Stewart, D.B. 2007 “Debt Overhang and Economic Growth-
the Asian and the Latin American Experiences”, Economic Systems, 31:3-11.
Shabbir, S. 2013. SBP Working Paper Series, Does External Debt Affect Economic Growth:
Evidence from Developing Countries. SBP Working Paper Series, 63:1–20.
Toda, H., Yamamoto, T., 1995. "Statistical Inference in Vector Autoregressions with Possible
Integrated Processes'. Journal of Econometrics, 66:225-250.
Wolde-Rufael, Y. 2004. Disaggregated Industrial Energy Consumption and GDP: The case of
Shanghai, 1952-1999. Energy Economics, 26(1):69-75.
Wolde-Rufael, Y. 2005. Energy Demand and Economic Growth: The African Experience.
Journal of Policy Modeling, 27:891-903.
Zivot, E. and Andrews, K. 1992. “Further Evidence On The Great Crash, The Oil Price
Shock, and The Unit Root Hypothesis”, Journal of Business and Economic Statistics,
10(10):251–70.
Zapata, H. O. and Rambaldi, A. N. 1997. "Monte Carlo Evidence in Cointegration and
Causation'. Oxford Bulletin of Economics and Statistics, 59:285-98.

CREDIT COOPERATIVES DEVELOPMENT STRATEGY THORUGH
PARTNERSHIP WITH FINANCIAL INSTITUTIONS IN PAPUA
(Rosiyati, Supervisor: Armanu, Fathur Rohman, Sudiro)
ABSTRACT
This study aims to understand and construct partnership model between

cooperatives and financial institutions in Papua Province. This research used a
qualitative method design which utilizes phenomenological approach. The
informants involved in this research are 8 informants who have a background as
cooperatives management (caretakers) and employees of financial institution. This
result is the strategy of credit cooperative in Papua to arrange partnership with
financial institution is based on mutual principle. Cooperative should improve its
management to meet feasibility and bankability criteria, including (a) capital
resource, legal aspect, and collateral which should be highly considered by the
cooperative management and (b) human resource practice like good
administrative affairs, good governance, and trust that must be the priorities to
improve cooperative business. These matters can encourage financial institution to
arrange partnership with cooperatives in Papua Province which then can make
those cooperatives grow and develop.
Keywords: strategy, partnership, credit cooperatives, financial institutions.
INTRODUCTION
1.1. Research Background

Micro Small and Medium Enterprises (MSME) in developing countries
often becomes the greatest economic activities regarding with its number and
ability to absorb workforce. The existing condition of Indonesia reflects that the
contribution of MSME sectors on Gross Domestic Product is not quite high; yet,
this sector is still a backbone for national economic stability. The role of MSME
is expected to be able to improve the welfare. The role of MSME to support
Indonesia economic can be seen from several aspects like: (1) its position as the
main actor in economic activities on several sectors, (2) highest job vacancy
offering, (3) important player in developing local economic and society
empowerment, (4) creating new market offering and source of innovation, and (5)
its contribution to maintain balance of trade through export activities (Cooperative
Department, 2010). Not all of those important roles can remain sustain during the
recent global crisis due to economic recovery process (Cooperative Department,
2010). This condition, as stated by Van Gils (2007) in Ates and Umit (2008),
makes MSME becomes pivotal part to encourage economic growth.
MSMEs in Indonesia take on pivotal role to support Indonesia economic.
The main driver of Indonesia economic basically is MSME sector. In addition,
there are some main functions of MSME in driving Indonesia economic, like (1)
MSME sector provides job vacancies for millions of people that cannot be

absorbed by formal sector, (2) MSME sector contributes to Gross Domestic
Product (GDP) enhancement, and (3) MSME sector as the source of Indonesia
reserve fund through the export of various product coming from this sector.
MSME has a power to survive and ability to improve its performance during
economic crisis. It is due to the dependability of the MSME sector to adjust its
product, develop with its own funding, paying loan with high interest, and not
highly get involved in bureaucratic matters. Even though, MSME takes important
role since the number of MSME reaching 99.19% from the total of 113,990
business units in Papua Province (Economic Census in 2006 – BPS Papua).
One of the MSME sectors which often supported by economic activities
that the society was cooperative. The essence of cooperative is a value system.
Cooperative does not only reflect this distinctiveness from other business forms
but also firmly applies a set of value in economic activities (Baswir, 2003).
Further, based on Djawahir (2012), the essence of cooperative consists of five
elements: (1) cooperative as a constitutional medium to achieve nation’s objective
in improving society welfare, (2) cooperative as a medium to fulfill expectation,
objectives, and needs of its members and society, both for economic and non-
economic matters as well as physical and non-physical matters, (3) cooperative as
a medium to encourage better life for its members and society, (4) cooperative as
a learning center, and (5) cooperative as a medium for society empowerment to
achieve better quality of the society.
One of the types of cooperative which has an important role to develop
MSME is credit cooperatives (Koperasi Simpan Pinjam/ KSP). Law No. 17 2012
defines credit cooperative as one of cooperative institutions. Credit cooperative,
based on the applicable law, is defined as a cooperative which runs it business for
credit/loan service that serves its members. Savings and loan, as one form of
Microfinance Institutions (MFIs) have become the main base of cooperative
activities that make the cooperative continues to survive and thrive stand through
time. Credit cooperative even becomes the main objective of micro and small
businesses in finding financing sources that is "friendly" and easy to reach with
unconditional convoluted with the principle of the kinship "seemed to belong to
himself".
Wijono (2005) states that the development of Micro Finance Institutions
(MFIs), including credit cooperatives, occurred along with the development of
SMEs, and especially because there are many barriers to SMEs in accessing
sources of financing from formal financial institutions. These obstacles arise
because the formal financial institutions are generally treated the same as the SME
Medium and Large Enterprises in any filing financing, which include adequacy of
collateral, capital, and business feasibility (bankable). The most of the SMEs are
not able to meet these requirements in addition to the need they are still on a small
scale, which is seen by some actors of formal financial institutions burdensome
operational costs.
Former research about cooperatives regarding the condition of human
resource and partnership pattern. The growth and development of cooperative is
based on the development of human resource. The partnership pattern between
cooperatives and financial institution is only characterized by executing and
channeling the funding for loan. This kind of partnership cannot enhance the

development of cooperatives in Papua. The partnership pattern requires more than
just loan executing and channeling to empower the existing cooperatives in Papua.
Low quality of human resource in cooperative institutions as well as
ineffective partnership pattern between cooperatives and financial institutions
provide an opportunity to re-explore the partnership strategy between
cooperatives and financial institution. This research aims to develop the
partnership pattern between credit cooperatives and financial institutions in Papua
since Papua Province is a unique region The research is expected to enrich
knowledge in credit cooperative management particularly at this province.
1.2. Research Focus

The research focuses on credit cooperatives (Koperasi Simpan Pinjam/
KSP) in Papua; though cooperatives have existed in Papua, the contribution to the
society is not yet as expected. Cooperative in Papua is not yet able to provide
good service to its members; in addition, the other problems are also about lack of
funding and lack of qualified human resource which hinder cooperative to
develop. This research is expected to be able to build a model of strategic
partnership between credit cooperatives and non-bankable MSMEs.
1.3. Problem Formulation

This research will explore about the strategy of credit cooperatives in Papua
to build partnership with financial institution. Problem formulation of this
research is based on the description of the research background.
1.4. Research Objectives

1. Understanding credit cooperatives strategy to build partnership with
financial institution in Papua.
2. Exploring strategic partnership between credit cooperatives and financial
institution in Papua
1.5 Research Benefit

This research is expected to provide contribution and enrichment from
the aspect of theoretical perspective regarding with strategic partnership
between credit cooperatives and financial institution. The theoretical
contribution is expected to deliver a unique perspective about the effort to
build strategic partnership between credit cooperatives and financial
institution in Papua. From practical perspective, this result is expected to be
the source of reference for credit cooperative practitioners in Papua
Province to develop partnership pattern between cooperatives and financial
institution for empowering society welfare. The result of this research futher
is also expected to be an important feedback for local government of Papua
Province as well as the Papua House of Representative in their decision
making related to partnership development model between cooperatives and
financial institutions.

2. RESEACRH METHOD
2.1. Research Approach

This is a qualitative research which uses phenomenological approach.
Qualitative research is a research procedure which produces some descriptions in
the forms of written and verbal words and the observed behavior (Bogdan &
Taylor, 1975). This approach is utilized to reveal the background of individuals
comprehensively without isolating other individuals or organization into variables
or hypothesis.
The approach utilized in this research is phenomenology which is
something that comes up from experience, how to experience particular thing, and
the meaning of the particular experience that has been taken (Kuswarno, 2009).
Phenomenological approach is a philosophical approach to examine individuals’
experience which is subjective and shaped through specific context to where they
live (Zigmund and Babin, 2007).
2.2. Research Setting

This research was conducted at Papua Province which considers that
Papua province has good potential in economic development and business world,
mainly in cooperatives. Papua, particularly in Jayapura and Nabire, is chosen as
the research location since this region is the center of development at the eastern
part of Indonesia. Papua society is unique as the heads of some ethnics in Papua
have pertinent role as the members of the Papua society respect and obey their
figure head. Further, Papua has several potentials and prospects as perceived from
its natural resource potential. On the other hand, this region is facing several
problems like the hindrance to access fund support through banking service and
non-banking institution, market accessibility, and technology accessibility.
2.3. Type and Source of Data

The source of data utilized in this research consists of both primary and
secondary data. Primary data are collected through in-depth interview and
observation which are summarized into information. The interview technique uses
in-depth interview to obtain more detail data. Further, the research data also
consist of field note, and photograph documentation. Secondary data are the
documents retrieved from observed cooperatives and banks regarding with
funding cooperation between those institutions. Secondary data also consist of
several references which support this research.
2.4. Data Collection Technique

Data collection in this research is conducted in three ways, including:
1. In-depth interview: exchanging information through face-to-face interview
about the relevant topic. 2. Observation: on-site observation is done through
observing the direct operation of several cooperatives in Papua. 3. Documentation

2.5. Data Collection
Data collection was conducted through four data collection stages like pre-
fieldwork stage, fieldwork stage, data identification stage, and data analysis stage.
1. Pre-Fieldwork Stage
At this stage, researcher prepared several instruments for fieldwork
research. The researcher visited several cooperatives and banks to collect some
information related to the partnership and cooperation between cooperatives and
banks.
2. Fieldwork Stage
After arranging the well preparation on the research instruments and
materials for fieldwork stage, the researchers then visited informants at some pre-
determined cooperatives and banks. Before meeting the informants, the researcher
contacted them first to make an appointment regarding with the time for
interview.
3. Data Identification Stage
After fieldwork stage, the next stage was data identification for the all data
that were collected during the fieldwork stage.
4. Analysis Stage
At this stage, the researcher identified the emerging themes from the
gathered information.
2.6. Analysis Unit and Informant Choosing

The analysis unit of this research is called as informant. The background
of the informants are (1) individual business practitioner in cooperative, (2)
government officer from Industry Department of the research location, (3) local
successful business figure, (4) society figure who represents the local culture
regarding with cooperative empowerment in Papua Province. The criteria of the
informants to ensure the depth of practical knowledge and experience are: 8 year’s
experience in cooperative management or has been in charge for a least 4 years in
cooperative management board; if he/she come from banking institution, the
minimum experience is 2 years with the bank to where he/she works has arranged
successful partnership with some cooperatives. Saturated information is chosen to
be the cut-off of the number of informants involved in this research. When the
researcher met the ninth informant, the provided information is similar with the
other eighth informants so that the researcher decided that eight informants are
sufficient.
2.7. Research Focus

The focus of this research is on partnership development strategy for
credit cooperatives and formal financial institutions by centering the observation
on the individuals who are cooperatives practitioners and local business
organizations. Society figures and government officers were involved as the
actors in arranging and running the strategy. The research subject is individuals
who manage cooperatives, society figure, local government officers from
Cooperatives and SME Department of Papua and heads of financial institutions.

2.8. The Role of Researcher as Research Instrument
Moleong (2006) stated that the characteristic of qualitative research is
inseparable with participative observation since the researcher defines overall
scenario. As the observer, researcher involves in the daily activities of his subjects
at particular and important situations that the researcher wants to comprehend;
however, not in all aspects of the daily situation a researcher should take role.
Researcher as a main instrument of research is due to qualitative research
focuses more on the effort to dig deeper information form the informants or
subjects of the research. Researcher should be able to adapt to the condition of the
informants as well as the situation during data collection; therefore, a researcher
should utilize his imagination and creativity to observe research subject in a whole
so that every situation related to subject can be fully observed by the researcher.
However, there are also other usable instruments like camera and field not to
support and complement the main instrument.
2.9. Field Notes
Moleong (2006) mentioned that field note is an important instrument in
qualitative research since it helps a researcher to make label, code, meaning, and
keywords from the observation activity at the fieldwork.
2.10. Data Analysis

The data analysis process in this research is done continuously since the
researcher conducted his observation and data collection through several stages
(Bungin, 2003), including: data reduction, data presentation, and data verification.
The data analysis in this qualitative research is loop instead of linear as proposed
by Miles and Huberman (in Bungin, 2003). This research uses phenomenological
analysis instrument from Creswell (1996) this consist of several steps below:
First Step : Collecting data from the interview with informants and
organizing the data in a form of transcription.
Second Step : Reading the transcription intensively and repetitively as well
as taking note on the information which is considered as
important information and then coding it.
Third Step : Finding and grouping the meaning of the statements which
are perceived by the informants. Next, the researcher
conducted a selection by collecting relevant statements in
partnership between credit cooperatives and financial
institution.
Fourth Step : Researcher developed an overall description from the attained
phenomena to find the essence of the phenomena. At this
stage, the researcher tried to find themes and meanings of the
research phenomena.
Fifth Step : Researcher provided explanation about the essence of the
observed phenomena about the problems faced by credit
cooperative in arranging partnership with financial institution
as well as the role of cooperative’s human resource in
supporting the partnership.
Sixth Step : Researcher arranged a research report based on the
phenomena in the partnership between cooperatives and
financial institution as well as see the correlation with
relevant literature.

2.11. Trustworthiness
To ensure the data validity, it needs trustworthiness assurance technique.
Validity checking is based on several criteria like credibility, transferability,
dependability, and conformability. The attained information is checked to the
informants whether what is written is like what they perceive.
3. RESULT
3.1. Partnership Requirements between Cooperatives and Financial Institution
This session presents that the result is regarding with the essence of
partnership between credit cooperatives and financial institutions in Papua. The
informants have some statements about partnership requirement between credit
cooperatives and financial institutions. Based on the informant’s comprehension,
the meaning that can be formulated about partnership is as a pattern or a form of
professional relationship among institutions that can be utilized as a medium to
cooperate in empowering credit cooperatives, starting from administrative aspect
to technical aspect. This kind of partnership alter the former perspective as credit
cooperative was perceived as illegible institution for financial funding or loan for
banking becomes more legible to attain loan from banking industry. This new
perspective causes those credit cooperatives can arrange partnership with bank
without significancy.
3.2.2. The Meaning of Partnership between Cooperatives and Financial

Institutions
This session describe how informants interpret the meaning of partnership
between cooperatives and financial institution. The formulation is presented in the
cooperative management in Papua by the financial institution. Therefore, the
management needs better attention to provide empowerment for cooperative
institution in Papua through supervision for better management. It should be noted
that the condition of cooperative in Papua is different from other developed and
developing provinces in Indonesia. Therefore, it needs particular policy to develop
and empower credit cooperative institutions in Papua.
3.2.3 The Ability of Cooperative to arrange Partnership with Financial

Institution
Informant can understanding on the obstacles to arrange partnership
between cooperative and financial institution that often occur so far in Papua. The
statements proposed by research informants indicate that in arranging partnership
between cooperatives and financial institutions is based on the applicable
requirements from the financial institution. The requirements should be met by
cooperatives which want to attain loan from bank as the cooperatives must be
feasible and bankable. On the other hand, the obstacle faced by cooperative to
arrange partnership is on the lack of qualified human resource.
3.4. Emerging Themes

Based on the formulated meanings, the researcher draws some themes
from the research problems as presented below (Table 3.1):
Table 3.1

Emerging Themes
No Informant Revealed Themes
1 Sarju, M. Said, Santoso, Benefit, Capital, and Supervision
Supardi Andi Ashadi, and
Nurani Cahya
2 Sarju, Santoso, Andi Ashadi, Feasible and bankable (legible for loan)
and Ludia Kiding
3 Supardi, Santoso, Andi Cooperative Management
Ashadi, Nurani, Ludia
Kiding, Irene Wersay
4 Sarju, M.Said, Supardi, Human Resource and Legal Aspect
Santoso, Andi Ashadi, Ludia
Kiding, and Irene Wersay
5 Sarju, Ludia Kiding, Irene Trust and Capacity Building
Wersay
6 M.Said, Santoso, Supardi, Collateral and Administration
Andi Ashadi, Ludia Kiding,
Nurani Cahya, and Irene
Wersay
4. DISCUSSION
The discussion part aims to articulate the meanings of the data that have
been found from the previous sessions. This part discusses: (a) the relevance of
research result with the review of literature regarding the partnership pattern, (b)
the contribution of research findings and its limitations for further research, (c) the
description of research findings to enrich the existing references about partnership
model between cooperatives and financial institutions in Papua Province in
particular and in Indonesia, (d) the limitations of this research, and (e) description
of the researcher’s experience related to the partnership model that can encourage
cooperative development in Papua.
4.1 The Relevance of Research Result and Reference on Partnership Process

between Credit Cooperatives and Financial Institutions
This research aims to develop partnership model between cooperatives and
financial institutions in Papua for improving cooperative in that province. The
results are derived from perception and experience of credit cooperatives
management in Papua particularly related to the process of partnership as
reflected by the cooperative caretakers and bank management in Papua. In
researcher’s opinion, there was no research that explores partnership between
cooperative and financial institution aimed to empower cooperative. Therefore,
the aim of this research is to find a strategy on empowering credit cooperatives in
Papua Province. This research does not aim to achieve generalization other than
the specific experience from the involved informants. This research is directed to
attain in-depth meanings and expression from the experience of the informants
regarding with credit cooperative development effort as a way out to solve
problems in partnership arrangement between cooperatives and financial
institutions in Papua Province.

4.2 Partnership Process between Cooperatives Management and Financial
Institution
As presented in previous session, the focus of this research is on the partner-
ship process between cooperative management and financial institution in Papua.
Partnership between cooperatives and financial institutions in Papua so far is
limited only to the loan and funding facility from financial institution to
cooperatives. The partnership process runs not yet as expected by both parties.
Cooperatives management only knows that partnership is cooperation between
cooperative and financial institution to attain loan, supervision, and training.
However, this comprehension is not only perceived by cooperative management
but also by the bank which provides the loan and funding. In fact, bank has a CSR
(Corporate Social Responsibility) that can be utilized to empower surrounding
society and economic institution. The understanding discrepancy happens due to
financial institution mostly considers its position as an institution with strong
awareness to avoid non-performing loan. This phenomenon becomes a burden to
arrange a partnership between cooperative and financial institution. The problems
faced by credit cooperatives in Papua is due to lack of trust from financial
institution, both in organizational and individual contexts. Therefore, it hinders
the cooperatives to arrange partnership with financial institution. Based on this
description, it leads to the following proposition:
Proposition 1: Capital, collateral, and legal aspect define the feasibility and
bankability of cooperatives to access funding support from financial institution
4.3. Human Resource Quality

Based on the analysis result, human resource becomes one of the crucial
problem faced by credit cooperatives in Papua Province to run good management
practice. Human resource quality is expected to have high competence in
developing product, market, and technology so that they are able to take a lead in
the competition on local, national, and regional markets.
Hamel and Prahalad (1994) stated that an organization needs to consider
its success in the future as a preparation to develop and arrange partnership for
achieving new product (and service) advantages. Thus, market competitiveness
strategy requires the top manager of an organization to adapt organization’s core
competence and its strategy as well as cooperation in managing available
resources for business success. In short term, Prahalad and Hamel (1990) further
explained that business’ competitiveness is driven by performance/price
attribution. However, a sustainable organization during global competition hardly
needs to achieve differential advantage.
In long term perspective, competitiveness is driven by the ability to
develop core competence. Core competence considers more on the product
competitiveness which is strongly relevant with vision and mission of
organization in short term.
Based on the description above, it comes to the following proposition:
Proposition 2: Administration, management, human resource, and trust possessed
by a cooperative unit define the level of feasibility and bankability to access
funding support from financial institution.

4.4. Credit Cooperatives Development Strategy through Partnership with
Financial Institutions in Papua
Partnerships undertaken between Credit Unions with Financial Institutions ,
understood that the existing partnership has been merely to borrow money from
financial institutions yet another form while training and technical assistance
needed by managers of cooperatives in order to know and understand the
procedure and conditions can assist in the partnership is the support of the
cooperative banks in obtaining funding. Partnership as a form of empowerment
for Cooperative is still regarded by the bank as cooperation or partnership form a
very risky, because in the minds of the perpetrators of Financial Institutions that
the partnership is to lend money easily. So to prepare for partnerships that can
benefit both parties required the cooperative efforts in order to meet the
requirements that apply to financial institutions.
The concept of empowerment of cooperative savings and loan, in this

paper formed from the meaning of the recorded information from all information
disclosed by informant in this study as well as some of the concepts raised by the
experts associated with empowerment. Therefore this empowerment model is not
the only model that can be chosen, but rather one of empowerment model that can
be applied within the scope of Credit Unions. According to Kieffer (1981) in
Suharto (2005), empowerment has three dimensions which include: competence
populist, political and social abilities, and competencies participatory (Suharto,
1997; Pearson et al, 1994).
Based on the discussion about partnership strategy between cooperatives

and financial institution, it leads to the following propositions:
Proposition 3: The fulfillment of feasibility and bankability aspects require
assistance and supervision from financial institution
Proposition 4: Mutual relationship principle between cooperative and financial
institution is a foundation of partnership arrangement between both
parties. The role of financial institution in this partnership
arrangement is to assist and to supervise the partner cooperatives.
4.5. The Development of Partnership Model between Cooperatives and
Financial Institutions in Papua Province
It should be considered that Papua has its uniqueness regarding with land
ownership based on cultural norm. This norm becomes a problem for land
ownership transfer as perceived from legal aspect when there is a business
transaction. All of the cultural figures and their descendants have the ownership
right for heritage or cultural land asset so that it is difficult to sell the property.
This phenomenon still happens in nowadays so that land/ property transaction for
collateral becomes significant hindrance to be considered as collateral for loan
from financial institution. Legible for banking service (bankable) requirement
seems to be a never ending problem for business practitioners, moreover for non-
native Papua.

Figure 4.1
Partnership Model between Credit Cooperatives and Financial Institutions
- Capital - Administration
- Legal Foundateion - Management
- Collateral - HRM
- Trust
Feasible and Bankable
Benefits
(Mutual exchange) Supervision and Capacity Building
PARTNERSHIP
Cooperatives and Financial Institution
EMPOWERED AND
DEVELOPED
COOPERATIVES
4.6. Research Contribution

The theoretical contribution of this research is on the model of partnership
process between cooperatives and financial institution as an effort to develop
credit cooperative in Papua Province. There are two things found in this research
regarding with the effort to develop cooperatives in Papua Province. First, it is
human resource quality (since there is lack of qualified human resource, it needs
to know how to improve the quality of human resource in Papua province.
Second, based on the statements of the informants, it is expected that the
partnership process does not only aim to attain loan but also capacity building and
supervision from financial institution to cooperative management in improving
human resource quality of the cooperative.
4.7. Research Implication
This research finds theoretical implication which deeply explains the
partnership process between cooperatives and financial institutions. The
theoretical implication reveals that during the partnership process there occurs a
problem about the requirements fulfilment. Partnership should be built based on
mutual relationship. This model can be used to develop cooperative institution.
Partnership is also encouraged by better human resource who manage the
cooperative institution as they should attain greater core competence for greater
benefits. Most of the cooperatives perceives that bankable for loan cooperative is
merely due to the collateral matter. Yet, land collateral has a legal problem; also,
the low quality of human resource and lack of trust from the financial institution

to cooperative are the causes of why cooperative is not legible for loan and
funding.
Further, from practical implication perspective, partnership arrangement is
possible when there is a trust among the cooperating partners. Partnership
enhances financial management ability of cooperative; while the financial
limitation of the cooperative can be solved through the loan achieved from the
financial institution. Based on the analysis result of the interview with informants,
there are found several themes that become the factors which drive a
successfulness of partnership process, including: feasibility, human resource
quality of the cooperative, and trust. The research model found in this study is a
development from the existing model rooted from prior reference and literature as
well as deep exploration from the informant statements during field research.
4.8. Further Research
Partnership process between cooperatives and financial institution is an
important matter since it has complicated problems to comprehend but interesting
to be further explored. The experience of cooperative caretakers in arranging
partnership with financial institution becomes the main focus of this research.
This research is able to reveal some information which is useful and important
from the experience of the informants; however, it needs further research to
develop the model of development strategy for credit cooperative.
Each informant of this research also expresses some negative experiences
during partnership process with financial institutions, particularly regarding with
feasibility and bankability assessment. Those negative experiences generate
valuable information about what the cooperatives management should do to make
the partnership process running well.
Further research is suggested to observe the human resource of
cooperative management to find out the fundamental problems underlying
partnership process between cooperatives and financial institution. It can be
achieved through proper capacity building program for cooperative management
in Papua to make the cooperatives well developed, self-dependent, and
empowered.
4.9. Research Limitation
This research focuses more on understanding the experience of credit
cooperative managers to build partnership with financial institution in Papua. The
informants of this research are the practitioners of the partnership process between
cooperatives and financial institution as the source of reference about the
uniqueness to build such partnership in Papua is limited. Lack of reference causes
this research cannot provide comprehensive information.
5. CONCLUSION AND SUGGESTION

5.1 Conclusion
1. From the result, it is found that strategic partnership between cooperatives and
financial institution is build based on trust. The cooperatives should also have
an ability to well manage their financial matters and have sufficient capital.
Cooperative development can be achieved through join training between
cooperatives and financial institution. Further, it is also supported by
government policy which regulates partnership development between
cooperatives and financial institution.

2. Strategic partnership between cooperatives and financial institution can be
developed through sufficient capital availability. The capital is supported by
regular member’s savings. The number of cooperative’s asset defines the
number of loan that can be achieved by the cooperative. The funding support
should be well managed to generate sufficient profit and pay the debt
installment punctually
3. Cooperative strategy to develop partnership in capital funding by improving
human resource quality both for its caretakers and its members. Good quality
of human resource from the caretaker’s side can improve cooperative
management which then enhance cooperative’s capital through profit coming
from the business they manage. Retained profit will cooperative’s capital.
5.2 Suggestion for Further Research

1. To achieve good partnership between cooperatives and financial institution,
the government should issue a regulation to support the partnership process
between the two parties. Therefore, the result of this research is expected to
provide some feedbacks for the government of Papua Province and Central
Government to maximize credit cooperative performance through partnership
with the existing financial institution in Papua and Indonesia. The expected
regulation is government’s support to assist, protect, and prepare development
strategy for credit cooperatives in Papua Province.
2. To be a source of reference to formulate the strategy for credit cooperative
development in Papua. It aims to formulate a needed strategy as required by
the partnership process between cooperatives and financial institution. It is
also expected to be able to generate a synergy between cooperatives and
financial institutions in conducting capacity building program for cooperative
management through training, technical supervision, and business mentoring
to attain sustainable development.
3. This result of this research should be considered by the government of Papua
province to encourage the development of credit cooperatives in that region as
well as improve society welfare of Papua. Based on of this research, it is
expected that Papua government will be able to understand the exact problems
faced by cooperative management in Papua to formulate proper and objective
solution based on the occurring phenomena.
The researcher expects that the result of this research can provide meaningful
contribution for theoretical development in cooperative partnership, particularly in
the development of credit cooperative management in Papua which then
encourage better welfare for the society.
REFERENCES
Alina B. Hyz. 2011. Small and Medium Enterprises (SMEs) in Greece - Barriers in Access to
Banking Services. An Empirical Investigation. International Journal of Business and
Social Science Vol. 2 No. 2; February 2011
Angela Roman, Valentina Diana Rusu. 2011. The Access of Small and Medium size Enterprises
to Banking Finance and Current Challenges: The Case of EU Countries. Journal Annales
Universitatis Apulensis Series Oeconomica, 14(2), 2012
Anonymous.2011.Segmentasion,Targeting,Posisioning.http://www.authorstream.com/drawpack.
Accessed in May 2nd 2013

Anonymous. 2013. Micro Finance di Indonesia: Peluang dan Tantangannya.
http://ceraharry.blogspot.com/2013/03/microfinance-di-indonesia-peluang-dan.html.
Diakses pada tanggal 2 Mei 2013
Asrini. 2011. Analisis Strategi Pengembangan Usaha Jasa Keuangan Syariah di Bidang
Agribisnis (Studi Kasus Koperasi Jasa Keuangan Syariah Berkah Mandiri Cimanggis.
Ates Aylin dan Umit Bititci. 2008. Strategy management in small to medium-sized enterprises:
Evidence from UK manufacturing SMEs. Strathclyde Institute for Operations
Management, University of Strathclyde, Glasgow UK.
Basrowi dan Sudikin. 2002. Metode Penelitian Kualitatif Perspekif Mikro. Penerbit Insan
Cendekia. Surabaya.
Baswir, Revrisond. 2003. Dinamika Korupsi di Indonesia: Dalam Perspektif Struktural. Jurnal
Universitas Paramadina Vol.2 No. 3, pp. 247-263.
Bogdan, R. and Taylor, S.J. 1975. Introduction to Qualitative Research Methode. John Willey and
Sons. New York
Buffa, E.S. 1984. Meeting the Competitive Challenge, Dow Jones Irwin, Homewood, IL.
Bungin Burhan. 2003. Analisis Data Penelitian Kualitatif, Pemahaman Filosofis dan Metodologis
ke Arah Penguasaan Model Aplikasi. PT. Raja Grafindo Persada. Jakarta
Burkholder, David U. 2009. Returning Counselor Education Doctoral Students:Issues of Retention
and Perceived Experiences. Dissertation.Kent StateUniversity.
Creswell, John W. 1998. Qualitative Inquiry and Research Design: Choosing Among Five
Tradition. Sage Publication Inc. USA.Sugiyono, 2008
Daniela Rodica Silivestru. 2012. Bank Loans and Small Firm Financing in Romania. Annales
Universitatis Apulensis Series Oeconomica, 14(1), 2012
Davies Warnock. 2000. Understanding strategy. Strategy & Leadership, Vol. 28 Iss: 5 pp. 25 - 30
Departemen Koperasi Dan Pembinaan Pengusaha Kecil 1996, Peraturan Pemerintah No.9 Tahun
1995 Tentang Pelaksanaan Kegiatan Usaha Simpan.
Gunawan, Imam. 2013. Metode Penelitian Kualitatif. Teori dan Praktik. Penerbit Bumi Aksara
Jakarta.
Hadiwiyono, Harun, 1980, Sari Sejarah Filsafat Barat, Kanisius, Yogyakarta
Hamel, G. and Prahalad, C. K. 1989, Strategic Intent. Harvard Business Rewiew, Vol. 67, No. 3.
Hamel, G. and Prahalad, C. K. 1994. Competing for the Future. Harvard Business School Press
Hamel, G. 1998. Strategy innovation and the quest for value. Sloan Management Review, Winter,
pp. 7-14.
Kamil, Mustofa, 2006. Strategi Kemitraan dalam Membangun PNF Melalui Pemberdayaan
Masyarakat (Model, keunggulan dan kelemahan. Departemen Pendidikan Nasional Badan
Peneliti dan Pengembangan. Bandung.
Kazan Halim, Ozer Gokhan and Cetin Ayse Tansel. 2006. Insights from research The effect of
manufacturing strategies on financial performance. Measuring Business Excellence. Vol.
10. No. 1 2006, pp. 14-26
Kementerian Koperasi dan UKM, 2010. Laporan Perkembangan Usaha Mikro, Usaha Kecil,
Menengah dan Besar, 2010.
Kendra Gangata, et al. 2013. Chalenges facing SMEs in Accessing Finance From Financial
Institutions: The Case of Bulawayo, Zimbabwe. International Journal of Applied
Research and Studies (iJARS) ISSN: 2278-9480 Volume 2, Issue 7 (July- 2013)
www.ijars.in. Manuscript Id: iJARS/ 582 1
Kirk, J. & Miller, M. L., 1986. Reliability and Validity in Qualitative Research, Sage Publications
Beverly Hills, CA.
Landiyanto Erlangga Agustino. 2007. Alternative Strategy to reduce poverty in Papua through
Microfinance Development. Online at http://mpra.ub.uni-muenchen.de/4391/
Maleong, Lexy. 2006. Metodologi Penelitian Kualitatif. Edisi Revisi. Penerbit PT.
RemajaRosdakarya Bandung.
Marta Ance Trio. 2010. Strategi Pengembangan Usaha Koperasi Simpan Pinjam Warga Sepakat di
Ciampea Bogor Jawa Barat. URI: http://repository.ipb.ac.id/handle/123456789/60402
Miles, Matthew dan Huberman, A. Michael. 1992. Analisis Data Kualitatif: Buku Sumber Tantang
Metode-Metode Baru. UI Press. Jakarta
Mostardeiro Marcio. 2007. CSR Strategy Formation Processes: A Multiple Case Study from
Brazil. Social Responsibility Journal, Vol. 3 Iss: 1 pp. 59 - 67

Mukhtar. 2013. Metode Praktis Penenelitian Deskriptif Kualitatif. Cetakan Pertama, Penerbit
Referensi GP. Group.
Mulawarman, Aji, D. 2013. Mengembangkan Kompetensi dan Konsep Bisnis Koperasi: Digali
dari realitas Masyarakat Indonesia. Hasil Penelusuran Google:
http://ajidedim.wordpress.com, Tahun 2013.. Diunduh tanggal, 12 -2-2013.
Nasution, 2003. Metode Penelitian Naturalistik Kualitatif. Tarsito. Bandung
Nkuah, J.K. at all. 2013. Financing Small and Medium Enterprises (SMEs) in Ghana: Challenges
and Determinants in Accessing Bank Credit. International Journal of Research In Sosial
Sciences. July 2013. Vol. 2, No. 3 ISSN 2307-227X
Papua Daily, 2012. http://z.tabloidjubi.com/index.php/2012-10-15-06-23 41/jayapura/ 18715-68-
21-persen-usp-koperasi-tidak-sehat diakses tanggal 17 Januari 2012).
Patton, Michael Quinn. 2002. Qualitative Research and Evaluation Methods. Third Edition.
Thousand Oaks, California: Sage Publication Inc.
Porter, M.E. 1996. What is strategy? Harvard Business Review, November-December, pp. 61-79
Gramedia Pustaka Utama. Jakarta
Pangabean, Riana. 2002 Efektifitas Kelompok Simpan Pinjam KUD dan Koperasi Kredit. Studi
Kasus di Wilayah Bangun Tapan. Kecamatan Bangun Tapan Kabupaten Bantul Daerah
Istimewa Yogyakarta (Seri Tesis Program Pascasarjana Institut Pertanian Bogor).
Panggaben Riana. 2014. Kerjasama Bank, Koperasi, dan Lembaga Keuangan Mikro (LKM)
Mendukung Pemberdayaan Usaha Mikro Kecil dan Menengah (UMKM). Diakses 14
Desember 2014. http://www.smecda.com/deputi7/ file_Infokop/ VOL15_02/4_%20 rian.
Prahalad, CK. And Gary Hamel. 1990. The Core Competence of the Corporation. Harvard
Business Review. May-June. pp 1-12.
Risanto, Yusuf. 2010. Analisis Modal Sosial Pada Klaster Industri Gula KelapaDalam Rangka
Mendorong Proses Inovasi untuk Mencapai Daya SaingUsaha Mikro, Kecil, dan
Menengah. Thesis. Universitas Brawijaya:Unpublished.
Satori, Djam’an dan Aan Komariah. 2009. Metodologi Penelitian Kualitatif. Alfabeta, Bandung.
SMERU. 2004. Perencanaan dan penganggaran strategi penanggulangan kemiskinan di daerah:
Pola mana yang paling tepat?. Lembaga Penelitian SMERU
Soetrisno, Noer. 2002. Koperasi Indonesia: Potret dan Tantangan. Jurnal Ekonomi Rakyat. Th II
No. 5 Agustus.
Soetrisno, Noer. 2003. Pasang Surut Perkembangan Koperasi di Dunia dan Indonesia. Jurnal
Ekonomi RakyatStrauss, Anselm dan Corbin, Juliet. 2003. Dasar-dasar Penelitian
Kualitatif:Prosedur, Teknik dan Teori Grounded. PT. Bina Ilmu. Surabaya.
Sugiyono. 2008. Memahami Penelitian Kualitatif. Alfabeta. Bandung.
Sugiyono. 2009. Metode Penelitian Bisnis (Pendekatan Kuantitatif, Kualitatif, dan R&D).
Alfabeta. Bandung
Sumisdjokartono, 2002. Analisis SWOT Dalam Rangka Perumusan Strategi Untuk
Mempertahankan Kontinuitas Koperasi redit (Credit Union) Pancur Kasih di Kecamatan
Pontianak Utara Kotamadya Pontianak Propinsi Kalimantan Barat (Seri Tesis Program
Pascasarjana Universitas Airlangga).
Swamidass, P.M. 1986. Manufacturing strategies, its assessment and practice. Journal of
Operation Management, Vol. 6 No. 4, pp. 472-80.
Tejasari, Maharani. 2008. Peranan Sektor Usaha Kecil dan Menengah dalam penyerapan Tenaga
Kerja dan Pertumbuhan Ekonomi Skripsi. Fakultas Ekonomi dan Manajemen. Institut
Pertanian Bogor, Bogor.
Urata, Shujiro. 2000. Policy Recommendations for SME Promotion in the Republic of Indonesia
Wheelwright, S.C. 1984. Manufacturing strategy: defining the missing link. Strategic
Management Journal, Vol. 5, pp. 77-91.
Wijono, Wiluyo Wiryo. 2005. Pemberdayaan Lembaga Keuangan Mikro sebagai salah satu pilar
system keuangan nasional - Upaya konkrit memutus mata rantai kemiskinan. Kajian
Ekonomi dan Keuangan Edisi Khusus.
Zigmund, Willliam G and Babin, Barry J. 2007.Exploring Marketing Research.Ninth Edition.
United States of America: Thomson Higher Education.

UNDERSTANDING THE RELATION OF ORGANIZATIONAL LEARNING
AND INNOVATION CREATION IN SMALL AND MEDIUM SIZE
ENTREPRISES: A CASE STUDY APPROACH
Sanaji
Email: dataaji03@gmail.com
Department of Management, Faculty of Economics
Universitas Negeri Surabaya
Kampus Ketintang Surabaya
Abstract
Company requires sufficient knowledge and skills from learning activities to be
innovative. But, understanding how the process of organizational learning and its
relation to the innovations in small and medium enterprises (SMEs) is relatively
limited. This study adopt a case study approach to fill this gap. Three SMEs were
selected. Their business are leather product, batik, and embroidered shoes at Sidoarjo
regency. Data were collected by in-depth interview to the SMEs’s owners and
documentation. The results show that the learning process in SMEs is exist, but it is
done unsystematically. Congenital learning remains the main source of knowledge for
SMEs, although they also acquire knowledge from external sources. Finally, its can
be concluded that SMEs which are more intensive and extensive in conducting
organizational learning, they become more innovative in product development and
marketing activities. Some practical implications and further researchs were
suggested in the rest of this paper.
Keywords: organizational learning, innovation, SMEs.
INTRUDUCTION
Small and medium enterprises (SMEs) play an strategic role for national
economy, in terms of its contribution to absorb a labor (Pawitan, 2012). Moreover,
SMEs are more resistant to the economic crisis (Tambunan, 2008). Ministry of
Cooperatives and SMEs of Indonesia (2013) reported that from the total of 56.5
million firms, as many as 99.9% are SMEs, and provide employment 97.16%.
However, its contribution to GDP is still low. SMEs contributed 59.08% of GDP at
current prices (about Rp 8,241.9 trillion). In terms of exports, SMEs contribute 20%
of total exports of Indonesia or about 4.8% equivalent to GDP (Abe, Troilo, Juneja, &
Narain, 2012). SMEs sector also has a very high mortality rate. Wirasasmita (2008)
estimated mortality rate of SMEs in Indonesia is about 78% in the first five years.
The UN agency Economic and Social Commission for Asia and the Pacific (Abe et
al., 2012) reported a failure rate of SMEs in Canada 67% in the first three years, New
Zealand 50% -60% in the first 5 years, Japan 44% in the first year, and in the United
States 25% in the first year and 70% in the first 10 years. The failure rate is higher in
the SME retail and restaurant which reached 70%-80% in the first year.
Many factors affected the failure and success of SMEs, such as approriate
competencies (Ahmad & Sheet, 2013); innovativeness (Gengatharen & Standing,

2011); management and know-how, products and services, understanding to
customers and markets, how to run a cooperation, resources, strategies, and the
external environment forces (Islam, Keawchana, & Joseph, 2011). But, many SMEs
that succeed in developing its business, sustain in long time and transformed into a
larger company is also many. So, understanding how SMEs can survive and continue
its business is interesting to study.
The sustainability of SMEs business is depend on the ability to innovate
(Liao,Wu, Hu, & Tsuei, 2009). Past researches suggested that SMEs’s ability to
innovate is associated with learning capability (Edwards et al., 2005; Griese &
Kleinaltenkamp, 2012). Furthermore, organizational learning and innovation impact
on performance (García-Morales et al., 2006; Ho, 2011; Hoq & Ha, 2009; Hult et al.,
2004; Hurley & Hult, 1998; Jiménez-Jiménez & Sanz-Valle, 2011). However, these
studies mostly done in large companies, and how this phenomena exist in SMEs
context is limited, especially for explaining the process of learning and its relation to
innovation and SMEs performance (Zhang, Macpherson, & Jones, 2006).
Previous studies suggest the need to understand the process of organizational
learning and how their relationships with the creation of innovation in SMEs. Some
related issues are to understand the nature of complexity and contextual
characteristics of learning process in SMEs (Zhang et al., 2006); relations of SMEs
efforts to build capabilities and dynamic performance of new product development
(Mosey, 2005), how SMEs utilizing knowledge for innovation (Rosenbauch et al.,
2011), what specific factors that can strengthen the capability of learning and the role
of strategic leadership in knowledge acquisition (Weerawardenaa et al., 2006).
Another issues including how SMEs manage the negative impact of innovation and
what kind of innovation that have an adverse impact on financial performance
(Harvest, 2011), and how the acquisition of managerial competencies from learning
process (Chaston, Badger, and Sadler-Smith, 2001) are still need to investigated.
This study attempt to fill that gap by focusing on efforts to understand the
relation of organizational learning and innovation of SMEs. To answer these
questions required a good understanding of (1) how learning occurs in the SMEs
organization, (2) how SMEs utilize the results of learning to create innovation, and
(3) how the relationship of organizational learning and innovation. The phenomenon
is a complex reality, so as to obtain a thorough understanding needed research
approach that is able to explore various sources of data and in-depth understanding of
reality, so that the case study approach is considered as the right choice.
LITERATURE REVIEW
Organizational learning
An organization can be described as organisms that have evolved over time,
that its existence is determined by its ability to adapt to a changing environment.
Organizations need to continue to build knowledge through continuous learning
process. Organizational learning is the process of how organizations learn in
acquiring knowledge (Fiol and Lyles, 1985), while the learning organization is results
(state of being) of learning process by organization (Tsang, 1997; Ortenblad, 2001;

Yeo, 2005). Organizational learning occurs when organization members act as agents
of learning for the organization by detecting and correcting errors of theory-in-use in
the organization, and embed their findings in a personal image and share information
about the organization (Argyris & Schon, 1997).
Some scholars proposed different framework about what components of and
the process of organizational learning within organization. For example, Huber
(1991) suggested four components, consist of knowledge acquisition, information
distribution, information interpretation, and organizational memory. Knowledge
acquisition is concerned with how company acquire knowledge. Knowledge
acquisition is the process by which knowledge is obtained, such as congenital
learning, experiential learning, vicarious learning, grafting, and searching.
Information distribution is the process by which information from different sources is
shared and thereby leads to new information or understanding. Information
interpretation is the process by which distributed information is given one or more
commonly understood interpretations. Organizational memory is the means by which
knowledge is stored for future use.
From learning orientation lense, Weerawardena et al. (2006) divided
organizational learning into three components, namely market-focused learning,
relational-focused learning, and internally-focused learning. Market-focused learning
concerned with mastery of market information for decision-competitive strategy.
Market-focused learning represented how organization must be oriented to market.
Relational-focused learning is defined as the capacity and extent an organization
acquires knowledge through external linkages or networks, and disseminates,
unlearns, and uses such knowledge for organizational change. to increase the
knowledge can be gained from interactions with business partners. Internally-focused
learning is the capacity and extent a firm develops knowledge through internal
sources and to disseminate, unlearn, and use this knowledge for organizational
change. This activities include experiential learning (trial and error learning), and
experimental learning (Huber, 1991), and in house research and development (R&D)
(Weerawardena et al., 2006). Moreover, because SMEs are reluctant to accept the
risks associated with innovative projects, so the ability to access external knowledge
resources efficiently can become a competitive factor for SMEs (Kang & Kang 2009;
Lasagni, 2012). This study adopt Huber (1991) and Weerawardena et al. (2006)
framework to understand the process of organizational learning within SMEs to
explain its relationship with innovation.
Innovation
The results of organizational learning process is knowledge accumulation, and
furthermore, knowledge become the basis of company's innovation. In this context,
the capacity of organizational learning related to innovativeness (Edwards et al.,
2005; Griese & Kleinaltenkamp, 2012). Learning capacity and innovation is seen as a
company’s dynamic capability to integrate, build, and reconfigure competences to
adapt the rapid environmental change (Eisenhardt and Martin, 2000).

Innovation is the function of entrepreneurship, and Drucker (1985) asserted
that innovation is about creating new wealth-producing resources or endows existing
resources with enhanced potential for creating wealth. Many categorization was
proposed about innovation in organization. Wang and Ahmed (2004) divided
innovation into five types, namely: product innovation, market innovation, process
innovation, behavior innovation and strategic innovation. Product innovation
emphasizes the novelty and importance of the product. Market innovation
demonstrated the originality of the approach of the company within reach, serve, and
take advantage of the target market. Process innovation refers to the process of new
production methods, management approaches and technologies to improve the
production and management processes. Innovation behavior refers to how company
use new values and new patterns of behavior. Finally, strategic innovation refers to
the way companies conduct strategic management in identifying and selecting
missions and objectives, as well as how companies manage and utilize limited
resources productively.
According to Hirsch (2013), before an innovation is viable for
commercialization, it must progress through a number of phases, including (1) idea
generation, (2) selection of most viable idea, (3) coalition building to transform the
selected idea into reality, and (4) implementation and commercialization of the
developed or new product, service, process, and technology. Based on this theory,
innovation is created through a systematic process and planned activities. However,
some succesful innovations were discovered by accident, not a planned activities
(Hirsch, 2013), and this phenomena may be occured in SMEs.
Past researchs found that organizational learning associated with
organizational innovativeness and firm performance (Baker & Sinkula, 2009). Based
on learning orientation perspective, Dulger, Alpay, Yilmaz, and Bodur (2014) found
that learning-focused have different effect on innovativeness and firm performance.
Market-focused learning emerges as a determining factor on behavioral
innovativeness and product innovativeness. Internally-focused learning is related to
product innovativeness, technological innovativeness and overall firm performance.
Furthermore, organizational learning and innovation impact on competitive advantage
and organizational performance (García-Morales et al., 2006; Ho, 2011; Hoq & Ha,
2009; Hult et al., 2004; Hurley & Hult, 1998; Jiménez-Jiménez & Sanz-Valle, 2011).
METHODOLOGY
This study adopts a case study approach (Eisenhardt, 1989; Yin, 2000) to
explore and understand the process of organizational learning and its relation to
SMEs innovation. Case study is an empirical inquiry, in which focus is on a
contemporary phenomenon within its real-life context and boundaries between
phenomenon and its context are not clearly evident (Yin, 1994). It suitable for
studying complex social phenomena. Three SMEs from different industries were
selected. They are CV Dwi Jaya Abadi, Batik Al-Huda, UD Hikmah (hereafter called
Firm 1, Firm 2, and Firm 3 respectively). Firm 1 produces various types of bags,
shoes, belts, and wallets, especially leather. The company still producing a suitcase

that became the forerunner of this company's products. Firm 2 produces a typical
batik of Sidoarjo and batik shirt. Whereas, Firm 3 produces embroidered shoes and
sandals in Jetis Sidoarjo. The three SMEs operated more than 10 years. They was
established in 1992, 2000, and 1983 as well as employed about 50; 20; and 12
workers respectively.
Data were collected using interview and documentation. Semi-structured
interviews and open-ended questions were used to obtain data from SMEs owners.
Interviews with owners were tape recorded and than transcribed in order to data
analysis. Furthermore, following Yin (2000) data analysis conducted in two phases,
namely the analysis of a single case and cross-case analysis to describe and
understand the process of learning and creation of innovation and how these two
phenomena connectedness.
RESULT
1. The process of organizational learning in SMEs
Based on Huber’s framework of organizational learning process, firstly I
describe the learning activity each case. This procedure is analogous to attempt
confirmation of the concept with data. The next cross-case analysis is to gain a
thorough understanding or full impression of the cases were studied.
Knowledge acquisition
Knowledge acquisition is done in various ways, but based on observations,
there are three prominent sources of knowledge acquisition, that are congenital
learning, learning from experience, and learning from external parties. In general,
congenital learning become the main source of knowledge since it was SMEs
established. This conclusion can be seen from the similar background of all of the
three current owners. All of the three owners live and grow up in a craftsmen
community. The founders have previously mastered the technology of how to make
the product. It can be said that they are as makers and marketers.
For example, HM Nuryono, the founder and owner of Firm 1, he was born
from a craftsmen family. His father worked as a handyman of suitcase and bag on a
local businessman. Since the second grade junior high school, HM Nuryono was
working as a handyman too for helping his father. This profession continues until he
got married, and this experience is a knowledge capital to establish his own business
in 1990 in a joint venture with brother-in-law. Similar to Mr. Huda, the owner of
Firm 2. His father is batik artisans in Jetis, a batik centers located in Sidoarjo. Since
senior high school, he learn to make and design batik, and sell it to his teachers.
Another evident from Mrs. Nazidah, she continue her father business (Firm 3) that
established in 1983. Before produce embroidered shoes and sandals, this firm
produced a woven leather shoes and switched to embroidered shoes in 1993, because
the price of leather too expensive.
Experience-based learning or experiential learning according to Huber (1991)
includes experiments, organizational self-appraisal, irregular learning, and experience
curve learning. Interview data show the diversity of how the three SMEs conducted

this experience-based learning. No systematic effort was done in experience-based
learning. The three SMEs tend to adapt ideas from customers and business partners in
developing innovation. Prominent events related to experience-based learning of
three SMEs are described as follows:
1) Firm 1 is a pioneer in the using of steakwood as suitcase frame to replace sengon
board and kapok in 1990s. At first, this decision is trial and error, when HM
Nuryono saw a lot of wasted steakwood board. He considered that the material is
more powerful than sengon board or kapok to be a frame of suitcase. Fortunately,
many buyers like his product and furthermore bring a lot of orders from suitcases
store in Surabaya and other buyers. This innovation is the starting point HM
Nuryono's success in developing his business by producing various kinds of
leather products such as bags, shoes, wallets, and belts. This company always buy
the latest issue of the fashion magazine to develop new models of bags and leather
shoes. In addition, the company also often observe new models of bags shoppers
in his store or on other occasions to imitate the model. HM Nuryono states that
only the glimpse of bag model used by someone else, he can translate quickly into
the design of the product to be realized. Perhaps this expertise has been like an
automatic skill, because he was very experienced in manufacturing of bags and
leather shoes, ranging from designing, making patterns, selecting material, sewing,
and finishing. Other source is from the Internet that mainly carried out by his
daughter and designer.
2) Firm 2 develop a unique color composition from various chemical materials which
can not be imitated by competitors. This expertise is based on the educational
background as an agriculture engineers. In developing the skills of their workers,
he involve them as mentors in batik training or workshop to a kind of community
that funded by provincial government of East Java and district government of
Sidoarjo.
3) Firm 3 conduct a trial and error in the use of latex which is mixed with gasoline.
This experiment aims to obtain a better adhesion. This idea emerged based on
complaints from overseas customers, especially from European Country, because
latex material can not stand in the cold weather. The application of this idea is
more a coincidence than a scientific experiment. Mrs. Nazidah told that she met
gasoline drops latex surface, and when the latex is held in the hand turned out to
be very sticky so it is difficult to remove. Based on the accident, Mrs. Nazidah try
to use it as a glue to make shoes. The result was very good in terms of stickiness.
However, the use of the method has also caused a negative impact, namely (1) it is
difficult to flatten shoes surface, so it needs to be pressed repeatedly, and these
activities require extra energy and more time, (2) within a certain time of period
after the shoes was worn, shoes surface turned into a bumpy, and (3) produced a
stench that not only interfere the workers, but also the residents around the plant.
Finally, after being used for about two months, the use of latex mixed gasoline
were stopped, and the firm reuse glue for gluing shoes.

Knowledge distribution
Distribution of information relating to how information from multiple sources
is distributed to all parts of the organization in order to obtain new understanding and
knowledge. Keywords of this process is knowledge gained from the learning process
will be on who, how to disseminate, and whether the dissemination of information
will generate a new knowledge for the organization. Dissemination of knowledge is
influenced by how the organizational structure in SMEs. Interviews showed that
despite a relatively low level of formalization of the structure, a third of SMEs have
been doing a functional division of labor, especially in the separation of the functions
of production on the one hand and the functions of marketing, finance, and human
resources on the other. At least, the owners were not directly involved in making
product. Nevertheless, the technical knowledge tends still centered on the owner. The
knowledge that is considered to be critical and key strength of SMEs solely owned by
owner.
For example, for Firm 2, the knowledge and skill about how to mix paints to
produce unique color is only mastered by owner, and it is not tought to his
employees. According to Mr. Huda, this knowledge must be kept secret, because he
fear that if be given to his worker would be used to make batik business or will be
given to a competitor. This evidence may be a typical characteristic of how SMEs
protect its compentencies. In the production process of batik, which is at the stage of
coloring, Mr. Huda gave a note on a piece of paper or give instructions directly to the
workers about the composition and mixture of colors that should be used.
In contrast to Al-Huda, information distribution in Firm 1 is more structured
and spread. In this firm, there are regular meetings once a week to discuss some
issues and problems, such as marketing, production, current trend of design and
model of shoes and bags in the market. This mechanism has been institutionalized
and performed regularly for a long time. The meeting was chaired by owner and
followed by head of production, designers, and group leader of worker. Firm 1 is
more opened in transmitting knowledge to employees and other craftsmen in
Tanggulangin sub district. For example, in the 1996's when more leather craftsmen
opened their own stores, they were very strict in keeping the secret of its products.
Even when there are local craftsmen who visit to his/her store suspected to steal the
ideas. In contrast to most craftsmen, owners of Firm 1 actually invited other local
craftmen who are not able to create a new model for buying his products and to
imitate, as long as they are not exactly same. If they are unable to sell, their product
will be accommodated in his store on consignment term, as long as quality and price
are appropriate.
Firm 1 also have different policies in the recruitment of new workers. Firm 1
accept new workers although they are unskilled to make a product. They will be
trained from the beginning to be a skilled worker by the group leader. This policy
does not exist in Firm 2 and Firm 3. On the two of SMEs, they just accepted an
experienced worker.
Information interpretation

Information interpretation is the process by which information from various
sources is understood in the same way by organization members (Sinkula, Baker, &
Noordeweir, 1997). The output of this process is shared understanding between
organization members that needed to eliminate or minimize work errors, so there is
no repetition of work processes. Error in production process and fulfill customer are
good indicator to see how shared understanding between members or work unit run
well.
Results of interviews indicated that this process do well for all of the three
SMEs. For example, production errors are very rare in Firm 1, because workers
received supervision and instruction directly by group leader. The position of group
leader is very important for workers as well as providers of accurate information in
making the product.
Organizational memory
Organizational memory is the last phase of organizational learning.
Organizational memory is how organization's knowledge is stored in the memory of
organization. The main function of memory is as reference by organization member
and more easier to retrieve the knowledge. Sinkula et al (1997) suggested that
organizational knowledge can be storaged in terms of physical form (printed and or
digital media) and cognitive. Physical storage is documenting knowledge in writing
either in printed (e.g. standard operating procedures, work instructions, manuals,
and/or documentation) and digital media (e.g. electronic file and/or database). But,
the most basic form of information storage is cognitive within each member of the
organization, and this type is always exist in every organization.
Based on data from interview, all of the three SMEs have limited effort in
storing their knowledge, especially in physical form. For example, Firm 1 do not save
the blueprints of various models of bags, shoes, wallets, and belts that have been
produced. The firm also don’t have code of product. As a result, when it received an
order for the same model from previous buyers, the company is often difficult to find.
HM Nuryono told that in 2010 there was a buyer from Germany who ordered the
same leather bag which it was purchased two years earlier. Because company does
not keep the blue print of the model, it needs more time to fulfill this order. Another
factors are the diversity of designs and models that constantly evolving time to time,
also makes it difficult to storage, because it requires more space to handle this
problem. In another hand, firm haven’t use digital media to storage the blue print or
picture of various model of product.
Relatively similar conditions are also found in Firm 2. The core knowledge is
stored cognitively on the owner. This firm develop a creative new batik motifs typical
of Sidoarjo continually, but does not make product description or photograph for all
of its work, making it easier knowledge storage in digital media. However, the owner
exclusivelly keep paper sketches about batik model that have been produced.
In contrast to the Firm 1 and Firm 2 which produce more diversified model of
products, Firm 3 produce fewer variations of embroidered shoes and sandals.
However, storage of knowledge of the design is also limited performed. Firm 3

recorded the motifs and models of its product in handwritten book. Mrs. Nazidah said
that she has about 100 embroidery motifs for shoes and sandals product.
Based on an analysis of how your knowledge storage performed by third SME,
an understanding can be obtained as follows:
a. Cognitive is the dominant storage wthin the third of SMEs. Overall, organizational
knowledge stored in the memory of its members, especially on the owner, which is
an integral part of organization competence. These conditions could hurt the
company in the long term, when people who hold the key core competencies in
production exit and or die.
b. Physical and digital storage are limited performed. The awareness of the
importance of documentation of standard processes, models, designs, and patterns
of the products is still relatively limited.
2. Oganizational innovation across SMEs

Conceptually, the result of learning is knowledge accumulation (cognitive) and
skills (practice). The accumulation of knowledge and skills is a major source of
organizational innovation. Innovation organizations continually emphasize novelty,
includes product innovation, market innovation, process innovation, behavioral
innovations, and strategic innovation. Any organizational innovations that have been
made by a third of SMEs can be described as follows:
a) Firm 1
Firm 1 has more than a thousand items for various products of bags, shoes,
wallet, belts on leather or non-leather. Every three days there are five new models.
For leather products, each model is produced in limited quantities, which is about
300 units. Innovation has become a culture in the community at the center
Tanggulangin leather craftsmen. This is confirmed by the owner that 90% of
products sold in the store is the result of its own production and 10% of it from
local craftsmen. Firm 1 apply strict regulations in selecting products from
suppliers. Each product should be a new model. This means Firm 1 itself and its
suppliers are none other than the local artisans must continue to be creative to
create new models.
In marketing, Firm 1 can be characterized as an innovative firm. Firm 1 is a
pioneer for applying of direct sales methods. In 1996’s, this firm recruited sales
force to sell its products to around East Java, and expanded marketplace to outside
Java by establish a marketing unit in Ambon Maluku and Makasar Sulawesi.
Although, the two ways of marketing innovation were not done anymore, but this
innovation inspired local entrepreneurs and other entrepirises to use this method.
For example, in the 2000s, Intako (a cooperative entity in Tanggulanging) imitated
this method by recruiting salesman for canvasing around Java. Firm 1 also an
innovator in terms of Internet adoption. Since 2002, firm adopted a website to
promote its product. In 2010 and 2012, Firm 1 used two websites:
http://produsenkoper.blogspot.co.id/ and http://dwijayaabadi.blogspot.co.id/, but
unfortunately, these two websites have not used optimally. In terms of organizing,
Firm 1 have recruited one designer whose specially tasked to design and create

new models of products. Hiring a designer is a form of innovation that has not
been done by two other SMEs were studied.
b) Firm 2
The main products of Firm 2 is handmade batik typical Sidoarjo and batik shirt.
Batik shirt is produced in collaborating with other partners . Product innovation
can be seen from the number and types of batik motifs created. Firm 2 produce and
maintain a classical motifs typical batik of Sidoarjo, like motif beras kuthah (rice
drops), kembang bayem (spinach flower), and kembang tebu (flower cane). In
addition, the company also continues to develop contemporary batik motifs to
meet the change of consumer tastes. Contemporary motifs is actually sourced from
classical one. On average, Firm 2 produce three new models each month in terms
of colors and patterns.
Another innovation that conducted Firm 2 is speed up production process. The
firm eliminate a klethek stage. Klethek is the activity of dyeing of new fabric to
remove the fine coir-fiber. This process takes approximately three days, and
eliminate it can reduce washing time into only one day. The using of the method
pursue Firm 2 to choose a fabric that has been refined. Another innovation in
production process is the use of wire to replace bamboo stick to hang the fabric
during the drying stage. The goal is to reduce the area affected by cloth clothesline
to achieve better quality of batik cloth.
In marketing, innovation Firm 2 is still limited. Firm 2 sells its products based
on order only and produce a few batik as stock for display and sample for
exhibition and in his home. Mr. Huda stated that participate on a trade show is the
most prominent way to promote and sell product. In addition, Mr. Huda marketed
his batik to government agency. Marketing through reseller also be done, but its
contribution to sales volume is small. The Internet is also used as a promotional
medium, namely in http://portalsip.com/batik-tulis-al-huda/facilitated by the
Department of Cooperatives, SMEs, Industry, Trade, Energy and Mineral
Resources Sidoarjo.
c) Firm 3
The main products of Firm 3 is embroidered shoes and sandals. Since 1992,
there are no a substansial change about the model of shoes and sandals, that is a
flat soles. However, the company also makes a high heel shoes embroidered and
sandals for party in small number. So, product innovation is only on embroidery
motifs. On average, the company creates 4 to 5 new embroidery motif per year that
designed by Mrs. Nazidah and her mother. Overall, the company has about 100
embroidery until 2015. The development of these motives are not conduct in a
planned program, but more driven by their hobby in drawing and designing
embroidery.
In marketing, about 75% its product is marketed to Bali. Most buyers are
tourists for its own use, a gift to their colleagues, and in small quantities to be sold
in their home country. Market development is done by following exhibitions in
many cities in Indonesia that facilitated by local government. Firm 3 also use two
sites in Internet to promote and sell its product. First, the firm has own blog at at

http://ibmbordirshoes.blogspot.co.id, and second at http://ukm.koperindag-
sidoarjo.org which managed by Department of Cooperatives, SMEs, Industry,
Trade, Energy and Mineral Resources of Sidoarjo. Unfortunately, this two sites
aren’t managed properly. The firm didn’t up date any information about its
product since published on the first time.
DISCUSSION AND CONCLUSIONS

In this section, I will propose a conceptual model about the relation of
organizational learning and innovation creation based on the emergence finding from
three cases. Based on data organizational learning process in three SMEs, it can be
concluded several findings. First, three prominent sources of knowledge acquisition
are congenital learning, experiential learning, and learn from external parties. This
finding confirms any previous conceptuals in organizational learning literature, such
as (Huber, 1991; Weerawardena et al., 2006). However, congenital learning is most
prevalent in the three SMEs. Current manager who the owner obtained their skill as a
heredity from their family and they life and grow up in craftmen community.
Second, the three SMEs remain ignore knowledge storage in approriate way.
Knowledge is mainly storing in cognitive level, which is embedded to organization's
members memory, especially on the owner. This practice may be inhibited the
organization to retrieve knowledge more quickly and easily, when its need to
innovate.
Third, the SMEs have conducted organizational learning in a unsystematic
way. What kind of knowledge that need to be mastered to develop the business can
not be determined with certainty. The trend is the search information is passive,
because it is not his planned learning process. Of course this is related to the
company's management planning process as a whole. Indeed, formal business
planning remains a constraint for SMEs in developing their business, so information
search activity and knowledge accumulation tend to be in accidental way.
Nevertheless, organizational learning activities practiced by three SMEs provide an
understanding of the differences of intensity and maturity between them. Based on
these criterias, the three SMEs can be concluded that Firm 1 is the first, followed by
Firm 2, and Firm 3.
Fourth, SMEs innovation concentrated on product innovation with a little
amounts in innovation process. While the technological innovation requires large
investments, which is not affordable by SMEs. On other hand, marketing innovation,
such as the use of Internet to promote and sell their products have been performed.
But SMEs remain faced some problems to optimalize this marketing tool. In general,
the successful implementation of inovation, such as Internet as marketing tool,
requires resources support and strong commitment. The lack of specialized manpower
to handle website management makes marketing innovation through the Internet can
not run optimally. As a result, continuously updated information as part of a content
management tends to be ignored. Based on the various types and intensities of
innovation on the three SME, the innovativeness of them can be sorted to be Firm 1,
Firm 2, and Firm 3 respectively.

What can be understood from two phenomena are that the intensity of
organizational learning related to the ability to innovate, although both activities
conducted unsystematically. Innovation is a form of response to integrate and realize
congenital, experiential, and external knowledge to adapt the changing of
technologies and market environment. Finally, this study propose a general
proposition that "SMEs are more intensive in conducting organizational learning
encouraging SMEs to become more innovative". This proposition is still in its early
stages in a more in-depth investigation overarching effort to explain the phenomenon.
IMPLICATION
Four main findings that have been discussed earlier suggested a typyical
characteristics of how SMEs conducted organizational learning and created
innovation. Some obstacles faced by SMEs in implementing both activities. In order
to improve SMEs performance in innovate some suggestions can be submitted. First,
SMEs need to be aware of the importance of a planned organizational learning,
especially in knowledge acquisition and distribution as well as knowledge storing
with a better way to facilitate the search for information and development of next
innovation. Second, learning can be directed to the utilization of open sources of
innovation (Lee, Park, Yoon, & Park, 2010; West & Bogers, 2014). Third, policy
makers need to start thinking about the sustainability of SME business, which
generally is a family business, so that the business continued passed to the next
generation. Third, policy makers need to encourage research and development that
result can be used by SMEs.
LIMITATIONS AND FURTHER RESEARCH

Although this study present an understanding of organizational learning and
innovation in SMEs, but contains limitations that still need to get clarification and
further deepening. First, primary data obtained through interviews with the owner, it
is possible to spare the information from other sources to gain a better understanding.
However, in the context of SMEs, where management is more one-man show, then
the owner is the source of information is the most reliable is feasible.
Second, research in organizational learning and innovation is relatively
complex study. Results of this study have provided a framework on how these two
areas related. Further studies may be aimed at two specific areas in the context of
SMEs, namely to develop measurements of variables in the model that was developed
in accordance with the distinctive characteristics of SMEs. This study is considered
important, as an answer to the need for objective measurement scale that is typical
with the characteristics of SMEs.
REFERENCES
Abe, M., Troilo, M., Juneja, J.S., & Narain, S. (2012). Policy Guidebook for SME
Development in Asia and the Pacific. Economic and Social Commision for Asia
and The Pacific (UNESCAP): Bangkok.

Argyris, C., & Schön, D. A. (1997). Organizational learning: A theory of action
perspective. Reis, 345-348.
Baker, W. E., & Sinkula, J. M. (2009). The Complementary Effects of Market
Orientation and Entrepreneurial Orientation on Profitability in Small
Businesses. Journal of Small Business Management, 47(4), 443-464.
Barge-Gil, A. (2010). Open, semi-open and closed innovators: towards an
explanation of degree of openness. Industry and innovation, 17(6), 577-607.
Bruneel, J., Yli‐Renko, H., & Clarysse, B. (2010). Learning from experience and
learning from others: how congenital and interorganizational learning substitute
for experiential learning in young firm internationalization. Strategic
Entrepreneurship Journal, 4(2), 164-182.
Chaston, I., Badger, B., & Sadler-Smith, E. (2001). Organizational learning: An
empirical assessment of process in small U.K. manufacturing firms. Journal of
Small Business Management, 39(2), 139-151.
Drucker, P. (2014). Innovation and entrepreneurship. Routledge.
Dulger, M., Alpay, G., Yilmaz, C., & Bodur, M. (2014). How do learning orientation
and strategy yield innovativeness and superior firm performance?. South
African Journal of Business Management, 45(2), 35-50.
Edwards, T., Delbridge, R., & Munday, M. (2005). Understanding innovation in
small and medium-sized enterprises: a process manifest. Technovation, 25(10),
1119-1127.
Eisenhardt, K. M. (1989). Building theories from case study research. Academy of
Eisenhardt, K. M., & Martin, J. A. (2000). Dynamic capabilities: what are
they?.Strategic management journal, 21(10-11), 1105-1121.
Esteve-Pérez, S., Mánez-Castillejo, J. A., Rochina-Barrachina, M. E., & Sanchis-
Llopis, J. A. (2007). A survival analysis of manufacturing firms in export
markets.Entrepreneurship, industrial location and economic growth.
Cheltenham etc.: Elgar, 313-332.
Fiol, C. M., & Lyles, M. A. (1985). Organizational learning. Academy of
García-Morales, V. J., Llorens-Montes, F. J., & Verdú-Jover, A. J. (2006).
Antecedents and consequences of organizational innovation and organizational
learning in entrepreneurship. Industrial Management & Data Systems, 106(1),
21-42.
Griese, I., Pick, D., & Kleinaltenkamp, M. (2012). Antecedents of knowledge
generation competence and its impact on innovativeness. Journal of Business &
Industrial Marketing, 27(6), 468-485.
Hernández-Mogollon, R., Cepeda-Carrión, G., Cegarra-Navarro, J. G., & Leal-
Millán, A. (2010). The role of cultural barriers in the relationship between
open-mindedness and organizational innovation. Journal of Organizational
Change Management, 23(4), 360-376.
Hisrich, R. D., & Kearney, C. (2013). Managing innovation and entrepreneurship.
Sage Publications.

Hoq, M. Z. and Ha, N. C. (2009), Innovativeness: Its Antecedents and Relationship to
SME Business Performance. Available at SSRN:
http://ssrn.com/abstract=1851423 or http://dx.doi.org/10.2139/ssrn.1851423
Huber, G. P. (1991). Organizational learning: The contributing processes and the
literatures. Organization Science, 2(1), 88-113.
Hult, G. T. M., Hurley, R. F., & Knight, G. A. (2004). Innovativeness: its antecedents
and impact on business performance. Industrial marketing management, 33(5),
429-438.
Hurley, R. F., & Hult, G. T. M. (1998). Innovation, market orientation, and
organizational learning: an integration and empirical examination. The Journal
of Marketing, 42-54.
Islam, M. A., Chittithaworn, C., Keawchana, T., & Yusuf, D. H. M. (2011). Factors
affecting business success of small & medium enterprises (SMEs) in Thailand.
Asian Social Science, 7(5), p180.
Jiménez-Jiménez, D., & Sanz-Valle, R. (2011). Innovation, organizational learning,
and performance. Journal of Business Research, 64(4), 408-417.
Jones, O., & Macpherson, A. (2006). Inter-organizational learning and strategic
renewal in SMEs: extending the 4I framework. Long Range Planning, 39(2),
155-175.
Kang, K. H., & Kang, J. (2009). How do firms source external knowledge for
innovation? Analysing effects of different knowledge sourcing methods.
International Journal of Innovation Management, 13(01), 1-17.
Laforet, S. (2011). Framework of organisational Innovation and outcomes in SMEs,
International Journal of Entrepreneurial Behaviour & Research, 17(4), pp.
380-408
Lasagni, A. (2012). How can external relationships enhance innovation in SMEs?
New evidence for Europe. Journal of Small Business Management,50(2), 310-
339.
Lee, S., Park, G., Yoon, B., & Park, J. (2010). Open innovation in SMEs—An
intermediated network model. Research policy, 39(2), 290-300.
Liao, S. H., Wu, C. C., Hu, D. C., & Tsuei, G. A. (2009). Knowledge acquisition,
absorptive capacity, and innovation capability: an empirical study of Taiwan's
knowledge-intensive industries. Technology, 11, 13.
March, J. G. (1991). Exploration and exploitation in organizational
learning.Organization science, 2(1), 71-87.
Mosey, S. (2005). Understanding new-to-market product development in SMEs.
International Journal of Operations & Production Management, 25(2), 114-
130.
Nobre, F. S. (Ed.). (2011). Technological, Managerial and Organizational Core
Competencies: Dynamic Innovation and Sustainable Development: Dynamic
Innovation and Sustainable Development. IGI global.
Örtenblad, A. (2001). On differences between organizational learning and learning
organization. The Learning Organization, 8(3), 125-133.

Pawitan, G. (2012). Characteristics of small medium manufacturing industries in the
era of ACFTA: Case study from West Java. Procedia Economics and
Finance, 4, 130-139.
Rosenbusch, N., Brinckmann, J., & Bausch, A. (2011). Is innovation always
beneficial? A meta-analysis of the relationship between innovation and
performance in SMEs. Journal of Business Venturing, 26(4), 441-457.
Sinkula, J.M., Baker, W. E., & Noordeweir, T. (1997). A Framework for Market-
Based Organizational Learning : Linking Values, Knowledge and Behavior.
Journal of Marketing, Vol.58, No.1, pp. 35-45.
Statistik UMKM. (2013). Statistik Usaha Mikro Kecil Menengah (2010–2011).
Sekretaris Kementerian Negara.
Tambunan, T. (2008). Development of SME in ASEAN with Reference to Indonesia
and Thailand. Chulalongkorn Journal of Economics, 20(1), 53-83.
Tsang, E. W. (1997). Organizational learning and the learning organization: a
dichotomy between descriptive and prescriptive research. Human
relations,50(1), 73-89.
Wang, C. L., & Ahmed, P. K. (2004). The development and validation of the
organisational innovativeness construct using confirmatory factor analysis.
European Journal of Innovation Management, 7(4), 303-313.
Weerawardena, J., O'cass, A., & Julian, C. (2006). Does industry matter? Examining
the role of industry structure and organizational learning in innovation and
brand performance. Journal of business research, 59(1), 37-45.
West, J., & Bogers, M. (2014). Leveraging external sources of innovation: a review
of research on open innovation. Journal of Product Innovation Management,
31(4), 814-831.
Yeo, R. K. (2005). Revisiting the roots of learning organization: a synthesis of the
learning organization literature. Learning Organization, The, 12(4), 368-382.
Yin, R. K. (1994) Studi Kasus: Desain dan Metode, Alih Bahasa: M. Djauzi
Mudzakir, Jakarta: Rajawali Press.
Zhang, M., Macpherson, A., & Jones, O. (2006). Conceptualizing the learning
process in SMEs Improving innovation through external
orientation. International Small Business Journal, 24(3), 299-323.

Longevity of Family Firms: A Review and Research Agenda
Shankar Sundaram
Xavier Labour Relations Institute, India
Abstract
Family firms continues to be a significantly contributor to developing and developed

economies globally. As a distinctive entity, family firms can be defined as those business
organizations where two or more members belonging to a single family significantly influence
business direction by exercising ownership, control and management. While it is true that many
family firms fail to survive for long, there are also examples of long run family businesses that
allows for the face value of longevity of family firms. Longevity of family firms is of utmost
social and economic importance. In this paper, the author reviewed extant literature on the family
business tradition to delineate the determinants of longevity of family firms so as to present an
integrative model.
Key words: Family firms, family, longevity, values, governance, succession

Introduction
Family firms continues to be a significantly contributor to developing and developed

economies globally. Worldwide, family firms are a driving force for economic development and
societal well-being, in addition to contributing to job creation, technological growth and
innovation. As a distinctive entity, family firms can be defined as those business organizations
where two or more members belonging to a single family significantly influence business
direction by exercising ownership, control and management (Litz, 1995; Shanker & Astrachan,
1996; Astrachan, Klien & Smyrnios, 2002). Some of the world renowned companies, for
instance, the Ford group, the Walton’s family (the second and third generation controls 39% of
Wal-Mart) and Cargill, with US$60 billion in global revenues, are family managed firms. In
India, sixteen family groups put together make up about 65 percent of total private sector assets
(Kenyon-Rouvinez & Ward, 2005). Reliance Industries, the erstwhile Tata Group and the Azim
Premji-led Wipro are among the top 20 firms among Asian Family-owned businesses from India.
Family firms are highly heterogeneous and differ from non-family firms with regard to
trust and motivation, organizational structure and governance, non market behaviours, and
performance (Phan & Butler, 2012; Nordqvist, Sharma, & Chirico, 2014). Historically, family
firms have for generations served for filling up our country’s resource voids by obtaining capital
resources from the most easily obtainable source, from the family, which are governed strictly by
family norms. The propensity of family firms to survive generations is also regarded as a central
element for family firm performance (Yu, Lumpkin, Sorenson & Brigham, 2012). Studies report
that family firms generate tremendous values for all its shareholders (Carney, 2005). Started as
an entrepreneurial organization, family firms continue to exploit market opportunities to provide
for the financial subsistence for the founding families worldwide. Family firms are reported as
having high ‘patient capital’ to invest for long-term (De Visscher, Aronoff & Ward, 1995), less
vulnerable to economic uncertainties (Ward, 1997; Habbershon & Williams, 1999) and
outperformed the S&P (Anderson & Reeb, 2004).
Contrary to these popular claims, several criticisms are also leveled against family firms.
For instance, studies found that owner-managers fixation to age-old successful strategy may limit
the growth of family firms after a period of time. Family firms may also face problems of

attracting and retaining qualified professionals to its fold. At the extreme level, when a family
firm is characterized by disharmonious family relationships, it is highly unlikely that family and
non-family stakeholders will find their engagement to be less satisfying, let alone be committed
to its future continuation. As a natural consequence, despite the success of many family firms,
only less a third survive into second generation and even lesser through to the third generation
(Heck & Trent, 1999), which is a cause for concern.
While it is true that many family firms fail to survive for long (Casson, 1999), there are
also examples of long run family businesses that allows for the face value of longevity of family
firms (Jaffe & Lane, 2004; Caspar, Dias, & Elstrodt, 2010). Given the contribution of family
firms to economies worldwide, several academic journals of higher order have emerged over the
years attempting to examine the unique capabilities/disadvantages of family firms (Taguiri &
Davis, 1999; Habbershon, Williams, & MacMillan, 2003). While extant literature have primarily
focused on succession and performance of family firms, to date, there exists no cohesive research
framework that helps us to understand family firms ability to stay competitive in the longer run
(Yu, Lumpkin, Sorenson, & Brigham, 2012; Stafford, Danes, & Haynes, 2013). Towards this
end, this paper first explores how the term longevity was approached in family business literature to
provide for conceptual grounding to examine the determinants or the strategic advantages of family
firms.
Longevity of Family Firms
Longevity is the most powerful matter for family firms (Zellweger, Nason & Nordqvist,
2011; Gupta & Levenburg, 2012; Carney, Gedajlovic, & Strike, 2014). As a unique firm, family
firms are more advantageous to achieve growth and longevity than family firms (Antheaume,
Robic, & Barbelivien, 2013). As Miller & Le Breton Miller (2005) put it in their book titled
“Managing for the Long Run: Lessons in Competitive Advantage from Great Family
Businesses”, family firms by its very nature strive for Continuity, Command, Community and
Connections (Four C’s). Since failure is likely to result in loss to the socio-emotional wealth,
owner-managers of family firms are more likely to make efficient investment and forgo
inefficient diversifications than professional managers (Miller, Le Breton Miller, & Scholnick,
2008; Cruz, Justo, & De Castro, 2010). Higher chances of survival are also expected because of

family-oriented goals, lower agency costs and survivability capital (Davis & Stern, 1980;
Carlock & Ward, 2010; Jones, Ghobadian, O'Regan, & Antcliff, 2013).
Family firms also seek long-term growth and business performance, while being ‘risk
averse’ to promote family’s wealth and maintain the control of the business. By doing so, family
firms reduce their business risks thereby increasing survival chances of family firms (Carney,
Gedajlovic, & Strike, 2014). As they strive for longevity, family firms accumulate tremendous
social and human capital, provide for employment opportunity, longer job tenures and reputation
(Anderson, Mansi & Reeb, 2002). Reputation, in turn, provide stronger incentives to boost firm
performance, enhances relationship with financial institutions, which can result in lower costs of
debt financing. Truly, successful family firms enjoy advantages of adaptability and continuity,
and internal cohesiveness as well as external connection (Miller & Le Breton Miller, 2005). But
what does longevity mean?
Longevity is a multifaceted concept. Although the word ‘longevity’ is so ambiguous, in

family business literature, it is generally discussed within the context of performance, business
success, growth, business continuity, transgenerational entrepreneurship, socioemotional wealth,
and sustainability (Beckhard & Dyer, Jr., 1983; Dyer, 1988; Malone, 1989; Drozdow, 1998;
Stafford, Duncan, Dane, & Winter, 1999; Walker & Brown, 2004; Chrisman, Chua, & Steier,
2008; Nordqvist & Zellweger, 2010; Berrone, Cruz, & Gomez-Mejia, 2012). For family firms,
longevity is about achieving a happy family and a strong business in simple sense for
generations. As family firms strive for multiple objectives, and therefore to measure the
longevity of family firms, it is essential to evaluate both the economic and non-economic goals
of the firms (Krappe, Goutas, & Von Schlippe, 2011; Colli, 2012; Chrisman, Chua, Pearson, &
Barnett, 2012; Zellweger, Nason, Nordqvist, & Brush, 2013; Morikawa, 2013). To say so, in
order for business to long run, it has to not only survive as a family firm, but also be
economically successful in its venture. Kalleberg & Leicht (1991) point out the distinctiveness of
business survival and success, it is necessary to recognize them as elements of longevity
construct in the context of family firms. In addition, longevity also entails the accumulation of
human and social capital, assurance and stability of employment opportunities, improving firm’s
reputation and credibility (Nahapiet & Ghoshal, 1998). Truly, there are several factors that add to
the conundrum of survival and longevity of family firms.
1. Family
Family plays a very important role in successful management and longevity of family
firms (Chrisma, Chua & Zahra, 2003; Fahed-Sreih & Djoundourian, 2006; Kim & Gao, 2012).
Family aspirations help in the creation of unique resources, the survivability capital (Sorenson,
Goodpaster, Hedberg, & Yu, 2009). Survivability capital refers to unique combination of
resources or capabilities (human capital, social capital and patient capital) that distinguishes
family firms from non-family firms (Carlock & Ward, 2010; Jones, Ghobadian, O'Regan, &
Antcliff, 2013). Family reduces transaction costs through altruism and affection. Family
members are more likely to be emotionally attached and committed to family firm goals
(Eddleston, Kellermanns, & Zellweger, 2010). Family member involvement also contributes to
its higher creativity and its emphasis on R&D (Ward, 1997). While some authors criticize family
involvement as a significant deterrent to family firm performance because of imposed
obligations which contradict economic rationality (Eddleston & Kellermanns, 2006; Chirico &
Bau, 2014), several others contend that the ‘flexibility’ afforded by familial ties is a significant
resource for family firms (Olson, Zuiker, Danes, Stafford, Heck, & Duncan, 2003).
Studies suggest that family influence also positively on non family members’ perception
about fairness of HR practices in family firms (Barnett & Kellermanns, 2006). Moreover, family
firms are also reported to communicate and exchange information more efficiently with greater
privacy. Pruning the family tree by limiting the number of family shareholder helps in enhancing
family harmony and business success (Gallo, 2006; Lambrecht & Lievens, 2008). Indeed, the
degree to which the family firm is able to balance the contradictory demands of family and
business and achieve unity between its members determines its success and longevity. The
convergence of thinking about the effect of family involvement has been made significant which
increasing work on the concept of “familiness” (Chrisman, Chua, & Steier, 2005; Pearson, Carr,
& Shaw, 2008; Rutherford, Kuratko, & Holt, 2008). Hence the following Hypothesis;
Hypothesis 1: Other things being equal, family involvement in ownership and management
significantly contribute to the longevity of family firms.
2. Family Firm Values

More than other factors, ‘values’ are regarded as the connective tissue - the source of its
success, commitment, and longevity (Aronoff, 2004; Denison, Lief & Ward, 2004; Aronoff &
Ward, 2010). Values determine what kind of behaviour is acceptable or unacceptable in
organizations (Ibrahim, McGuire, & Soufani, 2009; Distelberg & Sorenson, 2009; Erdem, &
Baser, 2010; Tapies & Moya, 2012). For family firms, due to overlap between family,
ownership, and management, values are even more crucial for survival and longevity, and its
culture (Mackie, 2001; Vallejo, 2008; Duh, Belak, & Milfelner, 2010; Vallejo, 2011). The most
successful families, too, have strong values rooted in member’s emotional bonds, blood ties,
and shared history (Hall, Melin, & Nordqvist, 2001). Successful family firms value its
obligations to its internal customers (non-family members who are employed in the firm), its
suppliers, customers and the community in which the firm operates (Vallejo, 2008). When such
values are grounded and shared as the firm’s, vital synergies arise (Chirico & Nordqvist, 2010).
Shared values also can help overcome the conflicts inherent to family firm ownership (Sorenson,
1999).
For owner managers, a sense of stewardship towards the future of the family, business,
community and the society comes naturally. Therefore, owner managers generally behave in
their firm's best interest and consider firm performance as their own well-being (Sorenson, 2000;
Eddleston, 2008). According to Koiranen (2002), family firms emphasize on being honest,
credible, obey the law of the land, quality and industriousness and therefore the owning families
were reportedly committed, responsible, fair, hardworking, successful and long run. Family firms
demonstrate a high level of personal integrity, commitment to satisfying customer needs and to
develop the business, which in turn increase shareholder’s value. Ward (2008) argues that values
puts them close to the market and makes them more adaptable to change. In a study among
family and non-family firms; values such as integrity, respect, customers, quality, responsibility,
excellence, teamwork, care for people, innovation, employees were quite common in both these
firms (Ceja & Tapies, 2012). While non-family firms were reportedly commercial-oriented,
family firms were driven by community-oriented values (Sharma & Manikutty, 2005; Duh,
Belak, & Milfelner, 2010). As owner managers regard their businesses, their assets, as well as,
the family’s most important heritage, tradition and history as important—they are likely to pass

on the family values and business traditions from generation to generation. Hence the following
Hypothesis;
Hypothesis 2: Family firm values significantly determine its success and longevity.
3. Family Firm Governance
How family businesses are governed influences how they perform (Le Breton-Miller &
Miller, 2006; Brenes, Madrigal, & Requena, 2011; Chrisman, Sharma, Steier, & Chua, 2013).
Given the intertwining between family, business and ownership, the success of family firms
depends on good governance structures. As ownership and control is concentrated in the hands
of a unique shareholder group, the family (Corbetta & Montemerlo, 1999), family is often
reported to significantly influence the system of governance (McGuire, Dow, & Ibrahim, 2012).
The distribution of power within the family, the family governance institutions (for example,
family council, family meetings, etc.), and the quality of communication among family members
and other stakeholders are likely to impact governance and performance of family firms
(Villagonga & Amit, 2009). According to Carney (2005), family form of governance, which
includes parsimony (propensity to carefully husband resources as family owns the resources),
personalism (combination of ownership and control held by the family), and particularism
(ability to set goals), all provide for efficiency, social capital and opportunistic investment
(Arregle, Hitt, Sirmon, & Very, 2007).
There is a long-held belief that family firms with highly-concentrated ownership lack in
transparency, accountability and fairness principles, which in turn may lead to higher agency
costs and the abuse of minority shareholder rights. However, with increasingly scrutiny of
corporate governance, family firms worldwide are showing signs of tremendous change (Zahra,
2010; Gedajlovic & Carney, 2010; Gupta & Kirwan, 2013; Nordqvist, Sharma, & Chirico,
2014). Moreover, as amily firms strive to protect the socio-emotional wealth, a governance
structure that matches the complexity of their constituent stakeholder structure is crucial to
provide solutions to ownership challenges, peace and harmony in the owning family, especially
with succeeding generations. Effectively, a well-developed family constitution, written code of
conduct, well-defined selection and accountability criteria, regular family council meetings and
effective family communication tools are essential to strengthen family ties and support in

building a unified team with common preferences and goals (Berent-Braun & Uhlaner, 2012).
Maintaining the institutional integrity is also an imperative for family firms than their fit with the
environment (Salvato, Chirico & Sharma, 2010). Effectively good governance structure brings in
transparency, accountability and control of the day to day operation of business and ensures
effective communication and harmony between family and non-family members (Brenes,
Madrigal, & Requena, 2011; Sciascia, Clinton, Nason, James, & Rivera- Algarin, 2013). Hence
the following Hypothesis;
Hypothesis 3: Good governance systems significant influence the longevity of family

firms.
4. Managing Succession
Succession has been most researched topic family business tradition (Perricone, Earle, &
Taplin, 2001; Wang, Watkins, Harris, & Spicer, 2004; Royer, Simons, Boyd, & Rafferty, 2008).
It is the most pressing problem that family firms experience in its life cycle – the difficulty in
passing on the control and ownership to the succeeding generation (Ward, 2004) and lack of
proper succession planning is the single most reason that resulted in the failure of family firms to
succeed into next generations. Successful and long-run family firms were found to take up
leadership succession very seriously and devote tremendous resources to planning for succession
early, provide opportunities for developing and grooming successors and finally take steps to
transfer the leadership and authority to the following generation in a smooth and effective
manner. Succession is often determined by the level of altruism prevalent within the family that
controls the firm (Salvato, Minichilli, & Piccarreta, 2011). This view proposes that stewardship
theory may be a particularly suitable vantage point in explaining how concern for subsequent
generations may determine specific organizational decisions and actions (Zahra, Hayton,
Neubaum, Dibrell, & Craig, 2008).
Harmonious relationship between family members, acceptance of individual roles by

each member, higher levels of participation and engagement, integration of non-family members
and respect for outside professional advice in the succession process are many of the factors that
enhances a family firm’s capability to navigate the challenge of succession process effectively
(Mitchell, Morse, & Sharma, 2003). With the business environment also changing rapidly,

succession process should be based on the family firm’s strategy following an integrated
competency model and the development of a culture of success (Morris, Williams, Allen, &
Avila, 1997; Chittoor & Das, 2007). Today, more than ever, family members belonging to family
firms are expected to finish their college graduation and then spend a considerable number of
years working elsewhere before they are inducted into family business. Whether the successor is
family member or not, a well established professional management of succession process is
critical for the longevity of family firms. Hence the following Hypothesis;
Hypothesis 4: Effective succession significantly influences the longevity of family firms.
5. Role of Non-Family Members
Non-family members play a critical role in the success and longevity of family firms.
Non-family members’ play an important role as the family firm grows in size and family no
longer will be able to provide sufficient human resources to the firm (Olson et.al, 2003;
Sundaramurthy, 2008; Vallejo, 2009; Farrington, Venter, & Boshoff, 2010). Family firms make
non-family employees feel like part of the family by involving them in key operational decisions,
emphasize merit, engage them through open communication, give opportunities to accumulate
personal wealth, and invest in their future (Tagiuri & Davis, 1996; Sirmon & Hitt, 2003). While,
family firms are reported to employ less complex HRM practices than non-family firms, yet,
they were also found to foster a unique working environment that inspires greater allegiance and
loyalty from employees – both family and non-family members (Astrachan & Kolenko, 1994). As
family firms are concerned about its longevity, it is naturally more group oriented, wherein
employees share knowledge and collaborate more readily (Eddleston, 2008).
While family firms are more likely to have a strong internal focus of developing
knowledge and expertise within the boundaries of the firm (Chirico & Salvato, 2008), long run
family firms have a balanced approach in bringing outside experience and expertise to stay
competitive. These firms create a meaningful picture that unites top management team and aid
for pragmatic execution of business strategies, and foster professional culture (Salvato, Chirico,
& Sharma, 2010). In a study among Italian family firms, non-family leaders outperform when
multiple family owners monitor, when they do not share power family members who are co-
CEOs, and when they are motivated by parochial family socio-emotional priorities (Miller, Le

Breton Miller, Minichilli, Corbeta, & Pitino, 2014). However, integrating non-family members
into family-owned businesses is not an easy job, yet, successful and long run family firms are
really mindful of how they engage non-family members. Hence the following Hypothesis;
Hypothesis 5: Effective engagement of non-family member significantly influences the

longevity of family firms.
International Orientation
The globalization of the world economy has provided a great opportunity for many
family-owned businesses to expand their operations to other markets around the world. Today,
family firms increasingly use internationalization as a strategy for growth, and sometimes even
for survival (Kontinen & Ojala 2010; Graves & Shan, 2014; Pukall & Calabro, 2014).
Transaction cost theory implicitly assumes that all firms follow the same strategies and
internalize transactions when the benefits outweigh the costs. Studies on family firms’ also found
that these firms are just as worldwide and profitable as non-family firms (Carr & Bateman,
2009). Family firms are likely to adopt a variety of internationalization form such as intermittent
exports, exports via agents, licensing or franchising and foreign direct investment in the overseas
markets; however, establish fewer joint ventures than nonfamily businesses (Abdellatif, Amann,
& Jaussaud, 2010).
Several factors contribute to the conundrum of internationalization of family firms (Gallo
& Sveen, 1991). The owning family, company's strategy, organizational structure, culture, firm
size, and developmental stage are intertwined with the family's international characteristics, and
each area involves different facilitating or restraining factors (Gallo & Pont, 1996; Fuentes-
Lombardo & Fernandez-Ortiz, 2010; Cerrato, & Piva, 2012; Liang, Wang, & Cui, 2014). Longer
time horizon needed for the significant investments required to penetrate international markets
and effective engagement of competent non-family managers make it up for some of the restrains
facing family firms (Fernandez & Nieto, 2005; Claver, Rienda, & Quer, 2009). Shared values
and goals also enable them to bridge cultural barriers more effectively than publicly held
corporations (Swinth & Vinton, 1993). Does this mean that family firms will be more
internationalized? Studies also point to issues such as family ownership (Fernandez & Nieto,
2006), concentration of power, delays or lack of succession plans (Fernandez & Nieto, 2005;

Bhaumik, Driffield, & Pal, 2010), and lack of in-house managerial capabilities (Graves &
Thomas, 2006) as a significant deterrent for internationalization. There is therefore a need for
additional research on this issue. Hence the following hypothesis;
Hypothesis 6: Internationalization of businesses significantly supports the longevity goals

of family firms.
Environmental Turbulence
The pace of change in today’s business environment is very fast and businesses recognize
that survival and longevity requires unique capabilities and agility (Christensen & Overdorf,
2000). Environmental turbulence or volatility is one of the most influential factors on a firm’s
integration of its production-distribution process and its strategic orientation (Stonebraker &
Liao, 2004). Environmental turbulence is referred to as changes in industry structure and
competition. It is extremely challenging to sustain high levels of performance, either personal or
organizational, when the pace and disruptiveness of change is relentless (Davis, Morris, & Allen,
1991; Selsky & McCann, 2008). While many reel from turbulent change, others view such
dynamic conditions as an opportunity — a source of competitive advantage (Calantone, Garcia,
& Dröge, 2003). Long run family firms are very sensitive to the environment and therefore are
likely to seek greater resiliency because of their exposure to environmental turbulence in the
form of more frequent and intense competitive and operational disruptions. Hence the following
hypothesis;
Hypothesis 7: Environmental turbulence significantly affects family firm’s success and

longevity.
Entrepreneurial Orientation
Entrepreneurial orientation is closely linked to strategic management and the strategic

decision making process that provides organizations with a basis for entrepreneurial decisions
and actions (Casillas & Moreno, 2010; Zellweger & Sieger, 2010). Entrepreneurially oriented
family firms pursue innovation, and show tremendous willingness to undertake some risks and to
proactively beat its competitors (Wiklund & Shepherd, 2005; Casillas, Moreno & Barbero, 2010;
Zellweger, Nason, & Nordqvist, 2011). For family firms, extant literature presents two differing
perspectives with regard to EO. While some contend that the long-term orientation of family
firms’ ownership would allow them to dedicate the resources required for innovation and risk
taking, thereby fostering entrepreneurship (Zahra, Hayton, & Salvato, 2004; Kellermanns,
Eddleston, Barnett, & Pearson, 2008), other scholars claim that entrepreneurial efforts are
obstructed by family tradition and the power dynamics resulting from family involvement
(Naldi, Nordqvist, Sjoberg, & Wiklund, 2007; Chirico, Sirmon, Sciascia, & Mazzola, 2011).
Family firms also may face greater family complexity as they move on from the founder (single
owner) to sibling partnerships and then to the cousin consortium in subsequent generations
(Davis & Harveston, 1999; McConaughy & Phillips, 1999; Salvato & Melin, 2008). However, it
is increasingly asserted that EO among owner managers contributes to the stability, growth and
longevity of family firms. Hence the following hypothesis;
Hypothesis 8: Entrepreneurial orientation of owner-manager’s significantly influence the
success and longevity of family firms.
Discussion
The family enterprise is so complex and a distinctive organization, in that it pursues

multiple objectives: maintaining unity and harmony within the family; achieving prosperity of
the family firm; keeping control of the business across generations; mitigating family conflict;
preserving its liquid assets and so on (Schulze, Lubatkin, & Dino, 2002; Eddleston, Chrisman,
Steier, & Chua, 2010; Benavides-Velasco, 2013). While the distinctive advantages of family
firms are often asserted, findings seem to be mixed and unequivocal. Family firms are prone to
some serious disadvantages, which may originate from inherent conflicts that arise out of the
interaction between business, family and ownership. Inability of the owner manager to cope with
disagreements from family members, benevolent attitude towards some family members or
favoritism and mixing of personal issues with the subject content thus causing collusion are some
the key issues that may hamper harmony in family as well as in business.
Despite these claimed disadvantages, many family firms thrive mightily for generations
and centuries, besting their competitors and changing not only the competitive landscape but
fundamental business practices. Longevity of family firms is of utmost social and economic
importance. Despite considerable research on the competitiveness of family firms, we know little
about why some family firms are successful in the longer run while many others fail to survive to

second generation. To overcome the inconclusiveness of findings of previous research, this paper
explored literature to identify factors or determinants of success and longevity of family firms as
an integrative model.
Family contributes to the longevity of family firms. Family firms are advantageous
because of the motivation and the values that govern the families and family firms. The firm has
access to the capital of the family and its members. Families of successful firms are found to be
highly systemic, develop and effective use its intuitive or tacit knowledge that transcends its
rational decision making and give its distinctive advantage over professionally managed firms.
Values are the life blood of family firms’ survival and longevity as it binds the family and
the business together. Without the shared values, family firms are more likely to be plagued by
ambiguity in strategic direction, therefore unnecessary debates and feuding may occur among the
stakeholder groups resulting in conflicts and tensions, which is very harmful for family firms’
success.
Governance is a game changer for family firms. It is very difficult for family firms to
effectively manage its internal talent, both family and non-family members, without good
governance practices, which is very essential for minimizing the inherent family-business
conflict and ensure management and governance by an efficient. While it is essential for family
firms to match non-family firms in governance structures, they also must be mindful of not to
lose their unique competitive advantage. Succession and passing over of ownership, control and
management add to the competitiveness and success of family firms. Long run family firms are
good in finding future leaders and provide tremendous opportunities to groom them for future
leadership roles. Non family members also play a significant role in family firm’s success. While
internal hires stand the best chance of success in family firms, long run family firms are mindful
of the importance of non-family members for firm’s success and have no difficulty in finding
professionals managers. Thoughtful on-boarding of non-family CEOs and giving them adequate
time to understand the family and business goals, establish rapport with the key stakeholders are
some of the key practices essential for help non-family CEOs to successfully navigate the
succession challenges and manage the firm for success and longevity.
Internationalization strategy contributes to the growth and success of family firms in

today’s hyper competitive business environment. Given the longer time horizon needed for the
significant investments required to penetrate international markets, it is advantageous to
internationalize their business to remaining competitive and successful. Entrepreneurial
orientation of owner managers is also crucial for the successful management and the success of
family firms. Environmental turbulence also affects the very functioning of business
organizations. Family firms seek greater resiliency because of their exposure to environmental
turbulence in the form of more frequent and intense competitive and operational disruptions.
These factors are likely to give family firms a measure of ambidexterity: effective at leveraging
and exploiting inherent capability as well as achieving capability adaptation, renewal and
exploration.
Conclusion
Longevity is without a doubt a keen interest and a huge leadership challenge for family
firms. This paper therefore reviewed literature to identify factors that contribute to the unique
advantages of family firms. This paper asserts that while family firms face some serious
disadvantages because of its very form, many family firms were able to protect their socio-
emotional wealth for generations. While research continues to bring about several positive
assertions about the strengths of family firms, future research are needed to unravel the direct
relationships between the determinants of longevity, and the measures of longevity as proposed
in this paper as well as the potential role of intervening variables. A larger sample will also make
it possible to test the validity of this proposed model and, above all, to identify the factors that
enables family firms to be successful in the longer run. Such studies will require the cooperation
of the family firms themselves in the first place.
References
Abdellatif, M., Amann, B., Jaussaud, J. (2010). Family versus Nonfamily Business: A
Comparison of International Strategies. Journal of Family Business Strategy, 1(2), 108-116.
DOI: 10.1016/j.jfbs.2010.04.004
Anderson, R.C., Mansi, S.A., & Reeb, D.M. (2002). Founding Family Ownership and the
Agency Cost of Debt. Journal of Financial Economics, 68(2), 263–285. DOI: 10.1016/S0304-
405X(03)00067-9

Anderson, R., & Reeb, D. (2003). Founding Family Ownership and Firm Performance: Evidence
from the S&P 500. Journal of Finance, 58(3), 1301–1328. DOI: 10.1111/1540-6261.00567
Anderson, R., & Reeb, D. (2004). Board Composition: Balancing Family Influence in S&P 500
Firms. Administrative Science Quarterly, 49(2), 209-237. DOI: 10.2307/4131472
Antheaume, N., Robic, P., & Barbelivien, D. (2013). French Family Business and Longevity:
Have They Been Conducting Sustainable Development Policies Before It became a Fashion?
Business History, 55(6), 942-962. DOI: 10.1080/00076791.2012.744583
Arregle, J.L., Hitt, M.A., Sirmon, D., & Very, P. (2007). The Development of Organizational
Social Capital: Attributes of Family Firms. Journal of Management Studies, 44(1), 73-95. DOI:
10.1111/j.1467-6486.2007.00665.x
Arregle, J.L., Naldi, L., Nordqvist, M., & Hitt, M.A. (2012). Internationalization of Family-
controlled Firms: A Study of the Effects of External Environment in Governance.
Entrepreneurship Theory and Practice, 36(6), 1115-1143. DOI: 10.1111/j.1540-6520.2012.005-
41.x
Aronoff, C. (2004). Self-Perpetuation Family Organization Built on Values: Necessary

Condition for Long-Term Family Business Survival. Family Business Review, 17(1), 55–59.
DOI:10.1111/j.1741-6248.2004.00003.x
Aronoff, C.E., & Ward, J.L. (2010). Family Business Values: How to Assure a Legacy of
Continuity and Success. New York: Palgrave MacMillan.
Astrachan, J.H., Klien, S.B., & Smyrnios, K.X. (2002). The F-PEC Scale of Family Influence: A
Proposal for Solving the Family Business Definition Problem. Family Business Review 15(1),
45-58. DOI: 10.1111/j.1741-6248.2002.00045.x
Astrachan, J.H., & Kolenko, T. (1994). A Neglected Factor Explaining Family Business Success:
Human Resource Practices. Family Business Review, 7(3), 251–264. DOI: 10.1111/j.1741-
6248.1994.00251.x

Barnett, T., & Kellermanns, F.W. (2006). Are We Family and Are We Treated as Family?
Nonfamily Employees' Perceptions of Justice in the Family Firm. Entrepreneurship Theory and
Practice, 30(6), 837–854. DOI: 10.1111/j.1540-6520.2006.00155.x
Beckhard, R., & Dyer, Jr., W.G. (1983). Management Continuity in the Family-Owned business.
Organizational Dynamics, 12(1), 5-12. DOI: 10.1016/0090-2616(83)90022-0
Berent-Braun, M.M., & Uhlaner, L.M. (2012). Family Governance Practices and Teambuilding:
Paradox of the Enterprising Family. Small Business Economics, 38(1), 103-119. DOI:
10.1007%2Fs11187-010-9269-4
Berrone, P., Cruz, C., & Gomez-Mejia, L.R. (2012). Socioemotional Wealth in Family Firms:
Theoretical Dimensions, Assessment Approaches, and Agenda for Future Research. Family
Business Review, 20(1), 1-22. DOI: 10.1177/0894486511435355
Bhaumik, S.K., Driffield, D., & Pal, S. (2010). Does Ownership Structure of Emerging-Market
Firms Affect their Outward FDI? The Case of the Indian Automotive and Pharmaceutical
Sectors. Journal of International Business Studies, 41(4), 437-450. DOI: 10.1057/jibs.2009.52
Block, J. H. (2011). How to Pay Nonfamily Managers in Large Family Firms: A Principal-Agent
Model. Family Business Review, 24(1), 9–27. DOI: 10.1177/0894486510394359
Brenes, E.R., Madrigal, K., & Requena, B. (2011). Corporate Governance and Family Business
Performance. Journal of Business Research, 64(3), 280-285. DOI: 10.1016/j.jbusres.2009.11.013
Cadbury, A. (2000), Family Firms and their Governance: Creating Tomorrow’s Company from
Today’s. London: Egon Zehnder International.
Carlock, R.S., & Ward, J.L. (2010). When Family Businesses are Best: The Parallel Planning
Process for Family Harmony and Business Success. Hampshire: Palgrave Macmillan.
Carney, M. (2005). Corporate Governance and Competitive Advantage in Family-controlled

Firms. Entrepreneurship Theory and Practice, 29(2), 249-265. DOI: 10.1111/j.1540-
6520.2005.00081.x

Carney, M., Gedajlovic, E., & Strike, V.M. (2014). Dead Money: Inheritance Law and the
Longevity of Family Firms. Entrepreneurship Theory and Practice, 38(6), 1261–1283. DOI:
10.1111/etap.12123
Carr, C., & Bateman, S. (2009). International Strategy Configurations of the World's Top Family
Firms. Management International Review, 49(6), 733-758. DOI: 10.1007/s11575-009-0018-3
Casillas, J.C., & Moreno, A.M. (2010). The Relationship between Entrepreneurial Orientation
and Growth: The Moderating Role of Family Involvement. Entrepreneurship & Regional
Development, 22(3&4), 265-291. DOI: 10.1080/08985621003726135
Casillas, J.C., & Moreno, A.M., & Barbero, J.L. (2010). A Configurational Approach of the
Relationship between Entrepreneurial Orientation and Growth of Family Firms. Family Business
Review, 23(1) 27–44. DOI: DOI: 10.1177/0894486509345159
Caspar, C., Dias, A.K., & Elstrodt, H.P. (2010). The Five Attributes of Enduring Family
Businesses. McKinsey Quarterly, 1, 1-10.
Casson, M. (1999). The Economics of the Family Firm. Scandinavian Economic History Review,
47(1), 10-23. DOI: 10.1080/03585522.1999.10419802
Cerrato, D., & Piva, M. (2012). The Internationalization of Small and Medium-sized Enterprises:
The Effect of Family Management, Human Capital and Foreign Ownership. Journal of
Management and Governance, 16(4), 617-644. DOI: 10.1007%2Fs10997-010-9166-x.
Chang, E., Chrisman, J.J., Chua, J.H., & Kellermanns, F. (2008). Regional Economy as a
Determinant of the Prevalence of Family Firms in the United States: A Preliminary Report.
Entrepreneurship Theory & Practice, 32(3), 559-573. DOI: 10.1111/j.1540-6520.2008.00241.x
Claver, E., Rienda, L., & Quer, D. (2009). Family Firms' International Commitment: The
Influence of Family-Related Factors. Family Business Review, 22(2), 125-135. DOI: 10.1177/08-
9448650833-0054
Chirico, F., & Bau, M. (2014). Is the Family an “Asset” or “Liability” for Firm Performance?
The Moderating Role of Environmental Dynamism. Journal of Small Business Management,
52(2), 210-225. DOI: 10.1111/jsbm.12095

Chirico, F., & Salvato, C. (2008). Knowledge Integration and Dynamic Organizational
Adaptation in Family Firms. Family Business Review, 21(2), 169-181. DOI: 10.1111/j.1741-
6248.2008.00117.x
Chirico, F., & Nordqvist. M. (2010). Dynamic Capabilities and Trans-Generational Value
Creation in Family Firms: The Role of Organizational Culture. International Small Business
Journal, 26 (4), 433-462. DOI: 10.1177/0266242610370402
Chirico, F., Sirmon, D. G., Sciascia, S., & Mazzola, P. (2011). Resource Orchestration in Family
Firms: Investigating How Entrepreneurial Orientation, Generational Involvement, and
Participative Strategy Affect Performance. Strategic Entrepreneurship Journal, 5(4): 307-326.
DOI: 10.1002/sej.121
Chittoor, R. & Das, R. (2007). Professionalization of Management and Succession Performance-

A Vital Linkage. Family Business Review, 20(1), 65-79. DOI:10.1111/j.1741-6248.2007.00084.x
Chrisman, J.J., Chua, J.H., & Steier, L.P. (2005). Sources and Consequences of Distinctive
Familiness: An Introduction. Entrepreneurship Theory and Practice, 29(3), 237-253.
DOI: 10.1111/j.1540-6520.2005.00080.x
Chrisman, J.J., Chua, J.H., & Steier, L.P. (2006). Personalism, Particularism, and the
Competitive Behaviors and Advantages of Family Firms: An Introduction. Entrepreneurship
Theory and Practice, 30(6), 719- 729. DOI: 10.1111/j.1540-6520.2006.00146.x
Chrisman, J.J., Steier, L., & Chua, J.H. (2008). Toward a Theoretical Basis for Understanding
the Dynamics of Strategic Performance in Family-Owned Firms. Entrepreneurship Theory and
Practice, 32(6), 935–947. DOI: 10.1111/j.1540-6520.2008.00264.x
Chrisman, J.J., Chua, J.H., & Steier, L.P. (2011). Resilience of Family Firms: An Introduction.
Entrepreneurship Theory & Practice, 35(6), 1107-1119. DOI: 10.1111/j.1540-
6520.2011.00493.x
Chrisman, J.J., Chua, J.H., Pearson, A.W., & Barnett, T. (2012). Family Involvement, Family
Influence, and Family-Centered Non-Economic Goals in Small Firms. Entrepreneurship Theory
& Practice, 36(2), 267-293. DOI: 10.1111/j.1540-6520.2010.00407.x

Chrisman, J.J., Sharma, P., Steier, L., & Chua, J.H. (2013). The Influence of Family Goals,
Governance, and Resources on Firm Outcomes. Entrepreneurship Theory & Practice, 37(6),
1249–1261. DOI: 10.1111/etap.12064
Christensen, C.M., & Overdorf, M. (2000). Meeting the Challenges of Disruptive Change.
Harvard Business Review, 78(2), 66-77.
Colli, A. (2012). Contextualizing Performances of Family Firms: The Perspective of Business

History. Family Business Review, 25(3), 243–257. DOI: 10.1177/0894486511426872
Corbetta, G., & Montemerlo, D. (1999). Ownership, Governance and Management Issues in
Small and Medium-size Family Businesses: A Comparison of Italy and the United States. Family
Business Review, 12(4), 361–374. DOI: 10.1111/j.1741-6248.1999.00361.x
Cruz, C., Justo, R., & De Castro, J.O. (2010). Does Family Employment Enhance MSEs
Performance? Integrating Socio-Emotional Wealth and Family Embeddedness Perspectives.
Journal of Business Venturing, 27(1), 62-76. DOI: 10.1016/j.jbusvent.2010.07.002
Davis, D., Morris, M., & Allen, J. (1991). Perceived Environmental Turbulence and Its Effect on
Selected Entrepreneurship, Marketing, and Organizational Characteristics in Industrial Firms.
Journal of the Academy of Marketing Science, 19(1), 43-51. DOI: 10.1007/BF02723423
Davis, P., & Stern, D. (1980). Adaptation, Survival, and Growth of the Family Business: An
Integrated Systems Perspective. Human Relations, 34(4), 207–224. DOI: 10.1111/j.1741-
6248.1988.00069.x
Davis, P.S., & Harveston, P.D. (1999). In the Founder’s Shadow: Conflict in the Family Firm.
Family Business Review, 12(4), 311-323. DOI: 0.1111/j.1741-6248.1999.00311.x
Denison, D., Lief, C., Ward, J.L. (2004). Culture in Family-Owned Enterprises: Recognizing and
Leveraging Unique Strengths. Family Business Review, 17(1), 61-70. DOI: 10.1111/j.1741-
6248.2004.00004.x
De Visscher, F.M., Aronoff, C.F., & Ward, J.L. (1995). Financing Transitions: Managing Capital
and Liquidity in the Family Business. Family Business Leadership Series. Marietta, GA:
Business Owner Resources.

Distelberg, B., & Sorenson, R. L. (2009). Updating Systems Concepts in Family Businesses: A
Focus on Values, Resource Flows, and Adaptability. Family Business Review, 22(1), 65-81.
DOI: 10.1177/0894486508329115
Drozdow, N. (1998). What is Continuity? Family Business Review, 11(4), 337–347. DOI:
10.1111/j.1741-6248.1998.00337.x
Duh, M., Belak, J., & Milfelner, B. (2010). Core Values, Culture and Ethical Climate as
Constitutional Elements of Ethical Behaviors: Exploring Differences between Family and Non-
Family Enterprises. Journal of Business Ethics, 97(3), 473–489. DOI: 10.1007%2Fs10551-010-
0519-9
Dyer, W.G. (1988). Culture and Continuity of Family Firms. Family Business Review, 1(1), 37-
50. DOI: 10.1111/j.1741-6248.1988.00037.x.
Eddleston, K.A., & Kellermanns, F.W. (2006). Destructive and Productive Family Relationships:
A Stewardship Theory Perspective. Journal of Business Venturing, 22(4), 545-565. DOI:
10.1016/j.jbusvent.2006.06.004
Eddleston, K.A. (2008). Commentary: The Prequel to Family Firm Culture and Stewardship: The
Leadership Perspective of the Founder. Entrepreneurship Theory and Practice, 32(6), 1055-
1061. DOI: 10.1111/j.1540-6520.2008.00272.x
Eddleston, K.A., Chrisman, J.J., Steier, L.P., & Chua, J.H. (2010). Governance and Trust in
Family Firms: An Introduction. Entrepreneurship Theory and Practice, 34(6), 1043-1055. DOI:
10.1111/j.1540-6520.2010.00412.x
Eddleston, K.A., Kellermanns, F.W., Floyd, S.W., Crittenden, V.L., & Crittenden, W.F. (2013).
Planning for Growth: Life Stage Differences in Family Firms. Entrepreneurship Theory and
Practice, 37(6), 1177-1202. DOI: 10.1111/etap.12002
Fahed-Sreih, J., & Djoundourian, S. (2006). Determinants of Longevity and Success in Lebanese
Family Businesses: An Exploratory Study. Family Business Review, 19(3), 225-234. DOI:
10.1111/j.1741-6248.2006.00071.x

Fernandez, Z., & Nieto, M. (2005). Internationalization Strategy of Small and Medium-Sized
Family Businesses: Some Influential Factors. Family Business Review, 18(1), 77-89. DOI: 10.11-
11/j.1741-6248.2005.00031.x
Fernandez, Z., & Nieto, M. (2006). Impact of ownership on the international involvement of
SMEs. Journal of international Business Studies, 37(3): 340-351. DOI: 10.1057/palgrave.jibs.8-
400196
Fuentes-Lombardo, G., & Fernandez-Ortiz, R. (2010). Strategic Alliances in the
Internationalization of Family Firms: An Exploratory Study on the Spanish Wine Industry.
Advances in Management, 3(6), 45-54.
Gallo, M.A., & Sveen, J. (1991). Internationalizing the Family Business: Facilitating and
Restraining Factors. Family Business Review, 4(2), 181-190. DOI: 10.1111/j.17416248.1-
991.00181.x
Gallo, M.A., & Pont, C.G. (1996). Important Factors in Family Business Internationalization.
Family Business Review, 9(1), 45–59. DOI: 10.1111/j.1741-6248.1996.00045.x
Gedajlovic, E., & Carney, M. (2010). Markets, Hierarchies, and Families: Toward a Transaction
Cost Theory of the Family Firm. Entrepreneurship Theory and Practice, 34(6), 1145–1171.
DOI: 10.1111/j.1540-6520.2010.00418.x
George, G., Wiklund, J., & Zahra, S.A. (2005). Ownership and the Internationalization of Small
Firms. Journal of Management, 31(2), 210-233. DOI: 10.1177/0149206304271760
Graves, C., & Shan, Y.G. (2013). An Empirical Analysis of the Effect of Internationalization on
the Performance of Unlisted Family and Nonfamily Firms in Australia. Family Business Review,
27(2), 142-160. DOI: 10.1177/0894486513491588
Gupta, V., & Kirwan, P. (2013). Role of In-Group Collectivism in the Longevity of Family Firm.
Global Business Perspectives, 1, 433–451. DOI: 10.1007/s40196-013-0022-7
Gupta, V., & Levenburg, N. (2012). Cultures, Ideologies and Family Businesses. Journal of
Family Business Management, 2(1), 57 – 75. DOI: 10.1108/20436231211216420

Habbershon, T.G., & Pistrui, J. (2002). Enterprising Families Domain: Family-Influenced
Ownership Groups in Pursuit of Transgenerational Wealth. Family Business Review, 15(3), 223-
238. DOI: 10.1111/j.1741-6248.2002.00223.x
Habbershon, T.G., & Williams, M.L (1999). A Resource-Based Framework for Assessing the
Strategic Advantages of Family Firms. Family Business Review, 12(1), 1-26. DOI:
10.1111/j.1741-6248.1999.00001.x
Habbershon, T.G., Williams, M., & MacMillan, I.C. (2003). A Unified Systems Perspective of
Family Firm Performance. Journal of Business Venturing, 18(4), 451-465. DOI: 10.1016/S0883-
9026(03)00053-3
Hall, A., Melin, L., & Nordqvist, M. (2001).Entrepreneurship as Radical Change in the Family
Business: Exploring the Role of Cultural Patterns. Family Business Review, 14(3), 193-208.
DOI: 10.1111/j.1741-6248.2001.00193.x
Heck, R.K.Z., & Trent, E.S. (1999). The Prevalence of Family Business from a Household
Sample. Family Business Review, 12(3), 209 – 224. DOI: 10.1111/j.1741-6248.1999.00209.x
Jaffe, D.T.., & Lane, S.H. (2004). Sustaining a Family Dynasty: Key Issues Facing Complex
Multigenerational Business- and Investment-Owning Families. Family Business Review, 17(1),
81-98. DOI: 10.1111/j.1741-6248.2004.00006.x
Jones, O., Ghobadian, A., O'Regan, R., & Antcliff, V. (2013). Dynamic Capabilities in a Sixth-
Generation Family Firm: Entrepreneurship and the Bibby Line. Business History, 55(6), 910-
941. DOI: 10.1080/00076791.2012.744590
Kalleberg, A.L., & Leight, K.T. (1991). Gender and Organizational Performance: Determinants
of Small Business Survival and Success. Academy of Management Journal, 34(1), 136-161.
DOI: 10.2307/256305
Keh, H.T., Nguyen, T.T.M., & Ng, H.P. (2007). The Effects of Entrepreneurial Orientation and
Marketing Information on the Performance of SMEs. Journal of Business Venturing, 22(4), 592-
611. DOI: 10.1016/j.jbusvent.2006.05.003
Kellermanns F.W. Eddleston K.A., Barnett T. & Pearson A. (2008). An exploratory study of
family member characteristics and involvement: Effects on entrepreneurial behavior in family
firms. Family Business Review, 21(1), 1–14. DOI: 10.1111/j.1741-6248.2007.00107.x
Kenyon-Rouvinez, D., & Ward, J.L. (2005). Family Business Key Issues. Basingstoke: Palgrave
Macmillan.
Kim, Y., & Gao, F.Y. (2012). Does Family Involvement Increase Business Performance?
Family-Longevity Goals’ Moderating Role in Chinese Family Firms. Journal of Business
Research, 66(3), 265-274. DOI: 10.1016/j.jbusres.2012.08.018
King, R., & Peng, W.Q. (2013). The Effect of Industry Characteristics on the Control Longevity
of Founding-Family Firms. Journal of Family Business Strategy, 4(3), 281-295. DOI:
10.1016/j.jfbs.2013.10.004
Koiranen, M. (2002). Over 100 Years of Age but Still Entrepreneurially Active in Business:
Exploring the Values and Family Characteristics of Old Finnish Family Firms. Family Business
Review, 15(3), 175-188. DOI: 10.1111/j.1741-6248.2002.00175.x
Kontinen, T., & Ojala, A. (2010). The Internationalization of Family Businesses: A Review of
Extant Research. Journal of Family Business Strategy, 1(2), 97-107. DOI: 10.1016/j.jfbs.2010-
.04.001
Lambrecht, J., & Lievens. J. (2008). Pruning the Family Tree: An Unexplored Path to Family
Business Continuity and Family Harmony. Family Business Review, 21(4), 295–313. DOI:
10.1111/j.1741-6248.2008.00131.x
Le Breton-Miller, I., & Miller, D. (2006). Why Do Some Family Businesses Out-Compete?
Governance, Long-Term Orientations, and Sustainable Capability. Entrepreneurship Theory &
Practice, 30(6), 731-746. DOI: 10.1111/j.1540-6520.2006.00147.x
Lengnick-Hall, C.A., & Beck, T.E. (2005). Adaptive Fit Versus Robust Transformation: How
Organizations Respond To Environmental Change. Journal of Management, 31(5), 738-757.
DOI: 10.1177/0149206305279367
Litz, R. (1995). The Family Business: Toward Definitional Clarity. Family Business Review,
8(2), 71-80. DOI: 10.1111/j.1741-6248.1995.00071.x

Liu, Y., Li, Y., & Xue, J. (2010).Ownership, Strategic Orientation and Internationalization in
Emerging Markets. Journal of World Business, 46(3), 381–393. DOI: 10.1016/j.jwb.2010.07.012
Lumpkin, G.T., Brigham, K.H., & Moss, T.W. (2010). Long-term Orientation: Implications for
the Entrepreneurial Orientation and Performance of Family Businesses. Entrepreneurship &
Regional Development: An International Journal, 22(3-4), 241-264. DOI:
10.1080/08985621003726218
MacKay, P., & Phillips, G.M. (2005). How Does Industry Affect Firm Financial Structure? The
Review of Financial Studies, 18(4), 1433–1466. DOI: 10.1093/rfs/hhi032
Mackie, R. (2001). Family Ownership and Business Survival: Kirkcaldy, 1870-1970. Business
History Review, 43(7), 1-32. DOI: 10.1080/713999227
Malone, S.C. (1989). Selected Correlates of Business Continuity Planning in the Family
Business. Family Business Review, 2(4), 341–353. DOI: 10.1111/j.1741-6248.1989.tb00003.x
McConaughy, D.L., & Phillips, G.M. (1999). Founders versus Descendants: The Profitability,
Efficiency, Growth Characteristics and Financing in Large, Public, Founding-Family-Controlled
Firms. Family Business Review, 12(2), 123-132. DOI: 10.1111/j.1741-6248.1999.00123.x
McGuire, J., Dow, S., & Ibrahim, B. (2012). All in the family? Social Performance and
Corporate Governance in the Family Firm. Journal of Business Research, 65(11), 1643–1650.
DOI: 10.1016/j.jbusres.2011.10.024
Miller, D., & Le Breton-Miller, I. (2005). Challenge versus Advantage in Family Business.
Strategic Organization, 1(1), 127-134. DOI: 10.1177/1476127003001001222
Miller, D., & Le Breton-Miller, I. (2005). Managing for the Long Run: Lessons in Competitive
Advantage from Great Family Businesses. Boston, MA: Harvard Business School Press.
Miller, D., & Le Breton-Miller, I. (2006). Family Governance and Firm Performance: Agency,
Stewardship, and Capabilities. Family Business Review, 19(1), 73-87. DOI: 10.1111/j.1741-
6248.2006.00063.x

Miller, D., Le Breton-Miller, I., Lester, R.H., & Cannella, Jr., A.A. (2007). Are Family Firms
Really Superior Performers? Journal of Corporate Finance, 13(5), 829-858. DOI:
10.1016/j.jcorpfin.2007.03.004
Miller, D., Le Breton-Miller, I., & Scholnick, B. (2008). Stewardship vs Stagnation: An

Empirical Comparison of Small Family and Nonfamily Businesses. Journal of Management
Studies, 45(1), 51-78. DOI: 10.1111/j.1467-6486.2007.00718.x
Miller, D., Le Breton-Miller, I., Minichilli, A., Corbetta, G., & Pittino, D. (2014). When do Non-
Family CEOs Outperform in Family Firms? Agency and Behavioural Agency Perspectives.
Journal of Management Studies, 51(4), 547–572. DOI: 10.1111/joms.12076
Mitchell, R.K., Morse, E.A., & Sharma, P. (2003). The Transacting Cognitions of Non-family
Employees in the Family Businesses Setting. Journal of Business Venturing, 18(4), 533-551.
DOI: 10.1016/S0883-9026(03)00059-4
Molly, V., Laveren, E., & Jorissen, A. (2011). Intergenerational Differences in Family Firms:
Impact on Capital Structure and Growth Behavior. Entrepreneurship Theory & Practice, 36(4),
703-725. DOI: 10.1111/j.1540-6520.2010.00429.x
Morikawa, M. (2013). Productivity and Survival of Family Firms in Japan. Journal of

Economics and Business, 70(1), 111-125. DOI: 10.1016/j.jeconbus.2012.11.001
Morris, M.H., Williams, R.O., Allen, J.A., & Avila, R.A. (1997). Correlates of Success in Family
Business Transitions. Journal of Business Venturing, 12(5), 385-401. DOI: 10.1016/S0883-
9026(97)00010-4
Nahapiet, J., & Ghoshal, S. (1998). Social Capital, Intellectual Capital, and the Organizational
Advantage. The Academy of Management Review, 23(2), 242-266. DOI: 10.2307/259373
Naldi, L., Nordqvist, M., Sjöberg, K., & Wiklund, J. (2007). Entrepreneurial Orientation, Risk
Taking, and Performance in Family Firms. Family Business Review, 20(1), 33-47. DOI:
10.1111/j.1741-6248.2007.00082.x
Nordqvist, M., & Zellweger, T. (Eds.). (2010). Transgenerational Entrepreneurship: Exploring

Growth and Performance in Family Firms Across Generations. Cheltenham, England: Edward
Elgar.
Nordqvist, M., Sharma, P., & Chirico, F. (2014). Family Firm Heterogeneity and Governance: A
Configuration Approach. Journal of Small Business Management, 52(2), 192-209. DOI:
10.1111/jsbm.12096
Olson, P.D., Zuiker, V.S., Danes, S.M., Stafford, K., Heck, R.K.Z., & Duncan, K.A. (2003). The
Impact of the Family and the Business on Family Business Sustainability. Journal of Business
Venturing, 18(5), 639-666. DOI: 10.1016/S0883-9026(03)00014-4
Pearson, A.W., Carr, J.C., & Shaw, J.C. (2008). Toward a Theory of Familiness: A Social
Capital Perspective. Entrepreneurship Theory and Practice, 32(6), 949-969. DOI:
10.1111/j.1540-6520.2008.00265.x
Perricone, P.J., Earle, J.R., & Taplin, I.M. (2001). Patterns of Succession and Continuity in
Family-Owned Businesses: Study of an Ethnic Community. Family Business Review, 14(2), 105-
122. DOI: 10.1111/j.1741-6248.2001.00105.x
Royer, S., Simons, R., Boyd, B. & Rafferty, A. (2008). Promoting Family: A Contingency
Model of Family Business Succession. Family Business Review, 21(1), 15-30. DOI:
10.1111/j.1741-6248.2007.00108.x
Rutherford, M.W., Kuratko, D.F., & Holt, D.T. (2008). Examining the Link between
“Familiness” and Performance: Can the F-PEC Untangle the Family Business Theory Jungle?
Entrepreneurship Theory and Practice, 32(6), 1089-1109. DOI: 10.1111/j.1540-
6520.2008.00275.x
Salvato, C., Chirico, F., & Sharma, P. (2010). A Farewell to the Business: Championing Exit and
Continuity in Entrepreneurial Family Firms. Entrepreneurship & Regional Development, 22(3 &
4), 321–348. DOI: 10.1080/08985621003726192
Salvato, C., & Melin, L. (2008). Creating Value across Generations in Family-Controlled
Businesses: The Role of Family Social Capital. Family Business Review, 21(3), 259-276. DOI:
10.1111/j.1741-6248.2008.00127.x
Salvato, C., Minichilli, A., & Piccarreta, R. (2011). Faster Route to the CEO Suite: Nepotism or
Managerial Proficiency. Family Business Review, 20(1), 1-19. DOI: 10.1177/0894486511427559

Sciascia, S., Clinton, E., Nason, R.S., James, A.E., & Rivera-Algarin, J.O. (2013). Family
Communication and Innovativeness in Family Firms. Family Relations, 62(3), 429–442. DOI:
10.1111/fare.12014
Schulze, W.S., Lubatkin, M.H., & Dino, R.N. (2002). Altruism, Agency, and the
Competitiveness of Family Firms. Managerial and Decision Economics, 23(4-5), 247-259. DOI:
10.1002/mde.1064
Selsky, J., & McCann, J. (2008). Managing disruptive change and turbulence through continuous
change thinking and scenarios. In Rafael Ramirez, John Selsky and Kees van der Heijden (eds.).
Business planning for turbulent environments: New methods for applying scenarios, 167-186.
London: Earthscan
Shanker, M.C., & Astrachan, J.H. (1996). Myths and Realities: Family Businesses’ Contribution
to the US Economy–A Framework for Assessing Family Business Statistics. Family Business
Review, 9(2), 107–123. DOI: 10.1111/j.1741-6248.1996.00107.x
Sharma, P., & Manikutty, S. (2005). Strategic Divestments in Family Firms: Role of Family
Structure and Community Culture. Entrepreneurship Theory and Practice, 29(3), 293–311. DOI:
10.1111/j.1540-6520.2005.00084.x
Sirmon, D.G, & Hitt, M.A. (2003). Creating Wealth in Family Business through Managing
Resources. Entrepreneurship Theory & Practice, 27(4), 339–358. DOI: 10.1111/1540-8520.t01-
1-00014
Sorenson, R. L. (1999). Conflict Management Strategies Used by Successful Family Businesses.
Family Business Review, 7(4), 117-136. DOI: 10.1111/j.1741-6248.1999.00325.x
Sorenson, R.L. (2000). The Contribution of Leadership Style and Practices to Family and
Business Success. Family Business Review, 13(3), 183-200. DOI: 10.1111/j.1741-
6248.2000.00183.x
Sorenson, R.L., Goodpaster, K.E., Hedberg, P.R., & Yu, A. (2009). The Family Point of View,
Family Social Capital, and Firm Performance. Family Business Review, 22(3), 239-253. DOI:
10.1177/0894486509332456

Stafford, K., Duncan, K.A., Dane, S., & Winter, M. (1999). A Research Model of Sustainable
Family Businesses. Family Business Review, 12(3), 197-208. DOI: 10.1111/j.1741-
6248.1999.00197.x
Stafford, K., Danes, S.M., & Haynes, G.W. (2013). Long-term Family Firm Survival and Growth
Considering Owning Family Adaptive Capacity and Federal Disaster Assistance Receipt.
Journal of Family Business Strategy,4(2), 188-200. DOI: /10.1016/j.jfbs.2013.06.002
Stonebraker, P.W., & Liao, J. (2004). Environmental Turbulence, Strategic Orientation:

Modeling Supply Chain Integration. International Journal of Operations & Production
Management, 24(10), 1037-1054. DOI: 10.1108/01443570410558067
Sundaramurthy, C. (2008). Sustaining Trust within Family Businesses. Family Business Review,
21(1), 89-102. DOI: 10.1111/j.1741-6248.2007.00110.x
Swinth, R.L., & Vinton, K.L. (1993). Do Family-Owned Businesses Have a Strategic Advantage
in International Joint Ventures? Family Business Review, 6(1), 19-30. DOI: 10.1111/j.1741624-
8.1993.00019.
Tagiuri, R., & Davis, J.A. (1992). On Goals of Successful Family Companies. Family Business
Review, 5(1), 43-62. DOI: 10.1111/j.1741-6248.1992.00043.x
Tagiuri, R., & Davis, J.A. (1996). Bivalent Attributes of the Family Firm. Family Business
Review, 9(2), 199-208. DOI: 10.1111/j.1741-6248.1996.00199.x
Tapies, J., & Moya, M.F. (2012). Values and Longevity in Family Business: Evidence from a
Cross‐Cultural Analysis. Journal of Family Business Management, 2(2), 130–146. DOI:
10.1108/20436231211261871
Upton, N., Teal, E.J., & Felan, J.T. (2001). Strategic and Business Planning Practices of Fast
Growth Family Firms. Journal of Small Business Management, 39(1), 60–72. DOI:
10.1111/0447-2778.00006
Vallejo, M.C. (2008). Is the Culture of Family Firms Really Different? A Value-Based Model for
its Survival through Generation. Journal of Business Ethics, 81(2), 261-279. DOI:
10.1007/s10551-007-9493-2

Vallejo, M.C. (2009). The Effects of Commitment of Non-Family Employees of Family Firms
from the Perspective of Stewardship Theory. Journal of Business Ethics, 87(4), 379–390. DOI:
10.1007/s10551-008-9926-6
Vallejo, M.C. (2011). The Organizational Culture of Family Firms as a Key Factor of
Competitiveness. Journal of Business Economics and Management, 12(3), 451-481. DOI:
10.3846/16111699.2011.599407
Villalonga, B., & Amit, R. (2006). How do Family Ownership, Control and Management Affect
Firm Value? Journal of Financial Economics, 80(2), 385–417. DOI: 10.2139/ssrn.556032
Villalonga, B., & Amit, R. (2010). Family Control of Firms and Industries. Financial
Management, 39(3), 863-904. DOI: 10.1111/j.1755-053X.2010.01098.x
Walker, E., & Brown, A. (2004). What Success Factors are Important to Small Business
Owners? International Small Business Journal, 22(6), 577–594. DOI:10.1177/026624260404741
Wang, Y., Watkins, D., Harris, N., & Spicer, K. (2004). The Relationship between Succession
Issues and Business Performance: Evidence from UK Family SMEs. International Journal of
Entrepreneurial Behaviour and Research, 10(2), 59-84. DOI: 10.1108/13552550410521380
Ward, J.L. (1997). Growing the Family Business: Special Challenges and Best Practices. Family
Business Review, 10(4), 323-337. DOI: 10.1111/j.1741-6248.1997.00323.x
Ward, J. (2004). Perpetuating the Family Business: 50 Lessons Learned from Long-Lasting,
Successful Families in Business. Basingstoke: Palgrave Macmillan.
Ward, J.L. (2008). Introduction. In J. Tapies and J.L. Ward (eds.), Family Values and Value
Creation: The Fostering of Enduring Values within Family-Owned Businesses, (pp.1-8).
Hampshire, England: Palgrave Macmillan.
Wiklund, J., & Shepherd, D. (2005). Entrepreneurial Orientation and Small Business
Performance: A Configurational Approach. Journal of Business Venturing, 20(1), 71-91. DOI:
10.1016/j.jbusvent.2004.01.001
Wilson, N., Wright, M., & Scholes, L. (2013). Family Business Survival and the Role of Boards.
Entrepreneurship Theory and Practice, 37(6), 1369-1389. DOI: 10.1111/etap.12071

Yu, A., Lumpkin, G.T., Sorenson, R.L., & Brigham, K.H. (2012). The Landscape of Family
Business Outcomes: A Summary and Numerical Taxonomy of Dependent Variables. Family
Business Review, 25(1), 33-57. DOI: 10.1177/0894486511430329
Zahra, S. A. (2010). Harvesting Family Firms' Organizational Social Capital: A Relational

Perspective. Journal of Management Studies, 47(2), 345-366. DOI: 10.1111/j.1467-
6486.2009.00894.x
Zahra, S.A., Hayton, J. C., & Salvato, C. (2004). Entrepreneurship in Family vs. Non-Family
Firms: A Resource-Based Analysis of the Effect of Organizational Culture. Entrepreneurship:
Theory & Practice, 28(4), 363-381. DOI: 10.1111/j.1540-6520.2004.00051.x
Zahra, S.A., Hayton, J., Neubaum, D.O., Dibrell, C., & Craig, J. (2008). Culture of Family
Commitment and Strategic Flexibility: The Moderating Effect of Stewardship. Entrepreneurship
Theory & Practice, 32(6), 1035-1054. DOI: 10.1111/j.1540-6520.2008.00271.x
Zellweger, T.M., Sieger, P. (2010). Entrepreneurial Orientation in Long-Lived Family Firms.

Small Business Economics, 39(1), 67-84. DOI: 10.1007/s11187-010-9267-6
Zellweger, T.M., Nason, R.S., & Nordqvist, M. (2011). From Longevity of Firms to
Transgenerational Entrepreneurship of Families: Introducing Family Entrepreneurial Orientation.
Family Business Review, 20(1), 1-20. DOI: 10.1177/0894486511423531
Zellweger, T. M., Nason, R. S., Nordqvist, M., & Brush, C. G. (2013). Why Do Family Firms
Strive for Nonfinancial Goals? An Organizational Identity Perspective. Entrepreneurship Theory
and Practice, 37(2), 229-248. DOI: 10.1111/j.1540-6520.2011.00466.

The Effect of The Application of Work Safety and Health to Awareness of SOP
( standard operating procedure ) on Employees Bulk ( subcontractor )
Construction in The Company XYZ Batam
Shinta Wahyu Hati1, Sri Wahyuni2

Department of Applied Business Administration, Politeknik Negeri Batam
shinta@polibatam.ac.id
ABSTRACT.
Occupational safety and health is an important factor in the business process in the industry,
especially in Batam. The purpose of this study is to determine the effect of the application of
occupational safety and health awareness of the SOP (Standard Operating Procedure) at XYZ
Company in Batam. The sampling technique uses the technique of sampling proportions with a
sample of 75 respondents. The design of the study is an explanatory research. The analytical
method uses multiple regression analysis. The result shows that awareness of safety and health
significantly influences the SOP (Standard Operating Procedure). There is a variable that
influences the dominant on the awareness variable of SOP (Standard Operating Procedure) is
occupational health variable. The results also shows that the safety variable has a significant
negative effect, which means the implementation of safety increases high performance but lack
of awareness of SOP (Standard Operating Procedure).
Keywords: Safety, Occupational Health, SOP (Standard Operating Procedure)
1. INTRODUCTION
Factor of Health and Safety (HSE) is an important factor that should be the primary
concern of nor all parties or industry. But in reality, theimplementation of occupational safety
and health awareness (HSE) in the workplace in some companies still receives less attention
from the workers. So that, accidents still common happen in some workplaces. The rate of
workplace accidents in Indonesia tends to increase every year. In 2013 it was reported that nine
people died everyday caused by workplace accidents. Director of Norma Accidents, Ministry of
Manpower and Transmigration, Amri, reveals that the number of occupational accidents
increased by 50 % over the previous year which recorded only six people died from workplace
accidents (Poskota News). Meanwhile, according to data from the International Labour
Organization (ILO), in Indonesia in a vulnerable time per year on average there were 99,000
cases of occupational accidents. Of the total amount, approximately 70 % of which resulted in
death and lifelong disability ( ILO , Sound Renewal 2014).
Cases of workplace accidents are also common in industry in Batam, especially. Start of
worker injuries and permanent disabilities, up to the loss of lives. The Company allegedly did
not implement a program of Occupational Health and Safety (HSE). Commencing in January-
June 2015 in Batam number of accidents at the location of the company 1,387 cases. Number of
work accidents that occurred from January 2015 as many as 260 cases. While as many as 291
cases in February in the company. While April sebanayak diperushaan 233 cases of
occupational accidents.Then in May of 2015 as many as 262 cases of knowledge in the
company. (www.buruhtoday.com)
According to the Mangkunagara Megginson (2007 ) Safety is a safe or good condition
of suffering and damage or loss in the workplace in the form of the use of machinery,
equipment, materials and processing , the floor where work and work environment, and work
methods. Safety risks can occur because of aspects of the working environment which may

cause a fire, electricity shock, cuts, bruises, sprains, fractures, and damaged limbs, sight and
hearing. While health is a condition that is free from physical and psychological disorders are
caused by the working environment. The health risks can occur due to factors in the work
environment to work beyond the prescribed period of time and environment that cause stress or
physical disorder.
Occupational accidents were suffered by workers; they can make death, disability, or
illness in a considerable period of time. Because of disability or illness cause the workers are
not able to work anymore or their work productivity levels will decrease, compared with the
current time in a healthy condition. If workers’ physicals condition go down and become not to
be able to work, then their incomes will also be reduced or even non-existent.
Accidents and disruption of workers' health happen can be caused due to unsafe
behavior and lack of attention of the company provides safe equipments and tools, such as
safety clothes, safety shoes, work safety glasses, headgear and safety equipment are inadequate
and lack of function properly. In addition to the condition and work environment that are not
conducive and safe as well as convenient for workers, they can cause disruption of physical
health. Workplace atmosphere and replacing tools and items that are not based on the standard
of work environment, they even can also cause illness for workers. The causes of workplace
accidents also occur because of the placement and the division of labor which are not in
accordance with the expertise and the application of occupational health and safety procedures
(HSE) which are not effective in the workplace.
Research Objectives
The objectives of committing the research are:
1. To know and analyze the effect of occupational safety variable to awareness in running
SOP (Standard Operating Procedure).
2. To know and analyze the effect of occupational health variable to awareness in running
SOP (Standard Operating Procedure).
3. To know and analyze the simultaneous effect between the occupational safety variable and
Occupational health variable of w to awareness in running SOP (Standard Operating
Procedure).
4. To know and analyze which variable has the dominat effect to awareness in running SOP
(Standard Operating Procedure).
Occupational Health and Safety
According Trisyulianti in Yani ( 2012), Health and Safety (HSE ) is a program

created by the company and workers as efforts to prevent the onset of accidents and
occupational diseases by identifying things that could potentially lead to accidents and
occupational diseases as well as anticipatory action if the case of occupational diseases and
accidents . Health and Safety (HSE) are all efforts and thinking done in order to prevent ,
mitigate and reduce the occurrence of accidents and their impact through the steps of
identifying , analyzing and controlling hazards by implementing a system of hazard control
appropriately and implement legislation on safety and health ( labor Law , 2003) .
SOP (Standard Operating Procedure)
According Hartatik (2014), SOP (Standard Operating Procedure) is a symbol of

business in the use of modern systems. In the world of work, SOP (Standard Operating
Procedure) is a guide for employees to carry out a job with a predetermined standard. SOP
(Standard Operating Procedure) describes the operational elements of both technical and

fundamental program of an organization that is usually managed under a work plan or
Quality Assurance (QA).
According to the International of Standards (ISO) 9007 concerning the quality
management system, SOP (Standard Operating Procedure) is the lifeblood of the
management system and is usually termed the two-level document. SOP (Standard
Operating Procedure) in SOP management system referred to as follows:
a) Guidance is SOP that describes a management policy from a company related to the
implementation of a management system.
b) The procedure is an explanation of the rules or instructions that are common to all
parts of an organization and workflows that involve multiple parts or functions within
the organization.
c) Work instructions are rules or steps to perform a specific activity.
3. METHODOLOGY
The design of the study is an explanatory research. According Sarwono and

Martadiredja (2008), explanatory research is preliminary research which is done to clarify and
define a problem. So the study according to the level of explanation is intended to explain the
position of research variables occupational safety, occupational health variables and variable
awareness run SOP and the relationship between one variable to another variable.
Operationalization of Research Variables

a. The independent variable (occupation safety variable (X1) and occupational health
variable (X2) are variables that influence or cause the changing or emerge of the
dependent variable (dependent).
1) Occupation safety variable (X1) describes safety at work place which is related to
machinery, work tools, materials and manufacturing processes, the foundation of
work place, and its environment and ways to do the job. The indicator of the
occupational safety variable (X1) consists of safety clothes, safety shoes, work eye
glasses, earplugs (ear plugs), safety gloves, work mask (respirator), safety tools,
socialization of the importance of occupational safety, deliverance of procedures of
job, application of procedures HSE, HSE banners, supervision and management,
safety training, understanding the use of safety tool and understanding of the
English language.
2) Occupational health variable (X2) describes a specialization in medicine that aims
to enable workers to obtain health status of the highest either physical or mental.
The indicators of occupational health variables (X2) consists of lighting, noise,
cleanliness of the working environment, providing of showers and clean water,
supplying drinking water, health care facilities / clinics, and Security Board
b. The dependent variable (SOP variable (Y)) is a variable that is influenced or causes due to
the independent variable. SOP variable (Y) describes the instructions for employees to
carry out a job with predetermined standard. The indicator of SOP variable (Y) consists
of guidelines, procedures, and work instructions.

According Arikunto (2006), is the data source object, thing or person where
researcher, watching, reading, or ask about the data. The data source is the person or
thing including that relating to the events chosen to serve as a data source to get the
process under study. Types of data sources used in this study are primary data and
secondary data. Types of data sources used in this study are primary data and secondary
data .

a. Primary data in this study was obtained from the responses and perceptions of
employees of the company XYZ. Researcher obtained primary data directly
from questionnaires, interviewed and conducted directly observation at
subcontractor employee at XYZ Company
b. Secondary data in this study was obtained from the documentation relating to the
research, such as company profile, corporate structure , the data amount of labor,
the data fixtures and equipment safety work, SOP ( Standard Operating
Procedure ) and data related to health and Safety (HSE).
These following operationalizations of research variable can be seen on the following table.
Table 1 Operationalization of Research Variables
Sub
Variabel Dimensi Indikator
Variabel
1) Safety clothes (safety )
2) Safety shoes (safety )
Tool and
3) Work safety Glassess (safety)
equipment safety
4) Ear cover ( Ear Plug )
5) Gloves
6) Work Mask ( respirators )
7) Safety Equipment
Health Safety 1) Socialization of the importance
(X1) (communication) 2) work safety
3) Delivery of working procedures
Prevention of 1) Application of Procedure HSE

HSE (Teory of occupational 2) Posters / banners on HSE
Fitriani, accidents 3) Monitoring of the management of HSE
Deoranto & 4) Safety Training
Dania)
Competence of 1) Understanding the use of safety
Employement equipment
2) Understanding English
1) Lighting
Physical,
2) Noise
environment,work
3) Hygiene working environment
Health Safety
(X2) 1) Providing of bathrooms and water
Health facility 2) Providing of drinking water
3) Means of health services/Polyclinic
BPJS
sanitation
(Social Security Agency of Health)
1) Awareness in running safety

Awareness in procedures
running of SOP 2) Awareness in executing safety
SOP (Y)
instructions
3) Awareness in occupational health

According to Zikmund in Sarwono and Martadiredja (2008 ) , the general population is
defined as any group that has a complete entity similarity in characteristics . The population is
employees of subcontractors XYZ are as many as 300 people .
According to Zikmund in Sarwono and Martadiredja (2008 ) sample is a statistical
practices relating to the selection of individual observations aimed at understanding the
population concerned, especially for the sake of making statistical inference. The sampling
technique used is the proportion, the sampling method in which each member of the population
has an equal chance to be selected into the sample. Sample calculation using the formula slovin
with the assumption that the population is normally distributed.
According to Sugiyono (2011) count by solvin form as:
Description:
n = Sample Size
N = Size of Population
d = Percent leeway inaccuracy due to errors decision
Samples that can be tolerated or desirable, for example 10 %. Slovin sample calculation with
the formula:
n= = 75
Based on calculations of sampling, the researchers took a sample of 75 workers at the XYZ
Company.

According Arikunto (2006), is the data source object, thing or person where
researcher, watching, reading, or ask about the data. The data source is the person or
thing including that relating to the events chosen to serve as a data source to get the
process under study. Types of data sources used in this study are primary data and
secondary data. Types of data sources used in this study are primary data and secondary
data .
a) Primary data in this study was obtained from the responses and perceptions of
employees of the company XYZ. Researcher obtained primary data directly
from questionnaires, interviewed and conducted directly observation at
subcontractor employee at XYZ Company
b) Secondary data in this study was obtained from the documentation relating to the
research, such as company profile, corporate structure , the data amount of labor,
the data fixtures and equipment safety work, SOP ( Standard Operating
Procedure ) and data related to health and Safety (HSE).
Validity and Reliability

Testing instruments to test the validity of the study was obtained from all the
research instruments that have value and qualify the significance value. Correlation
value is obtained, it can be said to be valid if the value r hitung ≥ r tabel at significance

level set out in the study (Uyanto, 2009). The validity of the test criteria used is as
follows:
a. If r arithmetic ≥ r tabel then it is declared invalid.
b. If r arithmetic ≤ r tabel then it is declared invald.
Meanwhile, according to Sugiyono (2011), the validity of the test criteria used are as
follows:
a. If r positif, and r ≥ 0.30, then the item is a valid question.
b If r negatif or ≤ 0.30 then the item is not a valid question.
Validity is used to measure the validity of a questionnaire. A questionnaire is
said to be valid if the questions on the questionnaire is able to express something that
will be measured by the questionnaire (Ghozali, 2006). In technique of this validity test,
researcher uses a statistical test product moment corelation. Analysis corelation product
moment is an analysis to test the validity of the instrument which is reached, if the data
is resulted from such instruments in accordance dengandata research question. Pearson
Product Moment Correlation Analysis (PPM) can be formulated as follows:
Source: Ghozali (2006)

Information:
r. = The correlation coefficient r
ΣX = Total score of questions
ΣY = Total score total
N = Number of respondents
Reliability is the level of reliability of the results of a measurement. Reliability test

shows the stability and consistency of data from an instrument that measures a concept and
useful for accessing the goodness of a meter in interval period. Reliability test in this study if the
Cronbach alpha coefficient ≥ 0.6 then the variable is reliable.
Data Analysis Method

The data analysis technique is a process of collecting data to facilitate researchers in
obtaining conclusions. Researchers conducted a quantitative research in data analysis technique.
In quantitative research, data analysis is an activity after the data of all respondents or other data
sources have been collected. Activity in the data analysis is to classify data based on variable
and types of respondents, to tabulate the data based on the variable of all respondents, to present
data for each variable which is researched.
1. Analysis Descriptive statistics

According Sekaran (2006) analysis Descriptive statistics provide a picture or description
of a data seen from the minimum value, maximum value, the arithmetic mean (mean) and
standard deviation. Descriptive statistics are intended to provide a good overview of how
respondents react to the items in the questionnaire.
2. Inferential Statistical Analysis

According Arikunto (2006), states that inferential statistics serve to generalize the
results of research conducted on a sample to a population. Further according Sugiyono (2011)

states inferential analysis is a statistical technique used to analyze the data sample and the
results applied to population.
3.Multiple Regression Analysis Test

To determine the quantitative analysis technique, the formula used is multiple
regression analysis or multiple regression analysis. According Sugiyono (2012) is about the
analysis of the shape and the level of relationship between one dependent variable and more
than one independent variable.
Y’=a + b1 . X1 + b2 . X2 + … +bn . Xn+ e

Sugiyono (2012)
Description:
Y ' = Y predictive value
X1 = Variable Safety
X2 = variable occupational health
b1 = regression coefficient variable safety, is the change in Y
For any changes X1sebesar 1 unit assuming X2 konsta .
b2 = coefficient of regression variables occupational health, is the change in Y
For any changes X2sebesar 1 unit assuming X1 konstan .
e = Error prediction (error)
4. RESULTS AND DISCUSSIONS
XYZ Company is a company which provides manpower for the oil and gas,
petrochemical, shipbuilding and pipeline construction industry mainly based projects and
solutions have been developed for the manufacture of steel construction. XYZ Company is one
of company which has expertise in the field of fabrication, design, engineering and assembly of
pipe pressure fields, subsea structures, modules, a jacket, topside platforms, and other common
steel constructions. The company provides engineering, construction and supply of labor for
strenuous activities such as, project management, engineering design, procurement, and
construction for the activities of Liquefied natural gas (LNG), oil and gas, of refined, chemical,
petrochemical, power plant, and other heavy industries (mining, dock and building).
XYZ Company really places its position to expand brand and service which capacity
of the oil and gas industry to improve the infrastructure, technology and excellence operational
that are needed for long-term survival in the industry. XYZ Company continues to develop a
secure platform with local offices in Batam to win the trust and dedication of local and global
clients and furthermore to develop recognition of brand in Asia. XYZ Company's primary goal
is to target clients who require services for pipeline construction, power industry, job
maintenance and fabrication projects.
1. Characteristics of Respondent
Profile of respondents is the data that displays objects which are respondents
being grouped based on, the education, the work part, income and tenure. To obtain the
data in this research, the researchers distributed questionnaires to the respondents,
namely 75 respondents. The following is to group of profile of respondents which are
divided based on the work division, age, education, income and tenure.
a. The work division.

Respondents in this research instrument are the respondents in helper division in the
number of 29 people (38.7 %). While the fewest respondents are respondents in the
QC division in number 2 (2.7 %). In helper division is obtained the most

respondents due to this division is really needed , especially by the welder division
to assist them to do many activities such as grinding, cutting wire / iron, lifting
materials and others.
b. Characteristics of Respondents based on Age

it can be concluded that the most respondents in this research instrument are
respondents who age 22-25 years old in the number of 19 people (25.3 %).
However, the fewest respondents who age 42-45 in number 5 (6.7 %).
Respondents’ age 22-25 years old are the highest number due to this aging is still
very productive to do many activities. For those age 22-25 years old has still a
strong physical to do hard activities. While respondents age 42-45 have low
productive levels due to this aging is greatly affected by the workers’ physicals.
c. Characteristics of Respondents based on Education

Respondents who have last education high school or equivalent to vocational
school are the highest number of respondents because education is very important
in doing the job. Skill and the knowledge can be gained and applied in the job, such
as calculation, skill in the field of mechanical and electrical engineering, and others.
The company will employ workers not only who have education, but also workers
who have work experience, but the workers who have the last elementary education
have been a special consideration for the company, especially for workers who
already have a lot of work experiences and a good work abilities so that they can be
accepted in the company.
d. Characteristics of respondents based on income

it can be concluded that the most respondents in this research instrument are the
respondents by getting income of >5 million as many as 34 people (45.3%).
However, the fewest respondents are respondents who get income of 2-3 million as
many as 3 (4.0%).The most respondents are the respondents who have income > 5
million because of the work that is given by the company is hard work to workers
and it is related to a large project. In addition, the workers who earn > 5 million are
workers who have overtime and more work hours than training workers do. However
the respondents who have income of 2-3 million are workers who are still in training
or probation for 3 months.
d. Never Work in Construction Company Before

Based on research results, it can be concluded that the most respondents in this
research instrument are the respondents who have never worked in the construction
company, as many as 39 people (52.0 %). This is caused the most respondents are
migrants from outside the area of Batam. However, the fewest respondents are
respondents who have worked in the construction company, as many as 36 people
(48.0 %). Respondents who have worked in Construction Company are respondents
who have lived in Batam for a long time and had experience of working in a
construction company in Batam as well as outside.

e. There is a health post in the Workplace
Based on research results , it can be concluded that the most respondents are
respondents who answered to have a health post in the workplace, as many as 70
people (93.3 %). This is caused the 70 respondents are employees who have been
working in the XYZ Company for a long time and they have known the environment
of XYZ company area. However, the fewest respondents are respondents who
answered not to need a health post in the workplace, as many as 5 people (6, 7 %).
Respondents who answered that there is not found a health post in the workplace are
respondents (new workers), they have not known overall about environment of
workplace in XYZ Company.
Table 1 Descriptive Statistic Analysis of Safety variable
Safety(X1)
Frequency of Respondents’ answers
Items Mean Total
1 % 2 % 3 % 4 % 5 %
Safety Clothes in standard 0 0.0 0 0.0 3 4.0 31 41.3 41 54.7 4.51 75
Safety Shoes in standard 0 0.0 0 0.0 19 25.3 30 40.0 26 34.7 4.09 75
Safety Eye glasses in standard 0 0.0 0 0.0 6 8.0 36 48.0 33 44.0 4.36 75
Ear plug in standard 0 0.0 0 0.0 3 4.0 38 50.7 34 45.3 4.41 75
Safety gloves in standard 0 0.0 1 1.3 16 21.3 27 36.0 31 41.3 4.17 75
availability of respirator 0 0.0 0 0.0 8 10.7 38 50.7 29 38.7 4.28 75
Quality Machine 0 0.0 1 1.3 14 18.7 37 49.3 23 30.7 4.09 75
Deliverance of rules and K3 procedures 0 0.0 0 0.0 2 2.7 37 49.3 36 48.0 4.45 75
The importance of the introduction of HSE 0 0.0 0 0.0 2 2.7 31 41.3 42 56.0 4.53 75
The importance of socialization APD 0 0.0 0 0.0 1 1.3 30 40.0 44 58.7 4.57 75
Implementation of HSE procedures
effectively 0 0.0 0 0.0 3 4.0 22 29.3 50 66.7 4.63 75
Installation of banners HSE 0 0.0 1 1.3 2 2.7 31 41.3 41 54.7 4.49 75
HSE supervisor for protective equipment 0 0.0 0 0.0 4 5.3 30 40.0 41 54.7 4.49 75
HSE Supervision and check material
procedures 0 0.0 0 0.0 4 5.3 33 44.0 38 50.7 4.45 75
The participation of workers in training HSE 0 0.0 0 0.0 1 1.3 23 30.7 51 68.0 4.67 75
Mean 4.41
Safety variable is measured by 15 items of questions with equipment indicators and

equipment safety, communication and prevention of occupational accidents. The mean value
or the averages of all the items are 4.41. The value illustrates that respondents’ responses to
occupational safety variable are positive. In the table and the graph above show that the
averages of respondents’ responses are 4.41, the average of response to occupational safety
variable (X1) is very positive. The positive response of respondents to the variable safety
include clothes safety used workers, safety shoes provided, glasses work safety and earplugs
(ear plugs) provided are appropriate standards, gloves safety and masks provided by the
company and the machines which are used to work have good quality.
Respondents responded positively to the availability of safety rules and procedures to
be followed by the workers, the company also provides an introduction (induction) at the
beginning to start to work; the company also socializes the importance of the use of personal
protective equipment (PPE) to the workers. Respondents gave positive response about the
implementation of safety procedures to prevent work accidents. There are safety banners in
the workplace; they may always remind workers to be careful in work. Respondents agreed

on Safety supervisor who always reminded to use personal protective equipment when
working, supervisors Safety always checked the suitability of the procedures, keep the
material properly, the participation of workers in safety training is very important to run on
safety procedures in the workplace.
Table 2 Descriptive Statistic Analysis of Occupational Health variable

Occupational Health (X2)
Frekuensi Jawaban Responden / Frequency of Respondent’s
Item responses Mean Total
1 % 2 % 3 % 4 % 5 %
Competence of using work tools 0 0.0 1 1.3 3 4.0 47 62.7 24 32.0 4.25 75
Ability to understand English 0 0.0 1 1.3 9 12.0 49 65.3 16 21.3 4.07 75
The effect of Light when welding 0 0.0 0 0.0 6 8.0 35 46.7 34 45.3 4.37 75
The effect of noise in the work place 0 0.0 0 0.0 7 9.3 34 45.3 34 45.3 4.36 75
Implementation of keeping clean in work
0 0.0 0 0.0 14 18.7 31 41.3 30 40.0 4.21 75
place
Importance of keeping clean in work place 0 0.0 0 0.0 10 13.3 34 45.3 31 41.3 4.28 75
Importance of clean work place 0 0.0 0 0.0 11 14.7 34 45.3 30 40.0 4.25 75
availability of clean toilet 0 0.0 5 6.7 22 29.3 34 45.3 14 18.7 3.76 75
Availability of tap water 0 0.0 2 2.7 20 26.7 38 50.7 15 20.0 3.88 75
availability of clean water 0 0.0 0 0.0 15 20.0 45 60.0 15 20.0 4.00 75

availability of polyclinic 0 0.0 1 1.3 9 12.0 45 60.0 20 26.7 4.12 75
Giving guarantee of occupation health 0 0.0 0 0.0 7 9.3 48 64.0 20 26.7 4.17 75
Means Variabel 4.14
Occupational health variable is measured by 12 items of questions with indicators of

employee’s competence, physical work environment, health care and health maintenance.
The mean value or the average of all items is 4.14. This value illustrates that respondents’
responses to occupation safety variable is positive (average value above 4).
In the table and the graph above show that the average of respondent’s responses is
4.14, it is very positive to occupational health variable (X2). Respondents feel having
competence to use work tools, the respondents state that they are able to understand the
instructions in English, respondents know and understand about the effect of lighting a fire
during welding and the effect of noise in the workplace, respondents understand and
implement awareness of the importance of environmental hygiene work to avoid
disturbance of sense of smell and health problems, respondents also put garbage in
accordance with its place in order to avoid a fire in the work place, respondents state that
the company already provides toilet in the workplace environment as well as the
appropriate standard faucet for washing of the body such as the feet, hands and face. The
Company has been providing drinking water in the workplace. The Company also provides
polyclinic for health care for workers, so that workers can check their health every time.

3. Multiple Regression Test results
Table 3, The Result of Multiple Regression

Dependent variable Independent Variable B t Sig. Pengaruh / Effect
Occupational Safety
-0,084 -2,201 0,031 Negative and Significant
Variable (X1)
Awareness Variable in
running SOP (Y) Occupational Health
0,296 6,117 0,000 Positive and Significant
Variable (X2)
Constant = 7,225
R = 0,586 Nilai Kritis / Critical Value:
R square = 0,343 t tabel = 1,9930
Adjusted R square = 0,325 Ftabel= 3,12
Fhitung = 18,785 Sig. =0,000
Based on the data in Table 3, it can be obtained parallel of multiple regression

value, in this below.
Y = 7,225 - 0,084 X1 + 0,296 X2 + e
From this parallel explains the test result simultaneously and partially
concerning the effect of occupational safety variable (X1) and occupational health
variable (X2) to awareness variable in running SOP (Y). The constant has a value of
7.225, which means if the occupational safety variable (X1) and occupational health
variable (X2) are zero, then the awareness variable in doing SOP (Y) has a value of
7.225. The value of the regression coefficient on the variable Safety (X1) is negative
and significant, namely -0,084 which indicates that there is a reverse effect between
safety variables to awareness in implementation of SOP. However, value of the
regression coefficient on the occupational health variable (X2) is positive and
significant, namely 0,296.
Partial test in Table 3 can be interpreted that effect of safety variable (X1) to
awareness variable in doing SOP (Y) is obtained t arithmetic (-2.201) ≥ t table (1.9930)
and the significance level (0.031) ≤ 0.05. While the partial test on occupational health
variable (X2) can be interpreted that the effect of occupational health variable (X2) to
awareness variable in doing SOP (Y) is obtained t arithmetic (6.117) ≥ t table (1.9930)
and the significance level (0,000) ≤ 0 05. It can be concluded that the occupational
health variable (X2) partially has a significant effect in running awareness variable in
doing SOP (Y). Simultaneous test in Table 4 can be interpreted that the F test in a
significance level of 0.000 is obtained value of F (18.785) ≥ F tabel (3.12). It can be
concluded that the independent variables are occupational safety variable (X1) and
occupational health variable (X2) simultaneously affect the dependent variable, namely
the awareness variable in doing SOP (Y). On the value of R is obtained 0.586. So, it can
be concluded that the safety variable (X1), occupational health variable (X2) have a
sufficient relationship to awareness variable in doing SOP (Y). It is said to be
sufficient, according Sugiyono (2007), the value of 0.586 is included in the value of
interpretation of the correlation coefficient (.40 to .599), which means having a
sufficient correlation.

However, the coefficient of determination (R square) is obtained 0.343 (34.3%),
which means a variation of awareness in doing SOP is explained by occupational safety
variable and occupational health variable and the rest is explained by other variables.
While the adjusted value Rsquare is obtained 0.325 (32.5%).
The Result of Hypothesis
1. The result indicates that the hypothesis 1 is accepted which is evidenced by

arithmetic t (-2.201) is bigger than table t (1.9930) and the level of significance
(0.031) is smaller than 0, 05. So, it can be concluded that H0 is rejected and Ha is
accepted, then there a significant influence between the occupational safety variable
(X1) to awareness variable in running SOP ( Y ) in the XYZ Company at Batam.
2. The result indicates that the hypothesis 2 is accepted which is evidenced by
arithmetic t (6.117) is bigger than t table (1.9930) and the level of significance
(0.000) is smaller than 0.05. It can be concluded that the H0 is rejected and Ha is
accepted, then there is a significant influence between occupational health variable
(X2) to awareness variable in running SOP (Y) in the XYZ Company at Batam
3. Simultaneous test result indicates that the hypothesis 3 is accepted which is
evidenced by the level of significance 0.000 is smaller than 0.05 and gotten F value
(18.785) is bigger than table F (3.12).So, it can be concluded that the occupational
safety and health can increase employees’ awareness in running the SOP (Standard
Operating Procedure).
4. Based on the test result of research which uses regression analysis technique
between safety variable and occupational health variable to the awareness variable
in running SOP, it can be said that the more influential variable predominantly is
occupational health variable that is 0,084. However; occupational health variable is
obtained 0,296.
DISCUSSION
1. Safety Awareness Influential Running Standard Operating Procedure

Dimensions of this safety gear and equipment is related to the Personal Protective
Equipment (PPE) such as safety clothing, safety shoes, work safety goggles,
earplugs (ear plugs), safety gloves, mask work (respirators) and machine is used in
working. In this dimension is important to be used to increase the safety of
employees of XYZ Company. Then the dimension of communication is related to
the socialization of the importance of safety and delivering of working procedures.
Socialization and job submission procedure is also known as HSE Induction.
Socialization of the importance of safety and the delivering of working procedures
are done by each new employee. Socialization aims that employees understand
safety procedures when working in the field. While dimension of prevention of
occupational accidents is related to the implementation of occupational health and
safety procedures, installation of banners of occupational safety and health, safety
management and supervision of occupational health and safety training. In this
dimension aims to influence employees to work according to the procedure which
is obtained by the company and supervise employees to obey always company's
procedures.

The result of this analysis is obtained from the safety variable (X1) which indicates
that in partial, there is significant influence on the awareness variable running SOP
in XYZ Company. Results of this analysis is evidenced by getting the value of the
safety coefficient of -0.084 to awareness in running SOP, in level of significance
(0.031) ≤ 0.05, which means there is a negative and significant influence on the
awareness variable in running SOP (Y). It is said to be a negative influence due to
the implementation of safety at XYZ Company has influence of awareness in
running SOP low. This result is also confirmed by the result of interviewing from
Admin Training HSE source which states that there are some employees who
neglect safety and health procedures such as the use of personal protective
equipment incompletely if there is not the supervision of the Supervisor HSE.
Therefore, HSE Supervisor always makes an HSE report that is conducted every
day during working and the end of each job so that employees obey the company's
procedures.
The result of this analysis is obtained from the safety variable (X1) which indicates
that in partial, there is significant influence on the awareness variable running SOP
in XYZ Company. Results of this analysis is evidenced by getting the value of the
safety coefficient of -0.084 to awareness in running SOP, in level of significance
(0.031) ≤ 0.05, which means there is a negative and significant influence on the
awareness variable in running SOP (Y). It is said to be a negative influence due to
the implementation of safety at XYZ Company has influence of awareness in
running SOP low. This result is also confirmed by the result of interviewing from
Admin Training HSE source which states that there are some employees who
neglect safety and health procedures such as the use of personal protective
equipment incompletely if there is not the supervision of the Supervisor HSE.
Therefore, HSE Supervisor always makes an HSE report that is conducted every
day during working and the end of each job so that employees obey the company's
procedures.
2. Occupational Health Effect Running Standard Operating Procedure

Dimension of employees’ competencies is related about understanding of the use of
safety equipment and English language. These dimensions are essential to the
activity of XYZ Company employees. If they understand the use of safety equipment
and English language, then the employee will be easy to do the job and the
possibility of accidents will also be low. Then on the physical dimension of the work
environment is related to lighting, noise and cleanliness of the work environment. In
this dimension will greatly affect the physical health of employees. If the employee
has a good physical and spiritual health, then a workplace accident will be avoided.
For the dimension of health facility is related to provision of shower and clean water,
supplying drinking water and health care facility / clinic. Health facility should be
provided by the company as supported facility is required by employees in working.
For the dimension of health care is related to BPJS (Social Security Organizing
Body). BPJS card can be used if an employee is sick and getting accident. BPJS card
given is by company which consists of two cards BPJS, namely health and BPJS
Employment. BPJS health can be used for caring of employees and their families
when getting illness. While the employment BPJS card is used by employee who get
injured at work in the workplace.

Result of the analysis of the occupational health variable shows that is found partial
significant influence on the awareness variable in running SOP (Y) at company
XYZ. Result of the analysis is proved by getting the acquisition of occupational
health regression coefficient value of the SOP awareness of 0.296. In significance
level (0,000) ≤ 0.05, which means there is a significant and positive influence of
occupational health between variable to occupation health variable and awareness
variable in running SOP. It could be said that the implementation of occupational
health in XYZ Company is very good. Employees are given a health facility such as
paramedics and clinics as well as facilitated by health insurance such as BPJS
Health, BPJS Employment and Prudential Insurance. So that employees give good
feedback to follow company procedures such as conducting HSE induction before
going to work environment.
CONCLUSIONS
The aim of this research is to test the effect of independent variable, occupational
safety and health to the awareness in doing SOP (Standard Operating Procedure).
The conclusions of this research are The value of regression of occupational Safety
variable (X1) significantly affects awareness variable in doing SOP (Y). The value of
regression coefficient is negative and significant value that is equal to -0,084, with t
arithmetic (-2.201) ≥ t table (1.9930) and the significance level (0.031) ≤ 0,05. So
that, it can be concluded that employee of XYZ Company has high occupational
safety but it affects on decreasing the level of awareness in doing SOP (Standard
Operating Procedure). So, It is still included in a less awareness in doing SOP. The
value of regression coefficient of occupational health variable (X2) significantly
affects awareness variable in doing SOP (Y). The value of regression coefficient is
positive and significant, which is 0,296, with the value of t arithmetic (6.117) ≥ t
table (1.9930) and the level of significance (0,000) ≤ 0.05. It can be concluded that
employee of XYZ Company has an occupational health which affects occupational
awareness in doing SOP (Standard Operating Procedure). The result of descriptive
statistical analysis in the occupational safety variable shows that respondents on
average (means) of 4.41 which is in the positive region to agree strongly. The result
of descriptive statistical analysis in occupational health variable also shows that
respondents on average (means) of 4.14 which is in the positive region to agree
strongly.
REFERENCES
Arikunto, Suharsimi. (2006). Prosedur Penelitian Suatu Pendekatan Praktik. Jakarta:

Rineka Cipta.
Budianto, Fendy. (2014). Pengaruh Keselamatan dan Kesehatan Kerja Terhadap
Komitmen Organisasional Karyawan pada Bagian Produksi PT. Sumber Kencana
di Bojonegoro. Jurnal AGORA. Vol. 2, No. 1. ISSN 2303-1174.
Calabro, Karen. S, et al. (2015). Organizational Culture and Health and Safety. Journal
of AAOHN. Vol. 48, No 480-486. ISSN 08910162.

Christina, Djakfar, dan Thoyib. (2012). Pengaruh Budaya Keselamatan dan Kesehatan
Kerja (K3) Terhadap Kinerja Proyek Konstruksi. Jurnal Rekaya Sipil. 6 (1), 1-13.
ISSN 1978 – 5658.
Dessler, Gary. (2009). Manajemen Sumber Daya manusia. Edisi Kesepuluh Jilid 2.
Jakarta: Indeks.
Fitriani, Nisaul, Panji Deoranto dan Wike Agustin Prima Dania. (2013). Analisis
Pengaruh Keselamatan dan Kesehatan Kerja (K3) Terhadap Produktivitas Tenaga
Kerja. Jurnal Industria. 2 (2), 93 – 105. ISSN 1403-377.
Ghozali, Imam. (2006). Statistik Nonparametrik. Semarang: UNDIP.
Hartono. (2011). Metodologi Penelitian. Pekanbaru: Zanafa Publishing.
Kheni, Gibb and Dainty. (2008). Health and safety management in developing
countries. Journal of Construction Management & Economics. 26 (11), 1159-
1169. ISSN 0144-6193.
Mangkunegara, Anwar Prabu. (2007). Evaluasi Kinerja Sumber Daya Manusia.
Bandung: Refika Aditama.
R. Cooper, Donald dan S. Schindler, Pamela. (2006). Metode Riset Bisnis. Jakarta:
Media Global Edukasi.
Santoso, Purbayu Budi dan Ashari. (2005). Analisis Statistik dengan Micosoft Excel dan
SPSS. Yogyakarta: ANDI.
Sarwono, Jonathan dan Martadiredja, Tutty. (2008). Riset Bisnis untuk Pengambilan
Keputusan. Yogyakarta: ANDI.
Sekaran, Uma. (2006). Research Methods for Business: Metodologi Penelitian untuk
Bisnis. Jakarta: Salemba Empat.
Somat, Ismed. (2013). Teknik Efektif dalam Membudayakan Keselamatan dan
Kesehatan Kerja. Jakarta: Dian Rakyat.
Sugiyono. (2011). Metode Penelitian Administrasi. Bandung: Alfabeta.
Sunyoto, Danang. (2012). Manajemen Sumber Daya manusia. Yogyakarta: CAPS.
Suyono, Karina Zain dan Nawawinetu, Erwin Dyah. (2013). Hubungan antara Faktor
Pembentuk Budaya Keselamatan Kerja dengan Safety Behaviour di PT DOK dan
Perkapalan Surabaya Unit Hull Construction. Jurnal Seminar IV. 2 (2), 67-74.
ISSN 1978-01-76.
Umar, Husein. (2008). Metodologi Penelitian untuk Skripsi dan Tesis. Jakarta: Raja
Pers.
W, Pungky. (2004). Peraturan Keselamatan dan Kesehatan Kerja. Jakarta: Departemen
Tenaga Kerja dan Transmigrasi R.I.
Yani, H. M. (2012). Manajemen Sumber Daya Manusia. Jakarta: Mitra Wacana Media.
Zulyanti, Noer Rafikah. (2013). Komitmen Kebijakan Keselamatan Dan Kesehatan
Kerja (K3) Sebagai Upaya Perlindungan Terhadap Tenaga Kerja. Jurnal Ilmu
Sosial dan Humaniora. 1 (2), 39 – 91. ISSN 2302-35

Increasing Traditional Retailers Competitiveness in Bandung.
Sri Astuti Pratminingsih and Eriana Astuti
Widyatama University, Bandung, Indonesia
Abstract
This study aims to analysis the influence of store atmosphere and shopping motivation
toward customers’ loyalty at traditional market.The method used in this research was
associative-descriptive survey. A sample of 200 cnsumers was taken using accidental
sampling method. The study was analyzed by regression analysis. The result shows that there
is influence of store atmosphere as much as 28.2% to customer loyalty. The study also founf
that shopping motivation influence 32.5% towards the customers’ loyalty. Therefore, it is
suggested to the management of traditional market to maintain and manage improvement
efforts in store atmosphere and shopping motivation to retain the market especially in the
raise of competition level in retail industry.
Keywords: retail industry, traditional market, store atmosphere, shopping motivation, loyalty
Introduction
Retail industry in Indonesia is growing and become an attractive market for global
retailer.APRINDO (Indonesian Retailers Association) estimates that growth of the retail
industry in 2015 is 12% ( Rp188,16 trillion when compared to the realization in 2014 of Rp
168 trillion). There are three main factors that affect the growth of retail in Indonesia,
namely: (1)Economic growth is fairly stable at around 5% and above. (2) The population of
Indonesia continues to rise. Most of the population of Indonesia middle-class status. (3)
Changes in people lifestyle who like to buy new products.
One of the player in retail industry is traditional market. The traditional market as retailer has
strategic value in maintaining the balance of the economy development because it embareces
67.7% of small and micro retailers and provide 12 million jobs for people. According to BPS
data in 2013, there are 13,450 traditional markets throughout Indonesia, and accommodate as
many as 12.6 million merchants who live and work from the market. This number does not
include those who become suppliers of merchandise and market manager. The amount will be
greater if each trader has to support a wife and two children, meaning there are 50.4 million
people of Indonesia who depend on the traditional market. That is the main reason for
maintaining traditional market and even developed.
Despite its importance, traditional markets are facing various problems such as the growth of
modern retailers, the retailer of various countries began to take over the traditional retail
market in Indonesia. AC Nielsen (2013) survey results in 2013 showed the number of
traditional market continues to decline 8%. In 2013 BPS data showed, at least 1.625 million
traditional market traders are forced out of business due to the proliferation of modern
markets, minimarkets and supermarkets. Other problem that challenged traditional market is
a change in consumer behavior to shop at traditional markets. Currently there is a decline
tendency for people to shop at traditional markets and move on to the modern market. For
that, the traditional markets must improve themselves in order to survive in the increasingly
fierce competition.

Previous studies found that store environment have significant impact on customer purchase
behavior in retail shop (Singh,P, Katiyar.N, Verma,G, 2014; Chen,S.H and Hsieh,T, 2011).
According to Kotler (2001) store atmosphere which is planned in accordance with the target
market and can attract consumers to buy.Therefore , it is very important for traditional market
to create attractive store atmosphere. Traditional markets should be an attractive place to
make a bargain, transactions, social interaction that can encourage the traditional retailers of
becoming the locomotive of economic growth.
Shopping motivation is other factor that infleuence customer loyalty in retail store. Subagio
(2011) stated that motivations are the fundamental reasons for a particular shopping behavior
and play a vital role in understanding the decision making process of customer in retailer.
Shopping motivation arising from the various needs of consumers which are now becoming
increasingly complex. Consumer shopping motivation can be divided into two types: the
utilitarian and hedonic shopping motivation (Engel et al. 1994 in Subagyo, 2011. Utilitarian
motivation is the motivation that drive the selection and decision making based on utility and
function maximizing approach (Pratminingsih S.A and Budi Prasetya.A., 2015). Their
judgments are based on cognitive activities, goal-oriented and conducting necessary task.
Thus the utilitarian shopping motivation is the motivation of consumers to shop for really
require or benefit from a product. While the hedonic motivation is the motivation of
consumers to shop for shopping is a pleasure that does not pay attention to the benefits of the
product purchased (Utami, 2010: 47).
There has been many researchers who conducted studies of store atmosphere and shopping
motivation, but most do so in modern retailers (Subagyo, 2011) while committed to the
traditional market is still very small. The objective of this study is to examines the effect of
store atmosphere and shopping motivation on customer loyalty of traditional markets. This
study will describe and provide empirical evidence of the relationship between store
atmosphere and shopping visitor loyalty motivation with traditional markets.
Literature review
Customer loyalty
Loyalty is defined as “a deeply held commitment to re-buy or re-purchase a preferred
product/ service consistently in the future, thereby causing repetitive same-brand set
purchasing, despite situational influences and marketing efforts having the potential to cause
switching behavior” (Oliver, 1999). Kotler and Keller ( 2007) depicted loyalty as a strongly
held commitment to purchase or subscribe to a particular product or service again in the
future although there was an effect of the situation and marketing efforts that could
potentially lead to changes in behavior.In retail industry, enhancing loyalty is crucial matter
especially when the competion in retail industry become more intense. It is argued that loyal
customers are willing to pay a premium price, and make cost saving through repeat purchase
(Gomez in Pratminingsih, 2015). Zeithaml, Berry and Parasuraman (1996) states that loyal
customer associated with the ability of service providers to make consumers: (1) remain loyal
to repurchase, (2) Stating the positive things about the brand or product purchased (WOM), (
3) recommending the product to other prospective buyers, (4) Spend more money for such
products, (5) are willing to buy at a premium price.
Oliver (1999) argued that loyalty development consist of four stages that emerge
consecitively over a period of time. The first stage is cognitive loyalty. It is believe that
loyalty established by the information about the product superiority than others. Cognitive

loyalty is based on an evaluation of the functional characteristics, especially the costs,
benefits and quality, if consumers feel that the company's competitors provide better offer
based on cost benefit ratio then they will move on to a competitor. The second stage is the
emergence of affective loyalty which are driven by factors that give rise to joy and
satisfaction and become the object of preference. High customer satisfaction is correlated to
the desire to buy again in the future. The third stage is conative loyalty. Conative loyalty is a
loyalty that indicates an intention or a deep commitment to make a purchase. The fourth stage
is the action loyalty. In this stage after going through three stages sequentially preceding the
consumer is ready to make a purchase, then at this stage of the consumer to take action
purchase.
Menurut Jacoby and Chesnut (1978) loyalty is measured through one of the three approaches,
namely; (1) behavioral approach, (2) the attitudinal approach, and (3) the composite
approach. Behavioral is based on real consumption, such as the purchase of a continuous,
patronage proportion (proportion of patronage) as well as the probability of purchase
(Toyama & Yamada, 2012). On attitudinal approach, loyalty is measured by the strength of
consumer’s desires to establish a relationship with the firm (Nguyen, Leclerc, LeBlanc,
2013). While the composite approach is the integration between the behavioral approach and
attitude approach (Dick and Basu, 1994). They purposed that loyalty is determined by a
combination of repeat purchase and relative attitude.
Store atmosphere and Loyalty

Store atmosphere can be defined as a design of store environment to create specific emotions
influences in consumers through the use of the five senses (sight, sound, smell, and touch) in
an effort to increase the likelihood of consumers to purchase goods or services offered by the
company (Kotler, 2001; Levy etal, 2012). Utami (2008: 217) explained that the atmosphere is
a combination of physical characteristics, such as architecture, the layout (display) , lighting,
color, temperature, music, and aroma which aims to design an emotional response and
customer perception and to influence customers to buy the product. The purpose of the
Atmosphere and store lay out is to influence the attention and desire of consumers to visit the
store, so it can influence consumer purchasing decisions. Store atmosphere is able to create
positive feeling where consumers easy to find the products they need, retaining them to to
stay longer, encouraging impulse buying, influencing them to the make purchases, and give
satisfaction in the shop. Kotler (1973) illutrated the relationship between store atmosphere
and probability to buy as follow:
Buyers Effect of perceived Impact of buyer’s

modified Sensory quality
perception related sensory qualities on
information and of the space
to sensory modifiying buyer’s
Aafective state on surrounding
qualities of the information and
his purchase purchase object
space effective state
probability
Figure.1. The causal chain connecting atmosphere and purchase probability
Bitner (1990) argued the carefully planned retail atmosphere is important key to attract
consumers to visit the retail. Turley and Ronald (2000) proved that store atmosphere can
affect in puchasing a product or service. Store atmosphere as an effort to design
environmentally atmospheric bought to produce specific emotional effect to buyers to

increase their buying. If the customers are happy with the atmosphere of a retail store then
likely the customer will revisit and repurchase the product are offered by the store and will
eventually become a loyal consumer (Ballantine et al, 2010, Ray & Chiagouris 2009).
Therefore the proposed hypotheses is :
H1: Store atmosphere influence customer loyalty in traditional market
Shopping Motivation and Loyalty

One of the factors that influence shopping decision making is shopping motivation (Slomon,
2008). Schiffman and Kanuk (2000) says that motivation can be defined as a driving force in
a person who lead them to perform an action. Shopping motivation will also impact on the
overall evaluation against a retailer whether they are satisfied or not with their experience
shopping (Tauber, 1972). Shopping motivation can be divided into two types; utilitarian
motivation and hedonic shopping motives (Engel, 1994).
Utilitarian shopping motives emphasis on the values or benefits that can be gained from
shopping activities, as a related task, sensible, cautious, and the efficiency of the activity.
Shopping with this motivation is product orientation according to the needs. Price, product
quality and efficiency are key considerations. While the motive hedonic shopping motivation
more oriented toward fun and entertainment and emotional worth of shopping (Westbrook &
Black 1985) . According to Arnold and Reynolds (2003) there are six dimensions of hedonic
shopping motives, namely: adventure, gratification, role, value, social and shopping
ideas.Subagio (2012) in the study proved that the motive of shopping hedonic and utilitarian
shopping motives influencing consumer loyalty in shopping in a positive and significant.
Hedonic shopping motivation create perceived pleasure consumers in shopping so as to make
them loyal to a retailer. Nguyen (2007) also says that shopping motivation affect customer
satisfaction and loyalty towards the retailer. So based on this, the hypothese is:
H2: Shopping motivation influence consumer loyalty in traditional markets
Research Methodology
This study uses the explanatory research, which is a study that aims to explain why an event
happened and to build, elaborating, expanding or testing the theory and find an explanation of
the influence / relationship between one variable to another variable (Nuryaman, Veronika,
2015).
The population of this study was defined as adult consumers who shopped in traditional
market, in Bandung. The data for this study were collected using self administered
questionnaires distributed throughout the market. The sample size of this study is 200 people
who shopped in traditional market.
Measurement
Measurement used to assess the study variables were developed based on the measurement
scale used in previous studies. The questionnaire is divided into two parts: the part to
determine the demographic profile of the respondents and the second part relates to the
research variables are: store atmosphere, shopping motivation and loyalty. The questionnaire
was adopted from previous research. Store atmosphere using a measurement that consists of
19 questions relating to the exterior, general interior, store layout and interior displays.
Shopping motivation is measured using the measurement consisting of 17 questions .Loyalty
instrument using measurement which consists of 4 questions.

RESULT OF THE STUDY
Responden Profile
Based on the results of the survey showed that respondents consisted of 149 respondents are
female (74.5%) and 51 respondents are male (25.5%). This is understandable because
shopping is regarded as women task. Based on the age of therespondents, majority of the
respondents aged on the range of 31 to 50 years (64.5%). The majority of respondents are
married respondents (87%) and the remaining of 13% of respondents unmarried. Based on
the education background, 36% of the respondents have bachelor degree and 39.5%
graduated from senior high school, 19% graduated from vocational studies and the remaining
has a master's degree. Most respondents said they visited a traditional market on average 4 to
5 times a month.
Table 1. Respondent demographic Profile
Variable Description Frequency Percentage

Gender Male 51 25,5%
Female 149 74,5%
Age < 20 years old 8 4,0%
20 – 30 years old 63 31,5%
31 – 40 years old 83 41,5%
41 – 50 years old 46 23,0%
Occupation House wife 2 1,0%
Student 25 12,5%
Employee 113 56,5%
Public officer 30 15,0%
Entrepreneur 30 15,0%
Education High school 89 39,5%
Vocational Study 38 19,0%
Bachelor degree 72 36,0%
Master degree 1 5,5%
Income < 3.000.000 IDR 51 25,5%
3.100.000 – 5.000.000 84 42,0%
5,100.000 – 7.000.000 27 13,5%
7,100.000 – 9.000.000 27 13,5%
> 9.000.000 11 5,5%
Quantity of visit per 1-3 times permonth 102 51,0%
month
4 – 6 times per month 72 36,0%
>6 times permonth 26 12,0%
Validity and Reliability

Validity of measurement instruments used in this study empirically assessed by examining
the square roots of each factor. According to Nazir (2012) if the square root result of each
factor is greater than the value of the table, then it is said to be a valid construct. Results of
calculations show that the value of the square root of each ranging from 0.272 to 0.762. All
values above the square root value of the table of 0.117, this means that the construct has
good validity.

To measure the reliability of the instrument used in this study then used Cronbach alpha
analysis. According Sekaran (2010) when the measurement results obtained construct more
than 0.60, it can be said that construct used in the study is valid. Table 1illustrated that the
calculation results of alpha values in this study all greater than 0.60, so all constructs in this
study reliable.
Tabel 2. Cronbach Alpha Values
Variable Alpha Cronbach Values Conclusion

Store Atmosphere 0.918 Reliable
Shopping motivation 0.863 Reliable
Loyalty 0.903 Reliable
The relation among shopping motivation, store atmosphere and Loyalty

Regression analysis is used to test the hypothesized relationships among the variables. The
research question asked whether the shopping motivation and store atmosphere have any
influence on consumer loyalty to traditional market.
Table 3. Regression between Shopping motivation, Store Atmosphere and Loyalty

Change Statistics
R Adjusted R Std. Error of R Square F Sig. F
Model R Square Square the Estimate Change Change df1 df2 Change
1 .682a .466 .460 .52058 .466 85.838 2 197 .000
a. Predictors: (Constant), SM, SA
b. Dependent variable :L
As can be seen in table 3, shopping motivation and shopping atmosphere simultaniously
influence consumer loyalty significantly (R square is 0.466), which means that 46.6% of
variation in consumer loyalty can be explained by shopping motivation and store
atmosphere.The finding is consistent with the findings of previous reserach. Muhammad,
Musa and Ali (2013) assert that atmospheric elements and shopping motivation influence
store loyalty.
Table 4. Hypotheses Result
Hypotheses R R2 t value Sig Test Result

H1 : Store Atmosphere has significant 0.531 0.282 8.823 0.000 Supported
correlation with loyalty
H2 : Shopping motivation has 0.672 0.452 12.774 0.000 Supported
significant correlation with loyalty
Table 4 shows that all hypotheses were supported. According to the outputs, p value of store
atmosphere is 0.000, which is less than α = 0.05 (p-value = 0.000<0.05). Therefore, the
alternative hypothesis (H1: Store atmosphere has significant correlation with loyalty) is
supported, which means there is a significan and positive relationship between store
atmosphere and customer loyalty towards traditional market.
The other hypothesis (H2: Shopping motivation has significant correlation with loyalty) is
also accepted based on the p value of shopping motivation is 0.000, which is less than 0.05

(p-value = 0.000<0.05). This result proved that the relationship between shopping motivation
and customer loyalty is supported.
Conclusion
The result of the study give some valuable knowledge with regards to the effects of
shopping motivation and of store atmospherics on traditional retail loyalty. The findings
demonstrate that store atmosphere fctors in traditional market significantly affect the
shoppers loyalty towards traditional market. In addition, the research finding also illustrates
that shopping motivation positively influence customers’ loyalty towards traditional market.
The traditional market is one of the social and cultural institutions that became the nation's
economic pillars that need to be maintained. Government and the traditional market managers
need to provide support to small traders who are in the market. Traditional market should
emphasize and prioritize their resources towards improving atmospherics of the markets in
order to sustain their business in the highly competitive marketplace. The small traders
should be facilitated in obataning their working capital and also need management training so
that they can manage better store.
References
1. Arnold,M.J and Reynold,K.E (2003). Hedonic shopping motivation. Journal of
Retailing, 79(2), 77 -95
2. Ballantine,P.W., Jack,R. & Parson,A.G. (2010). Atmosphereic Cues and Their Effect
on the Hedonic Retail Experience. International Journal of Retail and Distribution
Mangement, 38(8): 641-653.
3. Bitner, M.J. (1990). Evaluating Service Encounters: The Effect of Physical
Surroundings and Employee Responses. Journal of Marketing, 54(2), 69-82
4. BPS (2013)
5. Chen Shen-Han and Hsieh Tsuifang (2011) The effect of atmosphere on customer
perception and customer behavior responses in chain store supermarkets, African
journal of Business Management , vol.5 (24), pp.10054-10066, 14 October 2011.
6. Dick,A.S and Basu,K. (1994). Customer Loyalty: Towards an Integrated Conceptual
Framework, Journal of The Academy of Marketing Science, 22, 99-113.
7. Engel,J.F., Blackwell,R.D. and Miniard,P.W. (1994). Consumer Behavior, 7thed.
Orlando The Dryden Press, US.
8. Jacoby,J. and Chesnut,R.W. (1978). Brand Loyalty Measurement and Management,
New York, Wiley.
9. Kotler,P. (2001) “ Atmosphereic as a Marketing Tool”. Journal of Retailing, Vol. 49
(Winter), 48-64.
10. Kotler,P and Keller (2010). Marketing Management,Upper Sadle River,
Person/Prentice.
11. Levy ,M., Weitz,B.A. & Beitelspacher,L.S.,. (2012). Retailing Management, 8th ed.
NY. McGrawHill.
12. Muhamad,N,S.,Musa,R., and Ali.N.S. (2013). Unleashing the effect of Store
Atmospheric on Hedonic Experience and Store Loyalty. Procedia- Social and
Behavioral Science, 130 (2014) 469-478.
13. Nazir .M(2012). Reserach Method, Ghalia Indonesia, Jakarta.

14. Nguyen Nha,. Leclerc,A, & LeBlanc ,G.(2013). The Mediating Role of Customer
Trust on Customer Loyalty, Journal of Service Science and Management, 2013, 6, 96-
109.
15. Nuryaman, and Chistina,V. (2015).Research Methodology in Accounting and
Business: Theory and Practice, Ghalia Indonesia, 2015.
16. Oliver,R.L (1999). Whence Customer Loyalty?, Journal of Marketing, vol. 63,
Special Issue, 1999, pp.33 -44.
17. Pratminingsih, S.A; Prasetya, A,B (2015). Predicting Consumer Behavior Intention in
Bandung Ethnic Restaurant, APCBM Proceeding, August 29-31-2016, Seoul, Korea.
18. Ray,I. and Chagouris,L. (2009). Customer Retention: Examining the roles of store
affect and store loyalty as mediators in management of retail strategies. Journal of
Strategies Marketing, 17(1): 1-20.
19. Sakaran,U (2010). Reserach Methods for Business, NewYork: John Wiley& Sons,
Inc.
20. Schiffman,L.G & Kanuk.L.L (2004). Consumer Behavior (8thed). New York:
PrenticeHall.
21. Singh.P , Katiyar.N and Verma.Gaurav (2014). Retail Shopablity: The Impact of
Store Atmosphere & Store Layout on Cunsumr Baying Pattern, International Journal
of Scintific & Technology Research, Vol 3(8), August 2014.
22. Snepenger (2006)
23. Solomon,M.R (2008). Consumer Berhaviour: buying, having and being (8th ed). New
York: Prentice Hall.
24. Subagiyo,H. (2011). Pengaruh attribut Supermaket terhadap Motif Belanja Hedonik
dan Motif Belanja Utilitarian dan Loyaitas Konsumen, Journal of Marketing
Management, Vol.6, no.1, April 2011: 8-21.
25. TauberE.M. (1972). Why do people shop? Journal of Marketing, 36(October) 46-49.
26. Turley,L.W. and Milliman, R.E. (2000). Atmospheric effects on shopping behaviour:
a review of the experimental evidence. Journal of Business Research, 49 (2), 193-211.
27. Utami,C.W (2010), Retailing Management, Jakarta, Salemba Empat.
28. Westbrook, R.A. and Black,W.C (1985). A motivation-based shopper typology.
Journal of Retailing, 61(1), 78-103.
29. Zeithmal, V.A.,Berry ,L.l, and Parasuraman,A. (1996). The Behavioral Consequences
of Service Quality, Journal of Marketing, vol.60, No.2, 1996, pp. 31-46.

PRIVATISATION ON CAPTIVE MARKET PORT , WILL CUSTOMER SATISFY WITH
QUALITY OF SERVICE ?
Sri Rahardjo Suwito

Center For Coastal And Marine Resources Studies,
POST GRADUATE PROGRAM OF SCHOOL OF BUSINESS OF
B O G O R A G R I C U L T U R A L INSTITUTUES
ABSTRACT
Tanjung Priok as the biggest commercial port in the port system in Indonesia managed under
monopoly by PT Pelindo II as a state owned enterprise, but since the privatization policy the market
have changed into oligopoly market as a foreign investor a legal holder of privatization contract
managed a joint venture corporation with majority share holder. The change in port business
paradigm had occurred by then. In this research observation unit is privatized terminal PT. Jakarta
International Container Terminal (PT. JICT) and analysis unit are the customers of PT. JICT.
Respondent are customers of Container Terminal managed by PT Jakarta International Container
Terminal at port of Tanjung Priok. Researcher have found out that privatization is not
comprehensive privatization concept but partial privatization that unable to fulfill the customers
expectation on quality of service since the service encounter also managed by the government
agency that serve to the customer as beraucratic and not enterpreunerships style.The customers
suggest that government agency at port of Tanjung Priok change their mind for better quality of
service by employing service culture to reach customer satisfaction.
Keyword : Privatization , Service Culture, Quality of Service, Customer Satisfaction

Introduction
After the political reform in 1999, the Government has adopted a policy of privatization of services
company container terminal which is a business unit or subsidiary PT (Persero) Pelabuhan
Indonesia II, better known by PT Pelindo II as a state owned government to manage the port
commonly cultivated in ten (10) provinces in Indonesia. As the world's largest archipelago nation,
Indonesia has a sea that connects a series of islands large and small who number around 17,000
islands. Therefore, Indonesia needs to have communications and transport at sea that shapes the
country as a whole Politics and National Economy. In this case the port as an infrastructure together
with the shipping services industry plays a central role in the smooth flow of goods both domestic
trade and foreign trade Indonesia.
In the system of the Indonesian economy, public ports are managed as a monopoly by the
government through business entities in the evolution of the form of service companies, state
enterprises, agencies concession port, public corporations, and limited liability company and
according to Law No. 17/2008 on Shipping separation will occur, namely the port authority as a
function of government and business entities as the port operator. In the port services industry,
especially in the port of Tanjung Priok, business segments, handling loading and unloading of
containers is the core business of the company or spine when viewed from the revenue contribution
to the company. Container for packing goods: a transport system which is highly efficient because it
increases the productivity of the port to reduce service costs and the cost of handling the ship in
ports of Tanjung Priok Port which is the largest sea port in Indonesia in accordance with Decree No.
53/2002 concerning the National Ports Order has been designated as the International Hub port or
Trans-shipment. But on the other hand, when compared with ports in Malaysia and Singapore,
which has a greater capacity of the Port of Tanjung Priok, have a relatively less effcient.
Port Services Industry in Indonesia that manage ports that are cultivated is a state that was formed
to port business, PT (Persero). Pelabuhan Indonesia is divided into areas of operations that publicly
known as PT Pelindo ie I, II, III, and IV, each of which is the company's own and manage the port
in the area of operations that has been determined by the Minister of Transportation.
Model management and organization of the port according to the World Bank / UNCTAD (2006)
can be divided into Fully Public Port, Port Tool, Landlord Port, Fully privatized Port and Operating
Port. Based on its function Baird (1997) divides the harbor on Port Operator, Landowner and
Regulator.
PT. (Persero) Pelabuhan Indonesia I-IV operates in a monopoly market structure, because the
absence of other operators that manage public port itself there is no market competition mechanism
and management behaves as a monopolist and an arm and part of the government bureaucracy.
The shape and characteristics of the market in Container handling services business carried out by a
container terminal can basically be divided into two (2) that is a captive market and trans-shipment
market. The difference between Tanjung Priok characteristics of the market which is a captive
market compared to Singapore and Port Klang and Tanjung Pelepas in Malaysia which is a trans-
shipment market. Container Terminal in Port Klang consists of West Port and North Port and
Tanjung Pelepas managed by private operators who obtain concessions from the government of
Malaysia while the Container Terminal at the Port of Singapore remains managed by the Singapore
government through the Port of Singapore Authority (PSA). Captive market given the 100% or a
majority of the throughput of containers coming from Tanjung Priok port hinterland itself while the
trans-shipment market are largely or almost wholly derived container throughput instead of
economic and industrial centers in the hinterland port - a large port in question; but from a feeder
port is treated as its hinterland.
After the privatization policy of the unit container terminal in Tanjung Priok and the development
of the service industry container terminal to another and is a subsidiary of its own, the market
structure changes of the structure of the market monopoly into the market structure of oligopoly

given that there are more than 1 (one) management company which operates the terminal container
at the port of Tanjung Priok.
Port as a public service has raised a question of how the production branch main countries that
dominate the life of many can be privatized. Privatization is a growing participation of public
policies that allow the private sector in infrastructure management is the responsibility of the State.
Participation is possible when the private sector from a business standpoint there is the economic
level that is high enough to bring financial benefits because private profit-oriented businesses as
much as possible. Thus the paradigm shift that port as a macroeconomic instrument that has a very
strategic role for the economy of the country so a public service turned into the port as a business
entity that has a segment of business activities that can be commercialized so the private domain.
Paradigm basic science or philosophy harbor port that advantage is: "some where in the economy"
has shifted that benefit financially port can be picked directly from business activities caused.
Business concepts on the infrastructure thus direct potential to the high cost economy that will lead
to customer delivered value or the value of the services received by business customers are low
because the port that should support the economy with a profit structure that break even point a
player business directly because of port business shaped Persero that absolutely must be profitable
without subsidies from the government. This allows the point of view of development or evolution
of the port of the first generation to the third generation port at this time. Piers has been developing
based on UNCTAD (2003) evolved from the harbor to the first generation which only serves
stevedoring, then evolved into a port on the second generation that is not just a place for loading
and unloading of goods / passengers, but there is complete facility to be provided later at the time
this has developed into the third generation port is a port that is already equipped with logistic
center equipped with facilities to support the activities Distripark cargo distribution center (CDC) as
well as cargo consolidation center (CCC) .Pelabuhan on this third generation that has high
economic value and therefore can be commercialized and that is attractive to investment among
private entrepreneurs, because there are activities of logistics and transport activities integrated
goods which enables be privatization. That the purpose of a State formed a different state
enterprises with the establishment of private companies, which tend to make the maximization of
profit alone, which can not be used as a parameter or measure of success is the performance of an
SOE considering the existence of an SOE also to the mission of the government for their role as
agents of development.
The product mix of services performed privatization is a segment of container terminal care services
alone is not the whole harbor conducted privatization. Services activities at terminals located in the
ports of the world is not to be conducted by a country in the provision of facilities, but the biggest
part container terminal is still managed mixed between public / private, as is the case with the
terminals at the Port of Tanjung Priok, which has 4 (four) terminals, one terminal pristine state-
owned medium 3 (three) terminals owned and managed jointly with foreign parties in a contract
deal for 20 (twenty) years and a management contract with a fixed value, majority market share is a
business group Hutchinson Whampoa of Hong Kong which started since 1999 in the beginning of
political reform in Indonesia that leads to a democratic era.
The development of the service industry after privatization policy ptikemas terminal in Tanjung
Priok:
table 2
Container Terminal at the Port of Tanjung Priok.
Nama Terminal Hubungan dg PT Komposisi Saham
Pelabuhan Operator
Petikemas Pelindo II % (Persentase)
1 2 3 4 5
1 Jakarta International PT. Jakarta Usaha patungan 48 % PT. Pelindo II
Container Terminal International PT. Pelindo II dan 1 % Koperasi Pegawai
(JICT) Container Terminal Hutchison Port 51 % Asing
(JICT) Holding (HPH),
Hongkong
2 Koja Container Terminal Petikemas Usaha patungan 52 % PT. Pelindo II
Terminal Koja PT. Pelindo II 48 % Asing
dengan HPH,
Hongkong
3 Multi Purpose PT. Multi Terminal Anak perusahaan 100 % PT. Pelindo II
Terminal Indonesia (MTI) PT. Pelindo II 0 % Asing
4 MAL PT. Multi Alam Kontrak Lumpsum Rp. 50 Milyard per tahun
Lestari dengan PT. kontribusi pada PT.
Pelindo II Pelindo II
Source : Pelindo II.
The ownership status of container terminals in the world can be seen in Table 2 below
illustrates that the number of terminals mixed between Public / Private is the largest.
table 3
CONTAINER TERMINAL STATUS WORLD TITLE
PUBL
PRIVA
PUB IC/ PRIV
Port TE/
LIC privat ATE
public
e
1 Hong Kong 
2 Singapore 
3 Busan 
4 Kaohsiung 
5 Shanghai  
6 Rotterdam 
7 Los Angeles 
8 Hamburg 
9 Long Beach 
1 Antwerp 
0
1 Port Klang 
1
1 Dubai 
2
1 New York/ 
3 New Jersey
1 Bremen/ 
4 Bremerhaven
1 Felixstowe 
5
1 Manila 
6
1 Tokyo 
7
1 Qingdao 
8
1 Yokohama 
9
2 Laem 
0 Chabang
2 Tanjung 
1 Priok
2 Kobe 
2
2 Nagoya 
3
2 Keelung 
4
2 Colombo 
5
2 Dalian**  
6
2 Huangpu 

7
2 Nanjing 
8
2 Tianjin 
9
3 Xiamen***  
0
Source : UNCTAD/BANK DUNIA (2006).
The proportion of the number of terminals in the port of ports in the world in more detail can be
seen in chart 3 below:
200
180
160
140
Number of ports
120
100
80
60
40
20
0
PRIVATE PRIVATE/public PUBLIC PUBLIC/private
Source: UNCTAD / WORLD BANK (2006).
graph 3
Ownership classification of the container port in the sample
Source: UNCTAD Secretariat.
Investors and managers or implementing privatization of container terminals are PT Jakarta
International Container Terminal is Hutchinson Port Holding business group based in Hong Kong,
which is the largest container terminal operator in the world because it owns and manages container
terminals around the world.
PURPOSE OF THE STUDY:
This writing is intended to reveal how far the privatization policy is delivering results perceived
service users and how the effects of privatization policies referred to changes in the quality of
service. Writing goals is also to investigate and uncover and discover the facts about the quality of
care received and felt by the users of services from the management of foreign private is a global
company where service users who consist of a shipping company, shipper, consignee, trucking,
company industry or parties representing business customers as a service user container terminal
Jakarta International Container terminal (JICT) in Tanjung Priok.
THEORETICAL FRAMEWORK:
According Ramamurti (2004) why the government of a country to implement the privatization
program there are a number of reasons; which can be approached on three (3) strata discussion that
includes: (1) The discussion on the level of state-owned companies were privatized, (2) Discussion
at the industry group level, (3) The discussion on the macro-economic level or state. At the national
level in the corporation by Syafri Nugraha (2006) on the current state-owned enterprises are

generally located on the fourth generation that allows the participation of the private sector in
business infrastructure such as ports. The participation of foreign private business port in the form
of management contract on Services Industry Container Terminal for 20 years with a requirement
that private operators in question should be able to bring container ships full size in the form of
direct call which is expected to increase the value of services for business customers or customer
delivered value, which is gradually expected to reduce dependence on foreign trade Indonesia in
foreign ports, especially in Singapore such circumstances can be achieved if the customer delivered
value received by customers ie the shipping line, the shipper and consignee noticeably larger than
the accepted and felt when use the services of the port of Singapore in other words it can be said
that the level of satisfaction they felt at the service provider Container Terminal in the port of
Tanjung Priok compared using Terminal services in other ports is higher.
In the context of competition is one of the factors that make it difficult to increase the value of the
service at Container terminal in Tanjung Priok is Singapore's first geographical location is
strategically located in the Main Shipping Route that serves End to End Service of Northern Europe
to the Far East. The second is another aspect which is the parameter value improvement of a
container terminal is the concentration of cargo containers at a port which is an attraction in the
market or markets attractivenes where industrial shipping services always follow the rule of thumb:
ship follow the trade, which is expected to occur diverted traffic from ships eg large-ship that had
been trans-shipment in Singapore using Direct Call cruise to Tanjung Priok. Third is the issue of
bureaucracy as a barrier increase the value and quality of service at the port who allegedly
unimplemented service culture by all levels of public services at the port, which customer focus and
market orientation. Fourth is the limited resource production equipment
Following the policy of privatization of PT. Jakarta International Container Terminal (JICT)
Container Terminal Tanjung Priok, resulting in the development of several operators container
terminal in Tanjung Priok different management and offer each container handling services to its
customers both shipping line, shipper or consignee. "Policy of privatization of infrastructure
businesses in the form of Company Services Container Terminal has been taken by the government
and resulted in the transformation of the management of state-owned enterprises to private company
Foreign which is a global company that is expected to generate a business climate more efficient
transformation of management has resulted in corporate culture change from monopoly to oligopoly
which is expected to improve the delivery of services and increase the value of services for
customers and improve customer satisfaction.
Value Services for Business Customers and Customer Satisfaction Business services
company container at the Port of Tanjung Priok expected to be relatively low, it is thought to be
caused due to less efficient its management of a business unit that is indicated by the value of
services for business customers or customer delivered value is low and the process of service
delivery services are less effective with weak indicated by Container Terminal management system
that allegedly administered as SOE management style of the era. Likewise, the implementation of
corporate culture allegedly still not support the way business well for the business paradigm still
uses bureaucratic approach rather than entrepreneurship. Because if the corporate culture less
supportive way business properly will cause the process of delivering services to substandard, so it
will affect the value of the services rendered to the business customers to be low, which will
ultimately reduce customer satisfaction. In this case alleged that business customers are still not
satisfied with the service terminal privatization era because expectations are not in accordance with
the performance of the terminal obtained or there is a gap between expected and perceived, and not
match the value of service and cost of service.
Although privatization is a public policy involving the political and macro-economic policies of
government, but in this paper and put aside the political aspects related to the implementation of
privatization process.
Business process services in container terminal services industry is the concept of Business to
Business (B2B) as shown in the schematic above, namely:
1) Company Container Terminal Services: Terminal Operator that its business activities into the
observation of this dissertation research.
2) Channels / Intermediary Business: Freight Forwarding, Agent, EMKL, representing the shipper
and consignee.
3) Container transport service: Shipping line and trucking company representing the shipper and
consignee.
According to Cunha and Cooper (1998) that privatization brought changes such as the replacement
of a top manager of the old and new managers put more oriented to the market. This opinion
reinforces Oliver (1992), that the amendments to the values that occurred in SOEs privatized
showed changes in both internal and external aspects of the privatization of the company.
According Ramamurti (2000) that the privatization process is a very complex process because
privatization is not only the transfer of the control mechanism of the politicians to the private
managers over that privatization also resulted in the transformation of SOEs to the organization and
management structure and a new process that is a private company. Thus privatization process is
expected to result in better service delivery. In this research service encounter some that are under
the management of the units that perform services to business customers that may be in the port of
Tanjung Priok, a survey conducted by government, state-owned and container terminal operator
company PT JICT the focus of this paper.
According to Zeithaml (2009) in principle, service encounter is seen as a two-dimensional image of
a service process, in which the horizontal axis reflects the chronological action that a customer
service / service and the service provider, while the vertical axis shows the various different fields
of action. In the fourth image is the main component of the service are separated by three horizontal
lines: the line of interaction, the line of visibility, and a line of internal interaction. Line of
interaction reflects the direct interaction between the customer and the service provider
organization. Line of visibility separating all the activities and the services that appear invisible to
the customer. The line also separates between what employees do contact onstage and backstage.
Line of internal interaction separates the activities of employees in contact with the activity of other
support services. The division of tasks employees dealing directly with the customer or employee
who is supporting the entire process of delivering services. In this connection reflected that
employees onstage at the line of interaction perform direct communication with business customers,
which will assess the competence of the employees and the company image dikacamata business
customers. But this does not at all mean that employees backstage does not mean for the company
because without the support of business processes will not run because it is principally a working
team unity.
Meanwhile Ramamurti (2000) and the World Bank in Port Reform Toolkit (2003) defines that the
privatization process is a process that is very complex next World Bank (2003) states that "The
Most Complex Port of Reform is Privatization", where the pattern of operations and businesses
before and after the privatization of the port described by UNCTAD (1998) that how business
customers experience the service encounter is layered .

Privatization is the sale of shares of Persero, in part or in whole, to other parties in order to improve
the performance and value of the company, increase benefits for the country and society, as well as
broaden share ownership by the community. Privatization is applied to the container terminal
services company basically to increase the value of services for the privatization of the goal is
efficiency. According to the World Bank through the John Lethbridge (1993) states that the
objective of the privatization of port services industry concerning the interests of 3 (three) parties,
namely the Government, Enterprises Port and User Services. The government is concerned that
privatization of the port aims: to make the ports more responsive, efficient and cost effective as well
as to reduce the need for public financing of port development and to reduce the number of Civil
Servants engaged in port activities and also to generate funds through the disposal of port assets to
offset the national debt. Medium Enterprises harbor view that the privatization of the port can be: to
procure equipment, spare parts and materials very Rapidly and Often at much lower costs, to access
various sources of funds for financing additional capacity or services, to improve the performance
of labor through better recruitment, training and retention, changes in restrictive practices and better
supervision, substantially Increase the flexibility of the port in the provision of services to meet
market demands and to take into account changes in marginal costs, to Enhance the performance
and reduce the costs of various ancillary port services such as tugs, equipment maintenance, to
improve the competition within the port and with other ports. While the interests of service users
are: to reduce the overall turnaround time for vessels, cutting ship waiting time and time alongside
through better planning and the use of resources, to Ensure safer cargo handling and enhanced port
security, to provide a rapid response to users demands for specialized needs were there is a financial
or market incentives, to reduce prices charged for port services as well as the total costs to the users,
greatly improve the intermodal links through the private sector's better connections with the other
transport links and storage companies.
be described that the input and output process is a process of alternating activities in nature. The
process input in the form of arrival rate can be caused by shipping activities of foreland and
trucking loading containers from the area back up / hinterland to the container terminal and vice
versa with the output process. If done detailed description of the value chain of business processes
handling of containers in general can be seen in the schematic drawing activity 10
FRAMEWORK FOR THINKING
Privatization policy taken by the government resulting in its majority share by foreign companies
has brought a consequence there is a shift or change in corporate culture SOEs in accordance with
government bureaucracy monopolistic working always in contact and together with the atmosphere
and the direction of the political winds that happens, the culture of the company which will build a
service culture that market orientation and customer focus as a private company working
environment existing market dynamism. Corporate culture change impacts on the quality of service
and will ultimately affect the level of customer satisfaction business. So it is expected to be known
how the perceptions of business customers JICT Container Terminal in Tanjung Priok port under
the management of foreign private whether there is an increased perceived quality of service or it
can be said that privatization has increased the value for the business customers in order to obtain
satisfaction for business customers container terminal in question. If you look at the business
systems and marketing both before privatization, namely when the market was still monopolized by
the state and changes in the market into an oligopoly to be sustainable as the market leader
companies must develop a design company culture of customer focus and market orientation that
will affect the delivery of services, the value of services for business customers and improve
customer satisfaction business. Here will be described how the system of business and marketing
faced by the unit of analysis in this paper.
One of the requirements set by the government in the privatization of the Company Services
Container Terminal is improving the competitiveness of the terminal to the liabilities of terminal
operators to bring larger ships that direct calls are expected to increase customer delivered value
and that enables Container Terminal at the Port of Tanjung Priok increased competitiveness her
from Inferior to Superior Performance views of service quality. Thus Container Terminal in
Tanjung Priok results of privatization should be able to compete with the major container terminals
in the Ports in Southeast Asia.
C1 before privatization operates as a state that monopolizes the market; whereas after privatization
C1 operates in the competitive oligopoly market where customers: C2 is free to choose the use of
Container Terminal Services. Because the customer will choose the form of customer service
delivered high value in the context of creating value obtained by increasing customer benefits and
lower customer costs, then C1 must compete in an oligopoly market in question. If it is below the
monopoly of state-owned enterprises receive the container terminal business realities of the market
is given; because it is a captive market, not the case after the privatization policy which has
spawned several container terminal services company competing in an oligopoly market because
competitors have emerged C3, C1 therefore should be more customer focus and market orientation.
which always meet the demands of business customers in order to obtain quality services that he
hopes to obtain customer satisfaction In the era of monopoly marketing services performed by
transactional marketing strategies that focus on a single sale. In an oligopoly market after the
privatization of the corporate C1 marketing must change the pattern of transaction - based
marketing strategies to strategic marketing relationship that is based on high levels of customer
service, customer contact and quality play a role in relationship marketing.
Given that the ultimate goal of this research is to measure the results of the privatization policy of
customer satisfaction were also analyzed on the presence of ships direct call according to the terms
of privatization where one of them is that the management of container terminals should be able to
bring larger ships that are direct call which is a type of ship which are expected to visit the
Container Terminal in Tanjung Priok, the absence of ships direct call means it can be said yet
mechanisms for relationships marketing strategies or does myopia marketing / myopic marketing is
aiming for the target market is not quite right or it can be said privatization is not optimal.
C1 Company culture that developed after the privatization which include: Performance - Based
Culture or performance-based culture and customer focus; should be able to take the company to
meet the expectations of customers achieve the expected level of satisfaction and should also be
able to devise appropriate marketing strategies that performance base into the corporate culture, so
as to bring the ships direct call.
Market orientation that begins with the application of the concept of privatization has been
described as a public policy that allows the growing participation of private parties in the
management of infrastructure is the responsibility of the State. The participation of the private
sector is possible when there is a fairly high economic level that can bring financial benefits for the
private profit-oriented businesses as much as possible (Ramamurti 2004). With the evolution of the
generation of the harbor from generation 1 to generation 3 today (UNCTAD 2004) and the policy of
economic liberalization that led to the policy of privatizing the ports, thus a paradigm shift that
harbor the appropriate philosophy originally as an instrument of the political economy of the
country has a role very strategic for the country's economy and that control the lives of many people
who should be controlled by the state so the public domain has turned into a seaport as a business
entity that has a segment of business activities that can be commercialized so the private domain.
Paradigm basic science or philosophy harbor port that advantage is: "some where in the economy"
has shifted that benefit financially port can be picked directly from business activities caused.
Market orientation after their privatization policies which take the form of oligopoly competition
requires changes in the corporate culture of bureaucratic mechanisms of action shifting toward
competition or the free market. The theory shows a generic typology of organizational change
(Kreitner, Kinicki, 2003).
Related to organizational change by Firmansyah (2003): top management will get a lot of obstacles
when employees still think and behave the same as before SOEs privatized. So the thing that needs
attention is how to change the mindset of employees, because the employees are familiar with the
old behavior like a state bureaucracy that is a monopoly, while the existing strategic environment
requires follow market mechanisms. The process of adaptation to the new environment will be
successful if employees are able to change their behavior and old habits in communicating with
fellow members of the company and with customers. Firmansyah (2003) stated that because of the
position of the work between the top management and employees dilingkup under different, where
top management interact with the environment of a strategic nature shareholder, government
regulation of industrial structure, employees under better interact with things that are technical,
administrative and operational.
According to Levy (1986) and Firmansyah (2003): that change can be categorized as morphostatis
(first order) morphogenesis (order two). Fundamental changes morphostatis make something look
different even though the base is still in the same structure. Morphogenesis is changing the patterns
of changes in depth to the genetic code (DNA), which could affect future generations, the post-
privatization could be categorized as organizational changes that are morphogenetik, structure and
organizational processes changed the old state-owned enterprises.
According to David Osborne and Peter Plastrik (2004) that the government reform is not simply to
make government more efficient. Some destinations renewal is efficiency, but more important is the
effectiveness of government that is cheaper and better functioning government. David Osborne and
Peter Plastrik (2004) stated that the change in government organizations require a lot of political
effort because of government organizations dilautan political life business while living in a market
economy. David Osborne and Peter Plastrik (2004) explains the need to transform organizational
and bureaucratic system towards the customer-oriented governance including explicit quality
standards for public services, benchmarking and performance measurement and reforms designed to
simplify the rules and reduce costs.
In this regard the Government of Indonesia in order to meet the expectations of the "service user" (a
term used among government bureaucracy is not a term the "business customers" a term used
among pe business) has issued and set stardar minimal services for the users of services being
guidelines for operators public service providers as service performance to be achieved. Thus the
concept approach is top-down approach, the operator relatively simply observe and pursue these
performance targets without regard to how and what has been perceived and accepted business
customers with a cost already incurred. David Osborne and Peter Plastrik (2004) stated that the
transformation system and government organizations fundamentally in order to create a dramatic
increase in effectiveness, efisiens and their ability to innovate. This transformation is achieved by
changing the destination, the system of incentives, accountability, power structures, and culture
system and government organizations. Renewal is the replacement of the bureaucratic system into a
system that is self-employment. David Osborne and Peter Plastrik (2004) further argues that the
term entrepreneurial government to those who think that entrepreneurs are merely men or women
who run the business. But the true meaning of the word entrepreneur (entrepreneur) is much wider.
The word was coined by a French economist, J. B Say (1800) states that "Entrepreneurship is
moving various economic resources of a region with low productivity to regions with higher
productivity and greater results. In other words, entrepreneurs use resources in new ways to
maximize the productivity and effectiveness. Regarding the entrepreneurial model of government is
the government sector institutions that have a habit of acting like this are still using resources in
new ways to enhance the efficiency and effectiveness of government. David Osborne and Peter
Plastrik (2004) states that public servants is not a problem, the problem is with the system.
According to Oliver in Valarie A.Zeithaml (2009) on customer satisfaction that: satisfaction is the
consumer's fulfillment response In more technical declares that: we interpret this definition to mean
that satisfaction is the customer's evaluation of the product or service in terms of Whether that
product or service has met the customer's needs and expectations. Failure to meet needs and
expectations is assumed to result in dissatisfaction with the product or service. Furthermore Valarie
A Ziethaml (2009), said that although satisfaction and service quality both have a particular
meaning, but the satisfaction is usually seen as a broader concept; while the quality of services in
detail centered on the dimensions of service.
This theory is based on the quality of service is a component of customer satisfaction. According to
Kotler and Keller (2009), customer satisfaction is: "a person's feeling of pleasure or disappointment
from the resulting received Comparing a product's performance (or outcome) in relations to the
person's expectation".
The concept of customer value is very closely related to customer satisfaction. If the customer's
expectation of a company to product quality, service quality and the price is exceeded then the
company will get a high value on customer satisfaction (customer satisfaction) and will create
customer delight (customer delight). According to Gareth Jones R (2000) that the characteristics of
customer satisfaction can be distinguished:
1) Transaction-specific satisfaction: Customer satisfaction on a particular service or product from a
company.
2) Overall-satisfaction: Customer satisfaction on the overall service.
Privatization of PT Jakarta International Container Terminal is a concept that partial privatization
because according to studies that have been done and published in a World Bank report of Port
Reform Tool Kit (2006), there are still other ports privatization concept is compehensive
privatization or full privatization. According described CHAPTER II that the privatization of the
port or a terminal at the port can cause the bureaucratic longer because there is a service center or
service encounters that were previously served by previous operators, PT Pelindo II is still being
done by PT Pelindo II, such as Jasa Pandu and Delays which these services in a harbor services
business is the leading port service in the concept of privatization is not part of the authority
terminal operator PT JICT but still handled by PT Pelindo II, who received the delegation of the
government because it involves the safety of shipping. In addition there are other services such
encounter in the variability of variability of input and output is handled by the harbormaster,
customs, quarantine and immigration which are beyond the authority of the management of the
terminal PT JICT. The business customers considered that the port services are the types of services
that have a service encounter that are outside the responsibility of the manager of terminal services
at service JICT but this encounter will affect the level of satisfaction of business customers and
enterprise customers assess the low quality of service in service of this encounter. The process of
cultural change that customer focus or market oriented managerial level terminal PT JICT affected
by the privatization policy partially not followed by similar changes in the level of the element of
public service which has the authority as part of the government bureaucracy in the harbor, as well
as culture change internal corporate customer focus yet optimally provide the expected delivery of
services such as business customers.
Any changes in the organization of SOEs to the Company's foreign private by Firmansyah (2003)
top management will get a lot of obstacles when employees still think and behave the same as
before state enterprises were privatized, and the concept of development of Culture Company is still
in the process of changing the mindset of employees, because the employees are familiar with the
requires follow market mechanisms. The process of adaptation to the new environment is heading
towards achieving success if employees are able to change their behavior and old habits in
communicating with fellow members of the company as well as with business customers. Because
the period of privatization that has been running 10 (ten) years of management PT JICT have had
little impact overall in applying the concept of corporate culture that is market oriented or customer
focus as proposed by Levy (1986) and Firmansyah (2003) that changes could be categorized as
morphogenesis (order two) which DNA changes of state enterprises to foreign private companies
that focus on how to create satisfaction for business customers. Morphogenesis is changing the
patterns of changes in depth to the genetic code, which could affect future generations. According
to Firmansyah (2003) post-privatization could be categorized as organizational changes that are
morphogenetik, structure and organizational processes changed the old state-owned enterprises.
Any changes in the organization of SOEs to the Company's foreign private by Firmansyah (2003)
top management will get a lot of obstacles when employees still think and behave the same as
before state enterprises were privatized, and the concept of development of Culture Company is still
in the process of changing the mindset of employees, because the employees are familiar with the
requires follow market mechanisms. The process of adaptation to the new environment is heading
towards achieving success if employees are able to change their behavior and old habits in
communicating with fellow members of the company as well as with business customers. Because
the period of privatization that has been running 10 (ten) years of management PT JICT have had
little impact overall in applying the concept of corporate culture that is market oriented or customer
focus as proposed by Levy (1986) and Firmansyah (2003) that changes could be categorized as
morphogenesis (order two) which DNA changes of state enterprises to foreign private companies
that focus on how to create satisfaction for business customers. Morphogenesis is changing the
patterns of changes in depth to the genetic code, which could affect future generations. According
to Firmansyah (2003) post-privatization could be categorized as organizational changes that are
morphogenetik, structure and organizational processes changed the old state-owned enterprises. To
increase the value of service in order to improve the competitiveness of Indonesian ports face
competition, there needs to be a balanced tariff policy changes based on cost, competition and value
to the customer. According to Christopher Lovelock, Jochen Wirtz (2011) when customers see little
or no difference between competing offerings, they may just choose what they perceive to be the
cheapest, where the firm with the Lowest cost per unit of service enjoys an enviable market
advantage and Often assumes price leadership. Price competition intensifies with: 1). An increasing
number of competitors 2) .an increasing number of substituting offers, 3) a wider distribution of the
competitors and / or Subtitution offer, and 4) .an increasing surplus capacity in the industry.
Changes in tariff system implementation in line with what the government's own policies in
accordance KM Transport Order No. 52/2002 on the National Ports are set Tanjung Priok /
Bojonegara and Tanjung Perak as an International Hub Port. If already formulating policies should
thus be no implementation of its program and strategy to make it happen, if not so then it will just
stay as a concept on paper without having to be applied in the field and remains an das sollen and
will never be das sein. At the time of the development of world economic growth shifted to East
Asia then followed by the development of the ports of Hong-Kong, and Singapore Syanghai
become the leading port in the world that has a valuable service. Thus, in order to increase customer
delivered value that will increase the level of satisfaction of business customers and also increase
the value and competitiveness of ports in Indonesia, the policy of privatization of the port will not
bring changes towards the expected no fundamental change of government policy implementation
tariff increases value to the customer. The low customer value delivered at the port of Tanjung
Priok, especially in container terminal has been felt since the organizational form shaped port PT
Persero Pelindo II, namely the Indonesian legal entities which have characteristics such as private
companies should profit maximization while carrying out the mission of the country. Port as an
instrument of macroeconomic conversion has been done by the Indonesian government into micro-
economic instruments are realized with the establishment of PT (Persero) Pelabuhan Indonesia I, II,
III, IV required to be lucky like his stuff a company by using the company's accounting parameter.
And since that's happened micronization macro-economic aspects, the low value of the services
received by business customers Tanjung Priok port. His case would be different if the existing
policy only at the terminal level to be profitable and not the overall port. And hence the port
functions as an instrument of macroeconomic must be restored so that the advantages the port is
somewhere in the economy. The change of the Act No. 21/1992 become No. 17/2008 on Shipping
separating the regulatory functions that manage the macro aspects of government which is the port
authority and functions that only manages terminal operator, is already leading to the right track in
the management of ports in Indonesia insofar as the state is consistent with the measures taken. The
consequence that must be drawn is that the government should allocate sufficient funds for the
management of ports and not to impose on state-owned enterprises under the terms of a mission
country when seeing many port - a small port that is under the management of PT Pelindo II, which
is located in 10 provinces in western Indonesia imposes on funds obtained from the cross subsidy is
taken advantage of the port of Tanjung Priok. Imbalances policies in the infrastructure business in
Indonesia between the port and the road toll, the toll road government still funds public roads both
develop and maintain it so there are options for the public using the highways or toll roads.
Digalakannya non-oil exports and which has succeeded beyond oil and gas exports that use the port
of Tanjung Priok as a gateway to export - the main import in Indonesia for product manufacturing
both raw materials and finished goods or for non-oil and gas in general but also in practice that the
development of the port of Tanjung Priok was never funded the government through the state
budget, but the port operators must strive financing itself and which ultimately should be charged
on the value of goods that use the services of the port that should be borne by the business customer
port of Tanjung Priok resulting value of the services received by business customers is low because
the cost to the customer is high, because there is no another choice for business customers to use
port facilities.
The high cost to be paid by business customers that will ultimately be charged on the price of goods
using container because PT Pelindo II has the obligation to pay dividends very high to finance the
state budget, which should be restored and allocated to operators or port authorities to improve the
quality of service to its business customers. Results of research on the competitiveness of the main
export port Tanjung Priok by the World Bank (2007) and its impact on commodity export prices
showed that the Indonesian ports still under dipapan with a score of only 0.5 compared with
Singapore was ranked top in the efficiency and quality of service infrastructure in the world as can
be seen in the introduction of this article.
in addition to the emergence of China which offer investors the ease -Ease resulting in a lower cost
to investors both on the input - output process and production. Here it appears that policy is
enforced with a port system that is causing the port became one of the weak points in the entire
chain of a program to encourage economic growth. Value delivered to customers this low despite
the privatization policy of the port will be difficult to improve the performance of the port of
Tanjung Priok. If privatization according Ramamurti (2004) is a dictation institution International
as the World Bank and the IMF are expected to improve the performance of the port which is the
peak of the mountain that must be achieved, for example terminal operators privatization should be
able to bring ships Direct Call by not taking into account the location of the port of Tanjung Priok
who are not in the main line shipping service, the concentration of charge in Tanjung Priok,
bureaucratic problems service at Tanjung Priok convoluted and production resources are limited,
without a change in macroeconomic policy as outlined such although implemented the concept of
privatization will not be able to reached the top of the mountain to increase the performance of the
port of Tanjung Priok but keeps spinning - the play runs slope of the mountain without having to be
able to reach the mountaintop of success as expected and when seen from the aspect of business and
marketing then any such policy is to target a market is misdirected because the wisdom marketing
marketing myopia or myopic marketing.
Thus it appears that the assignment of Customs and Excise in the terminal JICT is an assignment of
the state in order to secure state revenues because the assignment is not included privatized and
mechanism of action exists against the enforcement of laws and regulations that exist and which can
influence the quality of service terminal is not the responsibility JICT container terminal as a
terminal operator. Privatization or takeover of customs duties once performed by the GOI of the
Directorate General of Customs and Excise to a surveyor company SGS from Switzerland. This
confirms the theory postulated by the World Bank that the privatization of the port can be a partial
privatization and privatization that are comprehensive, or full privatization.
As for complaints from business customers over existing services need attention and improvement
so that business customers feel satisfied by the quality of public services there.
Opinions of business customers on the service completion of export import documents by
quarantine showed that respondents in port operations and especially terminal JICT This quarantine
is a state institution does not include part privatized because the mechanism of service as perceived
by business customers included and is very bureaucratic, and generally on public services in
Indonesia assess business customers still need to improve the quality of service.
According to Philip Kotler (2007) using the approach of thinking of marketing to the public sector
will contribute to achieving government agency gooals as follows: Increasing revenues, increasing
service utilization, increasing compliance with law cots for service delivery and improving
customer satisfaction.
User services in accordance with the author's observation collected from observation, interview
hope still needs to be improved quality of public services in this service unit. Regarding the public
sector marketing, according to Kotler, Nancy Lee (2007) that some people claiming that
government operations are inherently different from business operations. The cry to the make
government agencies more efficient, effective, and innovative strikes many citizens as a pipe dream.
They see too many contrasts between government and business organisasi: Government organisasi
Often are monopolies; businesses exist in competitive markets.
Government is constituted to serve the interests of citizens; Business aims to maximize investor
profits. Kotler, Nancy Lee (2007) in Marketing in the Public Sector stated that the marketing
intensity in the ports sector Also covering customer service, public relations, sales force,
distribution channels, new product development, pricing results of this study confirm or line with
David Osborne and Peter Plastrik (2004) that the need to transform organizational and bureaucratic
system towards the customer-oriented governance including explicit quality standards for public
services, benchmarking and performance measurement and reforms designed to simplify the rules
and reduce costs. Renewal of government bureaucracy in the port of Tanjung Priok in order to
improve service to business customers is absolutely necessary to change the culture and mindset of
the organizers such as David Osborne and Peter Plastrik (2004) which states that the transformation
system and government organizations fundamentally in order to create a dramatic increase in the
effectiveness, efficiency and their ability to innovate. Renewal is the replacement of the
bureaucratic system into a system that is self-employment. On this entrepreneurial government
David Osborne and Peter Plastrik (2004) further argues that the term governance entrepreneur
(entrepreneur) is much wider. The word was coined by a French economist, J. B Say, around 1800,
"Entrepreneurship is moving the various economic resources of a region with low productivity to
regions with higher productivity and greater results .In other words entrepreneurs use resources with
new ways to maximize productivity and effectiveness. Regarding the entrepreneurial model of
government is the government sector institutions that have a habit of acting like this are still using
resources in new ways to enhance the efficiency and effectiveness of government.
Due to the complex its port management captive market such as Tanjung Priok, then by the policy
of privatization of the terminal under the management of foreign companies do not guarantee to be
able to increase the value of services and satisfaction for its business customers as soon as possible,
which in the evaluation of ten (10) years of the privatization of undeveloped service culture that
design appropriate customer focus culture management company privatization. But this can not be
said that the concept of privatization is a concept which failed because of the opportunity to achieve
the performance requirements are still available within 10 (ten) years until the expiration of the
contract between the investor and the government of Indonesia.
According this opinion need rearrangement of macro-economic policy and for the public to
understand the situation and the role of the Port of existing SOEs so that its position has not always
been cornered by a view that is based on lack of understanding about the national port system and
the characteristics of the market developed by the government. If the opinion of economists, as
stated in the book in question was temporarily PT. Pelindo II as a state which has the task of
managing the port is already accountable for its mandate, means the weaknesses in the system
managing the ports are not on SOE itself but the Ministry of companies that manage SOEs are
clerical and follow the culture of government bureaucracy and instead develop a service culture and
value creation in SOE management. So that the management of SOEs is a value creator and runner
instead of a business entity as done by the bureaucrats in the government bureaucracy. Thus,
management of state-owned enterprises by the Ministry of SOEs is no different than when the SOE
is under the technical ministries that are not based on principles but on a system of bureaucratic
entrepreunerships pemerintahan.Dengan thus only prolong the existence of the Ministry of SOEs
must be passed through the red tape for business decision-making SOEs meet market demand which
exists.
Port development:
Description First Generation Second Generation Third Generation
Period of Before 1960’s After 1960’s After 1980’s
development
Main cargo Break bulk cargo Break bulk and dry liquid Bulk and unitized,
bulk cargo containerized cargo
Attitude & - Conservative - Expansionist - Commercial oriented
strategy of port - Changing point of - Transport, industrial and - Integrated transport centre
development transport mode commercial centre and logistic form plat for
international trade
Scope of - Cargo loading 1) + 1) + 2) +
activities discharging 2) - Cargo 3) - Cargo and
storage, transformation ship- information distribution,
navigational service related industrial and logistic activities
- Quay and commercial services - Terminal and distribelt
waterfront area - Enlarged port area towards landside
Organization - Independent - Closer relationship - United port community
characteristic : activities within between port and port - Integration of port with
port. users trade and transport chain
- Informal - Loose relationship - Close relationship between
relationship between activities port and municipality
between port and within port - Enlarged port organization
port users - Port and municipality
Production - Cargo flow - Cargo flow - Cargo information flow
characteristics - Simple individual - Cargo transformation - Cargo information
service - Combined services distribution
- Low value – added - Improved value – added - Multiple service package
- High value – added
Decisive factors Labour / capital Capital Technology / know how
Source: UNCTAD Secretariat.
CONCLUSION

Container Terminal Services Company Era of Privatization do not reflect the market orientation
optimally within a period of 10 years after the operation of the company in accordance with the
policy of privatization.
This needs to be followed by the concept mewirausahakan bureaucracy of the government in the
process container terminal services, so that privatization towards or approaching the concept of a
comprehensive or full privatization improve the management of marketing activities for the more
attractive for direct call vessels visiting JICT terminal.
Management services company terminal handling of containers as the research object is not to get
caught in the myopic marketing or myopic marketing in the marketing strategy in an oligopoly
market is captive markets such as the Tanjung Priok, should be looked at equally among business
customers of the shipping line who chose Tanjung Priok especially terminal run PT JICT as the ship
choice port of call with business customers of all container transport company that serves the
production center to the terminal PT JICT and vice versa. Another case when the run is a container
terminal at the port of trans-shipment is in perfect competition where the terminal operators should
treat shipping line as the prime customers either shipping lane feeder as well as round the world
container shipping service, for this management need to increase marketing activities to attract more
for ship direct call discussing JICT terminal.
This needs to be followed by the concept mewirausahakan bureaucracy of the government in the
process container terminal services, so that privatization towards or approaching the concept of a
comprehensive or full privatizatio.
Privatization is done on SOE is to enhance the value and competitiveness of Indonesian ports, and
the success of an operation and port business in the interest of business customers is the cost to the
customer is low and the customer "s delivered a high value being the management company as the
operator of the level of satisfaction is at the level of achievement of performance standards of
service that is being commissioned and set by the government so it is a top down approach in
addition to ISO and ISPS Code, regardless of the expectations of business customers, because the
interests of the management company as terminal operators differ from those of business customers,
then in order to increase customer satisfaction business needs further research to find out the
expectations of business customers by arranging know Your customer expectation (KYCE) Model,
which is a model of bottom-up approach in order to achieve customer satisfaction business. So the
quality of service container terminal which is the public service will be done in a balanced manner
that is based on a dual service concept in question.
Privatization which will be implemented by the government of a country should also measure the
level of success to the satisfaction received by business customers is by measuring the level of
achievement of satisfaction in the era of state-owned enterprises, so aspects of microeconomics
such as business performance and marketing is an observation that is absolutely necessary in
addition to the parameters as well as economic performance macro as commonly done during this
time and also needs to be evaluated or diagnosed beforehand whether companies in the era of state-
owned enterprises already have a Service Culture, Corporate Culture entreprenuership that customer
focus and market oriented both in the market monopoly or oligopoly or even free competition, if it
is so does not need to be made the concept of privatization, because not all companies were
privatized have better performance than the state-owned company. In addition to privatization
should be carried out consistently on the implementation of Law No. 19/2003 on SOEs in particular
clauses governing the privatization and given the Culture Company is market oriented and customer
focus that operate in the market dynamics different from the Culture Company PT Pelindo II as a
state that operates dilautan government bureaucracy and politics, then with the completion of the
management contract of PT JICT within 10 (ten) years in order to avoid setbacks management of
PT JICT not be re-integrated in the environment of PT Pelindo II, but it is recommended be used as
state-owned company that stands alone and has the potential to go international compete in the
market of free competition.
The government should immediately implement Law No. 17/2008 on the cruise and return the port
functions as an instrument of macroeconomic with outlined that benefit the port is "somewhere in
the economy", that exploitation of the port is to stimulate the economic development of National
and hence at the port level structure of maximum profit should at the level of the break even point
and the government must make investments and provide subsidies to restore dividends earned from
port business for port development and commercial benefits only at individual terminals, marketing
concepts during the era of state-owned or privatized resulting in low customer's delivered value turn
into a general objective is to minimize the cost of cargo passing through the port and to maximize
the added value to the cargo, then the marketing objective will be more concrete, such as attracting
and Obtaining more traffic to the Ensure full use of the port facilities at a high level of productivity
". From the standpoint of business and marketing is increasing the market share of the profitability
of the harbor. Thus the port is not a business player and private domain but is "business trigger" so
is in the public domain because it is expected of a port is its multi-player effect. This would be in
line with the policy of macro-economic growth is projected to grow significantly.
That the requirements of the privatization of container terminals JICT is to be able to bring
the ships direct call to improve the performance of service end to end service which is expected to
improve the competitiveness of the port of Tanjung Priok, thus the management of PT JICT have to
do marketing strategies offensive that relationships-marketing strategy changing marketing era of
bureaucratic state-owned monopolies that are transactional marketing, but if in the future
management contracts that are 10 years ahead do not provide optimal results or privatization of
large port on the island of Java do not improve the competitiveness of the port and unable to make
the port on the island of Java into port tran-shipment, then the government must change its strategy
of port development in Indonesia with the development of the port trans-shipment is located outside
Java Island is to integrate the national port into the system of international shipping, especially
"Round the World Container shipping Service", so that Indonesia has a port which have high
competitiveness. Related to the implementation of free trade, the geography is unique that Indonesia
consists of thousands of islands, the P Sabang, P Batam, P Bintan, P Natuna, P Morotai, P Biak can
be allocated as Economic Buffer Zone (EBZ) regional non Indonesian customs with our monetary
system which is different from other regions in Indonesia, a more progressive concept of Special
Economic Zones (SEZ), which will encourage the growth of the economy which is the economic
center of gravity which is the new outer and inner port ports which include existing ports including
ports large -pelabuhan in Java Island. Thus the concept will spur the implementation of Presidential
Instruction No. 5/2008 on the empowerment of the national shipping with a strengthening of the
cabotage principle such that not only improve the competitiveness of the port, but also promote the
return shipping services industry, which until now practically controlled by foreign shipping.
Unit vertical coordinate all agencies in the port of Tanjung Priok to be able to bring the port of
Tanjung Priok has high competitiveness by improving the quality of service that is efficient by
applying service culture.
The success of privatization is determined by the rate of change of structure and the company's
internal business processes that are morphogenesis of bureaucratic management to management
entrepreneurship.
The higher the willingness or government policy to transform the management of bureaucratic
management to management entrepreunerships, the higher the success rate of business management
of SOEs.
The faster increase of comparative into competitive advantage over national maritime resources
sooner Indonesia has the World Maritime Leadership.
BIBLIOGRAPHY
Abbas F. Alkhafaji : Competitive Global Management, Principles and Strategies.

Ademola Ariyo and Afeikhena Jerome, Privatization in Africa : An Appraisal.
Alberto Chong Florencio Lopez – De Silanes, Privatization in Latin America : What does the
evidence say ?
Antonio Estache Marianela Gonzales : What does “Privatization” do for efficiency? Evidense from
Argentina’s and Brazils Railways.
Arnold S. Judson : Implementing Company Strategy Transforming Plans Into Reality.
Balaji S. Chakravarthy Peter Lorange : Managing the Strategy Process A Framework for a Multi
Business Firm.
Bateson, John E. G. (1999) Service Marketing and Management. Prentice Hall, New York.
Bennett S, 2004, Corporate Culture & Performance Appraisal.
Bernardo Bortoloti, Marcella Fantini, Domenico Siniscalco, Privatization Around the world :
Evidence from pa Bachrudin, Achmad dan Harapan L. Tobing, 2002, Analisis Data Untuk
Penelitiun Survey dengan menggunakan Lisrel-8, Jurusan Statistika FMIPA UNPAD.
Best, Roger J., 2000, Market-Based Management: Strategies for Growing Customcr V'alue and
Profitability. Prentice Hall, New Jersey.
Bowman, Chef. 1990, The Essence of Strategic Management, Prentice Hall, New York.nel data
Branch , Alan , 1998, Maritime Economics.
Buchari Alma (1992). Manajemen Pemasaran dan Pemasaran Jasa, Bandung Alfabeta.
Campbell, Andrew and Kathleen Sommers Luchs, 1997, Core Competencey Based Strategy.
International Thomson Business Press, London.
Carpenter, Gregory S., Rashi Glazer and Kent Nakamoto, 1997. Reading On Market-Driving
Strategies, Adison Wesley Longman. Inc. Massachusetts.
Chisnall, Peter M., 1995, Strategic Business Marketing, Prentice Hall, New York.
Clow, Kenneth E. and Donald Baack, 2002, Integrated Advertising, Promotion, and Marketing
Communication, Prentice Hall, New Jersey.
Cochran, William G., 1977, Sampling Techniques, John Willey & Sons, New York.
Collis, David J. and Cynthia A. Montgomery, 1998, Corporate Strategy: A Resource- Based
Approach, Irwin McGraw-I lilt, Boston.
Cook, Michelle and Curtis Cook, 2000, Competitive Intelligence, Kogan Page Limited, London.
Cravens, David W., 2000. Strategic Marketing, Sixth Edition. Irwin McGraw-Hill, Boston.
_____, Charles W. Lamb. Jr. and Victoria L. Crittenden, 1999, Strategic Marketing Management:
Cases, McGraw-Hill Companies, Inc., Boston.

_____, and Nigel F. Piercy, 2003, Strategic Marketing, Seventh Edition, McGraw-FIill Irwin,
Boston.
Cullinane, Kevin, Wang and Wook Song Dong 2005, Container Port Production and Economic
Efficiency, Palgrave Macmillan
Czinkota, Michael R. and Masaaki Kotabe, 2001, Marketing Management, Second Edition, South-
Western College Publishing, USA.
Cudahy, Brian , 2006 , Box Boats : How Container Ships Changed the World , Fordham University
Press New York .
D’Aveni, Richard A. and Robert Gunther, 1995, Hypercompelitive Rivalries. Competing In Highty
Dynamic Environments, The Free Press, New York.
David, Fred R., 1999, Strategic Management, Prentice Hall, New Jersey.
Darsono , 2006, Budaya Organisasi .
Day, George S., 1999, Market Driven Strategy: Processes .for Creating Value, The Free Press, New
York.
_____, and David J. Reibstein, 1997, Dynamic Competitive Strategy. John Willey and Sons, Inc.,
New York.
Deshpande ,R,1993,”Corporate Culture ,Customer Orientation , and Innovativeness in Japanese

Firms : A Quadrant Analysis”
Deshpande ,R,1993,”Organizational Culture , Market Orientation , Innovativeness and firm

performance : An International research odyssey .
Dess, Gregory G. and G.T. Lumpkin, 2003, Strategic Management: Creating Competitive
Advantages, McGraw Hill Irwin. Boston.
Dibb, Sally and Lyndos Simkin, 2001, The Marketing Casebook. Thomsofn Learning, Australia.
Donald J. Bower Sox, David J. Closs : Logistical Management, The Integrated Supply main
Process.
Doyle, Peter, 2004, Value – Based Marketing .
Ephraim W. Chirwa : Industry and firm effect of privatization in Malawian Oligopolistic

Manufacturing.
Ferrel, D.C., George H. Lucas, Jr. and David Luck, 1994, Strategic Marketing Management, South-
Western Publishing Co., Ohio.
Fiffield, Paul. And Colin Gilligan, 1999, Strategic Marketing Management: Planning & Control,
Butterworth-Heinemann, London.
Fitzsimons and Mona A. Fitzsimons,1994, Service Excellence and Value Added, South-Western
College Publishing, Ohio.
_____________,2006, Service Management.
George Yarrow : Theory of privatization, or why Bureauchrats are still in Business

.
G Hofstede (1991) , Culture and Organization.
Glueck,1988, Business Policy And Strategic Management.
Griffiths, Andrew (2003), 101 Ways to Really Satisfy Your Customers, NSW: Allen & Unwin.
Gronroos, Christian (1990), Service Management and Marketing: Managing the Moments of Truth
in Service Competition, Singapore: Maxwell Macmillan.
Gunnar Sletmo, Ernest W. Williams, Jr : Liner Conferences in the Container Age.
____________(2000), Service Marketing. Singapore: Maxwell Macmillan.
Hanel, Gary. And C.K. Prahalad, 1994, Competing for the Future, Harvard Business School Press,
Boston.
Harvey Robbins and Michael Finley, Transcompetition : Moving Beyond Competition and
Collaboration.
Hayuth, Yehuda, 1987, Intermodality : Concept And Practice.
Harrison, Jeffrey S. and Caron H. St. John, 1998, Strategic Management of Organization and
Stakeholders, South-Western College Publishing, Ohio.
Hawkins, Del L., Roger J. Best and Kenneth A. Coney, 2001, Consumer Behaviour: Building
Marketing Strategy, Irwin McGraw-Hill, New York.
Hax, Arnoldo C. and Nicolas S. Majluf, 1996, the Strategy Concept and Process, Prentice-Hall
International, Inc., New Jersey.
Heskett, 2006, Budaya Korporat dan Kinerja.
Hill, Charles W.L. and Gareth R. Jones, 1998, Strategic Management Theory: An Integrated
Approach, I loughton Mifflin Company, Boston New York
_____,and Gareth R. Jones, 2001. Strategic Management: An Integrated Approach, Fifth Edition. I
loughton Mifflin Company, Boston New York.
Hitt, Michael A., R. Duane Ireland and Robert E. Hoskisson, 1997, Manajemen Strategis:
Alenyongsong Era Persaingan dan Glohalisasi, Alih Bahasa oleh Armand Adiyanto,
Erlangga. Jakarta.
_____,1999, Strategic Management: Competitiveness and Globalization, South-Western College

Publishing, Ohio.

Hollensen, Svend, 2003, Marketing banagement: A Relationship Approach, Prentice Hall, Harlow.
Hooley, Graham J. and John Saunders, 1993, Competitive Positioning: the key to market success,
Prentice Hal International, New York.
Institute Shipping and Logistic, 1990, Port Management Textbook.
________, 1991, Port Marketing.
________,1991: Intermodal Transport Systems .
Jain, Subhash C., 2000, Marketing: Planning and Strategy, Sixth Edition, South-Western College
Publishing, Australia.
Jasfar,Farida ,2005, Manajemen Jasa : Pendekatan Terpadu.
Jan Owen Jansson ,1984: Port Economic
Jay B. Barney , 1996, Gaining and Sustaining Competitive Advantage.
J. Hassard J. Morris,1999, The Elusive Market : Privatization, politics and state – enterprise reform
in China.
John J. Coyle , 1998, : Transportation, Fourth Edition.
Jonathan Morris,2002, Privatization, Chinese,-Style : Economic Reform and the State owned
enterprise.
Johnston , Robert, 2005, Service Operations Management , Improving Service Delivery
Jurgen G. Backhaus , 2003, Mass Privatization in central and east euroepan Countries.
Kerin, Roger A. and Robert A. Peterson, 2001, Strategic Marketing Problems: Cases and
Comments, Ninth Edition, Prentice-Hall, Inc., New Jersey.
Kaplan ,Robert S and Norton David P (2004) , Strategy Maps , converting intangible assets into
tangible outcomes .
Kasali , Renald : Re-Code Your Change DNA (2007)
Kotler, Philip., 2001, A Framework for Marketing Management, Prentice-Hall, Inc., New Jersey.
_____, 2000, Marketing Management, the Millennium Edition, Prentice-Hall International. Inc..
New Jersey.
_____, 2003, Marketing Management, 11 Edition, Prentice-Hall International, Inc., New Jersey.
_____, and Gary Armstrong, 2001, Principles of Marketing, Ninth Edition. Prentice Hal
International, Inc., USA.
_____, Thomas Hayes, and Paul N. Bloom, 2002, Marketing Professional Services, Second Edition,
Prentice Hal International, Inc., USA.

_____,and Keller, 2006, Marketing Management, 12 Edition, Prentice Hal International, Inc.. USA.
_____, 2006, According to Kotler .
_____,2007, Marketing in the Public Sector .
Lamb, Charles W., Jr., Joseph F. Hair, Jr. and Carl McDaniel, 1999, Essential of Marketing, South-
Western College Publishing, Ohio.
Legowo , 1996, Persaingan Usaha dan Pengambilan Keputusan Managerial.
Lethbridge, John, 1993, Private Sector Participation In Indonesian Ports.
Lovelock, Christopher (1994), Service Marketing : Text. Cases and Reading, New York: Prentice
hall_ Englewood, Cliff.
____________ & Wright (2002), Service Marketing & Management Text, Cases and Reading, New
York: Prentice Hat1, Englewood. Cliff.
____________,2004 : Service Marketing.
Maister, David H, 1993, Managing The Professional Service Firm, Che Free Press. New Work.
Moeljono, Djokosantoso, 2005, Cultured, Budaya Organisasi Dalam Tantangan.
____________________,2003, Budaya Korporat dan Keunggulan Korporasi.
Malhotra, Narest, K, 2002, Marketing Research. An Applied Orientation, International Edition,

Prentice Hall, USA.
Mary M Shirley, 1997, Buraucrats in Business : The roles of privaizatin versus corporatization in
state – owned enterprise reform.
Mary M. Shirley, 1994, Privatization in Latin America : Lessons for transitional Europe.
Megginson, William : 2001, From State To Market : A Survey of Empirical Studies On

Privatization.
Miller, Alex., 1998, Strategic Management, Irwin McGraw-Hill, Boston.
Muhtosim Arief ,2006, Pemasaran Jasa & Kualitas Pelayanan .
Michael IAN Cragg , Dyck ,1999, Management Control and Privatization in the United Kingdom.
Michael E. Porter ,1998, ON Competition.
Mohammed Omran, 1999, The performance of state – owned enterprises and newly privatized firms
: Does Privatization Really Matter ?
Nasution M.N,2004.Manajemen Jasa Terpadu,

Naumann,Earl and Kethlen Giel (1995) : Customer Satisfaction Measurement , Cincinnati,Ohio :
Thomson Executive Press.
Natalia ,L (2006) , New Mindset in Building Corporate Culture
Ndara, Taliziduhu, 2003, Budaya Organisasi.
Nigel Slack, 2006, Operations and Process Management . Prentice Hall
Pabundu, 2006, Budaya Organisasi dan Peningkatan Kinerja Perusahaan.
Parasuraman, A., V.A. Zeithaml & L.L. Berry (1985). A Conceptual ,model of Service Quality and
Its Implication for Future Research, Journal of Marketing, Vol. 49 (Fall).
---------------------------------------------------------------- (1988). SERVQUAL : A Multiple Item Scale
for Measuring consumes Perceptions of service Quality, Journal of Retailing, Vol. 64.
----------------------------------------------------------------- (1991), Reassessment of Expectation as a
Comparisons Standard in Measuring Service Quality: Implication for Further Research,
Journal of Marketing, Vol 58.
Paul Trawick, 1997, Against the privatization of water : An Indigenous model for improving
Exixting Laws and Succesfully Governing the commons.
Paul Cook and Yuichird Uchida ,2000, Privatization and Economic Growth in
Developing Countries.
Payne, Adrian ,1993 , The Essence of Service Marketing , Prentice Hall Eanglewood Cliffs ,NJ
Pearce II, John A. and Richard B. Robinson, Jr., 2003, Formulation, Implementation, and Control
Competitivc Strategy, Fight Edition, McGraw-Hill Irwin, Boston.
Perreault, Jr., William D. and E, Jerome McCarthy, 1996, Basic Marketing: A Global-Managerial
Approach, Richard D. Irwin, Chicago.
Peter Nolan and Wang Xiaoqiang “University of Cambridge”, Cambridge, Uk, Beyond
Privatization : Institutional Innovation and Growth in China’s Large State-owned
Enterprises.
Petrick, James F (2002) : “Development of a Multi-Dimensional Scale for Measuring the Perceived
Value of a Service ,” Journal of Leisure Research .
Porter, Michael E., 1994, Keunggulan Bersaing, Alih Bahasa oleh Tim Penerjemah Binarupa
Aksara, Bina Aksara, Jakarta.
____,1997. Strategi bersaing, Alih Bahasa oleh Agus Maulana, Erlangga, Jakarta.
Ramamurti, (1991 ) : Privatization and Control of State Owned Entreprise .
Rambat Lupioyoadi (2001), Manajemen Pemasaran Jasa, Edisi 1, Jakarta: Salemba Empat.
Ranko Jelic : Richard Briston and Wolfgang Aussenegg The Choice of Privatization Method and the
financial performance of newly privatized firms in transition Economics
Schneider, 2003, Managing Across Cultures.
Sekaran, Uma., 2000, Research Methods far- Business: A Skill Building .Approach, Second Edition,
John Willey & Sons, Inc., New York.
Stanton, William J, 1981, Marketing Management: A Skill Building Approach, John Willey & Sons,
Inc., New York.
Stopford Martin, 1997, Maritime Economics.
Sucherly, 1996, Strategi Pemasaran dalam Industri Kayu Gergajian dan Pengaruhnya terhadap
Penjualan, Disertasi, Universitas Padjadjaran, Bandung.
Suddhesna Ghosh Banerjee the World Bank, Washington, DC. USA ,1999, Does Foreign Aid
promote privatization ? Empirical evidance from Developing Countries.
Sunita K, John Nellis ,2001, An assesment of privatization.
Sumawihardja S, 1987, Peranan Strategi Pemasaran Bagi Kelangsungan Hidup Industri Kecil
Pertenunan Tekstil Alat Tenun Bukan Mesin.
Tjiptono, Fandy, 2004, Manajemen Jasa
--------------------, 2005, Service Quality & Satisfaction.
--------------------, 2005, Pemasaran Jasa
Tobing, H, 2003, Analisis Data Untuk Penelitian Survai dengan menggunakan LISREL
Tomson, Arthur A. and A.J. Strickland, 1996. Strategic Managemet, Irwin, Chicago.
Triguno ,2002, Budaya Kerja.
Undang-Undang No 19 / 2003 tentang BUMN.
Undang-Undang No 21 / 1992 tentang Pelayaran .
Undang-Undang No 17 / 2008 tentang Pelayaran .
Urban, Glen L. and Steven H. Star, 1991, Advanced Marketing Strategy: Phenomena, Analysis, and
Decision, Prentice Hall, New.Jersey.
Van Looy , Bart, 2003, Services Management.
Wahyuningsih ,2005, A Study of Customer Value.
Walker. Orville C., Jr., Harper W. Boyd, Jr. and Jean-Claude Larreche, 1999, Marketing Strategy:
Planning and Implementation, Irwin McGraw-Hill, Boston.
_____, Harper W. Boyd, Jr., John Mullins and Jean-Claude Larreche, 2003, Marketing Strategy: A
Decision-Focused Approach, McGraw-Hill Irwin, Boston.
Want , Jerome, 2007, Corporate Culture.
W. Chank Kim, Renee Mauborgne , 2005, Blue Ocean Strategy.
Webster Jr, Frederick E., 2002, Market-Driven Management: How to Define, Develop, and deliver
Customer Value, Second Edition, John Willey and Sons, Inc., New Jersey.
Wheelen, Thomas L. and David J. Hunger, 2000, Strategic Management: Business Policy, Prentice
Hall international, Inc., USA.
Winardi, 2005, Management of Change.
Winer, Russell S., 2004, Marketing Management. Second Edition, Perason Prentice Hall, New
Jersey.
Wirasasmita, Yuyun, 2004, Kumpulan Makalah Penulisan Disertasi.
Wright, Peter., Mark J. Kroll and John Parnell, 1996, Strategic Management, Prentice Hall
International, New Jersey.
Qian Sun, Wilson H.S. Tong, 2001, China share Issue Privatization : The extent of its Success.
Zeithaml, Valerie A & Mary J. Bitner (1990), Service Marketing, NJ: McGraw Hill Co.
_________ (1996), Service Marketing and Management. McGraw Hill Co.
_________, 2006, Services Marketing .
Zikmund, William G., 2000, Business Research Methods, Sixth Edition, The Dryden Press,
Philadelphia.
Jurnal Ilmiah/Publikasi Ilmiah
Agus Rahayu, 2002, Strategi Pemasaran Berbasis Pasar dan Sumber Daya, Jurnal .Strategic,
_____, 2003, Pengaruh Kekuatan Lingkungan Mikro Eksternal terhadap Strategi Bauran
Pemasaran serta Implikasinya pada ProfitabiIitas. Jurnal,
_____, 2004, Pengaruh Kekuatan Lingkungan Mikro Terhadah Strategi Pemasaran 4Serta
Dampaknyu Pada Hasil Penjualan (Stud; Terhadap Industri Pakaian Jadi Di JIawa Barat).
Disertasi Program Doktor 1.konomi UNPAD, Bandung.
Bambang B. Sunaryo, 2002, Dinamika Strategi Pelayanan Outlet dan Kinerja Pemasaran, Jurnal
Sains Pemasaran Indonesia.
Brooksbank, Roger, 1999, The Theory and Practise of Marketing Planning in the Smaller Business,
Marketing Intelligence & Planning.
Chaharbaghi, Kazem and Richard Lynch, 1999, Sustainable Competitive Advantage: Towards a
Dynamic Resource-Based Strategy, Management Decision

Cholachatpinyo, A. and 1. Padgett, 2002, A Conceptual Models of the Fashion Process, Journal of
Fashion Marketing and Management.
Conrad , Craig A , 1997, Customer Satisfaction and Corporate Culture .

Deshpande, R, 1993,”Corporate Culture, Customer Orientation, and Innovativeness in Japanese
Firms : A Quadrant Analysis”,Journal of Marketing
Deshpande ,R,1993,”Organizational Culture , Market Orientation , Innovativeness and firm

performance : An International research odyssey , Journal of Marketing
Dibb, Sally, 1996, The Impact of the Changing Marketing Environment in the Pacific Rim: Four
Case Studies, International of Retail & Distribution Management.
Dicky Imam Prasetya, 2002, Lingkungan Eksternal, Faktor Internal, dan Orientasi Pasar
Pengaruhnya terhadap Kinerja Pemasaran, Jurnal Sains Pemasaran Indonesia
Dobbins, Richard and Barrie O. Pettman, 1998, Implement a Winning Marketing Strategy,
Management Research News,
Doyle, Peter and Veronica Wong, 1997, Marketing and Competitive Performance: an Empirical
Study, European Journal of Marketing,
Ferdinand, Augusty, 2002, Marketing Strategy Making: Proses dan Agenda Penelitian, Jurnal Sains
Pemasaran Indonesia.
_____, 2002, Kualitas Strategi Pemasaran: Sebuah Studi Pendahuluan..
Firmansyah , 2003, Perubahan Organisasi Dalam Post Privatization.
Gutberlet, Jutta, 2000, Sustainability: a New Paradigm for Industrial Production. International
Journal of Sustainability in Higher Education,
Hoffman, Nicole P., 2000, An Examination of the “Sustainable Competitive Advantage” Concept:
Past, Present, and Future.
Huang, Xueli, Geoffrey N. Soutar and Alan Brown, 2001, Resource Adequate in New Product
Development: a Discriminate Analysis, European Journal of Innovation Management,
Huber, Frank, Andreas Herrmann, Robert E. Morgan, 2001, Gaining Competitive Advantage
through Customer Value Oriented Management, .
I Wayan Jarnan Adi Putera, 2000, Pengaruh Strategi Pemasaran terhadap Hasil Penjualan Pada
Perusahaan Real Estate Di Kodya Malang, Tesis, Program Pascasarjana Universitas
Padjadjaran, Bandung.
Ibrahim, 2007, Landasan Filosofis Dan Yuridis Keberadaan BUMN : Sebuah Tinjauan .
Iles, Paul, 1997, Sustainable High-Potential Career Development: a Resource-Based View, Career
Development International,
Lehtinen,. Suzanne, 1983, Service Marketing For Consulting Business: Characterization and Needs
Assessment, Journal of Consulting Technology and Management.

Levit, Theodore, 1976, Services Industries: Operational Efficiency, Marketing Effectiveess and
Innovation, Journal of Industry and Apparel Technology and Management.
Nugraha, Safri , 2007, Privatisasi BUMN , Antara Harapan Dan Kenyataan. Usahawan.
Petrick, James F. (2002), “Development of a Multi –Dimensional Scale for Measuring the
Perceived Value of a Service, Journal of Leisure Research.
Simkin, Lyndon and Afthony Cheng, 1997, Understanding Competitor's Strategies: the Practioner-
academic Gap, Marketing Intelligence Planning.
Singh J (1988) dalam Fandy Tjiptono (2005): Pemasaran Jasa , Bayumedia Publishing
Sucherly, 2003, Peranan Manajemen Pemasaran Stratejik dalam Menciptakan Keunggulan

Posisional serta Implikasinya terhadap Kinerja Organisasi Bisnis dan Non Bisnis
(Pendekatan 5-A), Universitas Padjadjaran: Bandung
_____, 2004, Strategi Pemasaran, Model untuk Memelihara dan Meningkatkan Kinerja
Perusahaan, Universitas Padjadjaran: Bandung
_____, 2004, Pola Pembinaan dan Pengembangan Komoditi Unggulan dan Pengusaha Andalan
Industri Kecil Menengah di Jawa Barat, Pusat Penelitian dan Pengembangan Bisnis UNPAD,
Bandung.
Sumawihardja, Surchman, 2002, Mengembangkan Keunggulan Bersaing Usahu Kecil dan

Menengah Untuk Mencapai Posisi Pasar yang Kuat dan Berkesinambungan dalam Era
Global. Suatu Pendekatan Manajemen Stratejik, Universitas Padjadjaran: Bandung
Suripto, Imam, 1970, Organisasi dan Management Perseroan (Persero) Niaga dan Sumbangannya
di dalam Pembangunan Ekonomi Nasional , Universitas Padjadjaran Bandung .
Surjaatmadja, S, 2004, Pengaruh Pergeseran Pelanggan dan intelejen Pesaing Terhadap

Koordinasi lintas fungsi, serta implikasinya pada profit perusahaan Jasa Konsultan di
Indonesia, Disertasi Universitas Padjadjaran: Bandung
Suh, Moon W. and Eun-Kyung Lee, 2000, Estimation of Consumer Demands: an Application to
U.S. Apparel Expenditures, Journal of Textile and Apparel Technology and Management,
Volume 1, Issue 1: Hal 1-8.
Wahyono, 2002, Orientasi Pasar dan Inovasi: Pengaruhnya terhadap Kinerja Pemasaran, Jurnal
Sains Pemasaran Indonesia, Volume 1, Nomor 1: Hal 23-40.

CORPORATE GOVERNANCE MECHANISM: EVIDENCE
FROM UNIT-IPO FIRMS LISTED ON INDONESIA STOCK
EXCHANGE1
Suherman2
Gatot Nazir Ahmad3
2,3
Faculty of Economics Universitas Negeri Jakarta
suherman@feunj.ac.id
Abstract
The purpose of this study is to examine the differences in corporate governance
mechanisms between unit-IPO firms and share-only IPO firms. The mechanism of
corporate governance is proxied with the number of directors on the board,
outsider director and debt level. Sample covers 40 units-IPO firms listed between
2007 and 2015. The results show that 1)there are significant differences in the
number of directors between unit-IPO firms and share-only IPO firms, 2)there is
no significant difference in outsider director between unit-IPO firms and share-
only IPO firms, and 3)there is no significant difference in debt level between unit-
IPO firms and share-only IPO firms. Further, descriptive statistics indicate that the
unit-IPO firms have higher risk compared with share-only IPO firms.
Keywords: corporate governance, option, IPO
1. Introduction
Research on corporate governance have been carried out both in Indonesia
and abroad. The issue of corporate governance research mostly linked to the
performance / value of the company (see Latief, et al., 2014; Guest, 2009;
Ghazali, 2010; Peni and Vahamaa, 2012; Velnampy, 2013). The better (worse)
corporate governance mechanisms, the higher (lower) the performance of the
company. In addition linked to the performance of (see Suherman, et al., 2010;
Suherman, et al., 2015; Yang, et al., 2014;Lee, 2014; Vemala, et al., 2014; Lam, et
al., 2013).
In contrast to the above issues, the present study will investigate the
mechanisms of corporate governance and the characteristics of unit-IPO firms, in
particular to find out whether the unit-IPO firms have corporate governance
1
This research is funded by DIKTI.

mechanisms are less effective than with share-only IPO firms and investigate
whether the unit-IPO firms have a higher risk compared with share-only IPO
firms. When will sell shares to the public, managers faced two choices bidding
method whether to sell shares to the public without warrants or with
accompanying warrants. Schultz (1993) states that the company sold shares with
warrants is to reduce agency costs associated with the revenue received during the
IPO. Howe and Olson (2009) argued that the warrant is a mechanism of corporate
governance for companies doing IPOs. They also say that the options / warrants
are as one substitution for corporate governance of a company that did an IPO.
Decision-unit method IPOs IPOs or share-only chosen by the company
also depends on agency conflicts that exist in the company. Schultz (1993) argues
that companies that go public accompanied warrants the companies that received
venture capital backing. The company must realize the goals set by the owners of
the venture capital to continue to grow and receive additional funding. IPO
companies issuing shares with warrants to get the proceeds from the IPO in
smaller amounts and must prove to the market that they (IPO firms) has a good
economic prospects in the future. If the market's positive reaction to the IPO stock
price rises. When the stock price reaches the price of 'exercise' warrants, each
warrant holder to sell (exercise) warrants and gives the result (money) to the
company's IPO in additional funds. Companies issuing warrants accept cash less
current IPO, reducing the effects of free cash flow (Jensen, 1986).
IPO firms that sell shares with warrants (unit-IPOs) have characteristics of
smaller size, age younger, and more at risk than the company IPO issue shares
only (Schultz, 1993; Jain, 1994; How and Howe, 2001; Howe and Olsen, 2009).
Unit-IPOfirms also sold its shares in an amount greater than the share-only IPO
firms. Schultz (1993) suggests that companies are younger, smaller and more
risky to have greater difficulty determining whether the company has projects that
are profitable to do. Furthermore, if companies release large amounts of shares in
the IPO, agency cost becomes a major problem because insiders have reduced the
incentive to act in the interests of shareholders. The difference between unit-IPO
firms and the share-only IPOs shows that the decision warrants issued during the

IPO depends on the agency conflict within the company, the same as the dividend
distribution decision expressed by Officer (2006).
In the context of Indonesia, to our knowledge, there has never been done
research on corporate governance and company characteristics in companies that
do a good IPO offerings unit-share IPO and IPO-only. Thus, this study expands
the literature related to corporate governance, especially in developing countries
such as Indonesia. In particular, this research examines the agency theory in the
context of the unit-IPO firms.
Further, below will be described on literature review, research methods,
results, and conclusions.
2. Literature Review and Hypothesis

Howe and Olson (2009) argued that if the warrants (options) is a substitute
for the mechanism of corporate governance in companies that do an IPO, a
company that did an IPO with warrants have structures that corporate governance
is less effective compared to companies that do an IPO shares only without
warrants. As a mechanism of internal governance, the board of directors
researched. Jensen (1993) and Yermack (1996) revealed that the greater the
number of board of directors, the less effective the council to perform its
functions. Furthermore, the larger the board of directors, the less independent
board of directors (Weisbach, 1988; Hermalin and Weisbach, 1998; Howe and
Olsen, 2009).
H1: Unit-IPO firms have more members in the board of director than shares-only
IPO firms that go public at the Indonesia Stock Exchange between 2011 and 2014
H2: Outsiders in the board of directors of unit-IPO firms are fewer in number than
the outsiders in the board of directors of shares-only IPO firms that go public at
Indonesia Stock Exchange between 2011 and 2014

Companies with lower debt that does not benefit from the IPO oversight role
performed by banks and other lenders (Diamond, 1984; Fama, 1985; James, 1987;
Howe and Olsen, 2009).
H3: Debt-unit IPO firms is lower than the level of debt in shares-only IPO firms
that go public at the Indonesia Stock Exchange between 2011 and 2014
3. Methods
Sample
Sample of this research consists of 40 unit-IPO firms between 2007 and
2014 listed on Indonesia Stock Exchange. We then compared the respective unit-
IPO firm with respective shares-only IPO firm in 1) industry are the same, and / or
2) have a total stock market value approaching (the number of ordinary shares
outstanding after the IPO multiplied by the offer price).
Variables
a. Board of directors
Board members are members who sit on the board of directors. Measured
with the number of board members who sit as members.
b. Director Outsiders
Director outsiders is a board of directors from outside the company and
has no family relationship with dewandirektur. Director of outsiders is measured
by the percentage of the total outsiders director of the board of directors.
c. Debt
Debt is measured with debt to equity ratio.
Data
This study employs secondary data. Data were taken from the annual
report.
Metode Analisis
Data were analyzed using two different test samples of different groups.
The first two groups are unit- IPOs and share-only IPOs.

Hypothesis Testing
To test the hypothesis of the study carried out two different test
independent groups (two independent sample t-test). Different groups first is
governance unit IPO firms, and the second is a different group share-only IPO
firms.
4. Results
Table 1 shows the descriptive value both companies IPO accompanied
with warrants (unit-IPOs) in panel A and IPO without the warrants (share-only
IPOs) in panel B. The average number of directors sitting on the company's IPO
with warrants more less than the company's IPO without warrant (3.68 compared
to 4.28). While the median number of directors on the company's IPO with or
without warrants equal at 4. Statistically, there appears a large difference between
the number of directors on the company's IPO is accompanied by warrants and the
company's IPO without warrants.
Percentage of outsider directors on the company's IPO accompanied by
warrants and the company's IPO without warrants showed relatively similar. For
example, the average percentage of outsider directors of companies the IPO is
accompanied by warrants amounted to 22.61%, while the company's IPO without
warrants amounted to 22.87%. The median value of IPO companies accompanied
warrants and without warrants equal, ie 4. Furthermore, minimum and maximum
values in the company's IPO with warrants and without warrants is the same that
is 0% and 50%.
The amount of debt (measured by debt to equity ratio) on its IPO with
warrants and without warrants indicate the numbers are not much different to the
average value and median. The average debt held by the company IPO with
warrants of 2.71, while the company's IPO without warrants is 2.89. Meanwhile,
the median value of corporate debt that accompanied the IPO warrants was 1.19
compared with the median value of the company's IPO without warrants by 1.51.
The maximum value of the debt on the company's IPO with warrants and without
warrants showed a considerable difference, amounting to 28.82 at the IPO

company with warrants and amounted to 14.77 at the company's IPO without
warrants.
The average age of the company's IPO is accompanied warrants a bit
younger than the company's IPO without warrants, namely 15.95 years and 16.25
years. Median age of the IPO company with warrants and without warrants is
equal ie 13,50 years. The minimum age at the company's IPO with warrants and
without warrants is the same that is 3 years. While the maximum age of the
company's IPO with warrants is 57 years, and the company's IPO without
warrants was 58 years old.
Table 1. Descriptive Statistics
Panel A: Unit-IPOs
Min Max Mean Median STD
Number of
2 6 3.68 4 1.02
directors
Director outsider
0 50 22.61 25 15.03
(%)
Debt to equity ratio 0.07 28.81 2.71 1.19 4.92
Firm age (year) 3 57 15.95 13.50 11.54
Initial return (%) -81.62 70 34.98 37.89 33.99
Shares sold at IPO
10.18 70 30.74 30 12.36
(%)
Return volatility
8.85 81.23 47.29 49.58 24.37
(%)
Gross proceeds 22,500 2,095,500 338,600.31 220,200
431,471.02
(million Rp)
Options offerend
25.6 6,500 1,124.83 600 1,432.08
(million shares)
Age of option 1 5 3.22 3 1.12
Exercise price (Rp) 102 1,050 266.78 192.50 222.20
Observation 40 40 40 40 40
Panel B: Share-Only IPOs
Min Max Mean Median STD
Number of 2 7 4.28 4 1.38
directors
Director outsider
0 50 22.87 25 11.76
(%)
Debt to equity ratio 0.12 14.77 2.89 1.51 3.64
Firm age (year) 3.00 58.00 16.25 13.50 10.07
Initial return (%) -17.27 70.00 18.34 10.00 24.81
Shares sold at IPO
10.00 73.39 26.32 25.00 14.21
(%)
Return volatility
2.21 80.22 28.65 17.25 26.89
(%)
Gross proceeds
30,100 2,064,873.75 337,411.34 217,114.01 421,332.36
(million Rp)
Observation 40 40 40 40 40

Average initial returns showed a considerable margin in which the
company's IPO with warrants have an average return of its initial 34.98% and the
company's IPO without warrants is 18.34%. Median initial IPO returns are
accompanied by warrants and without warrants is 37.89% and 10%. The
minimum initial return on IPO with warrants and without warrants was -81.62%
and 17.27%. While the maximum initial IPO returns are accompanied by warrants
and without warrants is the same, namely 70%.
Average price of shares released to the public in an IPO company with
warrants is higher than the company's IPO without warrants, ie 30.74% versus
26.32%. Its median value was greater on the company's IPO with warrants,
compared with the company's IPO without warrants, ie 30% versus 25%.
However, the maximum value of the shares sold to the public by companies that
accompanied the IPO warrants smaller (70%) compared with the company's IPO
without warrants (by 73.39%). While the minimum value of the shares sold to the
public by companies that accompanied the IPO warrants greater (ie 10.18%)
compared with the company's IPO without warrants (at 10%).
The average return volatility that accompanied the company's IPO warrants higher
than the company's IPO without warrants, ie 47.29% against 28.65%. The lowest
value and the highest return volatility that accompanied the company's IPO
warrants was 8.85% and 81.23%. While the lowest value and the highest volatility
of return of IPO without warrants was 2.21% and 80.22%. Standard deviation
value return volatility that accompanied the IPO company warrants a lower (ie
24.37%) compared to its IPO without warrants (26.89%).
Average gross receipts from sales of IPO (gross proceeds) IPO
accompanied warrants greater than the company's IPO without warrants, ie 338.6
billion rupiah compared to 337.4 billion rupiah. Minimum and maximum gross
proceeds of IPO companies that accompanied the warrants was 22.5 billion rupiah
and 2.09 trillion rupiah. While the company's gross IPO proceeds without
warrants was 30.1 billion rupiah and 2.06 trillion rupiah.
Table 1 panel A (unit-IPOs) shows the number of options / warrants are
sold, the life of the options / warrants and the exercise price. Average options /

warrants sold was $ 1.12 billion more pieces. Median options / warrants offered
are as many as 600 million shares. Options / warrants offered the lowest and the
highest was 25.6 million shares and 6.5 billion shares. While the standard
deviation is high at 1.43 billion more pieces. Age options / warrants have an
average age of 3.22 years for. The median of 3 years. Age fastest and longest
option is 1 year and 5 years. The average exercise price is Rp.266,78 with a
standard deviation of Rp. 222.20. Median exercise price of Rp. 192.50. The
highest and lowest exercise price is Rp.102 and Rp.1.050.
Table 2 shows the results of different test IPO companies with options
(unit-IPO firms) and the company's IPO without options (share-only IPO firms).
Different test using the t test and Z test (Wilcoxon test). Corporate governance
using three proxies, namely the number of directors, the director of outsider and a
debt to equity ratio. The number of directors on the company's IPO accompanied
the options / warrants differ significantly from the number of directors on the
company's IPO without an option where the average number of directors on the
company's IPO with a lot more options than in the company's IPO without
options. It is seen from the t value of 2.212 (significant at 95%) and the value of Z
= 2.029 (significant at 95%). This result is contrary to Howe and Olsen (2009),
which found the number of directors on the company's IPO is accompanied by a
lot more options than in the company's IPO without options. Yawson (2006)
suggested that the large size of the board that lead to high costs manejerial causing
a decline in profitability. The number of members of the board of directors that
much can cause communication problems and coordinators which could
negatively affect the company's performance (Beasley, 1996; Yermack, 1996).
Table 2. Results
Unit-IPO firms Shares-only IPO firms Difference test
Mean Median Mean Median t z
b
Number of directors 3.68 4.00 4.28 4.00 2.212 2.029b
Directors outsider (%) 22.61 25.00 22.87 25.00 0.090 0.700
Debt to equity ratio 2.71 1.19 2.89 1.51 0.239 0.245
b
denotes significance at level of 95%

Two other proxy of corporate governance is the director of the outsider
and the debt to equity ratio showed no significant difference in the company's IPO
and the company with the option IPO without options. Test value t and z on
director outsider just .090 and .700. While the value of t and z debt to equity ratio
of 0.239 and 0.245. These results do not support the findings of Howe and Olsen
(2009), which revealed no significant difference in the number of outsider
directors and the debt to equity ratio of the company accompanied IPO and IPO
option without options.
In general it can be said that the mechanism of corporate governance at the
company's IPO accompanied the options / warrants and the company's IPO
without options is no different.
5. Conclusion
When the company decided to "go public", managers are faced with two
choices: 1) selling shares with warrants (called unit-IPOs), or 2) sell any shares
without warrants (called a share-only IPOs). Unit IPOs provide the right (not the
obligation) for the owner to buy the stock at a price agreed upon at the beginning
of a period of time. From a practical standpoint, the IPO with warrants named as
"sweeteners". This study examines differences in corporate governance
mechanisms between unit-IPO firms and the share-only IPO firms. The results
showed no difference in general corporate governance mechanisms between unit-
IPO firms and the share-only IPO firms.
References
Bhagat, S., Carey, D., Elson, C., 1999.Director ownership, corporate performance,
and management turnover.Business Lawyer 54, pp.885-919.
Chemmanur, T. J., and Fulghieri, P. 1997. Why include warrants in new equity
issues? A theory of unit IPOs.Journal of Financial and Quantitative
Analysis, 32, 1, pp.1-24
Denis, D., Sarin, A., 1997. Ownership structure and top executive
turnover.Journal of Financial Economics 45, pp.193-221.

Diamond, D., 1984. Financial intermediation and delegated monitoring.Review of
Economic Studies 51, pp.393-414.
Emirzon, J. 2007. Prinsip-prinsip good corporate governance: paradigm baru
dalam praktik bisnis Indonesia. Genta Press.
Fama, E., 1985. What’s different about banks? Journal of Monetary Economics
15, pp.29-39.
Ghazali, N. A. M. 2010. Ownership structure, corporate governance, and
corporate performance in Malaysia.International Journal of Commerce and
Managementi, 20, 2, pp.109-119.
Guest, P. M. 2009. The impact of board size on firm performance: evidence from
UK. European Journal of Finance, 15, 4, pp.385-404.
Hermalin, B., Weisbach, M., 1998.Endogenously chosen boards of directors and
their monitoring of the CEO.American Economic Review 88, pp.96-118.
How, J., and Howe, J., 2001. Warrants in initial public offerings: empirical
evidence. Journal of Business 74, pp.433-457.
Howe, J. and Olsen, B. 2009.Security choice and corporate governance.European
Financial Management, 15, 4, pp.814-843
Jain, B.A., 1994. Unit IPOs: a mechanism for small businesses to go public.
Journal of Small Business Management 32, 57-68.
James, C., 1987. Some evidence on the uniqueness of bank loans.Journal of
Financial Economics 15, pp.29-39.
Jensen, M., 1986. Agency costs of free cash flow, corporate finance, and
takeovers. American Economic Review 76, pp.323-329.
Jensen, M., 1993.The modern industrial revolution, exit, and the failure of internal
control systems.Journal of Finance 48, pp.831-880.
Jensen, M., Meckling, W., 1976. Theory of the firm: managerial behavior, agency
costs and ownership structure. Journal of Financial Economics 3, pp.305-
360.
Lam, K.C.K. McGuiness, P B., and Vieito, J. P. 2013. CEO gender, executive
compensation and firm performance in Chinese-listed entreprises.Pacific-
Basin Finance Journal, 21, pp.1136-1159.

Latief, R., Raza, S. H., and Gillani, S. A. H. 2014. Impact of corporate governance
on performance of privatized firms: evidence from non-financial sector of
Pakistan. Middle-East Journal of Scientific Research, 19, 3, pp.360-366.
Lee, K. W. 2014. Compensation committee and executive compensation in
Asia.International Journal of Business, 19, 3, pp.213-236.
Lee, M., Lee P., and Taylor, S. 2003.Unit Initial Public Offerings: Staged Equity
or SignalingMechanism?,Journal of Accounting and Finance, 43, pp.63-85
Morck, R., Shleifer, A., Vishny, R., 1988. Management ownership and market
valuation: an empirical analysis. Journal of Financial Economics 20,
pp.293-315.
Officer, M.S., 2006. Dividend policy, dividend initiations, and
governance.Unpublished working paper.University of Southern California.
Peni, E. and Vahamaa, S. 2012. Did good corporate governance improve bank
performance during the financial crisis?.Journal of Financial Services
Research, 41, 1, pp.19-35
Schultz, P., 1993. Unit initial public offerings: a form of staged financing. Journal
of Financial Economics 34, pp.199-229.
Shleifer, A., Vishny, R., 1986. Large shareholders and corporate control.Journal
of Political Economy 94, pp.461-488.
Suherman, Wulan Rahmawati, and Agung D. Buchdadi. 2010. Firm Performance,
Corporate Governance, and Executive Compensation in Financial Firms
Evidence in Indonesia.working paper.
Suherman, Fitriawan, R., and Ahmad, G. N. 2015. Pengaruh Kinerja Perusahaan,
Kepemilikan Institusi, dan Komisaris Independen Terhadap Total
Kompensasi: Studi pada Perusahaan yang Terdaftar di LQ45 Tahun 2009-
2012. Jurnal Aplikasi Manajemen., vol. 13, no. 3, pp.516-526
Velnampy, T. 2013. Corporate governance and firm performance: a study of Sri
Lankan listed manufacturing companies. Journal of Economics and
Sustainable Development, 4, 3, pp.228-236.
Weisbach, M., 1988. Outside directors and CEO turnover.Journal of Financial
Economics 20, pp.431-460.

Yang, F., Dolar, B., dan Mo, Lun. 2014. CEO compensation and firm
performance: did the 2007-2008 financial crisis matter?.Journal of
Accounting and Finance, 14, 1, pp.137-146.
Yermack, D., 1996. Higher market valuation of companies with a small board of
directors. Journal of Financial Economics 40, pp.185-211
Vemala, P., Nguyen L., Nguyen, D, and Kommasani, A. 2014. CEO
compensation: does financial crisis matter?, International Business
Research, 7, 4, pp.125-131.

THE EFFECT OF CORPORATE GOVERNANCE AND
CORPORATE SOCIAL RESPONSIBILITY ON FIRM
PERFORMANCE: EVIDENCE FROM INDONESIA
Suherman
Faculty of Economic State University of Jakarta
Email: suherman@feunj.ac.id
Fahryan Rinaldi
Fakultas Ekonomi Universitas Negeri Jakarta
pb.fahryan20@gmail.com
Umi Mardiyati
Faculty of Economic State University of Jakarta
Email: umi.mardiyati@gmail.com
ABSTRACT: The purpose of this study is to know the effect of board of director,
independent commissioner, managerial ownership and corporate social
responsibility (CSR) on bank performance by using firm size and growth
opportunity as control variables. The research model in this study is employs
panel data analysis. The samples are firm listed on Indonesia Stock Exchange in
2010-2013 selected by purposive sampling. The results show that corporate
governance by using a proxy the number of board director, the number of
independent commissioner, and proportion of managerial ownership has not
significant on bank performance measured by Tobin’s Q and the results for CSR
indicators such as economic, social, environment, human right, labor practice and
the responsibilities of product has not significant on bank performance.
Keywords: Corporate Governance, Corporate Social Responsibility,

Performance
I. INTRODUCTION
The Banking sector is one of sector which has an important role in the
economy of a country. Banks with sound financial performance is necessary so
that the intermediary function can run smoothly. Bank with good performance

reflected in stock prices that steady and increase. Maximizing bank performance
is very important it also means maximize shareholders wealth. To obtain firm
performance, managers can implement a number of ways. First, using one
indicator of financial ratio that improve profitability. Profitability increase can
lead to raise stock market prices. Second, managers implement good corporate
governance. Better corporate governance process can increase firm value and firm
performance. Third, managers can implement and disclose corporate social
responsibility. By implementing and disclose good corporate social responsibility
extensively, it can enhance firm's image and sales growth. It is not separated from
trust and acceptance public to firm's products.
The concept of corporate governance arise because of the existence of
limitation from agency theory. Agency problem arise from the gap between the
shareholders as owners of the company with management as an agent. In the
agency theory revealed that there are inconsistencies or asymmetric information
between principal and agent. In this position the manager has more information
than the principal giving rise to the assumption that these individuals act to
maximize their own interests.
Corporate Governance is creating control mechanisms to enable the
creation of profit sharing system and the balance of wealth for shareholders and
create efficiencies for company. Corporate governance can helped create a
conducive relationship and accountable between elements in firm to improve the
performance of the company. Corporate governance also provides a structure that
facilitates the determination of the objectives of a company , and as a means to
determine the performance monitoring techniques . John Pieris suggests that the
basic principles of corporate governance include aspects of accountability,
fairness, transparency, responsibility and independence.
Ferry describes that corporate governance in the banking industry are
described as a relationships between board executive director of stakeholders,
commissioners, with shareholders. Indonesia implemented a system of dual -
board system which means that there are differences and the separation of roles
between the board of directors and board of commissioners. The amount of the

board of directors logically will greatly affect the speed of corporate decision-
making. The number of board of directors will provide benefits for the company
since the creation of networks with parties outside the company and ensure the
availability of resources.
Independent commissioner is commissioner which does not come from a
party affiliated with the company. The existence of an independent commissioner
is expected to provide oversight of the company objectively and independently,
ensuring a clean and healthy management of the company's operations in order to
support the company's performance. Jensen and Meckling revealed that the
greater number of monitors, the potential for conflict is getting low and will
reduce agency cost and will affect the performance of the company. In the capital
structure in Indonesia , managerial ownership can come from members of the
board of directors or of commissioners, this means managers as well as
shareholder. Increasing the proportion of shares held by commissioners and
directors are believed to improve the financial performance of companies. This
makes the manager will focus its attention on the performance of the company,
thus increasing the company 's financial performance in conjunction with
increasing managerial stock ownership in the company.
Corporate social responsibility ( CSR ) is an idea that makes the company
no longer focused on a single bottom line , that is the value of the company
reflected in its financial condition , but also on the concept of the triple bottom
lines ie Profit , People and Planet. According Kusumadilaga Corporate Social
Responsibility is not just the cost , but also an investment for the company. By
implementing Corporate Social Responsibility (CSR) is the company in addition
to getting a good image from consumers and investors, with this program the
company can increase the number of sales that have an impact on the profitability
and bank performance.
LITERATURE
Agency Theory
Agency relationship perspective is basis to understand Corporate
Governance. Agency problems in corporate conflicts that usually occur because

owner (the principal) can not play an active role in management. They delegate
authority and responsibility for management to managers (agents) to work on
behalf and for his interests. Delegation of authority makes managers have a vested
interest to make strategic, tactical and operational decisions that can benefit them,
triggering conflict agency conflict. According to agency theory, agency conflicts
occur due to differences in interests between owners and managers (Jensen and
Meckling, 1976). On one hand, owners want manager to work hard to maximize
owner utility. On other hand, managers also tend to strive to maximize their own
utility.
Signaling Theory
Signal theory explains why companies have an incentive to provide
information on external financial reports. Encouragement of companies to provide
information because there is asymmetry of information between the company and
outsiders because companies know more about the company and upcoming
prospect than outsiders (investors, creditors). Signal theory put forward about how
should a company give a signal to users of financial statements. This signal in the
form of information about what has been done by the management to realize the
wishes of the owner. The signal can be either promotion or other information
which states that the company is better than any other company. Companies can
improve company performance by reducing the information asymmetry. One way
to reduce information asymmetry is to give a signal to the outside, one of them a
reliable financial information and will reduce the uncertainty about the company's
prospects to come.
Forum for Corporate Governance in Indonesia (FCGI) defines Corporate
Governance are: A set of rules governing the relationship between shareholders ,
trustees ( managers ) of the company , the creditors , the government , employees
and internal stakeholders and external relating to the rights and their obligations or
in other words a system that controls the company. Corporate Governance goal is

to create added value for stakeholders. Implementation of good corporate
governance is considered to improve banks that had a bad image , protect and
enhance the interests stakehoderscompliance with laws and regulations in force
and the general ethics of the banking industry in order to create a sound banking
system . moreover implementation of good corporate governance in banking is
expected to affect the performance of banks , due to the implementation of
corporate governance can beimprove financial performance , reduce risk due to
management actions tend to benefit themselves , and increase investor confidence.
Board of Directors (BOD)
According to the law (UU) number 40 of 2007 on limited liability
companies, the board of directors (board of directors) is the organ of the company
which is authorized and fully responsible for the management of the company for
the benefit of the company, in accordance with the purposes and objectives of the
company and to represent the company, either in inside and outside the court in
accordance with the provisions of the articles of association. The board of
directors is a party to a corporate entity in charge of carrying out the operation and
management of the company. Members of the board of directors appointed by the
RUPS. Wardhani (2006), states that the board of a large number of profitable
companies from the perspective of resource dependence is that companies
dependent on the council to be able to manage its resources better. Hardikasari
(2010), stated that the increase in the size of the board will benefit the company
for the creation of a network with outside parties and ensure the availability of
resources.
BOD = The amount of board of director
Independent Commisioner (IND)

According to the National Committee on Governance (KNKG), 2004, the
Independent Commissioner is a commissioner who is not affiliated with the
management, board members more, and the controlling shareholder, and free from
the business relationship and other relationships that affect its ability to act
independently or act solely in the interests of the company. The existence of an

independent commissioner serves as a counterweight in decision-making and to
protect minority shareholders. Barnhart and Rosenstein (1998), proving that the
higher representation of outsider directors (independent directors), the higher the
independence and effectiveness of the corporate board, so as to enhance the value
and performance of the company. According to Lestari (2013), the relationship
between the independent directors and the bank's performance was also supported
by the perspective that the presence of independent directors is expected to
provide oversight of the company objectively and independently, ensuring a clean
and healthy management of the company's operations in order to support the
company's performance.
The amount of IND
IND =
Total commisoner
Managerial Ownership (MGO)

Managerial ownership (managerial ownership) is ownership by the
management company, as measured by the percentage of shares owned by
management. According Itturiaga and Sanz (2000), managerial ownership
structure can be explained from two perspectives, namely the approach of the
agency (agency approach) and approach imbalance (asymmetric information
approach). Approach the agency considers managerial ownership structure as an
instrument or tool separately reduce the agency conflict. Approach information
imbalance looked mechanism managerial ownership structure as a way to reduce
the imbalance of information between insider and outsider through information
disclosure in capital markets. Ross et. al (in Tarjo, 2005) states that the greater the
proportion of shareholding in the company, the management tend to try harder for
the benefit of the shareholders which is none other than himself.
Share owned by director and commisioner
MGO =
Total Share
Corporate Social Responsibility .

CSR is a concept that organizations to have various forms of
responsibility towards all stakeholders , which include customers, employees ,

shareholders , communities and the environment. World Business Council for
Sustainable Development (WBCSD) defines Corporate Social Responsibility as
an ongoing commitment among business to behave ethically and contribute to
economic development while improving the quality of life of the workforce and
their families as well as local communities and society as a whole. Corporate
Social Responsibility is a firm commitment to improve community being well
through the practice of good business and contribute most of the company's
resources.
CONCEPTUAL FRAMEWORK

RESEARCH HYPOTHESIS
Based on theoretical basis, previous studies, the hypothesis in this study
are as follows:
H1 : The number of the board of directors have a significant effect on the
financial performance listed banking companies in the Stock Exchange in
2010- 2013.
H2 : The number of independent commisioner significant effect on the financial
performance of banking companies teraftar on the Stock Exchange in 2010-
2013.
H3 : The proportion of managerial ownership significantly influence the
company's financial performance banking teraftar on the Stock Exchange in
2010- 2013.
H4 : Corporate social responsibility significantly influence the company's
financial performance banking teraftar on the Stock Exchange in 2010- 2013.
H5 : The number of the board of directors, the amount of independent
commisioner, proportion of managerial ownership and corporate social
responsibility simultaneously significantly effect on the financial performance
of banking companies listed on the Stock Exchange in 2010-2013
METHODS
Research object descriptions
Basen on data from www.idx.co.id this study population is bank industry
that is list from 2010-2013 with total 38 frims. Researchers used the analysis of
panel data regression to identify independent variables that influence such as the
board of directors (BOD), independent commissioner (IND), managerial
ownership (MGO), corporate social responsibility (CSR) and identifying the
dependent variable that is affected is the performance of financial banks (Tobin's
Q). According to Winarno (2011), panel data is a combination of cross section
data and time series data. Data collected in the study period that the financial
statements from January 2010 until December 201 Summary of sample selection
criteria is shown in table 2.

Table 1 Criteria Sample Research
No Description Amount
1 Bank listed on indoensia stock exchange during 2010-2013 38

2 Bank that do not include the CSR report (2)
3 Bank that do not include the corporate governance report (14)
Total sample 22
Source: Indonesia stock exchange
Descriptive statistic
Table 2 Descriptive Statistic
TQ BOD (n) IND (%) MGO (%) CSR (skor) SZ (jt) GR (%)
Mean 1.08 7.55 0.56 7.08 0.63 13.343 0.26

Maximum 1.45 15.00 0.80 56.43 1.00 7.330 3.10
Minimum 0.88 3.00 0.33 0.01 0.33 1.5 -0.21
Std. Dev. 0.12 2.90 0.08 16.48 0.20 18.708 0.38
Observations 74 74 74 74 74 74 74
Source : Data processed in 2015
Normality Test
The objective of normality is to determine whether the data in the study
with normal distribution or not. This study use Kolomogorov – Smirnov test. The
model is considered normal distribution when the probability of Kolmogorov -
Smirnov count is greater than 0.05 .
Table 3. Normality Test
Value
Kolmogorov-Smirnov Z 1,311
Probability 0,064
Source : Data processed in 2015
In this study, researchers used Kolmogorov-Smirnov test to determine
whether the observed data to be studied normal distribution. The model is
considered normal distribution when the probability of Kolmogorov-Smirnov
count is greater than 0.05. Table 2 shows the value of the Kolmogorov-Smirnov
test was 1.311 and the 0.064 significance (> 0.05), which shows the probability
values have normally distributed

Multikolineraritas test
According Ghozali (2011), multicollinearity test is used to determine
whether there is a linear relationship between the independent variables. To
determine whether or not multicollinearity of the independent variables is by
using Pearson correlation, whereby if the correlation between the independent
variables is quite high (over 0.90) are suspected multikolinearitas symptoms.
From Table 3 shows that there is no correlation coefficient between the variables
which is greater than 0.8 or close to 1. Thus multicollinearity between the
variables in this study was low.
Table 4 Multikolienearitas Test
BOD IND MGO CSR SZ GR
BZ 1.000 -0.271 -0.248 0.468 0.729 -0.204
KI -0.271 1.000 0.300 0.085 -0.060 -0.030
KM -0.248 0.300 1.000 -0.080 -0.180 -0.033
CSR 0.468 0.085 -0.080 1.000 0.477 -0.314
SZ 0.730 -0.060 -0.180 0.477 1.000 -0.220
GR -0.204 -0.030 -0.032 -0.314 -0.220 1.000
Source: Output Eviews 7.0, the data is processed researcher (2015).
Hetetoskedasticity Test
According Ghozali (2011), heteroscedasticity test is used to test whether
the regression model occurred inequality residual variance from one to the other
observations. Heteroskidastity test aims to test whether there is inequality in the
regression model residual variance from one observation to another observation.
To find out heteroscedasticity in this study using white test. Based on the value of
the probability table 4 Chi-Square of Obs * R-squared of 0.754> 0.05, it can be
concluded that the variables in this study free of heteroscedasticity.
Table 5. Heteroskedasticity Test
Heteroskedasticity Test: White

Scaled explained SS 4.675 Prob. Chi-Square(6) 0.586

Autocorelation Test
According Ghozali (2011), autocorrelation test aims to identify whether
the linear regression model was no correlation between bullies (residual) different
time. In this study, autocorrelation test using test Durbin-Watson (DW), the result
of the Durbin-Watson at 2.013. Furthermore, compared with DW tables, with a
lower limit (dL) of 1.458 and an upper limit (dU) of 1.801. It can be stated that the
results of the Durbin-Watson statistic test used terms dU <d <4-dU, where the
results of the 4-dU was 2,198. Thus it is stated that there is no autocorrelation in
the equation, because the value of Durbin-Watson are in terms dU <d <4-dU or
1.801 <2.013 <2.199.
Table 6. Autocorelation Test
Probability
Durbin-Watson Stat 2.001372
Chow Test
Chow test as the initial test was used to select the best approach between
the common effect or fixed effect. In Table 7 can be seen that the value of P-
Value of Cross-section of 0.00 Chi-square smaller than 0.05 Alpha or it can be
said that H0 rejected and Ha accepted. So it can be said that in the test chow fixed
effect model is better used and can be resumed at test Hausman.
Table 7. Chow Test
Probability
Cross-section Chi-square 0.0000
Hausman Test
In Table 8 shows the probability of the chi-square value of 0.3100. Chi-
square probability value is greater than 0.05, so H0 is accepted and the regression
model used is Random Effect.
Table 8. Hausman Test
Probability.
Cross-section random 0.3100

Hypotesis Testing
Table 8. Multiple Linear Regression Analysis
Coefficient Prob.
C -0.0621 0.9626
BOD 0.0048 0.7016
IND 0.2513 0.1538
MGO -0.0009 0.1203
CSR -0.0017 0.9875
SZ 0.0299 0.4999
GR -0.1154 0.0387
Prob (F-Statistic) 0.0000
R-Squared 0.8004
The board of direction has a coefficient of 0.0048 with probabilty stat

test and t-test of 0.3855 and 0.7016 . These results prove that a variable number of
the board of directors no significant effect on the financial performance of banks
are proxied by Tobin 's Q. The number of boards of directors are not the only
indicator which determines the quality of banks' performance , there may be
another indicator of a board of directors that can affect the performance of
banking among others ; educational background , competence and attitude and
personality has directors itself.
Coefficient of variables independent commissioner at 0.2513 with a
probability value of 0.1538 . The results showed that the proportion of
independent directors on the study did not significantly influence the financial
performance of banks are proxied by Tobin 's Q . This can be caused by
independent commissioners are involved in decision making outvoted by the other
commissioners and at banking industries have Financial Fervices Authority and
indoensia Banking as financial controller.
The managerial ownership ( MGO ) has a coefficient value of -0009 , as
well as probabiltas value of 0.1203 means that in this study the managerial
ownership variable has no significant effect on the financial performance of
Banking The proxied by Tobin 's Q. This is because the banks do not give a large
proportion of ownership Shares for directors and Commissioner so that the
management is less motivated to be professional.

CSR has a variable coefficient value of 0.0017 and probabiltas value of
0.9875 . These results indicate seignifikan CSR has no effect on the financial
performance of banking proxied by Tobin 's Q. This is because CSR is a cost that
can reduce corporate earnings . More and more companies conduct social
activities , financial performance declines so that profit is also automatically
decreases.
Variable firm size has koefiisien at 0.0299 with 0.4999 probabiltas value
means that the variable firm size does not have a significant effect on the financial
performance of banks. These results are consistent with research conducted by
Nuswandari which proves that firm size is not guaranteed if the company has a
good performance. The probability value of growing ooportunity is 0.0387 with
the coefficient of -0.1154 means the variable growing opportunity to have a
significant influence on the financial performance of banks are proxied by Tobin's
Q.
Suggestion
1. For the government (BAPEPAM, Indonesia Stock Exchange authorities and
Bank Indonesia) should make corrections concerning the procedures for the
implementation and application of corporate governance in Indonesia,
especially on internal corporate governance such as directors, independent
board, and ownership manegerial. One way to do government in an effort to
improve governance is to strengthen the rules forming a component of
corporate governance as not only based on the number or proportion but also
pay attention to other aspects such as education, experience and skill.
2. For companies, social responsibility (CSR) as well as the disclosure of which
is always propagated and updated to conform to the conditions that exist in
today's society.
3. For further research annual report as the data used in this study, the
researchers suggest using a longer period to be able to access the effectiveness
of the policies related to the monitoring mechanisms of corporate governance
on corporate performance, especially banking.

References
Agustina, Melia Tertius dan Christiawan, Yulius Jogi. 2015. Pengaruh Good
Corporate Governance Terhadap Kinerja Perusahaan Pada Sektor
Keuangan. Business Accounting Review, Vol. 3 No. 1, pp. 223-232.
Bambang, Listyo Purno. 2013. Pengaruh Mekanisme Good Corporate Governance
Terhadap Kinerja Perbankan, Skripsi Universitas Negeri Semarang.
Barnhart, Scott W. dan Stuart Rosenstein. 1998. Board composition, managerial
ownership, and firm performance: An empirical analysis. The Financial
Review, Vol. 33, No. 4, pp. 1-16.
Bidhari, Sandika, Ubud Salim, Siti Aisjah. 2013. Effect of Corporate Social
Responsibility Information Disclosure on Financial Performance and Firm
Value in Banking Industry Listed at Indonesia Stock Exchange. European
Journal of Business and Management, Vol. 5, No. 18, pp. 39-47.
Eisenhardt, K.M. 1989. Agency Theory: An Assesment and Review. Academy of
Management Review, Vol. 14. No. 1, pp. 57-74.
Elkington, John. 1998. Accounting The Triple Bottom Line. Measuring Busniness
Excellence, Vol. 2 No. 3, pp. 18-22.
Ferry, N. 2008. Peranan Good Corporate Governance dalam Industri Perbankan
Indonesia. Makalah Bank dan Manajemen, No. 55, Vol. 2, pp.245
Ghozali, Imam. 2011. Aplikasi Analisis Multivariate dengan Program IBM SPSS
19. Semarang: BP UNDIP.
Hardikasari, Eka. 2010. Pengaruh Penerapan Corporate Governance Terhadap
Kinerja Keuangan pada Indunstri Perbankan yang Terdaftar di BEI Tahun
2006-2008. Skripsi Universitas Diponegoro.
Hasanah, Nur. 2013. Analisis Pengaruh Mekanisme Good Corporate Governance
Terhadap Kinerja Perbankan. Skripsi Universitas Islam Hidayatullah
Jakarta.
Itturiaga, F. J.L. dan Sanz, J.A.R. 2000. Ownership Structure, Corporate Value
and Firm Investment. A spanish Firms Simultaneous Equation Analysis.
Working Paper Universidad de Valladolid. pp. 1-32.

Jensen, M.C dan Meckling, W.H. 1976. Theory of The Firm: Managerial
Behavior, Agency Cost, and Ownership Structure. Journal of Financial
Economics, Vol. 3, pp. 35-60.
Pieris, John dan Wiryawan, Nizam Jim. 2008. Etika Bisnis dan Good Corporate
Governance, Edisi kedua, Jakarta. Pelangi Cendikia.
Kusumadilaga, Rimba. 2010. Pengaruh Corporate Social Responsibility Terhadap
Nilai Perusahaan Dengan Profitabilitas Sebagai Variabel Intervening.
Skripsi Universitas Diponegoro.
Lestari, Puji Lestari. 2013. Pengaruh Good Corporate Governance Terhadap
Kinerja Perusahaan. Skripsi Universitas Diponegoro.
Ndaruningputri, Wulandari. 2005. Pengaruh Indikator Mekanisme Good
Corporate Governance terhadap Kinerja Perusahaan Publik di Indonesia.
Tesis Tidak Dipublikasikan. Semarang: Program Magister Akuntansi
UNDIP.
Ni Nyoman G Martini Putu, Moeljadi, Djumahir, Atim Djazuli, 2014. Factors
Affecting Firms Value of Indonesia Public Manufacturing Firms.
International Journal of Business and Management Invention, Vol. 3, Issue
2, pp. 35-44.
Nuswandari, Cahyani. 2009. Pengaruh Corporate Governance Perception Index
Terhadap Kinerja Perusahaan Pada Perusahaan Yang Terdaftar di Bursa
Efek Indonesia. Jurnal Bisnis dan Ekonomi (JBE), Vol. 16, No.2, pp. 70 –
84.
Nopiani, Kadek, Sulindawati, Erni, Sujana, Edy. 2015. Pengaruh Mekanisme
Good Corporate Governance Terhadap Kinerja Keuangan Bank Perkreditan
Rakyat di Bali . Jurnal Akuntansi, Vol.3 No.1.
Nugrahanti, Yeterina Widi dan Shella Novia, 2012. Pengaruh Struktur
Kepemilikan sebagai Mekanisme Corporate Governace Terhadap Kinerja
Perusahaan. Jurnal Manajemen, Vol.11, No.2, pp.8.
Rosilinia, Kadek, Gede Adi Yuniarta, dan Nyoman Ari Surya Darmawan. 2014
Pengaruh Corporate Social Responsibility Terhadap Kinerja Keuangan

Perusahaan (Studi Empiris Pada perusahaan LQ45 Di BEI periode 2008-
2014. Jurnal Akuntansi. Vol 2 No.1.
Tarjo. 2005. Analisis Free Cash Flow dan Kepemilikan Manajerial terhadap
Kebijakan Utang pada Perusahaan Publik di Indonesia. Jurnal Riset
Akuntansi Indonesia, Vol. 8, No. 1, pp. 82-104.
Wardhani, Ratna. 2006. Mekanisme GCG dalam perusahaan yang mengalami
Permasalahan Keuangan (Financially Distressed Firms). Simposium
Nasional Akuntansi IX. Padang.
Winarno, Wing Wahyu. 2011. Analisis Ekonometrika dan Statistika Dengan
EViews. Yogyakarta: UPP STIM YKPN

POSITIONING IN SELECTING PRIVATE UNIVERSITY IN JAKARTA
Tati Handayani1), Bernadin Dwi M 2), Jenji Gunaedi Argo3)

E-mail: tatihandayani@gmail.com
1),2),3)
Economic and Business Faculty of UPN Veteran Jakarta
ABSTRACT
The objective of this research is to acknowledge the perception mapping of the people
towards UPN ”Veteran” Jakarta, Gunadharma University, Moestopo University dan Satya
Negara Indonesia University that are located in South Jakarta reviewed from the indicator of
Location, Promotion, Tuition Fees, Educational quality, Reference, Brand image, and
Facility. The number of sample on this research is 360 respondents which are senior high
school students around South Jakarta. The analysis technique being used in this research is
multivariate analysis technique. This multivariate analysis is connected with statistical
method which is equally performing analysis to more than two variables on each private
university. To find out the similarity between private universities can be done with Multi
Dimensional Scaling (MDS) and Correspondence Analysis (CA) to discover the excellence of
each variable on every private university. In this research both analysis tools are being used
and completed each other, because MDS and CA are both producing an out put which is
perceptual map than can draw the Position of UPN “Veteran” Jakarta and its competitor.
Though MDS and CA, both are expected to get on information about the Positioning of UPN
“Veteran” Jakarta as Private University, also the preference of variable exellence that UPN
“Veteran” Jakarta has. This information will be made as platform in defining the marketing
strategy which can be implemented on UPN “Veteran” Jakarta to strengthen its positioning
based on variables that are owned by private university.
Keywords: Perceptual mapping, multi dimensional scaling, correspondence analysis.
1. Introduction
Higher Education in Indonesia as one of the service organization currently is in a

fundamental change. The changes of curriculum, learning method, and semester package
system to be semester credit system and other changes affect on many things, among others
are the period of study as well as better graduation quality. These changes are implemented to
anticipate the environmental change, especially to prepare for the globalization era. These
changes are not only caused by the rapid progress of science, technology and art, but also
caused by change of people expectation to the Higher Education role in being the pioneer for
the nation and country future.
To meet this demand, the Higher Education with its study programs is necessary to obtain the
people trust with quality assurance, quality control, quality improvement. These quality
assurance, quality control as well as quality improvement can be given to the university or the
study program which has been evaluated carefully by nationally accreditation process
(National Accreditation Board for Higher Education, 1998).
Education according to the Act of National Educational System (2003) is the aware and
planned effort to realize the learning situation and process so that the learners can actively
develop their potential to get spiritual power of religion, self-control, personality,
intelligence, good behavior as well as skills required for themselves, community and nation.
While, the definition of learning according to Bell-Gredlar in his book, Udin Winata Putra
(2008): the assessment change due to learning will be absorbed enough permanently.

According to the Act No. 20 of 2003 Concerning the National Education System article 1
paragraph 20 (Study and Learning Theory), learning is the interaction process of learners and
teachers as well as learning sources in a learning environment.
2 Article 1 paragraph 6 Act No 20/ of 2003, learning environment is the learning as the
background for the learning process such as in classes, library, school, course places,
internet-café, family, community as well as universe. So that the education is the human
demand to create the ability development and improve self quality in future life.
Choosing the appropriate higher education must be adjusted to these things; first, the goals
and fields to be taken later, second, to know which higher education really qualified is. By
considering the condition and situation, it seems that different higher education context
causes different central of attention. The main attention on the quality is still limited on the
necessary effort to improve the quality. In reality, there are three factors which can be seen as
the motivating factors to enhance the scope of attention in order to improve the quality. The
first factor is the student itself, this fact is one of the indicators for low quality achievement in
higher education system. The second factor relates to the issue value of money, namely
related to the fact of economic decrease giving direct effect on community ability decrease
including the students’ parents to finance their children education. It is still argued whether
the higher student has contributed to the qualified education. The third factor as the
motivating factor for the quality assurance system implementation in higher students is in line
to the increasing demand on the university accountability. Related to this matter, community
has the right to know the university procedure in maintaining and monitoring the activity
quality, its measurement used to identify and solve the efficiency possibility, as well as the
extend of the university to be able to response on the changing community demand.
The number of Private as well as State Higher Education in Indonesia currently is 3.017
institutions. This number keeps increasing in all parts of Indonesia. In Jakarta and its
surrounding, there are 48 private universities, 15 private institutions, 8 polytechnics and 11
private academics (source: Google:Wikipedia: ProyekWiki PT di Indonesia) seen in the table
1 below.
Table 1.Total of Private University in Indonesia
Total of Private University in Indonesia

Private
University
26%
Private
Academics
61% Institutions
Polytechnic 8%
5%
The number of Private University (PU) in Jakarta does not cover the PU in Tangerang, ,
Bekasi, Depok which the number also keeps increasing. Choosing the best PU is by seeing
the PU reputation meaning commonly known as PU with good image, having good learning
facilities, accreditation status and its graduations having no difficulty to look for any jobs.
But, the PU reputation in marketing term is known as the brand image.

2. Literature Study
Positioning is the marketing strategy in giving the brand image in the memory of potential
customers in target market. The higher education brand image in the people mind will ease
the decision in determining the appropriate PU. Bowen & Makens (2003:283) described the
positioning as a procedure for a product to be described by the consumers in the important
attributes. Thus, the marketers must adjust the attributes to be offered based on the customer
demand and priority in targeted segment (Evans, Campbell & Stonehouse, 2003:132;Mullins
& Walker, 2010).Lovelock & Wirtz (2007), giving emphasize that the positioning on the
service is by demanding the overall marketing strategies on the important things for the
market target in creating the products to be the option products. It is not only the
communication and analogy.
Positioning requires marketing strategy in describing the essence of brand (product/service),
objectives in helping the customers to reach it and conducted in unique ways (Kotler
&Keller, 2007). Lovelock & Wirtz (2007), specifically in service field, stated that there are 3
demands to analysis in developing the positioning strategy; market, competitor and internal
analysis. The positioning has the important role in marketing strategy because it ‘relates the
market analysis and competitive analysis to the company internal analysis’ (Lovelock &
Wirtz, 2007 : 195). The Competitor Analysis determines the position by the competitor and
the internal analysis identifies the possibility as basic for differentiation.
According to Parikshat (2010) a brand can be positioned in many ways: offering the special
benefits, targeting on certain segment, price or distribution. It is apart from the position
considered to be good by the academics and practitioners as one of the key elements of
modern marketing management. Positioning the goal in market target requires the cognitive
and affective image analysis by the prospective students, according to Carlos (2011).
Private universities currently operate in very competitive and dynamic environment because
there are many competitors. According to Mustafa (2013) there are 3 reasons for private
university option, namely holistic education, academic factor (performance in final test),
social and logistic factor (the close distance of school from house) (Bell, 2009). The other
additional factors include sport facility, university reputation in certain field (Collins &
Snell,2000), discipline, religious (Finnemore,1984), offering community, teacher quality,
small field and price (Parker et al., 2007) as he consideration in choosing private higher
university.
According to Shaik (2005), education is the service containing cores and supporting services.
Teaching and learning are the example of service core because it is important for a success
learning experience. The part of educational service is accommodation and attention for the
children outside the learning hours. In the 21 st century, in which the environment changes
rapidly, it is important for the university to know precisely what consumers looking for
certain servicesin this case is education. According to Andrew (2003), positioning relates to
the effects of mind to choose private universities.
3. Methodology
In this research, the research object (population) is the community which has known
University of Pembangunan Nasional Veteran, University Satya Negara Indonesia,
Gunadarma University and University of Moestopo Jakarta. The sample collection method is
purpose sampling (judgment sampling).

3.1 Multi Dimensional Scaling (MDS).
The analysis technique of Multi Dimensional Scaling (MDS), map has very important role.
This aims to describe the position of an object to other objects, based on similarity. In this
research, the analysis tool of Multi Dimensional Scaling (MDS) aims to know the positioning
of UPN “Veteran” Jakarta compared to its competitors (obtained from the respondent
sample perception) on the product similarity compared to other products. The similarity is
measured by using scale of 1 until 5.
3.2 Correspondence Analysis (CA)

By the analysis technique of Correspondence Analysis (CA), the researches want to know the
position of UPN “Veteran” Jakarta compared to other universities. The respondent perception
in questionnaire, is categorized into two, namely:
a) Value of 0 (zero), meaning that the university is not satisfied / not good or still has many
deficiencies.
b) value of 1 (one), meaning that the university is satisfied / good.
For similarity and association, both are measured by chi-squre, with hypotheses:
Ho : χ = 0, there is no significant correlation between attribute and private university.
Ha : χ ≠ 0, there is significant correlation between attribute and private university.
Testing criteria:
If χ2count ≤χ2table, so Ho is accepted.
If χ2count >χ2table, so Ho is rejected.
4. Results
1. University of Pembangunan Nasional “Veteran” Jakarta.
UPN “Veteran” Jakarta was established in 1963 as private university under the Guidance of
Ministry of Defence Republic of Indonesia, located in RS.Fatmawati Pondok Labu Street
South Jakarta.
Faculties
1) Faculty of Economic and Business 5) Faculty of Computer Science
2) Faculty of Medical 6) Faculty of Health Science (Nursery, Community Health,
Physiotherapy),
3) Faculty of Social Politic Science 7) Faculty of Law
4) Faculty of Machinery Engineering 8) Magister Program of Management and Magister
Program of Law

2. Gunadarma University
Was established in 1981, the campus is located in:
1) A Campus, located in Kenari 3 Street number 33, Jakarta consisting of 12 classrooms.
2) B Campus, located in Salemba Bluntas street, Central Jakarta consisting of 9 classrooms
3) C Campus, located in Salemba raya Street No. 53, Central Jakarta consisting of 9
classrooms.
4) D Campus, located in Margonda Raya street No. 100, Depok consisting of 18 classrooms.
5) E Campus, located in Akses Kelapa Dua street, Cimanggis Depok consisting of 55
classrooms.
6) F Campus, located in Akses Kelapa Dua street, Cimanggis Depok consisting of 39
classrooms.
7) G Campus, located in Akses Kelapa Dua street, Cimanggis Depok.
8) H Campus, located in Kyai Haji Noer Ali street , Kalimalang, Bekasi consisting of 24
classrooms.
9) I Campus, located in Danau Kelapa Dua Karawaci street, Karawaci, Tangerang.
Study program / departments
1) Three Diploma Program (D3)
2) S1-Computer Science and Information technology 5) S1 Civil Engineering
3) S1 Faculty of Industry engineering 6) S1 Faculty of Psychology
4) S1 Faculty of Economics 7) S1 Faculty of Letter
3. Moestopo University
Was establish in 1962, located in I Campus in Hanglekir Street and II Campus in Bintaro.
Study Program /department
1) Faculty of Dentistry
2) Faculty of Social Science and Politic Science
3) Faculty of Communication Science
4) Faculty of Economics
5) Post-Graduate Program consisting of: Magister of Management, Magister of
Administration Science and Magister of Communication Science
4. University of Satya Negara Indonesia

The campus is located in Arteri Pondok Indah Street No.11 Kebayoran Lama, South Jakarta,
established since 1989.

Faculties:
1) S1 Faculty of Engineering
2) S1 Fishery and Maritime Science
3) S1 Faculty of Economics
4) S1 Faculty of Social Science and Politic Science
5) Magister Program of Management
Discussion
There is one statement, namely no 11with measurement result of 0.216 smaller than 0,361,
meaning that the statement is invalid. While, the other 23 statements are significant and can
be stated to be valid. The reliability test is conducted with α cronbach technique. The reliable
processed samples are 196 respondents, with the following details:
Table 2. Questionnaire Distribution Results
Name of senior Questionnaires The questionnaire Questionnaires

high school distributed is not returned back
SMKN 20 30 - 30
SMAN 6 30 2 28
SMKN 47 30 12 18
SMAN 66 30 - 30
SMA Budi Luhur 30 - 30
SMKN 28 30 - 30
SMAN 97 30 - 30
Total 210 14 196
3. Similarity between Private Universities in South Jakarta

In this research, the analysis tool of Multi Dimensional Scaling (MDS) aims to know the
positioning UPN “Veteran” Jakarta compared to its competitors, Moestopo University,
Gunadarma University and University of Satya Negara Indonesia (obtained from the
respondent sample perception) on the product similarity compared to other products. The
similarity is measured by using scale of 1 until 5. The table below shows the new Stress value
compared to the previous Stress value of 7 to be 0.001 after there are four times of iteration
so that the iteration is stopped. The number of 0,00063 show to approach zero, so the output
is increasing to get similarity to the real condition.
The RSQ value is used to know the closeness between the data and perpetual map, by RSQ,
it can be concluded that the data can be mapped correctly or not. The correlation value
between data and geometric map is shown by the following data:
Averaged (rms) over matrices
Stress = .30188 RSQ = .46775
It shows the correlation value of 0,46775 . the RSQ value is getting to approach 1 meaning
that the data is getting to be mapped perfectly. Although the stress value category of this

research model is bad, there is no respondent to be eliminated. The reason is there is
consistency between the respondents and similarity value of motorcycle pair.
This consistency can be seen in graph of Derived Subject Weight (figure 1) and Scatterplot of
Linear Fit (figure 2) showing the line pattern to the right. Based on these graphs, this research
model still can be used.
Figure 1
Figure 2
Dimension of Perceptual Map

In the model of two-dimensions, the position of Private Universities is in one quadrant out of
four quadrants. The Private Universities in the same quadrant mean to be the Private
Universities having some similarities. The implication is that the Private Universities will
compete each other, otherwise the Private Universities in different quadrants means to be the
Private Universities with no similarity meaning that there will be no competition. The further
the position, the more different Private Universities are. The research results from 4 PU can
be seen in Figure 4 3.as the following.
The mapping results in Figure 3 shows a two-dimensional perceptual map out of four Private
Universities studied:
a. University of Satya Negara Indonesia is in the first quadrant with dimensions of 1 negative
and
2 positive. University of Satya Negara Indonesia is perceived by the consumers to have
significant differences compared to other private universities because it is located relatively
far compared to other private universities.
b. Moestopo University is located in II quadrant with dimensions of 1 and 2 positive.
Meaning that the consumers perceive Moestopo University having similarity or having no
significant differences compared to other private universities.
c. UPNV Jakarta is located in III quadrant with dimensions of 1 positive and 2 negative.
Thus, UPNV J has the similarity or does not have a significant difference compared to other
private universities.
Gunadarma University is in the IV quadrant with dimensions of 1 and 2 negative. Thus,
Gunadarma University has the similarity, or does not have a significant difference compared
to other private universities.
5. Correspondence Analysis

Table 3. Product Attribute Recapitulation
Satya Negara
UPN Gunadharma Moestopo Indonesia
NO Indicator VJ University University University
1 Location 85 73 130 71
2 Promotion 96 110 141 108
3 Tuition fee 60 72 101 80
4 Educational quality 81 99 133 96
5 Reference 76 93 111 90
6 Brand image 96 94 120 86
7 Facility 118 112 129 105
The test result of Chi-Square obtained that
Chi-Square Tests
Value Df
a
Pearson Chi- 107.395 18
Square
333Likelihood 137.307 18
Ratio
N of Valid Cases 2683
Conclusion: there is significant correlation between attributes and university
Table 4. Processing Result of 2-Dimensional Data
No. Name of private higher education Name of Attribute

1 Moestopo University Location
2 UPN “VETERAN” JAKARTA Promotion and Tuition Fees,
3 Gunadharma University Reference and Brand image
4 Satya Negara Indonesia University Facility
Based on the perception map of product attributes from the Private Universities (Figure 4), it
can be seen the respondents' preferences by the proximity of each product attributes to the
private colleges:

a. University of Pembangunan Nasional “Veteran “ Jakarta has a closeness between the
attribute promotion and tuition
b. Gunadarma University has a closeness between the references and imagery.
c. Moestopo University Jakarta has a closeness with location attributes.
d. University of Satya Negara Indonesia has a closeness with the facility attributes.
In this study, there are attributes affecting on the positioning of PU in South Jakarta, these
attributes are promotion and tuition, references and imagery, as well as the location and
facilities. These are based on the research conducted by Debbie VE (2013), which stated that
the university should have the competence and competitive advantage. Each PU has
advantages in different attributes such as the results of this study:
a. UPN "Veteran" Jakarta has the attribute promotion and tuition.
b. Gunadarma University has the attribute references and imagery.
c. Moestopo University has the location attributes.
d. University Satya Negara Indonesia, has the facility attributes.
This is according to research by Parikshat SM, (2010) in which to name of university will be
considered to be the positioning in several ways: offering special benefits, targeting specific
segments, and tuition. Although, each PU has different excellences but, each of which must
be consistent in doing so. This matter is in line to a research by Andrew (2004), I Gusti Ayu
(2008) stated that the positioning requires consistency and focus on an ongoing basis.
Likewise, according to Carlos (2011), Nur Raina N (2011) stated that positioning the goals in
market target (prospective students) requires cognitive and affective analysis owned by

prospective students. So that the customer satisfaction will be achieved and the consumer will
have loyalty to the institution, and they will have the willingness to make payments and will
inform prospective students. This is according to research by Munjiati M (2005), Mustafa
(2013), I Made Suartika (2007) stated that in order to improve the quality, it is required good
services and tuition.
CONCLUSION
In this study, both the analytical tools are used and complement each other, because MDS
and CA generate output as the perceptual describing the positions of UPNV Jakarta and its
competitors. Through MDS and CA, it is expected to give information about the positioning
of UPNVJ as a private university, as well as the variables excellence preference by UPNVJ.
This information will be used as a basis in determining the marketing strategies applied to
UPNVJ to strengthen its positioning based on the variables owned as a private university.
Reference
Andi M.Sadat,2009. Brand Belief.Jakarta : Salemba Empat.

Dwinto Martri Aji Buana,2009. Jurnal Bisnis & Manajemen Co branding dan Pengaruhnya
Terhadap Brand Equity, Bandung.
Dewa Ruchi. Craft, Anna. 2000. Continuing Profesional Development..Educational
Leadership.Vol. 6, 50, March.
Day, Christopher. 2002. Developing Teachers The Challenges of Life Long Learning.
London: Falmer Press.
Freddy Rangkuti.2009. The Power of Brand. Cetakan ke 3.Jakarta : PT. Gramedia Pustaka
Utama.
Freddy Rangkuti.2010. Marketing Strategy Competitive Positioning. Jakarta : PT.Gramedia,
Fredy Tjiptono, dkk.2008. Pemasaran Strategik. Yogyakarta : CV.Andi Offset.
Gage, N.L dan Bernliner, DC. 1988. Educational Psychology. (4 th ed). Houston, TX:
Houghton Mifflin.
Gurney, Philip. 2007. Five Factor For Effective Teaching, Journal of Teacher work, Volume
4 issue 2, 89-98. New Zealand
Hadis, Abdul. 2010. Manajemen Mutu Pendidikan. Bandung: Alfa Beta Steers.
Indah Piliyanti .”Program Studi Ekonomi Islam “.Dalam. Perspektif Mahasiswa (sebuah
Kajian Pemasaran Pendidikan).The 9 th Annual Conference on Islamic Studies
(ACIS)
Kotler, Philip.2009. Manajemen Pemasaran. Penerbit Indeks,
Kotler, Amstrong.2011. Principles of Marketing. Pearson Prentice Hall.

Kotler, Philip and Amstrong, Gary.2012.Principles Of Marketing, Fourteen Edition. England
: Pearson Education Limited.
Kotler, Philip dan Keller,Kevin. 2009.Manajemen Pemasaran. Jakarta : Penerbit
Prenhalindo.
Moses L. Singgih Rahmayanti , 2008. “Faktor-faktor Yang Mempengaruhi Kualitas
Pendidikan Pada Perguruan Tinggi “.Prosiding Seminar Nasional Tekno Bidang
Teknik Industri.
S.Winata Putra Udin.2008. Model-model Pembelajaran Inovatif. Jakarta : Penerbit PAU-
PPAI. Universitas Terbuka.
Srinadi ,I Gusti Ayu Made,dkk. “Faktor-faktor Penentu Kepuasan Mahasiswa Terhadap
Pelayanan Fakultas Sebagai Lembaga Pendidikan (Studi Kasus di FMIPA,
Universitas Udayana). Cakrawala Pendidikan, November 2008, Th. XXVII, No. 3
UU No. 20 Tahun 2003 tentang Sisdiknas.
Undang-Undang Sisdiknas Sistem Pendidikan Nasional. 2009. Bandung: Fokusmedia
Watkins, Chris&Eileen Carnell.Effective learning.London: Institute Of Education University
Of London.
Wlodkowski, RJ& Jaynes, J.H. 2004.Motivasi Belajar Cetakan 1. Depok: Pusta

Leverage, Free Cash Flow, and Interest Rates Charge Influence of Stock Return and
Financial Performance as Intervening Variable
(Study on Manufacturing Industry Listed in Indonesia Stock Exchange)
Tonny Serfius Maringka

Eben Haezar School of Economics, Manado, Indonesia
Abstract
This study aims to examine and analyze variable characteristics of the company such
as leverage, free cash flow, and interest rates charge effect to stock return with intervening
variable by financial performance. This research used a quantitative approach and a path
analyzes. The object of this research is all companies in the manufacturing industries which
are listed on the Indonesia Stock Exchange from 2009 until 2013. These samples are included
51 companies, with observation for five years and a total of observations are 255. These
results showed that the direct effect between the leverage, free cash flow, and interest rate
charge variables had no significant effect on stock return. For a direct effect, financial
performance has a significant on the stock return and a indirect effect between financial
performance, obtained leverage and free cash flow has not significant on stock return.
Keywords: Leverage, free cash flow, interest rate charge, financial performance, stock
return.
Introduction
The big challenge faced by the manufacturing company with the economic crisis is due to the
pressures of global problems such as excessive credit expansion, investment and slow
economic growth are affect to the performance of companies as a whole. This is related to
financial management led to financial performance, debt of ratio, and foreign exchange
because of foreign liabilities and the products are produced by publicly traded companies to
use imported contents. Information from the Indonesian capital market in mid-2007, with the
subprime mortgage crises caused by global stock price index fell to the lowest level, also
affecting Composite Stock Price Index (Azis & Mansury, 2008).
The fundamental variables like one of them a net profit (net profit) is used in the investment
and finance to identify the ability of companies, which can describe the future shareholder
returns. (Sagafi & Vakilifard, 2012). Return on equity performance is regarded by financial
performance. ROE is an indicator that is able to explain the relationship between the
variables of internal characteristics with changes in stock returns, because it has elements of
earnings and equity value. ROE can increase profit margins, creating a higher efficiency in
the use of assets or measuring the total asset turnover, and increase the power of leverage, as
measured by equity multiplier (Brigham et al. 2007).
Chen et al. (1991) describes the macro variables are used as a proxy for risk underlying stock
returns such as industrial production, interest rates, inflation, consumption and oil prices.
Almost all variables affect to the value of the company, except for consumption and oil
prices. Factors outside the company will have an impact on the performance shown on the
elements of internal characteristics that affect returns or corporate earnings.

According to Pohan (2008: 53) said that the bank rate is a benchmark used to determine the
amount of the loan. Fluctuations or changes in interest rates is proxy by level of interest
expense will affect funding decisions and directly to the company's financial performance.
This research related to stock returns are reflected in the price, which shows the value of
company stock prices, especially the dominant factors that affect to the rate of return on the
stock price. The price mechanism is formed due to the demand and supply creates the
perception of investors about the company. Stock returns is very important because the
ultimate goal of the company is to achieve the level of profit or return on investment that
reflects to the condition of the company. Investments related to finance, in which each
funding decision have a effect on the company's investment and source of funding for
financing decision is closely linked by investment decision. Return can be interpreted as the
return of a sacrifice or a degree of advantage enjoyed by an investor (Ang, 1997). Husnan
(1994) also states that stock return is the result obtained from an investment.
Problem Statement
What are characteristic variables such as leverage, free cash flow, and interest rate charge
significant affecting stock return direct, indirect and intervening by financial performance?
Research Objective
To examine and analyze the effect of variable leverage, free cash flow, and interest rate
charge on stock return, financial performance as intervening.
Literature Review
Financial leverage associated with the realization of the company's existence debt than equity
financing. Leverage is a tool in determining how likely the company will fail to contract
debts (Ross et al. 2002). An establishment is using financial leverage, if finance a portion of
its assets in securities that pay fixed interest (e.g. accounts at the bank, issuing bonds or
preferred stock). If the company uses financial leverage or debt, changes in Earnings Before
Interest and Tax (EBIT) of the company will result in a larger change in earnings per share
(EPS). Husnan (2004) explains that the analysis of financial leverage to focus on changes in
after-tax profits as a result of changes in the operating profit. The level of financial leverage
shows a comparison between changes in after-tax profits to changes in operating income.
The net cash flow is equal to net income plus non-cash, typically net income plus
depreciation and amortization. Another term that is called free cash flow as cash flow that is
to be distributed to all shareholders and debt holders after the company invested in fixed
assets, new products, and working capital. Free cash flow is calculated by operating cash
flow. Operating cash flow = NOPAT + Depreciation, or FCF = NOPAT - Net investment in
operating capital. Net operating profit after tax (NOPAT) is a measure of the performance of
the best of the net income, as it relates to the free cash flow is an important measure in
determining the value of the company (Brigham & Houston, 2009).

The interest rate is the price of using the money or it can be rent for the use of money within
a certain period. The charge of interest payments represent a company or has a correlation
with interest rate loans into one the size of investment. Expected return on investment from
stocks is often influenced by other investment options (Boediono, 2005). In the construct of
theoretical relations economic volatility of the stock return is based on a mechanism by which
the identification of key macro variable one of which is the interest rate (Harvey, 1991; Smith
& Sims, 1993, Flanery & Protopapadakis, 2002; Wongbangpo & Sharma, 2002 ).
Performance is a function of the ability of organizations to benefit and manage resources in
developing a competitive advantage. There are two types of performance, the performance of
financial and non-financial performance (Hansen & Mowen, 2005). The company's
performance is usually divided into the financial performance or the economic performance
and innovative performance. Financial performance is expressed by the term sales growth,
employee turnover, and stock prices (Havnes & Senneseth, 2001). Measure of financial
performance such as return on sales related to how much revenue the company for sales,
return on assets to measure a company's ability to use its assets and return on equity (ROE)
the return obtained by investments (Tangen, 2003); (Almajali et al. 2012).
Signaling helpful to describe the behavior of the individual or organization for has access.
Signaling theory is the fundamental approach with regard to reduce the information
asymmetry between the two parties (Connelly et al. 2011). Signaling theory was developed to
explain the activity in the company (corporate insider) relating to information about the
activities and prospects of the company to outside investors. In connection asymmetry of
information, for investors is very difficult to distinguish that high-quality and low-quality
companies. Managers will declare information that is not balanced and not useful. Good and
bad companies, the managers will declare the company has good growth prospects and profit,
and simply the passage of time will attest. Low-quality companies profit is wrong statement,
is a problem of information asymmetry if believed by the investor.

Methodology
This research used a quantitative approach and a path analyzes. The object of this research is
all companies in the manufacturing industries which are listed on the Indonesia Stock
Exchange from 2009 until 2013. These samples are included 51 companies, with observation
for five years and a total of observations are 255.
Conceptual Framework
Leverage
1
2
3
Free Cash Financial

Flow 4 Performance 7 Stock Return
6
5
Interest Rate
Charge

Results
Results of this study explained that the financial performance proxy by return on equity into
critical information that gives a signal about the financial condition of the manufacturing
company. Some of the information would cause a change in the assessment and response
from internal companies, stockholders and stakeholders to sources of funding and investment
decisions. That is the best considerations to take decisions based on perceptions or
information published by companies.
Picture 1. Path Results
Leverage
-0.014 NS
(X2)
0.287S -0.036 NS
Free Cash Financial Stock Return
Flow (X3) 0.298 S
Performance 0.297 S
(Y2)
(Y1) 0.012 NS
0.028 NS 0.012 NS
Interest Rate
0.087 NS
Charge (X1)
The results showed that a leverage, free cash flow, and interest rate has direct effect and not
significant. Financial performance and significant direct effect on the stock return. The results
also show that there is a indirect effect to the financial performance, gained by leverage and
free cash flow are significant. Furthermore, interest rate charge has no significant effect on
the stock return. The result of the study is confirm that leverage and free cash flow, does not
concern the stockholders, because the information about the financial performance is
becoming more important for funding and investment decisions. The high risk will increase
the stock return for investors willing to take the risk (risk taker) to exploit the situation to
obtain a return.

Tables 1. Direct effect, Indirect effect, and Totally Effect
Exogenous Endogen Intervening Effects Explanation

Variables Variables Variables
Direct p-value Sig. or no sig. Indirect p-value Results
Leverage Stock Financial -0,014 0,828 Non Significant 0,085239 0,000 0,071239 Significant
Return Performance
Free Cash Stock Financial -0,036 0,692 Non Significant 0,088506 0,000 0,052506 Significant
Flow Return Performance
Interest Stock Financial 0,087 0,160 Non Significant 0,008316 0,474 0,095316 Non Significant
Rate Return Performance
Charge
Conclusions
Investment and expansion of safe and profitable, as well as the use of free cash flow may
make the financial performance as information or a positive signal to the increase in stock
return. The high level of interest rate charge indicates that the company's debt ratio will cause
the lower liquidity of the company and cannot predict the stock returns. The high level of
interest expenses do not encourage increased by financial performance. Interest expense as a
description of the company's internal financial conditions relating to the policy interest rate
and the loan is not able to influence funding decisions and investments that affect the return
on equity (ROE) as a proxy for financial performance and stock price. Financial performance
becomes a source of important information for all stakeholders as a basis for funding and
investment decisions. Financial performance will be illustrated by the increase in the return
on equity (ROE) of a company and the company's position in terms of the level of equity.
Leverage encouraged financial performance or return on equity (ROE). Policies related to the
company's debt financing decision could determine the level of stock return. Good financial
management and directed to the use of leverage in determining the composition of the
sources of funding (capital structure target) may increase the company's stock return.
The amount of free cash flow will increase affecting financial performance return on equity
(ROE). Indicated that the high free cash flow further expand investment opportunities with
determination manager that leads to a high risk of the company resulting from the
uncontrolled use of funds. This causes a interest conflict between managers, creditors and
shareholder provide information on the conditions of the company. In the capital structure,
and signaling the approach of the pecking order theory in which good company information
led to overvalued stocks, and vice versa. Investment and expansion of safe and profitable, as
well as the use of free cash flow is actually creating financial performance as a positive signal
information to increase stock return. This study found that leverage and free cash flow
information is not a concern, exactly information about financial performance becomes more
important for funding and investment decisions.

Reference
Aburime, U.T. 2008. Determinants of Banks Profitability: Macroeconomic Evidence From
Nigeria, Working Paper, 03 September, Deakin University.
Adjasi, C.K.D. 2009. Macroeconomic uncertainty and conditional stock-price volatility in

frontier African markets—Evidence from Ghana, Emerald, The Journal of Risk
Finance, Vol. 10, No. 4, pp. 333-349.
Afza, T. & Mirza, H. 2010. Ownership Structure and Cash Flow as Determinants of
Corporate Dividend Policy in Pakistan, International Business Research, Vol. 3, No.
3, pp. 210-221.
Ahmad, H., Fida, B.A. & Zakaria, M. 2013. The Co-determinants of Capital Structure and
Stock Returns: Evidence from the Karachi Stock Exchange, The Lahore Journal of
Economics, 18: 1 (Summer 2013): pp. 81–92.
Almajali, A.Y., Alamro, S.A. & Al-Soub, Y.Z. 2012. Factors Affecting the Financial
Performance of Jordanian Insurance Companies Listed at Amman Stock Exchange,
Journal of Management Research, Vol. 4, No. 2.
Anokye, A.M. & Tweneboah, G. 2008. Macroeconomics Factor and Stock Market
Movement: Evidence from Ghana, Munich Personal RePEc Archive Paper, No.
11256.
Atemnkeng, J. & Nonggang, J. 1998. Market Structure and Profitability in the Banking
Industryof CFA Countries: The Case of Comercial Banks in Cameroon, Working
paper.www.jsd-africa.com.
Azam, M. 2011. Stock price variation regarding madroeconomic and firm-specific
accounting variables: Evidece from Karachi Stock Echange. International Research
Journal of Finance and Economics, 81, 77-88.
Azis, J.I. & Mansury, Y. 2008. Measuring Economy-Wide Impacts of a Financial Shock,
ASEAN Economic Buletin, 21 (2).
Berger, A.N. & Mester. 1997. Inside The Black Bo: What Exlplains Differences In The
Different Cost of Financial Institutions, Journal Of Banking And Finance, Vol. 21.
Boediono, 2005. Ekonomi Makro, Edisi Empat, Penerbit BPFE-UGM, Yogyakarta.
Brigham, E.F. & Houston, J.F. 2009. Fundamental Financial Management, International
Edition. Thomson South-Western, USA.
Brigham, E.F., Gapenski, L.C. & Daves, P.R. 2007. Intermediate Financial Management,
Ninth Edition. Thomson South-Western, USA.
Chambers, N. Funda, H., Karaaslan, S.B. 2013. Analysis of the Effects of Capital Structure
and the Beta Coefficient on Stock Returns: A Case Study of the Istanbul Stock
Exchange (ISE) - Manufacturing Industry, International Journal of Business and
Social Science Vol. 4 No. 7.

Chen, Nai-Fu, Roll, Richard, & Ross, S.A. 1991. Economic Forces and The Stock Market,
The Journal of Business, Vol. 59, No. 3 (July) 383-403.
Connely, B.L., Certo, S.T., Ireland, R.D. & Reutzel, C.L. 2011. Signaling theory: A review
and assessment. Journal of Management, 37 (1) pp. 39-67.
Flanery, W.J. & Protopapadakis, A.A. 2002. Macroeconomics factors do influence aggregate
stock returns, Review of Financial Studies, Vol. 15, No. 1, pp. 23-49.
Harvey. C.R, 1991. The World Price of Covariance Risk, Journal of Finance, Vol. 46, No. 1,
pp. 11-55.
Hansen, R. & Mowen, M. 2005. Management Accounting, 7 Edition, Singapore: South-

Western.
Havnes & Senneseth, 2006. A Panel Study of Firm Growth Among SMEs in Networks, Small
Business Economics, pp. 293-302,
Helfert, E.A. & Ross, S.A. 2000. Techniques of Financial Analysis: A Guide to Value
Creation, International Edition, Singapore.
Hijazi, S.T. & Tariq, Y.B. 2006. Determinants of capital structure: A case for the Paskistani
cement industry, Lahore Journal of Economics, 11 (1), 68-80.
Hirshleifer, D., Hou, K, & Teoh, H.S. 2009. Accruals, Cash Flow, and Aggregate Stock
Return, Journal of Financial Economics, Vol. 91, Issue 3 (March) pp. 389-406.
Husnan, S. 2004. Manajemen Keuangan Teori dan Penarapan, Edisi Keempat, BPFE-UGM,
Yogyakarta.
Megginson, W.L. 1997, Corporate Finance Theory, by Addison-Wesley, Educational

Publishers Inc.
Oral, E. 2012. An empirical analysis of trading volume and return volatility relationship on
Istanbul stock exchange national -100 Index. Journal of Applied Finance & Banking,
vol.2, no. 5, 2012, pp. 149-158.
Rehman, A.Ch, Usman Yousaf, Asad Ejaz, & Saima Sardar, 2011. Relation of Stock Market
Return with Interest Rate, Interdiscipinary Journal of Colntemporary in Business,
Copy Right, Institute of Interdisciplinary Business Research 1020, July 2011, Vol. 3,
No. 3.
Ross, S.A., Westerfield, W.R. & Jaffe J. 2002. Corporate Finance, Mc Graw-Hill Higher
Education, sixth edition,
Ross, Stephen A., Randolph W. Westerfeld, & Nradford D. Jordan, 2003. Fundamentals of
Corporate Finance, Sixth Edition, McGraw-Hill, New York.
Tangen, S. 2003. A Comparison of Financial Performance in Banking Sector: Some Evidence

from Omani Commercial Banks, Interational Research Journal of Finance and
Economics, 3, pp. 1-22.
Saqafi, V. & Vakilifard, H. 2012. The Effect of Variables of the Fundamental Techniques on
Returns of the Stock in Tehran Stock Exchange, Interdiciplinary Journal of
Contemporary Research in Business, July, Vol. 4, No. 3. pp. 808-813.
Smith, K. & Sims, A. 1993. Stock market performance and macroeconomic variables,
Applied Financial Economics, Vol. 3, pp. 55-60.
Wilson, G. 1986. “The Relative Incremental Information Content of Accrual and Cash Flow:
Combined Evidence at the Earning Announcement and Annual Report Date”, Journal
of Accounting Research, Vol 24 (Supplement), pp165-200.
Wongbangpo, P. & Sharma, S.C., 2002, Stock Market and Macroeconomic Fundamental
Dynamic Interaction: ASEAN-5 country. Journal of Asian Economies, Vol. 13, pp.
27-51.
Wuryani, E., 2012. Company Size in Response to Earning Management and Company
Performance. Journal of Economics, Business and Accountancy Ventura, Vol 15, No.
3, Des 2012 pages 491-506.

DETERMINANT OF INSTITUTION IMAGE AND ITS
IMPLICATION ON THE EVALUATION OF STUDENT’S
INTENTION IN DECIDING PRIVATE ECONOMICS COLLEGES
IN MEDAN CITY
Sri Rezeki1
Nandan Limakrisna2
1 The Head of Eka Prasetya STIE in Medan Indonesia and Lecturer at a State
University Medan
2 The Associated Professor at UPI-YAI Doctoral Management Science Program
ABSTRACT
The purpose of this research was to examine, analyze, and interpret the results
of the study on the description of the reference group, perceived value, the image of
the institution, and the intention of the College student in selecting private economics
institutions. To analyze review, and interpret the results of the study on the
relationship of reference group with perceived value. To analyze review, and interpret
the results of the research on the influence of partially, in particular: the influence of
groups of references to the image of the institutions of students in private higher
education . The influence of perceived value to the image of students in private higher
education institutions. The reference group influences of students’ intention to choose
private economics college. The influence of perceived value of students’ intention to
choose private economics college. The influence of the image of the institution against
the intention of the students to choose private colleges. Obtained results of study on
the influence of simultaneous reference group and the perceived value of students
against the intention of the student through the image of the institution.
The methods used in this research was descriptive and explanatory survey
methods. The type of investigation in this research was the causality, by finding
causal relations as a result of an event that examined. While the unit of analysis in
this study is institutions in Medan, as well as the observation unit the one year
students, with the sample of 400 respondents.
Findings in this research was apparently the image of the institution on
students in selecting higher education institutions will be perceived positively when
the student perceives the value felt by them. But the students intend to select a
colleges when there is a reference group that encourages them. Indirectly,the
student's intention to select collegea specific are dominantly determined by students '
perceived value through the image of the institution.
Key Words : Reference Group, Perceived value, Institution Image, Student Intention

INTRODUCTION
Rank of accreditation in college has also become a major point for the
candidate students in determining their choice especially for those who want to work
in the government sector , based on the regulations that require the future woek
applicants work to derived from the study program with a rank of accreditation.
Interest a procpective students and not choose private colleges as their colleges’
images main preference compared to the government universities as the private tends
to be less familiar institutions than image universities.
The relatively less familiar and renown private institutions coused by value
perceptions has affected the choises and as a result group refrences tends to be low
and in turn it will influence the students’choice making. From the sudy, there is an
indication that senior high school graduates are not willing to pursue their higher
education in economic sciences in Medan and it is a result of the institutions’images..
The less familiar images tend to be coused by perceived value which is

relatively low and there is usually an impression that pursuing higher education in
economic and business school (STIE) is not that prestigious compared to big, large
and wide universities.
Similarly, the leader of a specific reference group gives relatively low rating
for continuing the study to economics and business school (school).Hence, it is very
crucial to carry out a research about group reference influence and the values
perceived by the customers in order to improve the institutions’images, the
implications of evaluation of students’interest to choose a college.
LITERATURE REVIEWS
Frouzan Far at all. (2012:187) that, the theory of implied reference groups
share the common experience that is owned by a group of people, if the experience of
an individual have been evaluating behaviour, norms and values felt right for them.
Anwar and Gulzar (2011:48) explain the following things, when all the factors
like service quality satisfaction, food, entertainment etc, raises the satisfaction of
consumers or customers (Spreng, MacKenzie, dan Olshavsky, 1996). It is
conceptualized as a result of the construction of the double (Yi, 1990). Different
authors postulated that consumers who are satisfied will be loyal customers or
purchase service repeatedly or became an endorser of the service by saying positive
things through word of mouth (Taman 2004). According to Jordaan and Prinsloo, 200,
one satisfied customers bring three other customers. Oh (1999) shows that the
perception of quality, value, customer satisfaction, purchase intent, and Word of
mouth support correlates positively with one another.
Alves (2010:76) reveal, some studies have found that the image and reputation
of the University institutions greatly affect retention and loyalty (Nguyen dan
Leblanc, 2001; Bloemer dan de Ruyter, 1998; Helgesen dan Nesset, 2007). According
to Eskildsen et al. (1999), This variable really is one that has the greatest influence on
the loyalty of students in higher education.However, loyalty is a concept that has been
poorly applied in higher education
Webb dan Jagun (1997), This concept of measuring students ' willingness to
recommend the institution to another student, wants to tell the positive things about
the institution and the desire to come back later to continue his studies.

Bearden, Netemeyer and Teel (1989) in Pentina at all. (2008:119) expose, the
consumer has a vulnerability to interpersonal influence defined as need for identifying
or enhance one ' significant others ' image through the acquisition and use of the
products and the brands, a willingness to conform to other people's expectations about
purchasing decisions, and/or inclination to learn about the products and services of
others and/or seek information from other people.
Manski (1993) in Almados at all. (2010: 622) says, the choice of consumer
products can be the consequence of the choice groups see (endogenous social effects)
or group characteristics (contextual effects). In addition, members of the group
reference can behave in similar ways because of the factors in General observations
(the effect of correlated).
Alves (2010: 77) explain, the model proposed by's Clow et al. (1997) proposes
that the image of the company formed by real things such as pricing, advertising and
from Word of mouth and that this image affects the satisfaction of directly and
indirectly through the perceived quality.
Perceived value is the antecedent of the decision variables of students, it can
be seen on some of the following information. Rajaguru and Matanda (2011: 17)
stated that a functional attribute is physical evidence that affects the purchase
motivation and decision making by consumers.
George Evans (2002: 135) explains that the customer perceived value
approach is to try to identify how people evaluate the competing offer-with the
assumption that when they make their purchasing decisions, they do so with the value
as the main driver.
[Kuo-Ming Chu (2009: 99) mentioned that research, Heskett et al. (1994) and
Eisingerich & amp; ] Bell (2007) evaluating the relationship between customer value
and loyalty. One model, called the ' service-profit chain puts to work ' encapsulates
the concept of providing value to customers, in turn, will affect customer satisfaction,
and customer satisfaction will in turn affect customer loyalty, which will affect the
company's growth and profits.
Brown and Mazarol (2008: 86) reveals, the use of size VALUE is deemed to
be appropriate for different values of service quality and consumer satisfaction give
strong influence on purchase intent than the quality of service
Ngu yen and Leblanc (2001: 305) stated that from the perspective of
marketing, there is the influence of the institutional image and reputation on the
behavior of customers, regardless of the lack of empirical evidence. Many authors
assert that the image and reputation of good institutions help organizations increase
sales, market share.
Fox and Kotler (1995) in Alves (2010: 74) explains, the image and reputation
of the institution are often more important than the quality of the image because it
really felt and is able to influence the choices made by prospective students.
Alves (2010: 74) reveals, in their study of the image of universities, Shemwell
and Yavas (1996), Landrum et al. (1998) and Parameswaran and Glowacka (1995)
found that higher education institutions need to maintain or develop a different image
to create a competitive advantage in an increasingly competitive market. These
writers, reveal the image that is one of the main influences on the willingness of
students to apply for registration.
The image of the institution is the intervening variables of reference groups
and influence the perceived value of college students based on the following
explanation. Alves (2010: 76) reveals, some studies have found that the image and
reputation of the University institutions greatly affect retention and loyalty (Nguyen

and Leblanc, 2001; Bloemer and de Ruyter, 1998; Helgesen and Nesset, 2007).
According to Eskildsen et al. (1999), this variable is actually one that has the greatest
influence on the loyalty of students in higher education. However, loyalty is a concept
that has been poorly applied in higher education. Webb and Jagun (1997), this
concept of measuring students ' willingness to recommend the institution to another
student, wants to tell the positive things about the institution and the desire to come
back later to continue his studies.
Alves (2010: 77) reveals, the model proposed by's Clow et al. (1997) proposes
that the image of the company formed by real things such as pricing, advertising and
from Word of mouth and that this image affect the satisfaction of directly and
indirectly through the perceived quality.
Ngu yen and Leblanc (2001: 305) stated that from the perspective of
marketing, there is the influence of the institutional image and reputation on the
behavior of customers, regardless of the lack of empirical evidence. Many authors
assert that the image and reputation of good institutions help the Organization
increase sales and market share.
Based on the framework of thought above, then the hypothesis of the research
may be submitted is as follows :
1. There is a reference to the group that influences the image of the institution.
2. There is a perceived value against the influence of the image of the institutions.
3. There is the influence of the group reference and value are perceived together
against the image of the institutions.
4. There is a reference to the group the influences the evaluation of the student's
interest. .
5. There is a perceived value against the influence of evaluation of student interest.
6. There is the influence of the image of the institution's response to the evaluation of
the student's interest. There is the influence of the Group of reference, values
perceived, and the image of the institution together against the evaluation of
student's interest.
METHODOLOGY
Research methodology used is the descriptive survey method in order to have facts of
symptoms that is and find arguments factually and methods of explanatory survey for
the purpose of test relations and effect between variables in the treatment. The
investigation type in this research was causality. While the unit analysis in this
research is Private economic Calleges in the city of Medan, and unit observation are
students first year. In addition, this research also cross sectional, because it is
accomplished at certain time in 2014 (Sekaran. 2010: 32 ).

In this part, the testing of the fourth hypothesis about the influence of exogen
variable of reference group (KRN) and the exogen variable of value experience by the
college students (ND) towards an institution image (CL) will be conducted with the
following model equation :
CI = 0.13*KRN + 0,71*ND, Errorvar.= 0.58, R² = 0.42
(0.088) (0.158) (0.11)
1.60 5.43 5.27
In which :
KRN = Reference Group
ND = The Value Experienced
CL = Institution Image
Based on the above equation, it is seen that the value of reference

group on institution image is 0.13 with t count 1,60 < 2 (not significant),
whereas the value of institution image is 0,71 with nilai t count as high as 4,43 > 2
(significant). This shows that the dominant value is institution image rather than
reference group. This means that institution image of Economics and Business
Colleges will be well perceived by the students/prospective students if the value felt is
highly perceived. Whereas the contribution of the simultaneous reference group and
the value felt on the institution image is 0,42 or 42% with F count = 5,27 > 3,37
(Significant) as can be seen from the above equation. Other factors which affects
institution image besides reference group results in a value of 58%. For this reason, it
can be concluded that hypothesis 1, 2 and 3 are acceptable as “there is a significant
reference group effect and the value felt by the institution image simultaneously.” The
institution image is determined by reference group and the value felt, though the
influence of reference group is relatively small. If seen partially, the dominant value
felt to influence the institution image rather than reference group.
The testing of hypothesis seven about the influence of exogen variable of

refenrence grou[ (KRN), exogen variable felt by the students (ND), and institution
image (CL) on the evaluation of students’ Interest (EM) simultaneously will be
conducted.
The result obtained is by Lisrel program for the structural equation model,
based on the hypothesis proposed is as follows :
EM = 0.13*KRN + 0,71*ND + 0.55*CL, Errorvar.= 0.46, R² = 0.54

(0.088) (0.158) (0.21) (0.12)
1.60 5.43 2.63 3.50
In which :
KRN = Reference Group
ND = The Value Experienced
CL = Institution Image
EM = Students’ Interest Evaluation

Based on the equation above, it is seen that the value of reference group effect on
students’ interest evaluation is 0.66 with t count 4,28 > 2 (significant), while the value
effect on students’ interest evaluation is 0,29 with t count 3,16 > 2 (significant), this
shows that reference group dominantly influences the students’ interest evaluation
rather than the value felt. This means that students can decide to choose certain
Economics and Business College if there is a reference group recommending them to
choose that Economics and Business College. The effect of direct reference group
simulation, the value felt, and institution image on students’ interest evaluation with
the contribution of 54%, while the other 46% is influenced by other factors on
students’ interest evaluation besides reference group and the value. Meanwhile, the
contribution of indirect reference group, the value felt and institution image on
students’ interest evaluation is 0,54 with F count 3,83 > 2 (significant), while the
other 46% is by other factors. It can be concluded that hypothesis 4, 5, 6, and 7 are
accepted, “there is a significant reference group, value felt, and institution image on
students’ interest evaluation in choosing economics and business college
simultaneously”. Economics and business college image will be positively perceived
by the students. But the students will decide to choose the institution if there is a
reference group pushing them to do so. But if seen indirectly, the evaluation on
students’ interest is dominantly determined by the value felt through image
institution.
Table of Hypothesis Testing
Structural Line Coefisient t-Value

Hipo (Standar- atau Result
-tesis dized)/ R2 F-value
1 Reference Group  Institution Image 0,13 1,60 Not
Significant
2 Value Felt  Institution Image 0,71 4,43 Significant
3 Reference Group and The Value Felt  R2=0.42 5,27 Significant
Simultaneous Institution Image
4 Reference Group  Students’ Interest Evaluation 0,66 4,28 Significant
5 Value Felt  Students’ Interest Evaluation 0,29 3,16 Significant
6 Institution Image  Students’ Interest Evaluation 0,55 2,63 Significant

7 Reference Group, Value Felt, and Institution R2=0.54 3.83 Significant
Image on Simultaneous Institution Image
Source : LISREL processed result 8.30, 2015.
Based on the analysis result above, the economics and business school image
that is reflected by the studying environment will be positively perceived if the
students themselves perceive the value felt reflected by the relational value. But the
students will choose the school reflected by desire if there is a reference group that
pushed them, reflected by normative reference group. If seen indirectly, the
evaluation on students’ interest to choose economics and business school reflected by
the normative reference group is more dominantly determined the value felt by by
nthe students reflected by relational value through institution image reflected by the
studying environment.

CONCLUSION
1. If the reference group reflected by normative reference group followed by

prospective students and the value perceived reflected by the relational value
is positive, it will improve the institution image reflected by studying
environment with the contribution of 42%, while the other 58% is influenced
by other factors.
2. If the reference group reflected by the normative reference group followed by
the prospective students reflected by the the positive relational value, and
strengthen by the institution image reflected by the good studying
environment, then it can increase students’ interest in choosing economics and
business college reflected by the the desire with the contribution of 54%,
while the other 46% is influenced by other factors.
RECOMMENDATION
1. To improve the institution image reflected by the studying environement, the

value perceived by prospective students is reflected by the relational value
which has to be improved and supported by the normative reference group,
such as peers, parents, and close relatives.
2. To increase students’ interest in choosing economics and business school, the
normative reference group needed to be considered by the school, besides the
good institution image rated by the prospective students and the positively
perceived relational value.
REFERENCE
Aaker A. David, 1996. ”Manajemen Equitas Merek”.Jakarta:Spectrum Mitra Utama.
Adam, Rebecca G and Rosemary Blieszner. 1994. An Integrative Conceptual

Framework for Friendship Research. Journal of Social and Personal
Relationships, v.11 no.2: 163-184.
Alves, Helena. 2010. The Measurement of Perceived Value in Higher Education: a

Unidimensional Approach. Universidade Da Beira Interior.
Alves, Helena and Mario Raposo. 2010. The Influence of University Image on
Student Behavior. International Journal of Educational Management.Vol. 24
No. 1, Emerald Group PL.
Andang Fajri. 2009. Mengukur Jumlah Paparan Tvc Yang Efektif Biaya Untuk
Menimbulkan Dampak Attention, Interest, Desire, Dan Action Pada
Konsumen Di Kota Jambi. Jurnal Manajemen Pemasaran Modern.
Anderson. E. and Weitz B. 1989. Determinants of Continuity in Conventional

Industrial Dyads, Marketing Science, Vol. 8, pp. 310-23.
AntaraNews.com, 2 Juni 2011.Rektor: Calon Mahasiswa Hati-hat iMemilih PTS.

Anwar, Saleha and Amir Gulzar. 2011. Impact Of Perceived Value On Word Of
Mouth Endorsement And Customer Satisfaction: Mediating Role Of
Repurchase Intentions. International Journal ofEconomics and Management
Sciences Vol. 1, No. 5, 2011, pp. 46-54
Asep Hidayat. 2011. Aspek-Aspek Strategis dalam Penerimaan Mahasiswa Baru

pada PerguruanTinggi. EDUCARE: Jurnal Pendidikan dan Budaya.
Atilgan, Eda, SerkanAkinci, SafakAksoy, and ErdenerKaynak. 2009. Customer-

Based Brand Equity for Global Brands: A Multinational Approach. Journal of
Euromarketing, 18:115–132, 2009.
Azar H. 2011. Relative thinking in consumer choice between differentiated goods and
services and its implications for business strategy.Judgment and Decision
Making, Vol. 6, No. 2, February 2011, pp. 176–185.
Barich, H. dan Kotler, P. (1991), “A framework for marketing image management”,

Sloan Management Review.
Baumrind, D. 1979. Parental diciplinary patterns and social competence in children.

Youth and Society, 9, 239-176.
Bednar, D.E., & Fisher, T.D. 2003. Peer referencing in adolescent decision making as
a function of perceived parenting style. Adolescence, 38, 607-621.
Belanger, Charles, Joan Mount, and Mathew Wilson. 2002. Institutional Image and
retention. Tertiary Education management. MCB University press.
Calon Peserta Seleksi Jalur Undangan SNMPTN 2011Per Provinsi. Melalui

<http://www.dikti.go.id>
Changing Minds.org. 2011. AIDA. John and John. New York.
Chen, Fang Fang, Karen H. Sousa, and Stephen G. West. 2005. Structural Equation
Modeling. Lawrence Erlbaum Associates, Inc.
Chen, Welping. 2011. Franchisee perceived relationship value and loyalty in a

franchising context: assessing the mediating role of franchisee satisfaction and
the moderating role of franchisee characteristics. African Journal of Business
Management Vol. 5(28), pp.11487-11496.
Chu, Kuo-Ming. 2009. The Construction Model of Customer Trust, Perceived Value
and Customer Loyalty. The Journal of American Academy of Business,
Cambridge
Cooper, Donald R. 2001. Business Research Methods. McGraw-Hill Irwin, 2001 -

744 halaman.

Crosby, Lawrence A., Kenneth R. Evans, and Deborah Cowles 1990,”Relationship
Quality in Services Selling: An Interpersonal Influence Perspective,” Journal
of Marketing, 54 (July), 68-81.
David J,2005, A Conceptual Model Of Predectors in Decision Making, The Higher

Education Market Enviroment Has Entered an Era Of Hyper –Competition.
Dawson, E. Murell and Chatman, Elfreda A. 2001. "Reference group theory with
implications for information studies: a theoretical essay." Information
Research, 6(3) Available at: http://InformationR.net/6-3/paper105.html© the
authors, 2001. Updated: 10th April 2001
Dirjen DIKTI, 17 Mei 2011. Pengumuman Hasil Seleksi Jalur Undangan SNMPTN
2011.
Djoko S,Tempo 24 Agustus 2012,Pemilik Group Alfamart,Bisnis Ritel, Pemilik

Yayasan Pendidikan Bunda Mulia
Dwyer, E Robert and Tanner Sejo Oh. 1999. Developing Buyer Seller Relationships.
Journal o fMarketing 51 (April): 11-279
Dwyer, F.R., Schurr, P.H. and Oh, S.1987, “Developing buyer-seller relationships”,
Journal of Marketing, vol. 51, no. 1, p 11-27.
Eisingerich, Andreas B. and Bell, Simon J. 2007, Maintaining customer relationships

in high credence services, Journal of Services Marketing 21(4), 253-262.
Eggert A., Ulaga W., Schultz F. 2006. Value creation in the relationship life cycle: A
quasi-longitudinal analysis. Industrial Marketing Management, Vol. 35,
pp.20-27.
Ellen Day,2002, Volume 15, hal 22The Role Of Value in Consumer-Satisfaction,The

University Of Georgia
Eshlaghy, Abbas Toloie and Amin Asadollahi. 2011. To Evaluate Changeability of

Brand to Brand Association for Goods by using Fuzzy Expert System Based
on Consumers Perceptions of Value of Goods. European Journal of
Economics, Finance and Administrative Sciences.
Evans, George. 2002. Measuring and Managing Customer Value. Work Study. MCB,
London.
Finney, T.G. & Finney, R.Z. 2010. “Are Students Their Universities’ Customers? An
Exploratory Study,” Education and Training, Vol. 52, No. 4, pp.276-291
Frouzan Far, Mohammad Hassan, Sorayya Meimar, and Faezeh Tagipour. 2012. The
Role Of Reference Groups On Student's Cultural Values.Interdisciplinary
Journal Of Contemporary Research In Business.
Gi-Du Kang and Jeffrey James. 2004. Service quality dimensions: an examination of
Gro ̈ nroos’s service quality model. Managing Service Quality  Volume 14 ·

Number 4 · 2004 · pp. 266–277  q Emerald Group Publishing Limited · ISSN
0960-4529 DOI 10.1108/09604520410546806
Gion Roos,European Journal Of Marketing 1996, The Value Concept and

Relationship Marketing.
Gray, R 1986, Social, environmental and sustainability reporting and organizational

value creation?: Whose value? Whose creation? Accounting, Auditing &
Accountability Journal, vol. 19, no. 6, pp. 793-819. Retrieved February from
Emerald Insight database.
Gummesson, Evert. 1997. Productivity, Quality and Relationship Marketing in

Service Operations. International Journal of Contemporary Hospitality
Management, 10/1, 4.
Gundlach, G. T., and P. E. Murphy. 1993. Ethical and legal foundations of

relational marketing exchanges. Journal of Marketing 57 (October): 35-
46.
Haase. S. 2009. Applying Career Competencies in Career Management. A Research

Submitted in partial fulfilment of the University of Coventry
Hair, Black, Babin, Anderson, Tatham 1998, Multivariate Data Analysis, Pearson
Prentice Hall, New Jersey.
Hariri, Mahsa and Hossein Vazifehdust. 2010. How does Brand Extension Affect
Brand Image?. International Conference on Business and Economics
Research. Kuala Lumpur. Malaysia.
Hasnelly. 2011. Winning Strategies Value Creation of Customer Loyalty of Green

Food Product. Journal of Asia Pacific Business Innovation & Technology
Management 001 (2011) 0047-0059
Heinonen, Kristina. 2004. Reconceptualizing Customer Perceived Value: The Value

of Time and Place. Managing Service Quality. Emerald Group PL.
Hoy, Tarter 2006,Academic Optimism of school;A Force For Student

Achievment,American Educational Research Journal.
Hsiung, Lin Chein. 2011. A study on the relations between the brand image and
customer satisfaction in catering businesses. African Journal of Business
Management Vol.5 (18), pp. 7732-7739, 6 September, 2011.
Indah Purnamasari. 2012. Department of Community Nutrition (Departemen Gizi

Masyarakat). Class of Consumer Behavior February 2012.
Ivy, Jonathan. 2001. Higher Education Institution Image : a Correspondence Analysis

Approach. The International Journal of Education Management. MCB

University Press.
Jakstiene, Sandra, Dalia Susneine, and Valdas Narbutas. 2008. The Psychological
Impact of Advertising on the Customer Behavior. Communications of the
IBIMA Volume 3, 2008.
Jalalkamali, Mohammad. 2010. The Effects of Motivation on Purchase Decision.

COPY RIGHT © 2010 Institute of Interdisciplinary Business Research. Vol 2
no. 8.
Jefkins, Frank., 2004, Periklanan; Edisi ke tiga (Munandar Haris,Trans),

PT.Erlangga, Jakarta.
Joanna, Minkiewicz and Jody Evans. 2011. Corporate image in the leisure services
sector. Journal of Services Marketing  25/3 (2011) 190–201  q Emerald
Group Publishing Limited [ISSN 0887-6045] [DOI
10.1108/08876041111129173].
Jöreskog, K. G. and Sörbom, D. 1988, LISREL 8: New Statistical Features, Scientific

Software International. Inc.
Kandampully Jay & Ria Duddy. 1999. Relationship Marketing: a Concept Beyond
The Primary Relations. Marketing Intelligence & Planning. Vol. 17/7
[1999] 315 – 323
Kathryn W. Sack. 2001. Primary Lifelines: Informal Friendship Groups Of Women In

Higher Education. Dissertation submitted to the Faculty of the Virginia
Polytechnic Institute and State University.
Kelloway, E. Kevin. 1988. Flow’ at Work : An Experience Sampling Approach.

Journal of Occupational and Organizational Psychology.
Khan, Nasreen and Sharifah Latifah Syed A. Kadir. 2011.The impact of perceived
value dimension on satisfaction and behavior intention: Young-adult
consumers in banking industry. African Journal of Business Management Vol.
5(16), pp. 7055-7067.
Khodami, Soheila, Hamid Moradi, and Parviz Ahmadi. 2011. The Impact of Three
Dimensions of the Value of the Mass-customized Product on the Overall
Perceived Value of MC and the Purchase Intention. European Journal of
Economics, Finance and Administrative Sciences. ISSN 1450-2275 Issue 31
(2011)
Klinger, Daun and Raffaela Maffie. 2011. How premium hotel brands struggle to
communicate their value proposition. International Journal of Contemporary
Hospitality Management. Vol. 18. Page 2426-252. Emerald Publishing.
Kopertis12.or.id. 12 Juni 2011. 30% PTS Terancam bangkrut.

Kotler, Philip & Kevin Lane Keller, 2009. A Framework for Marketing Management.
4e Edition. Prentice Hall International Inc.: New Jersey.
Kotler, Philip. 2005. Marketing Management: Analysis, Planning, Implementation,

and Control (5' ed.). Englewood Cliffs, New Jersey: Prentice Hall
International, Inc.
Kotler, P. and Fox, K. 1995, Strategic Marketing for Educational Institutions, 2nd ed.,
Prentice-Hall, Englewood Cliffs, NJ.
Kotler, Philip dan Kevin Lane Keller, 2012, Marketing Management, , Prentice Hall
International, Inc. A Division of Simon & Scuster, Englewood Cliffs,
Nj07632.
LeSage, James P. and R. Kelley Park. 1975. Introduction to Spatial Econometrics.

Boca Raton, FL: Chapman & Hall/CRC.
Lindgreen, A., & Swaen, Wynstra. 2005. Corporate Social Responsibility.

International Journal of Management Reviews, 12, 1-7.
http://dx.doi.org/10.1111/j.1468-2370.2009.00277.x
Long Yi, Lin and Lu, Ching Yuh. 2010. The Influence of Corporate Image,
Relationship Marketing, and Trust on Purchase Intention: The Moderating
Effects of Word of Mouth. Tourism review. Vol. 65. No. 3. pp. 16-34.
Masukan Pemerintah Atas Rancangan UU RI Tahun 2011 tentang Pendidikan Tinggi,

Pasal 1 butir 4, Kementerian Pendidikan Nasional, Juni 2011.
Meng, Shiang-Min, Gin-Shuh Liang, and Shih-Hao Yang. 2011. The relationships of
cruise image, perceived value, satisfaction, and post-purchase behavioral
intention on Taiwanese tourists. African Journal of Business Management Vol.
5(1), pp. 19-29, 4 January, 2011.
Mohammad, Anber Abraheem Shlash. 2012. The Effect of Brand Trust and
Perceived Value in Building Brand Loyalty. International Research Journal of
Finance and Economics ISSN 1450-2887 Issue 85 (2012).
Moisidis, J. Turcinkova. 2011. Impact Of Reference Groups On The Teenagers’

Buying Process Of Clothing In The Czech Republic. Acta Universitatis
Agriculturae Et Silviculturae Mendelianae Brunensis.
Monroe, K.B., & Grewal, D. 1990. "Effects of price, brand, and store information on
buyers’ product evaluations", Journal of Marketing Research, Vol.28, No.3.
Moorman, Christine, Gerald Zaltman, and Rohit Deshpande, 1993.”Relationship

between Providers and Users of Market Research: The Dinamics of Trust
Within and Between Organization,” Journal of Marketing Research, Vol 29,
pp. 314-328.
Morgan, R.M and Hunt, SD. 1994. The Commitment Trust Theory of
Relationship Marketing. Journal of Marketing, 58 (July). Pp.20-38

Mosavi, Seyed Alireza and Mahnoosh Ghaedi. 2011. Role of perceived value in
explaining trust and repurchase intention in e-shopping. African Journal of
Business Management Vol. 6(14), pp. 4910-4920, 11 April, 2012
Nasreen Khan, Sharifah LS, and Sazali AW. 2010. Investigating Structure
Relationship from Functional and Relational Value to Behavior Intention: The
Role of Satisfaction and Relationship Commitment. International Journal of
Business and Management Vol. 5, No. 10; October 2010
Ndubisi, N. O. 2004. Effect of gender on customer loyalty: a relationship marketing

approach. Marketing Intelligence and Planning, (1), 48-61.
Ndubisi, Nelson Oly. 2005. Relationship Marketing and Customer Loyalty. Marketing
Intelligence and Planning.Vol. 25. No. 1. pp. 98-106.
Nguyen, Nha and Gaston LeBlanc. 2001. Image and Reputation of Higher Education
Institutions in Students’ Retention Decision. The International Journal of
Educational management. ABI/Inform. MCB University Press.
Ogbuji, Chinedu N, Aham Anyanwu, and Julius Onah. 2011. An Empirical Study of
the Impact of Branding on Consumer Choice for Regulated Bottled Water in
Southeast, Nigeria. International Journal of Business and Management.
Pentina, Iryna. 2008. The Role Of Virtual Communities As Shopping Reference

Groups. Journal of Electronic Commerce Research, VOL 9, NO 2
PP No. 19 Tahun 2005. PP tersebut adalah PP No. 32 Tahun 2013
PR Smith, P. C., & Stone, E. F. (Eds.). 2008. Job satisfaction: How people feel about
their jobs and how it affects their performance. New York: Lexington Books.
PTS Online 22-01-2010. Akreditasi Perguruan Tinggi Indonesia.
Rajaguru, Rajesh and Margaret Jekanyika Matanda. 2011. Functional Attributes and
Shopping Value: Supermarket Vs Local Market. International Journal of
Global Business, 4 (2), 15-27, December 2011.
Raquel Sanchez,Fernandez and M.Ageles 1998,The Concept Of Perceived Value:A

Systematic Review Of The Research,University Of Almeria Spain
Raymond Wong and Helen Wong. 2012. Relationship Commitment in Self-financed

Higher Education. International Journal of Business and Management Vol. 7,
No. 7; April 2012.
Rintamaki, Timo and Lasse Mitronen. 2011. Customer Value Propositions And Co-
Creation Of Service In Multi-Channel Retail Contexts. University of Tampere
Management School. FI-33014 University of Tampere.

Roig, Juan Carlos Fandos, Javier Sanchez Garcia, Miguel Angel Moliner, and Jaume
Llorens Monzonis. 2006. Customer perceived value in banking services.
International Journal of Bank Marketing. Emerald Group PL.
Robert and Gotignon 1986,The Moderating Effect Of Corporate Image;The Influence

Of Service Quality and Trust on Purchase Intention.
Sadeh, Ehsan, Leila Mousavi, and Sina Sadeh. 2011. Influential Factors on Brand
Equity in E-retailing Companies. Journal of Basic and Applied Scientific
Research. TextRoad Publication.
Sekaran, Uma. 2010. Research Methods for Business : A Skill Building Approach.
John Wiley & Sons, 3 Feb 2010 - 488 halaman
Sengguruh Nilowardono. 2011. Kelompok Acuan. Consumer Behavior Series.

Presentation. Jakarta.
Sinha and DeSarbo 1998, The Importance Of The Value Concept in Marketing
Probably Cannot be Over Stated.
Smadi, Ziad Moh’d Ali, Bahjat Eid Al-jawazneh. 2011. The Consumer Decision
Making Styles of Mobile Phones among the University Level Students in
Jordan. International Bulletin of Business Administration ISSN: 1451-243X
Issue 10 (2011).
Strasser 2007, Explain that Marketing Enviroment of Higher Education has Entered
Hight Competition Area Which Need Communication As Frame Work Of
Consistent Marketing and These Are Stated As Follows.
Supranto J and Nandan Limakrisna. 2011. Perilaku Konsumen & Strategi Pemasaran
: Untuk Memenangkan Persaingan Bisnis. Edisi 2. Mitra Wacana Medis.
Jakarta.
Taleghani, Muhammad and Meysam Almasi. 2011. Evaluate the Factors Affecting
Brand Equity from the Perspective of Customers Using Aaker's Model.
Kuwait Chapter of Arabian Journal of Business and Management Review Vol.
1, No.4; December 2011.
Tellis, Gerard J. and Gary J. Gaeth, 1990, “Best Value, Price-Seeking, and Price
Aversion: The Impact of Information and Learning on Consumer Choice,”
Journal of Marketing, Vol. 54 (April)
Voon, Kueh 2007, Culture and Service Quality Expectations;Evidence From

Generation Y Consumers in Malaysia.Journal Of Service Theori and Practice
Impact Factor;0,98, 11/2007
Wilson, Gaye R. 2011. Trust Or Consequences: The Relationship Between Faculty

Trust And Faculty Learning Communities In Higher Education. A
Dissertation. Birmingham, Alabama.

Walter, Achim, Thio A Mueller, and Gabriele Helfert. 2001. The Impact of
satisfaction, Trist, and Relationship Value on Commitment : Theoretical
Considerations and Empirical Results. University of Karlsruhe, IBU P.O. Box
6980.
Wong, Amy and Amrik Sohal, 2002. “An Examination of the Relationship between
Trust, Commitment and Relationship Quality,” International Journal of Retail
and Distribution management, 30 (10, 34-51.
Yee, Audrey Sin Lye and Keoy Kay Hooi. 2011. Consumer Decision-Making
Behavior Critical Factors: An Exploratory Study. International Conference On
Management (Icm 2011) Proceeding.

The Influence of Motivation, Socialisation, and
Taxpayers' Awareness on Individual Compliance in
Paying Taxes
Waseso Segoro1, Emilya Putri2
1
Management Department, Faculty of Economy, Universitas Gunadarma
Jl. Margonda Raya No. 100, Depok, Indonesia
2
Management Department, Faculty of Economy, Universitas Gunadarma
Jl. Margonda Raya No. 100, Depok, Indonesia
Tax is one of the highest revenues of a country that comes from within itself used to support
financial development and to make sure that it can run well. Tax revenue increases based on
the increasing number of taxpayers. Maximising tax revenue cannot rely solely on the actions
of the treasurer and tax officials, but also on the taxpayers. This research analyses the
influence of motivation, socialisation, and taxpayers' awareness on individual compliance in
paying taxes. Primary data was obtained by distributing questionnaires to 67 individual
taxpayers residing in Cimanggis Green Residence II Depok. Data analysis was supported by
the SPSS 2.0. The tests conducted are the Validity Test, the Reliability Test, the Classic
Assumption Test, and the Multiple Linear Regression Analysis. The results showed that the
socialisation variable is the only variable that affects individual compliance in paying taxes.
However, as a combined variable, all variables are influential.
Keywords: Motivation, Socialisation, Taxpayers' Awareness

The Influence of Motivation, Socialisation, and
Taxpayers' Awareness on Individual Compliance in
Paying Taxes
INTRODUCTION
The factors that cause violations by taxpayers vary. The main reason of this is that the
taxpayers' income is mainly used to make ends meet. This creates a conflict between self-
interests and the interests of the country. Other causes are the taxpayers' unawareness on their
obligations to their country, the lack respect and willingness to comply with laws and
regulations, high tax rates, and environmental conditions (Jatmiko, 2006). The following is a
table describing the summary of taxpayers in the area of Cimanggis, Depok during the last 3
years based on the data obtained from the KPP office:
Table 1
Taxpayer Percentage Data
Year Assessment SPPT Realisation Realised SPPT Percentage
2011 53.985 16.886.593.963 30.407 8.983.355.087 56.32%
2012 55.776 21.418.964.038 35.886 14.181.131.509 64.34%
2013 57.086 21.733.717.759 38.015 14.681.518.638 66.60%
Based on the table above, it can be seen that in 2011 to 2013, the SPPT realisation
increased yearly. However, it did not increase significantly. It can also be seen that the
increase in SPPT realisation was significant in 2011 to 2012, but not so much in 2012 to
2013.
The goal of achieving tax revenue as how it was targeted can only be reached if
taxpayers fulfil their obligations. The Act No. 28 of 2007 on "General Provisions and Tax
Procedures" states that tax subjects include an individual or entity, taxpayers, tax cutters, and
tax collectors with rights and obligations to taxation in accordance to the provisions of tax
laws. Watung (2010) says that there are four factors that affect taxpayers in performing their
tax responsibilities. These factors are: taxpayers' knowledge, taxpayers' understanding of tax
laws, the perceived benefits of paying taxes, and the taxpayers' optimistic attitude towards
paying taxes. The taxpayers' willingness to meet their tax obligations will encourage the
increase in tax revenue.
Based on the problems discussed here, the purpose of this research can be presented
as follows:
1. To determine the effect of motivation, socialisation, and taxpayers' awareness as a
combined variable on individual compliance in paying taxes.
2. To determine the effect of motivation on individual compliance in paying taxes.
3. To determine the effect of socialization on individual compliance in paying taxes.
4. To determine the effect taxpayers' awareness on individual compliance in paying
taxes.

Figure 1 Research Framework
HYPOTHESES
The authors' hypotheses are divided into two categories, which are:
1. Simultaneous
H4 : Motivation, socialisation, and taxpayers' awareness simultaneously
affect individual compliance in paying taxes.
2. Partial
H1 : Motivation affects individual compliance in paying taxes.
H2 : Socialisation affects individual compliance in paying taxes.
H3 : Taxpayers' awareness affects individual compliance in paying taxes.
A. Research Object
The object of this research is the personal taxpayers residing in Cimanggis Green
Residence II, Depok. This is to determine if the people in the area have dutifully paid
their taxes.
B. Data Collection Method

Data collection methods are ways that can be used by researchers to collect data
(Arikunto, 2007: 100). The methods used in this research are:
1. The Questionnaire Method
Questionnaire is a list of questions given to another person with the intention that
the person who is willing to give the proper response based on the user's request
(Arikunto, 2007:102). Independent variables which data is derived from the
questionnaires are motivation, socialisation, and taxpayers' awareness.
The questionnaires used in this research are closed in nature. Closed
questionnaires are questionnaires presented in a way that respondents can just give
a check mark (√) in the corresponding column or space (Arikunto, 2007: 101).
The questionnaires were distributed to respondents to disclose the data on the

motivation, socialisation, and taxpayers' awareness variables. The questionnaires
consist of two parts, which are the personal data of respondents and the questions.
2. The Documentation Method
The method of documentation is in the form of written data which can support this
research. This method was used to obtain a written record of the amount of tax
revenue derived from individual income.
C. Data Analysis
Data analysis method is quantitative and expressed in numbers and

calculations using statistical methods assisted by SPSS. To determine the effect of
independent variables on the dependent one, multiple tests were used. In multiple
linear regressions, the first step taken was to test the requirements of the analysis by
performing the normality test, multicollinearity test, autocorrelation test, and
heteroscedasticity test on the data.
After performing the regression assumption test, the test on the model's
solidity, commonly known as the significance test, was performed by measuring the
values of statistical f (Anova), coefficient of determination (R2), and the statistic t.

Based on the regression model used, four hypotheses were tested. The following is a table
detailing the results of the test:
Table 2
Test Results
No Variable Result Statistics Description
1 Motivation Rejected Calculated t < Motivation does not affect

Table t individual compliance in
paying taxes.
0.457 <
1.9983
2 Socialization Accepted Calculated t > Socialisation affects individual

Table t compliance in paying taxes.
4.220 >
1.9983
3 Taxpayers' Rejected Calculated t < Taxpayers' awareness does not
Awareness Table t affect individual compliance in
paying taxes.
0.866 <
0.9983

4 Motivation, Accepted Calculated f > As a combined variable,
Socialisation, Table f motivation, socialisation, and
and taxpayers' awareness
Taxpayers' 6.918 > simultaneously affect
Awareness as 2.5200 individual compliance in
a combined paying taxes.
variable
CONCLUSION
A. Conclusion
Based on the test results conducted on the society of Cimanggis Green Residence
II Depok, it can be concluded that:
1. Motivation does not affect individual compliance in paying taxes.
2. Socialisation affects individual compliance in paying taxes.
3. Taxpayers' awareness does not affect individual compliance in paying
taxes.
4. As a combined variable, motivation, socialisation, and taxpayers'
awareness simultaneously affect individual compliance in paying taxes.
B. Suggestions / Managerial Implications

1. For the Government
In order to improve the compliance of an individual taxpayer within a
community, tax socialisation should be properly delivered. With the
implementation of socialisation in paying taxes, such as holding publication
activities through the medium of both printed media, such as newspapers and
magazines; and audiovisual media, such as announcements on the radio or
television, the knowledge about paying taxes as an obligation can be relatively
quick and easy to adapt.
1. Motivation is not a significant variable. This is due to the lack of
motivation and encouragement in the individual taxpayer's own self.
Therefore, the government should provide something that can motivate or
encourage every taxpayer personally, so that they can develop a sense of
responsibility and become fully compliant in paying taxes.
2. Socialisation is a significant variable. This means that the better the
socialisation, the better the individual taxpayer's compliance will be. So,
the government should reach the taxpayers in advance, either directly or
through a particular medium, with the goal to influence their behaviour to
achieve an equal level of understanding. This is also to ensure that every
individual has the same understanding as the others.
3. Taxpayers' Awareness is not a significant variable. This could be due to
the lack of awareness in each taxpayer's own self. As good citizens, we
must raise our awareness in paying taxes, that by paying taxes we can help
the government to improve the welfare of our country and improve our
sense of responsibility in obeying its rules.

2. For Further Research
It is advised that more materials or data to be used in further research. It
should be conducted more in depth so that the results obtained can be more
accurate and thoroughly tested.
REFERENCES
Handayani, S. W., Faturohman, A., and Pratiwi, U. (2013). Faktor-faktor yang
Mempengaruhi Kemauan Membayar Wajib Pajak Orang Pribadi Yang Melakukan
Pekerjaan Bebas. Makalah Simposium Nasional Akuntansi XV Banjarmasin, 1-24.
Handoko, T. and Hani. (2008). Manajemen Personalia dan Sumber Daya Manusia. Edisi
Kedua. Yogyakarta: BPFE.
Harjanti, A. P. (2012). Pengaruh Kesadaran Wajib Pajak, Pelayanan Fiskus dan Sanksi
Pajak terhadap Kepatuhan Wajib Pajak Orang Pribadi yang Melakukan Kegiatan
Usaha dan Pekerjaan Bebas. Semarang: Universitas Diponegoro.
Herryanto, M. and Arianto, T. A. (2013). Pengaruh Kesadaran Wajib Pajak, Kegiatan
Sosialisasi Perpajakan, dan Pemeriksaan Pajak terhadap Penerimaan Pajak
Penghasilan di KPP Pratama Surabaya Sawahan.
Mardiasmo. (2011). Perpajakan (Edisi Revisi 2011). Yogyakarta: Penerbit Andi.

Najib, D. F. (2013). Analisis Faktor-Faktor yang Mempengaruhi Kepatuhan Wajib Pajak
Orang Pribadi dalam Membayar Pajak Penghasilan (Studi Kasus pada Wajib Pajak
Orang Pribadi KPP Pratama Malang Utara). Malang: Fakultas Ekonomi dan Bisnis
Universitas Brawijaya.
Priyatno, D. (2008). Mandiri Belajar SPSS. Edisi Pertama. Yogyakarta: Mediakom.
Rahman, A. (2010). Panduan Pelaksanaan Administrasi Perpajakan untuk Karyawan,
Pelaku Bisnis dan Perusahaan. Cetakan 1. Penerbit Nuansa.
Rustiyaningsih, S. (2011). Faktor-faktor yang Mempengaruhi Kepatuhan Wajib Pajak. Widya

Warta, 2. ISSN 0854-1981
Santi, A. N. (2012). Analisis Pengaruh Kesadaran Perpajakan, Sikap Rasional, Lingkungan,

Sanksi Denda, dan Sikap Fiskus terhadap Kepatuhan Wajib Pajak. Semarang:
Universitas Diponegoro.

A framework of e-HRM adoption studies: Review and future
research
Winarto
Fakultas Ekonomi – Universitas Methodist Indonesia
winarto.zip@gmail.com
Abstract
Electronic human resource management (e-HRM) systems become more widely used
by profit and non-profit organization. However, the field currently lacks sound
theoretical frameworks that can be useful in addressing a key issue concerning the
implementation of e-HRM systems, in particular to obtain a better understanding of
the factors influencing the adoption of e-HRM systems. The objective of this paper is
to provide a foundation towards the development of a theoretical framework for the
implementation of e-HRM systems and develop a conceptual model that would
reflect the nature of e-HRM systems’ adoption through systematic literature review.
Keywords: e-HRM, adoption studies, IT adoption, information system
1. Introduction
Information systems (IS) are increasingly influencing human resource management (HRM)
practices in organizations. The rapid development of the Internet and information technology
during the last decade has enhanced the adoption of electronic Human Resource Management
(hereafter called e-HRM). It is defined as the planning, implementation, and application of
information technology for both networking and supporting at least two individual or collective
actors in their shared performing of HR activities (Strohmeier, 2007). Marler and Fisher (2013)
argued that e-HRM literature is still at an early stage when compared to either the general IT/IS
literature or strategy literature, because early e-HRM studies begin appearing in international
publication around 1995 (Strohmeier, 2007).
As electronic human resource management (e-HRM) systems become more widely used,
previous research suggested that e-HRM contributes to increase the value of HR function (e.g.
Parry, 2011; Wahyudi & Park, 2014) and organizational innovation (Lin, 2011). Nevertheless,
the diverse positive consequences of e-HRM implementation within organizations are not taken

for granted. It means that e-HRM is just a technology, which has other factors to be successfully
adopted and implemented.
Additionally, from the Human Resource practices (e.g. recruitment, selection, performance
appraisal), changing from manual/traditional way to electronic processing requires good
understanding on how the e-HRM adoption and implementation may effectively work. People
may be afraid of the privacy risks invasion when they submit their job application through the e-
recruitment (Harris, Hoye, & Lievens, 2003). Further, in organizational level, although the e-
HRM may reduce cost and speeding up processes (Strohmeier, 2007), the e-HRM technology
requires installation, maintenance and changes costs which make the organization to think about
cost and benefits of the e-HRM system.
While some organizations implement the e-HRM technology as a means of facilitating the HRM
practices and increased research interest on e-HRM, the field currently lacks sound theoretical
frameworks that can be useful in addressing a key issue concerning the implementation of e-
HRM systems, in particular to obtain a better understanding of the factors influencing the
adoption of e-HRM systems. Since academic interest and research in e-HRM adoption have
increased, the review of literature review is needed to identify the e-HRM adoption research
trend as well as to find the literature gaps that will be valuable for future research in order to
enhance the understanding of e-HRM adoption.
Given the widespread use of e-HRM systems and the potential advantages and disadvantages
associated with them, the main purposes of the present article is to provide a review of the
factors that affect e-HRM acceptance and adoption. I believe that IS adoption and acceptance, in
this case e-HRM systems, is not merely about the technology and its advanced features, but some
other factors also determine the IS adoption within organizations. From the theoretical
perspective, the review may offer directions for e-HRM research by explaining the factors such
as system and technology, organizational characteristics, users and individuals’ characteristics as
well as environmental and contextual factors which influence e-HRM adoption. From managerial
and practitioners perspectives, the review also provides useful insights on how e-HRM may be
implemented within organizations, where multi and holistic factors are behind the IS adoption.

This literature review employs a research question: what factors do influence e-HRM adoption in
organizations and how those factors are categorized according 4 main groups; system and
technology, organizational characteristics, users/individual characteristics as well as
environmental and contextual factors? The review covered all technology application and
implementation which related to the Human Resource Management practices such as e-
recruitment, e-selection, and e-training. Thus, the objective of this paper is to provide a
foundation towards the development of a theoretical framework for the implementation of e-
HRM systems and develop a conceptual model that would reflect nature of e-HRM systems’
acceptance and adoption.
This paper will be presented as follows. In the next part, I will explain the methodology that is
used to compile empirical research from two popular academic databases through systematic
literature review. Then, in the next part, the systematic literature review result will be presented
and followed by the discussion and the implication for the practice and future research.
2. Methodology
As explained in the previous part, a systematic literature review is conducted to find and select
relevant papers for this review. I adopted the procedure of Crossan and Apydin (2010) when they
conducted a systematic literature review on organizational innovation. The step by step,
planning, execution and reporting, that have been taken in the systematic literature review
process will be described below.
2.1. Planning phase

Two main activities in the planning phase are defining the objectives of the research and
identified the key data source. Firstly, the objective of the literature review is to identify and
draw the framework of the all relevant factors influencing e-HRM adoption in organizations. In
addition, two databases were used, ISI Web of Knowledge’s Social Sciences Citation Index
(SSCI) and Business Source Premier, to generate all the relevant literature from 1995 to 2014.
2.2. Execution phase

The execution phase includes the collection and organization of the data as well as the data
processing and analysis. I must identify initial selection criteria such as keyword and search
terms, and classify the research papers/publications. The first step in the review process was an

extensive search for scholarly peer-reviewed journal articles through two search engines:
EBSCO Business Source Premier, ISI Web of Knowledge. I used those two databases to enlarge
the number of available article and increase the probability that the most relevant papers are
included. I only focused on papers which were published between 1995 and 2014.
I used several keywords to find the relevant research papers. E-HRM researchers use different e-
HRM terminologies in their research which generally refer to information system-supported way
of performing HR policies and practices (Strohmeier, 2007). After exploring the e-HRM
terminologies used by e-HRM researchers, then I used them as the keywords. Specifically, by
multi-searching in those two databases, the keywords used were the combinations of e-HRM and
the synonyms/interchangeable terms (e-selection, e-recruitment, employee self-service systems,
e-compensation, e-benefits, HR portal, virtual HR, web-based HR, e-learning HR, and Human
Resources Information System), derivatives of adoption, derivatives of acceptance, and
derivatives of diffusion.
The process resulted in an initial pool of 104 papers; 39 papers from EBSCO Business Source
Premier and 65 papers from ISI Web of Knowledge. It is summarized in the Table 1. Based on
that initial pool, I listed all of those papers in spreadsheet and then sorted it out to find the
duplicates papers, where the title is the same. This resulted in 48 papers must be dropped; 13
papers from EBSCO Business Source Premier and 35 papers from ISI Web of Knowledge, and
therefore the rest of the paper was 56 articles.
Because those papers are from two different databases, it is still possible to have the duplicate
problem. Thus, the final screening was combining all of those papers and deleting the duplicates
as well as irrelevant papers, for instance the papers are not related to e-HRM adoption research
such as e-learning adoption and acceptance in medical school. Also, to keep the task manageable
and to provide some guarantee of quality research, only studies published in refereed
international journals and only articles that have been conducted empirical research were
considered. Work published in books, research notes, open journals, conference or working
papers was excluded and judged as irrelevant papers. This resulted in 35 papers must be
eliminated, and therefore, there were 21 papers to be reviewed.

Table 1 Initial Pool and Final Result of Literature Review
No Databases Initial After Duplicate

Elimination
1 EBSCO Business Source Premier 39 26
2 ISI Web of Knowledge 65 30
Initial paper for review 104 56
2.3. Reporting Phase

After reading these articles, I compiled a summary in the table (see appendix), including the
research problem, the main variables/hypotheses, theoretical underpinning, research methods and
the findings/conclusion. In the next section, I will synthesize and discuss the findings of the
literature review.
3. Results
E-HRM systems have practical values in organizations. However, many e-HRM studies are still
lack of theoretical consideration and little is reported in the academic literature the adoption of
such system (Tansley & Watson, 2000). Therefore, the literature review is purposefully to find
an explanation of the various, multi-dimensional factors that contribute to e-HRM adoption in
the organization. Before explaining that, I will start with the various theoretical underpinning and
methods used in the 21 research papers.
3.1. Theoretical Underpinning in e-HRM adoption research

Most of the e-HRM adoption research use the theory proposed by Davis, the Technology
Acceptance Model. Seven research papers use the Technology Acceptance Model as the
theoretical lens. It is not a surprising result, because Technology Acceptance Model is the
common and popular theory in e-HRM adoption research. Perceived usefulness and perceived
ease of use have been known as the important variables to the success of new technology
adoption and lack of user acceptance could impede the IS adoption (Davis, 1989).
Several theories also have been used in the e-HRM adoption research, for instance Theory of
Planned Behavior (TPB), Unified Theory of Acceptance and Use of Technology (UTAUT)
(Venkatesh, Morris, Davis, & Davis, 2003), signaling theory, change management theory, and
contingency theory. Surprisingly, 10 research papers do not mention specifically the theoretical
theory they used. Each theory in the e-HRM adoption research based on the systematic literature
review will be discussed below.

Theory of Planned Behavior (TPB) is one of competing models in Information Technology
acceptance. Specifically, Theory of Planned Behavior extends the Theory of Reason Action
(TRA) to predict human behavior and then it is used to predict individual acceptance of
Information System (IS). While TRA only has 2 main constructs, attitude toward behavior and
subjective norm, the Theory of Planned Behavior adds a construct, perceived behavioral control,
as an additional determinant of intention and behavior (Venkatesh, Morris, Davis, & Davis,
2003). Lin’s paper (Lin, 2010) applies the Theory of Planned Behavior to investigate the
influence of job seeker attitude, subjective norm, and perceived behavioral control on the
intention to use job search website.
Although the Technology Acceptance Model is popular in Information System research, the
theory has been criticized (Legris, Ingham, & Collerette, 2003). Further, Unified theory of
acceptance and use of technology (UTAUT) was developed to distinguish between intention to
use and actual usage (Venkatesh, Morris, Davis, & Davis, 2003). They argue that intention to use
will affect the actual use of IS acceptance. This theory has been applied to investigate the effects
of language standardization on the acceptance and actual use of e-HRM systems (Heikkila &
Smale, 2011).
In addition, TAM has to be integrated into a broader model and related to human and social
change processes (Legris, Ingham, & Collerette, 2003). Thus, several e-HRM adoption research
in this systematic review have integrated the Technology Acceptance Model with another theory,
such as signaling theory, contingency theory and change management theory. Kashi and Zheng
(2013) integrate the Technology of Acceptance Model with signaling theory, in particular to
explore the potential effects of visual characteristics and users’ impression of recruitment
website.
Wahyudi and Park’s paper (2013) also integrate the Technology Acceptance Model with
contingency theory. The contingency theory highlights that outcome variables depend on best fit
and contextual factors. In their research, Wahyudi and Park suggest that the leadership style in
the organizations as the contextual factor in the e-HRM adoption.
Change management theory has been integrated with the Technology Acceptance Model to
explore the Human Resources (HR) portal implementation (Ruta, 2005). The implementation of

HR portal is very complex process. Before HR portal implementation, employees interact with
person, but after the HR implementation, employees must become familiar with the information
technology and accept interaction with computers. The change process must be well managed by
the organizations so that the employees accept the HR portal and organizational change smoothly
run.
To conclude, mostly the type of theories used in adoption studies is in one-sided way which
tends to the positivism approach. In addition, the researchers used a single theory to explore the
e-HRM adoption, although there are few studies which combine two kinds of theories, such as
contingency theory and change management theory.
3.2. Research Methodology in e-HRM adoption research

E-HRM research employs quantitative and qualitative approach as the research methodology.
Specifically, e-HRM adoption researchers use a wide range of research methodology, such as
survey research, exploratory case study, action research, and mixed methods. Each of the
research methodology will be explained below.
Survey research is the most popular research methodology in the e-HRM adoption research. In
this systematic literature review, 13 research papers employ survey research. The e-HRM
researchers mostly employ this kind of research methodology because the theoretical foundation
of e-HRM is based on psychology discipline, such as the Theory of Rational Action, the Theory
of Planned Behavior, the Technology Acceptance Model or UTAUT. Using the survey research,
e-HRM researchers assess to find any relationships and test any hypotheses between independent
variables, such as perceived usefulness, perceived ease of use, and dependent variables, such as
intention to use and actual use. Furthermore, the e-HRM researchers also develop more complex
model in order to test mediating variables or mediator variables which influence the relationship
between independent variables and dependent variables.
From the qualitative research approach, e-HRM researchers also employ the case study and
action research approach as the research method. Usually, they conduct their research in an
organization or more; then they interviewed the employees and people who use the e-HRM
system. Further, they also use secondary data to support the data analysis (e.g. Panayotopoulou,
Galanaki, & Papalexandris, 2010). Finally, the data are analyzed and compared through within-

case analysis and cross-case analysis. In addition, few e-HRM researchers employ mixed
method. Generally, they conduct survey research using questionnaire and then followed focus
group discussion or interview (e.g. Panayotopoulou, Vakola, & Galanaki, 2007).
In conclusion, though there were few studies employed qualitative research, most of the research
method in e-HRM adoption used survey research. From the theoretical perspectives used which
have been explained above, the survey research is the appropriate one. The Technology
Acceptance Model, Theory of Planned Behavior (TPB), Unified Theory of Acceptance and Use
of Technology (UTAUT) are basically coming from psychology to find a single truth by
hypothesizing and testing the relationship between independent and dependent variables.
3.3. E-HRM adoption research framework

The systematic literature review has yielded an important framework of e-HRM adoption
research. After reading all the research articles and making a summary (See the appendix), the
analysis has identified several main factors which influence e-HRM adoption and the outcomes
(expected and actual ones) of e-HRM implementation (See Figure 1). The factor influencing e-
HRM adoption has been synthesized and grouped based on the theoretical underpinning and
important variables/constructs.
4. Discussion and Conclusion

The main purpose of the systematic literature review is to identify the factor influencing e-HRM
adoption. The review has resulted in a framework which consists of four groups which influence
e-HRM adoption; system and technology, organizational, users/individuals and environmental
and contextual factors. This e-HRM framework sits in the position that system and technology
itself is not enough. There are others factors that will influence e-HRM be accepted and adopted.
Any issues and opportunities in each factor will be discussed below.
4.1. System and Technology Characteristics

System and technology emphasize on the fact that technology characteristics can affect the IS
adoption (Chakrabortya & Mansor, 2013). E-HRM is basically a computerized system that helps
the information processes in human resources practices, such as selection and recruitment
processes, training, or performance appraisal. Thus, the e-HRM system and technology must
ensure the reliability of information which flows within and outside organizations. Based on this
systematic literature review, various numbers of system and technological factors contribute in
influencing e-HRM adoption. The system and technological factors are external variables which
ultimately influence on internal beliefs, attitudes, intentions, and usage.
Technological Acceptance Model is the basic theoretical foundation for system and
technological characteristics. The model explains that the system quality, perceived ease of use
and perceived usefulness are the important factors that determine the user’s attitude toward his or
her intention to use and actual usage of IS as well as reflect feelings of favorableness or un-
favorableness toward using the technology.
Furthermore, based on the signaling theory, user’s impression is an important factor that
influences the user to adopt and use the technology. It encourages the user to apply a job offered
by an organization (Kashi & Zheng, 2013). Thus, the e-HRM system must pay attention to the
possible effect of website and its features which could improve/decrease the IS adoption and
acceptance, for example language standardization (Heikkila & Smale, 2011).
4.2. Organizational Characteristics

E-HRM adoption within organization can be influenced by organizational characteristics. Some
important factors of organizational characteristics are found in this systematic literature review.
Firstly, the level of e-HRM adoption in organization can be influenced by high level of
management commitment and top management support (Troshani, Jerram, & Hill, 2011). The
management commitment and the support from top management can make decision which
encourages the employees to accept and adopt e-HRM in organizations.
Secondly, organizational size and degree of centralization are important factor in successful e-
HRM adoption (e.g. Panayotopoulou, Galanaki, & Papalexandris, 2010). Organization with large
numbers of employees can use and adopt e-HRM to support their business processes because
potential benefits can be spread across large user bases, although in the same time, it has
complexity issue. Further, the degree of centralization affects e-HRM adoption when decisions
are made at higher hierarchical levels in the organization which ultimately increase the level of
e-HRM adoption.
In the e-recruitment case (Llorens, 2011), organizational status is the important factor which may
courage the potential applicants to apply for a job. It is argued that the organization with high

organizational status will have more possibilities to hold candidate pool quality and the overall
quality of new hires.

Towards e-HRM adoption research framework
The numbers refer to the selected papers. See appendix!
System and Technology characteristics:
Perceived usefulness (2, 4, 5, 10, 14, 18, 20, 21)
Perceived ease of use (2, 4, 10, 18, 20, 21)
Perceived privacy (2)
Impression (10)
Information quality (5, 20)
Organizational characteristics:
Degree of centralization (3, 9)
Organizational size (3, 8, 9, 13, 15)
Management commitment & culture (9, 16)
Top management support (12, 14, 15, 16)
Organizational status (1)
E-HRM adoption: Outcomes:

User attitude (14) Individual level (19):
Intention to use (16) System satisfaction (6, 20)
System usage (14) Occupational strain (14)
Users/individuals characteristics: Usage behavior (18) Organizational (19, 3, 20)
Knowledge of IT (5) HRM effectiveness, Effective communication
Prior experience (5, 8) Reduce cost/efficient, improve business process,
Age (5, 8) increase the value of HR
Gender (5, 8)
Application-specific efficacy (2)
Educational level (3)
Environmental and contextual:

Internet penetration (3)
Type of industry (13, 16)
Government regulation (9)
Peer/social influence (4, 17)
707 | P a g e
4.3. Users/Individuals Characteristics
This literature review finds a range of individual and users factors influencing e-HRM adoption.
System and technological factors are about the system and technology quality which will be run
and used by the users. The level of adoption will be different among users because they have
different skills and knowledge about IT as well as their prior experience working with IT. User’s
gender, age, application-specific efficacy and educational level are found as important factors
which will influence the degree of e-HRM adoption in individual level.
4.4. Environmental and Contextual Factors

Environmental and contextual factors describe the area where organizations conduct their
business, and include industry characteristics, and supporting infrastructure (Chakrabortya &
Mansor, 2013). Firstly, the degree of Internet penetration in the country and society is an
important factor which influences the e-HRM adoption. It is because the e-HRM technology
implementation depends on the Internet and its supporting infrastructure. Secondly, social and
peer influence is found as the significant factor which will influence the adoption of e-
recruitment, particularly user’s intention to use the system.
4.5. E-HRM Adoption and Outputs

The literature review focuses on a range of factors influencing e-HRM adoption which has been
explained above. Furthermore, based on the systematic literature review, a range of constructs
has been used in different research, to measure the e-HRM adoption. Some research measures
the user’s attitude towards the e-HRM adoption. However, measuring the user’s attitude is not
enough, therefore some research propose to use behavioral measurement, such as intention to
use, usage behavior and actual system usage.
The literature review also identifies the outcomes of e-HRM adoption in individual level and
organizational level. In individual level, the e-HRM user will have high system satisfaction
(Wickramasinghe, 2010) and less occupational strain (Konradt, Christophersen, & Schaeffer-
Kuelz, 2006). Furthermore, in organizational level, the e-HRM adoption research uses several
indicators to measure the outcomes of e-HRM adoption. Because the role of HR will be
transformed and facilitated by the used e-HRM systems, e-HRM adoption research assesses the
outcomes by measuring the HRM effectiveness, effective communication, reduce cost and be
more efficient, increase the value of HR as well as improve business process.

5. Avenues for Future Research, Implications and Limitation
5.1. Avenues for Future Research

There are some opportunities for researchers to further investigate the adoption of e-HRM and
ultimately contribute to the theoretical and practical of e-HRM research. First of all, almost 10
papers do not clearly explain the theoretical foundation of their research. Future research must
clearly decide and state the theoretical lenses for empirical analysis. Further, it is suggested to
employ and combine two different theories as the theoretical lenses to obtain more understanding
on how e-HRM system be adopted and accepted. Secondly, most of the e-HRM adoption
employed cross-sectional data and not longitudinal in nature. Thus, future research can employ
the longitudinal data which will investigate before and after the adoption of e-HRM, as well as
explain the actual outcomes of e-HRM for HR practices and business processes within
organizations. As well, future empirical studies may also test the e-HRM adoption framework
across different industries and explore the mechanism that exists in the e-HRM adoption. Also,
while many studies have emphasized the technological determinism, further studies may shed
more light on the nature and strength of the contextual factors which force or hinder the e-HRM
adoption.
5.2. Managerial Implications

In addition to contributing to research and theoretical perspectives, this study also contributes to
managerial and practice. Usually, most people believe that the IS technology has potential
advantages when it is implemented; without giving much attention on the other vital factors.
Thus, there is a need to take a more holistic perspective by observing e-HRM practice from
system and technology, organizational, users/individuals and contextual perspectives.
5.3. Limitations
While the literature review provides a direction for future research, I am aware that the literature
review has some limitations. Firstly, I have not offered detailed propositions linking the
elements/characteristics in the e-HRM framework. Secondly, I used two popular databases to
find the relevant papers. Those databases may have omitted some relevant research as well.
However, I believe that the careful procedure of the systematic review has reduced the
probability to omit the relevant papers. For future research, it is suggested to find the relevant

papers directly from peer-reviewed journals. I hope this framework will provide a means to help
integrate the research in e-HRM studies in order to advance both research and practice.
Bibliography
Chakrabortya, A. R., & Mansor, N. N. (2013). Adoption of Human Resource Information
System: A theoretical analysis. Procedia - Social and Behavioral Sciences, 75, 473-478.
Crossan, M. M., & Apaydin, M. (2010). A multi-dimensional framework of organizational

innovation: A systematic review of literature. Journal of Management Studies, 47(6),
1154-1191.
Davis, D. F. (1989, September). Perceived usefulness, perceived ease of use and user acceptance
of information technology. MIS Quarterly, 13(3), 319-340.
DeLone, W. H., & McLean, R. E. (1992). Information system success: The ques for the
dependent variable. Information System Research, 3(1), 60-95.
Florkowski, G. W., & Olivas-Lujan, M. R. (2006). The diffusion of human-resource information-

technology innovations in US and non-US firms. Personnel Review, 35(6), 684-710.
Harris, M. M., Hoye, G. v., & Lievens, F. (2003). Privacy and attitudes towards Internet-based
selection systems: A cross-cultural comparison. International Journal of Selection and
Assessment, 11(2-3), 230-236.
Heikkila, J.-P., & Smale, A. (2011). The effects of ‘language standardization’ on the acceptance
and use of e-HRM systems in foreign subsidiaries. Journal of World Business, 46(3),
305-313.
Huang, J., & Martin-Taylor, M. (2013). Turnaround user acceptance in the context of HR self-
service technology adoption: an action research approach. The International Journal of
Human Resource Management, 24(3), 621-642.
Kashi, K., & Zheng, C. (2013, March). Extending Technology Acceptance Model to the e-
recruitment context in Iran. International Journal of Selection and Assessment, 21(1),
121-129.
Keller, C. (2005). Virtual learning environments: three implementation perspective. Learning,

Media and Technology, 30(3), 299-311.
Konradt, U., Christophersen, T., & Schaeffer-Kuelz, U. (2006). Predicting user satisfaction,
strain and system usage of employee self-services. International Journal of Human-
Computer Studies, 64(11), 1141-1153.

Lapointe, L., & Rivard, S. (2005). A multilevel model of resistance to information technology
implementation. MIS Quarterly, 29(3), 461-491.
Legris, P., Ingham, J., & Collerette, P. (2003). Why do people use information technology?: a
critical review of the technology acceptance model. Information and Management, 40(3),
191-204.
Lin, H.-F. (2010). Applicability of the extended theory of planned behavior in predicting job
seeker intentions to use jon-search websites. International Journal of Selection and
Assessment, 18(1), 64-74.
Lin, L.-H. (2011). Electronic human resource management and organizational innovation: the
roles of information technology and virtual organizational structure. The International
Journal of Human Resources Management, 22(2), 235-257.
Llorens, J. J. (2011). A model of public sector e-recruitment adoption in a time of hyper

technological change. Review of Public Personnel Administration, 31(4), 410-423.
Marler, J. H., & Fisher, S. L. (2013). An evidence-based review of e-HRM and strategic human
resources management. Human Resources Management Review, 23, 18-36.
Martins, L. L., & Kellermanns, F. W. (2004). A model of business school students's acceptance
model of a web-based course management system. Academy of Management Learning
and Education, 3(1), 7–26.
Mueller, D., & Strohmeier, S. (2011). Design characteristic of virtual learning environments:
state of research. Computers and Education, 57, 2505-2516.
Ngai, E., & Wat, F. (2006). Human resource information systems: a review and empirical
analysis. Personnel Review, 35(3), 297-314.
Panayotopoulou, L., Galanaki, E., & Papalexandris, N. (2010). Adoption of electronic system in
HRM: is national background of the firm relevant? New Technology, Work and
Employment, 25(3), 253-269.
Panayotopoulou, L., Vakola, M., & Galanaki, E. (2007). e-HR adoption and the role of HRM:
evidence from Greece. Personnel Review, 36(2), 277-294.
Parry, E. (2011). An examination of e-HRM as a means to increase the value of the HR function.
The International Journal of Human Resource Management, 22(5), 1146-1162.
Payne, S. C., Horner, M. T., Boswell, W. R., Schroeder, A. N., & Stine-Cheyne, K. J. (2009).
Comparison of online and traditional performance appraisal systems. Journal of
Managerial Psychology, 24(6), 526-544.

Rahim, M. M., & Singh, M. (2007). Understanding benefits and impediments of B2E E-business
system adoption. Journal of Internet Commerce, 6(2), 3-17.
Ruta, C. D. (2005). The application of change management theory to HR portal implementation

in subsidiaries of multinational corporations. Human Resource Management, 44(1), 35-
53.
Stone, D. L., Lukaszewski, K. M., Stone-Romero, E. F., & Johnson, T. L. (2013). Factors
affecting the effectiveness and acceptance of electronic selection systems. Human
Resource Management Review, 23(1), 50–70.
Stonebraker, P. W., & Hazeltine, J. E. (2007). Virtual learning effectiveness: An examination of

the process. The Learning Organization, 11(3), 209-225.
Strohmeier, S. (2007). Research in e-HRM: Review and implications. Human Resource

Management Review, 17, 19-37.
Strohmeier, S., & Kabst, R. (2009). Organizational adoption of e-HRM in Europe. Journal of
Managerial Psychology, 24(6), 482-501.
Sun, P.-C., Tsai, R. J., Finger, G., Chen, Y.-Y., & Yeh, D. (2008). What drives a successful e-
learning? An empirical investigation of the critical factors influencing learner
satisfaction. Computers & Education, 50, 1183-1202.
Tansley, C., & Watson, T. (2000). Strategic exchange in the development of Human Resource
Information Systems (HRIS). New Technology, Work and Employment, 15(2), 108-122.
Teo, T. S., Lim, S. G., & Fedric, S. A. (2007). The adoption and diffusion of human resources
information systems in Singapore. Asia Pacific Journal of Human Resources, 45(1), 44-
62.
Tong, D. Y. (2009). A study of e-recruitment technology adoption in Malaysia. Industrial

Management & Data System, 109(2), 281-300.
Troshani, I., Jerram, C., & Hill, S. R. (2011). Exploring the public sector adoption of HRIS.
Industrial Management & Data Systems, 111(3), 470-488.
van Raaij, E. M., & Schepers, J. J. (2008). The acceptance and use of a virtual learning
environment in China. Computers & Education, 50, 838–852.
Venkatesh, V., Morris, M. G., Davis, G. B., & Davis, F. D. (2003). User acceptance of
information technology: toward a unified view. MIS Quarterly, 27(3), 425-478.
Voermans, M., & Veldhoven, M. v. (2007). Attitide towards e-HRM: an empirical study at
Philips. Personnel Review, 36(6), 887-902.

Wahyudi, E., & Park, S. M. (2014). Unveiling the value creation process of electronic human
resources management: An Indonesian case. Public Personnel Management, 43(1), 83-
117.
Wickramasinghe, V. (2010). Employee perceptions towards web-based human resource

management systems in Sri Lanka. The International Journal of Human Resource
Management, 21(10), 1617–1630.
Wilson-Evered, E., & Härtel, C. E. (2009). Measuring attitudes to HRIS implementation: A field
study to inform implementation methodology. Asia Pacific Journal of Human Resources,
47(3), 374-384.
Winkler, S., Konig, C., & Kleinmann, M. (2013). What makes human resource information
successful? Managers' perceptions of attributes for successful human resource
information. The International Journal of Human Resource Management, 24(2), 227-
242.
Yoo, S. J., Han, S.-h., & Huang, W. (2012). The roles of intrinsic motivators and extrinsic
motivators in promoting e-learning in the workplace: A case from South Korea.
Computers in Human Behavior, 28, 942–950.

Conscientiousness and Emotional Stability as Moderators to the Influence of
Transactional Leadership to In-Role and Extra-Role Performance
Wisnu Prajogo (YKPN School of Business)
Some research found that the relationship of leadership and employee

performance remains in the black box since there were many inconsistencies in
findings. So, it is suggested to explore moderating and mediating variables in the
relationship between leadership and employee performance. This research
explores employee conscientiousness and emotional stability as moderating
variables in the relationship between leadership and performance. 504 employees
from manufacturing companies in central java and Jogjakarta participated in this
research.
This research found several result. First, there is a direct positive influence of
transactional leadership to employee in-role and extra-role performance. Second,
the influence of transactional leadership to employee in-role performance will be
stronger in employee with high conscientiousness and high emotional stability.
Third, the influence of transactional leadership to employee extra-role
performance will be stronger in employee with high conscientiousness. Fourth,
the influence of transactional leadership to employee extra-role performance will
be weaker in employees with high emotional stability.
(Keywords: transactional leadership, in-role performance, extra-role performance,

conscientiousness, emotional stability)
Introduction
Leadership is a topic that becomes an interest for many researchers. Most
research in this area examined the direct effect of leadership to performance.
Studies then develop to examine the moderating and mediating variables in the
relationship of leadership and performance. These studies provide support for the
direct effect, moderated effect, and mediated effect of leadership to performance.
This study uses the terminology of transactional leadership as leadership role
which uses reward and punishment as an attempt to create employee performance.
This study explores in-role and extra-role performance as measures of
employee performance. Basically, the use of in-role performance measures has
not been able to describe the performance as a whole because it only measures the
performance of how well an employee to work in accordance job descriptions and
the results achieved. In competition between companies is very tight, companies
need every employee to perform better. In-role performance measure is
insufficient because the employee is usually not work alone, but also work with
other colleagues. Therefore, we need a second measure the performance called
extra-role performance.
Extra-role performance is performance measure that includes things that
are not required in the job description and not related to the compensation system,
but doing so would improve the effectiveness of the organization as a whole

(Mackenzie et al., 2001). Using in-role and extra-role performance measures
becomes critical, as organizations need employees who are able to do a good job
and are also willing to make a special role beyond his/her core functions (Werner,
2000). One aspect of extra-role performance is the cooperation between the
employees in terms of how much an employee is willing to support and help
colleagues. Extra-role performance measures is important, because employee with
high extra-role performance, will have higher willingness to help colleagues. This
will increase in-role performance of each employee.
This study choose conscientiousness and emotional stability personality
dimensions as a moderating variables in the relationship between leadership and
employee performance. Conscientiousness relates to how well employees have the
awareness to work properly. People with high conscientiousness will achieve
higher performance than employees with low levels of conscientiousness.
Therefore, the same instructions of the leader may be differently implemented
based on the level of employee conscientiousness. Conscientiousness may
moderate the influence of leadership on performance because employees with
high conscientiousness will respond better with a supervisor instructions, so that
he/she will perform better. In other words, leadership effects on performance will
be stronger on employees with a high level of conscientiousness.
Emotional stability is associated with a person's ability to face pressures.
People with high emotional stability is more resistant to pressures. Therefore, the
same instructions of the leader can affect different people with different levels of
emotional stability.
Theoritical background and Hypotheses

Based on Bass (1985), transactional leadership is split into two principal
components, namely contingent reward and management by exception as an effort
to make employees to perform well. Contingent reward includes clarification of
work to do to get the reward, and the use of incentives to influence the motivation
(Bass, 1985).
Management by exception is the behavior of a manager who insists on
efforts to make sure employees work the required procedures, and the use of
corrective action in response to any deviation from the existing procedures (Bass,
1985). Bass (1985) divides this construct into two aspects: management by
exception active and passive.
The active nature of the management by exception appears in supervisor’s
effort to constantly monitors the actions of employees to ensure the employees
work according to stipulated procedures to avoid mistakes. The nature of the
passive management by exception appears in their superior action after becoming
a serious problem or an error occurs and also the form of the provision of warning
or penalty if the employee works outside the procedures which led to an error in
their work. Therefore, differences in the nature of the active and passive
management by exception seemed at the time the action employer on the
employee performed before or after the occurrence of an error.

Researches of Direct Effect of Leadership to Performance
Research on the direct effect on the performance leadership is concerned
with how a leader's behavior will directly affect the performance. Avolio,
Waldman, and Einstein (1988), Deluga (1988), Hater and Bass (1988), Howell
and Avolio (1993), Kirkpatrick and Locke (1996), and Politis (2002) are
researchers in this aspects. Those research defined the dependent variable in
various ways that include: organizational effectiveness (Avolio, Waldman, &
Einstein, 1988; Howell & Avolio, 1993), individual performance (Kirkpatrick &
Locke, 1996; Politis, 2002), and performance measure according MLQ
(multifactor leadership questionnaire) which are the effectiveness of leaders and
subordinates satisfaction on the leader (Deluga, 1988; Hater & Bass, 1988).
Avolio, Waldman, and Einstein (1988) uses the size of the effectiveness of
the organization in the form of market share, debt to equity ratio, return on assets,
stock price and earnings per share. They examined the effects of transformational
and transactional leadership practices on measures such performance in a
managerial simulation involving 190 students of master of business administration
program. They found a positive relationship between transactional and
transformational leadership to the organization's effectiveness.
Howell and Avolio (1993) using consolidated-business-unit performance
as criteria for organizational effectiveness. By using the 78 respondents managers
of major financial institutions in Canada, they found several things:
transformational leadership is associated with performance; transactional
leadership is negatively related to performance; and support for innovation
moderate the relationship transformational leadership performance.
Kirkpatrick and Locke (1996) manipulates three components (vision, the
implementation of the vision of the task cues, and communication style) in
crossed experimental design with 282 respondents advanced business-class
students to predict the performance and attitudes of individuals. They found that
the vision affect performance weakly and strongly influence attitudes. Their other
findings is the implementation of the vision in the form of task cues affect the
quality and quantity of performance and communication styles affect only the
perception of charisma.
Other research using individual performance as dependent variable
described by Politis (2002). He examined the role of transformational and
transactional leadership in the process of knowledge acquisition by using
structural equation modeling. He found all the elements of multifactor leadership
questionnaire unless management by exception attributes associated with
knowledge acquisition, personal trait and control related to actual performance,
and control associated with perceived performance.
In addition to the use of the organization's performance and the individual
performance as many variables as described, there is also research the use of
performance measures MLQ described as variable. Deluga (1988) using a
manager-employee influencing dynamics (covering friendliness, bargaining,
reason, assertiveness, higher authority, and the coalition), and performance criteria
in accordance MLQ (which includes satisfaction with the leader and the
effectiveness of the leader) as explanatory variables and elements transformational

and transactional leadership accordance MLQ as explanatory variables. They use
400 employees as the manufacturing company respondents and found that
transformational and transactional leadership is inversely related to employee
Influencing behavior. They also found that the relationship is not unidirectional
upward Influencing employee behavior with transactional leadership is more
powerful than with transformational leadership. In addition, they also found that
transformational leadership is more related to the effectiveness of leaders and
subordinates to superiors satisfaction than transactional leadership.
Hater and Bass (1988) replicate the augmentation effect earlier research by
using satisfaction with the leader and leader effectiveness as part MLQ described
as dependent variable. They use elements of transformational and transactional
leadership of MLQ. By using respondents subordinate managers in the delivery
company, they discovered several things. The first finding them is no support for
the allegations augmentation effect. Their second finding is transformational
leadership and ordinary differentiating top performing managers.
This research gives support to the common view that states that leadership
is one of the things that will affect the performance. Nevertheless, the majority of
research still focuses on the organization's performance and the performance of
the leader, but do not emphasize the performance of subordinates, so it requires a
lot of emphasis on leadership research on the subordinate (Ehrhart & Klein,
2001). Deficiency that will be addressed in this study is to highlight the impact of
the behavior of the leader to performance of subordinates.
Researches on Moderating Variables in the Relationship Between Leadership

and Performance
In addition to research on the direct relationship of leader behavior and
performance, there is also research on leadership that emphasizes their moderating
variable in the relationship of leader behavior and performance. Some moderating
variables used include: the use of humor by the leader (Avolio, Howell, & Sosik,
1999), transformational leadership training (Barling, Weber, & Kelloway, 1996;
Dvir, Eden, Avolio, & Shamir, 2002), occupation (Keller, 1992), and employee
motive (Wofford, Whittington, & Goodwin, 2001).
Avolio, Howel, and Sosik (1999) examined the relationship between
leadership style, the use of humor, and employee performance. They use leaders
and employees of financial institutions in Canada as a respondent. They found that
relationship style of leadership with the performance of individual and business
unit performance is moderated by the use of humor by the leader. The interesting
thing of their research is the use of humor by the leader will strengthen the
relationship between leader behavior and performance of subordinates.
The use of transformational leadership training as a moderating variable
was researched by Barling, Weber, and Kelloway (1996) and Dvir, Eden, Avolio,
and Shamir (2002). Barling, Weber, and Kelloway (1996) using a pretest-posttest
control-group design to assess the effect of transformational leadership training on
leadership behavior relations supervisor in the performance of the bank
employees. They found that transformational leadership training will produce a
significant effect on the perception of subordinates on transformational leadership,

influence the organizational commitment of subordinates, and affect its financial
performance. Thus, transformational leadership training will moderate the
relationship of transformational leadership and performance.
Dvir, Eden, Avolio, and Shamir (2002) conducted a longitudinal and
randomized experiment on the effect of transformational leadership training on
the development and performance in the context of military leaders and followers.
They found that transformational leadership training given to the group leader, has
a direct positive impact on the development of subordinates. In addition, there is
also an indirect positive impact on the performance of subordinates, in the sense
that a subordinate who led a group leader in the training of transformational
leadership has a better performance than the subordinate group leader who had no
training transformational leadership.
Keller (1992) examined the relationship of transformational leadership
with the project group's performance in the three research and development
organization. By using a professional employee respondents on three research and
development organization, they found that transformational leadership can predict
the project's quality and high performance, as measured by budget / schedule.
They also found that the type of research and development will moderate the
relationship of transformational leadership and performance, as well as more
transformational behaviors predict the performance of research and development
rather than transactional behavior.
Wofford, Whittington, and Goodwin (2001) examined the subordinates’
situational motive as potential moderators of the effectiveness of transformational
leadership. They found that the need for autonomy and growth need strength
moderate the relationship between transformational leadership and performance.
These studies show that there has been many researches on moderating
variables in the relationship between leader behavior and performance. Many
researchers with a variety of moderating variables managed to find support on the
variables that moderate the relationship of leader behavior and performance. Thus,
the strength of the direct relationship between leader behavior and performance is
also influenced by other variables.
Personality dimensions as Moderating Variables Between Leader Behavior

and Performance
Personality is a pattern of behavior, thoughts, and emotions that are unique
and relatively stable of a person (Greenberg, 2003). It causes personality can
explain why a person do certain things (Hogan, 2000). Many researchers define
personality into five-factor model of personality or five factor models of
personality (Digman, 1990; Barrick & Mount, 1991; McCrae & John, 1992). Five-
factor model of personality says there are five personality factors include
openness to new experience, conscientiousness, extraversion, agreeableness, and
emotional stability.
Five-factor model of personality is widely selected because it is the most
comprehensive model of personality, so it is widely used in research on
personality (Barrick & Mount, 1991). This study adopts the five-factor model of
personality, but it does not take five personality factors as a whole. The study only

choose conscientiousness and emotional stability as the moderating influence on
the performance of transactional leadership.
Conscientiousness is often interpreted as personal competence,
compliance, self-discipline, and approval. Characteristics of people with a high
level of conscientiousness are: always have a desire to improve the way work,
organized in everything, has high urge for achievement, always complete tasks in
a structured and always plan everything. In addition, other researchers said that,
people with conscientiousness usually has a clear goal, have a strong
determination, timely, well-planned, able to work effectively, able to motivate
yourself, and reliable (Barrick & Mount, 1991; Moberg, 1999).
Emotional stability is characterized by people who are not easy to worry,
not easily scared, rarely feel inferior, resilient, not easily stressed, easygoing, and
remain calm in the face of everything (Barrick & Mount, 1991; Moberg, 1999).
The Influence of Transactional Leadership to Performance

Transactional leadership is an attempt manager affects employee to
manage their needs and interests (Bass, 1985). This is based on the argument that,
every employee has a need and desire that he wants to fulfill. A transactional
manager tries to meet the needs of employees so that employees work the
employer expectations.
Transactional leadership influence on employee performance based on the
assumption that the behavior that got reinforcement will be repeated and behavior
that is ignored will be lost (Skinner, 1953 as cited in Greenberg, 2003). In the
context of transactional leadership, getting a superior reward the good
performance of its employees, the employees will work with the better. On the
other hand, if the well perform employee is not rewarded, employees will not
work properly anymore. Therefore, what happens in the transactional leadership is
a reciprocal relationship between the employer and the employee, who then
mutual relations will determine the behavior of employees (Bass, 1985; Pillai et
al., 1999). Thus formulated the hypothesis:
H1a: Transactional leadership positive effect to employee in-role performance

H1b: Transactional leadership positive effect to employee extra-role performance
Conscientiousness and Emotional Stability as Moderating Variables in the

Relationship of Transactional Leadership and Performance
Employees can perceive leaders differently depending on the
characteristics of the leader. In other words, the behavior of the same leaders are
often percepted differently by different employees. Employees with high levels of
conscientiousness would receive the leaders’s instruction better than employees
with low levels of conscientiousness. This is due to the employees with a high
level of conscientiousness tend to perform better. Therefore, the transactional
behavior of the leader will have bigger impact on the performance of employees
with a high level of conscientiousness. Thus the hypothesis is formulated as
follows:

H2a: The effect of transformational leadership to in-role performance will be
stronger on employees with a high level of conscientiousness than the employees
with lower levels of conscientiousness.
H2b: The effect of transformational leadership to extra-role performance will be
stronger on employees with a high level of conscientiousness than the employees
with lower levels of conscientiousness.
On the other hand, emotional stability describes different things.

Employees with high emotional stability are less likely to be afraid, not anxious,
and not easily worried. This kind of employees will face their challenges wisely.
Therefore, they would be able to better respond leader’s transactional leadership.
Transactional leader behaviors are frequently seen as a threat by employees with
low levels of emotional stability, so that the leaders transactional behavior will
affect less well on performance. Thus the hypothesis is formulated as follows:
H2C: Effects of transformational leadership to in-role performance will be
stronger on employees with high levels of emotional stability rather than on
employees with low levels of emotional stability.
H2D: Effects of transformational leadership to extra-role performance will be
stronger on employees with high levels of emotional stability rather than on
employees with low levels of emotional stability.
Methods
Sample and Procedures
Respondents are administrative staff on some major manufacturing
companies in Yogyakarta, Semarang and Solo. Sample selection is done by
specifying specific criteria (purposive sampling) that the administrative staff (non-
production) with tenure of one year.
To increase the level of return the questionnaire, researchers gave
souvenirs for every questionnaire returned and filled full. Anonymity is done to
maintain the objectivity of the respondents because there are parts of the
questionnaire which asks respondents to give an opinion about the behavior of the
leadership of their immediate supervisor.
705 questionnaires circulated to employees of nine companies that are
willing to be surveyed and 554 questionnaires returned a questionnaire, in order to
obtain the level of return (response rate) amounted to 78.6%. Researchers
conducted a check on all data that has been inputted into the computer of 554
questionnaires were returned.
Table 1
Respondents Demographis Characteristics
Frequency %
Sex Male 296 58.7
Female 208 41.3
Age until 25 66 13.1

26 – 30 131 26
31 – 35 106 21.2

36 – 40 88 17.5
41 – 45 71 14.1
46 – 50 29 5.8
>50 12 2.4
Marriage Status Married 371 73.6

Not Married 133 26.4
Education High School 251 49.8

Diploma 1 32 6.3
Diploma 3 73 14.5
Bachelor Degree 147 29.2
Master Degree 1 0.2
Work Tenure Until 5 years 157 31.2

6 – 10 years 135 26.8
11 – 15 years 108 21.4
16 – 20 years 54 10.7
21 – 25 years 34 6.7
26 – 30 years 14 2.8
More than 30 years 2 0.4
Measures
Transactional leadership is an attempt manager affects employees with
managing their self interest (Bass, 1985). Transactional leadership behavior was
measured with 12 items of the statement of multifactor Leadership Questionnaire
(MLQ) 5X version developed by Bass (1985) was used to measure the
transactional leadership. Examples statement items to measure transactional
leadership is "my manager confirms remuneration that would be obtained if
someone reached performance goals".
Conscientiousness is an element of personality associated with the person's
consciousness to work properly covering their personal competence, compliance,
and self-discipline. An employee with a high degree of conscientiousness, usually
have a high awareness to work properly, and do things to support its performance.
12 items on the statement form NEO FFI (NEO Five Factor Inventory) developed
by McCrae (1992) was used to measure conscientiousness personality. Examples
statement items for this variable is "I'm very well organize themselves so as to
complete the work on time".
Emotional stability is a personality characteristic that is characterized by
people who are not easy to worry, not easily scared, rarely feel inferior, resilient,
not easily stressed, easygoing, and remain calm in the face of everything. 12 items
on the statement form NEO FFI (NEO Five Factor Inventory) developed by
McCrae (1992) was used to measure the emotional stability personality. Examples
statement items for this variable is "I often feel lower than other people".
In-role performance is a measure of performance that is tied to how well
an employee perform tasks according to her job description. This variable was
measured by items statement developed by Williams and Anderson (1991).

Sample items from the statements for this variable (item 7 statement there) is "I
accomplish the tasks assigned to me well".
Extra-role performance of a particular behavior in a work that is not part of
the job description, is not related to the payroll system, but it is believed to
improve the performance of their functions become more effective organizations.
Items for measuring extra-role performance were developed from MacKenzie et
al. (1999). Examples statement items for this variable (from 8 item that statement
there) is "I am willing to take the time to help colleagues who have difficulty in
working".
Result
After conducting factor analysis for testing data quality, revealing that
most of questionanaires are valid, then reliability analysis was conducted.
Descriptive data about all the variables used in this study can be seen in Table 2.
Tabel 2
Descriptive Statistics
Variabel Cronbach Std.

Alpha Mean Deviation TS PC PES KIR KER
Transactional leadership .705 2.9772 .87116 1 .101* .045 .124** .162**
Conscientiousness .776 4.0246 .46570 .101* 1 .144** .497** .359**
Emotional Stability .739 3.2747 .61992 .045 .144** 1 .218** .049
In-role Performance 784 4.2806 .61494 .124** .497** .218** 1 .374**
Extra-role Performance .828 3.5641 .72140 .162** .359** .049 .374** 1
* or ** showing significant correlation
The entire value of Cronbach Alpha is above 0.6 indicates that the entire
instrument used to measure all the variables included instrument with good
reliability. Thus, the entire instrument meets the reliability criteria. The analysis
then be continued to the hypotheses testing. Table 3 below summarizes the
hypotheses testing.
Table 3
Direct and Moderating Effect of Transactional Leadership to Performance
Dependent Independent
Sample Beta t value sig
Variable Variable
In-Role Transactional
All Respondents 0.087 2.797 0.005
Performance Leadership
Extra-Role Transactional
All Respondents 0.134 3.678 0.001
Low Conscientiousness 0.06 1.156 0.249
High Conscientiousness 0.073 2.128 0.034
Low Conscientiousness 0.108 2.01 0.045
High Conscientiousness 0.121 2.513 0.013

Low Emotional Stability 0.087 1.756 0.081
High Emotional Stability 0.083 2.095 0.035
Low Emotional Stability 0.173 3.267 0 001
High Emotional Stability 0.105 2.101 0 037
The test results presented in table 3 showed that transactional leadership

has positive direct effect to employee in-role performance (β = 0,087, p < 0,01).
Thus hypothesis 1a stating that transactional leadership has positive effect on in-
role performance is supported. The test results also showed that transactional
leadership has positive direct effect to employee extra-role performance (β =
0,134, p < 0,01). Thus the hypothesis 1b stating that transactional leadership has
positive effect to extra-role performance is supported.
Testing the influence of transactional leadership to in-role performance
with conscientiousness as a moderating variable was analyzed with sub group
analysis. Data is divided by 2 based the score of conscientiousness. The division is
done with the mean split and descriptive statistics obtained from the average value
for the variable conscientiousness of 4.00. Table 3 showing a regression with low
conscientiousness score (equal to or smaller than 4,00). In this table it appears that
transactional leadership has no effect on performance (β = 0,06, p > 0,01). Table 3
also showing a regression with high conscientiousness score (greater than 4,00).
In this table it appears transactional leadership has positive influence to
performance (β = 0,037, p < 0,05). Thus it appears that the level of
conscientiousness moderates the influence of transactional leadership to in-role
performance. Transactional leadership influence on in-role performance is
stronger for the high level of conscientiousness employees. Thus, Hypothesis 2a
supported.
Testing the influence of transactional leadership to the extra-role
performance with conscientiousness as a moderating variable was analyzed with
sub group analysis. For this data is divided by 2 based the score of
conscientiousness. The division is done with the mean split and descriptive
statistics obtained from the average value for the variable conscientiousness of
4.00. In this table it appears that transactional leadership has positive influence to
employee extra-role performance (β = 0,108, p < 0,05) for employee with low
conscientiousness. We can also see that for employee with high
conscientiousness, there is also a positive influence of transactional leadership to
employee extra-role performance (β = 0,121, p < 0,05). Though equally influential,
but the value of beta is different, so it appears that the level of conscientiousness
moderates the effect of transactional leadership in extra-role performance. Results
also showed that the effect of transactional leadership in extra-role performance
will be much stronger as a high level of conscientiousness employees. Thus, the
hypothesis 2b supported .
Testing the influence of transactional leadership to in-role performance
with emotional stability as a moderating variable was analyzed with sub group

analysis. For this analysis, data is divided by 2 based the score of emotional
stability. The division is done with the mean split and descriptive statistics
obtained from the average value for the variable emotional stability of 3.27. Table
3 showing a regression with low emotional stability score (equal to or smaller than
3,27). In this table it appears that transactional leadership has no effect on
performance (β = 0,087, p > 0,05). Table 3 showing a regression with high
conscientiousness score(greater than 3,27). In this table it appears transactional
leadership has positive influence to performance (β = 0,083, p < 0,05). Thus it
appears that the level of emotional stability moderating influence on performance
in transactional leadership-role. Transactional leadership influence on in-role
performance is stronger when the high level of emotional stability employees.
Thus, Hypothesis 2c supported.
Testing the influence of transactional leadership to the extra-role
performance with emotional stability as a moderating variable was analyzed with
sub group. For this data is divided by 2 based the score of emotional stability. The
division is done with the mean split and descriptive statistics obtained from the
average value for the variable emotional stability of 3.27.
Table 3 showing a regression on a low level of emotional stability (equal
to or smaller than the average existing). In this table it appears that transactional
leadership effect on extra-role performance(β = 0,173, p < 0,01). In Table 3 is a
regression on the level of emotional stability is high (β = 0,105) Though equally
influential, but the value of beta is different, so it appears that the level of
emotional stability moderating influence transactional leadership in extra-role
performance. But the influence of transactional leadership in extra-role
performance is stronger when a low level of emotional stability, so the hypothesis
is not supported 2d.
Discussion
This study which found a direct influence on the performance of
transactional leadership, so this study reinforce previous studies on the effect on
the performance of transactional leadership. Managers who behave transactional
will explain what to do in order to get the rewards and what should not be done so
that employees do not get sanctioned. This behavior addressed the employees and
the employees can achieve good performance.
High conscientiousness conditions of an employee will make employees
aware of their role and what to do. Therefore, employees with high
conscientiousness would respond to instructions from superiors with better and
perform better anyway. This study found that transactional leadership effects on
performance will be stronger on employees with a high level of conscientiousness.
This applies both to measure the performance of in-role and extra-role
performance measures.
High stability emotional conditions of employees will make employees
can respond more calmly superior instruction without feeling threatened. The
feeling of calm that would make employees can work better and achieve good
performance. Related to this, the study found that the effect of transactional

leadership in in-role performance will be stronger on employees with high levels
of emotional stability.
However, there is a quite unique finding. This study found that the effect
of transactional leadership in extra-role performance is higher when employees
low emotional stability. This could be due to employee perceptions of extra-role
performance. Extra-role performance is a performance that is not required for
employees and not in the job description, but doing so would make the
organization run better. Examples of extra-role performance is an employee who
wants to help his co-workers. Employees with high emotional stability, might
easily reject supervisor instructions to do so, so that the effect of transactional
leadership in extra-role performance is lower on employees with high emotional
stability.
Limitation and Suggestion for Future Research

There is one limitation to this research that not all of intruments developed
were valid. Future research should revise the questionnaire ans also explores more
moderating and mediating variables.
References
Antoni, J., Leung, K., Knowles, G.. (2002). Critical Success Factors of TQM
Implementation in Hongkong Industries. International Journal of Quality
and Reliability Management, Vol 19 (5): 551-566.
Avolio, B.J., Howell, J.M., & Sosik, J.J. (1999). A Funny Thing Happended on
The Way to The Bottom Line: Humor as Moderator of Leadership Style
Effects. Academy of Management Journal, 42(2): 219-227.
Avolio, B.J., Waldman, D.A., & Einstein, W.O. (1988). Transformational

Leadership in a Management Game Simulation. Group & Organization
Studies, 13(1): 59-80.
Barling, J., Weber, T., & Kelloway, E.K. (1996). Effects of Transformational
Leadership Training on Attitudinal and Financial Outcomes: A Field
Experiment. Journal of Applied Psychology, 81(6): 827-832.
Barrick, M.R., dan Mount, M.K.(1991). The Big Five Personality Dimensions and
Job Performance: A Meta-Analysis. Personnel Psychology, 44: 1-26.
Bass, B.M. (1985). Leadership and Performance Beyond Expectation. New York:
The Free Press.
Deluga, R.J. (1988). Relationship of Transformational and Transactional

Leadership with Employee Influencing Strategy. Group & Organization
Studies, 13(4): 456-467.

Digman, J.M. (1990). Personality Structure: Emergence of the Five-Factor Model.
Annual Review of Psychology, 41: 417-440.
Dvir, T., Eden, D., Avolio, B.J. & Shamir, B. (2002). Impact of Transformational
Leadership on Follower Development and Performance: A Field
Experiment. Academy of Management Journal, 45(4): 734-744.
Ehrhart, M.G., & Klein, K.J. (2001). Predicting Followers’ Preferences for
Charismatic Leadership: The Influence of Follower Values and
Personality. The Leadership Quarterly, 12:153-179.
Greenberg, J., Baron, R.A. (2003). Behavior in Organizations. New Jersey:

Prentice Hall.
Hater, J., & Bass, B.M. (1988). Superiors' Evaluations and Subordinates'
Perception of Transformational and Transactional Leadership. Journal of
Applied Psychology, 73(4): 695-702.
Hogan, R. (2000).What is Personality. Advantage Hiring Newslett,November 7.
Howard, P.J. dan Howard, J.M. (2004). The Big Five Quickstart: An Introduction
to the Five Factor Model of Personality for Human Resource
Professionals. Center for Applied Cognitive Studies (CentACS), Charlotte,
North Carolina.
Howell, J.M., & Avolio, B.J. (1993).. Transformational Leadership, Transactional

Leadership, Locus of Control, And Support for Innovation: Key Predictors
of Consolidated-Business-Unit Performance. Journal of Applied
Psychology, 78(6): 891-902.
Jung, D.I. dan Avolio, B.J. (2000). Opening the Black Box: An Experimental
Investigation of the Mediating Effect of Trust and Value Congruence on
Transformational and Transactional Leadership. Journal of Organization
Behavior, 21: 949-964.
Keller, R.T. (1992). Transformational Leadership and The Performance of

Research and Development Project Groups. Journal of Management,
18(3): 489-501.
Kirkpatrick, S.A., dan Locke, E.A. (1996). Direct and Indirect Effects of Three
Core Charismatic Leadership Components on Performance and Attitudes.
Journal of Applied Psychology, 81(1): 36-51.

MacKenzie, S.B., Podsakoff, P.M., dan Rich, G.A. (2001). Transformational and
Transactional Leadership and Sales Performance. Journal of the Academy
of Marketing Science, 29(2): 115-134.
MacKenzie, S.B., Podsakoff, P.M., dan Paine, J.B.. (1999). Do Citizenship

Behaviors Matter More for Managers Than for Salespeople. Journal of the
Academy of Marketing Science, 27(4): 390-410.
McCrae, R.R. dan John, O.P. (1992). An Introduction to the Five-Factor Model
and Its Applications. Journal of Personality: 175-215.
Moberg, D.J. (1999). The Big Five and Organizational Virtue. Business Ethics
Quarterly, 9(2): 245-272.
Peck, S.R. (1994). Exploring the Link Between Organizational Strategy and the
Employment Relationship: The Role of Human Resources Policy. Journal
of Management Studies, 31:715-735.
Pillai, R., Schriesheim, C.A., & Williams, E.S. (1999). Fairness Perception and
Trust as Mediators for Transformational and Transactional Leadership: A
Two-Sample Study. Journal of Management, 25(6): 897-933.
Politis, J.D. (2002). Transformational and Transactional leadership Enabling

(Disabling) Knowledge Acquisition of Self-managed Teams: The
Consequences for Performance. Leadership and Organization
Development Journal, 23(4): 186-197.
Tabachnick, B.G. dan Fidell, L.S. (1996). Using Multivariate Statistics. Harper
Collins College Publishers.
Werner, J.M. (2000). Implications of OCB and Contextual Performance for

Human Resource Management. Human Resource Management Review,
10(1): 3-24.
Williams, L.J. dan Anderson, S.E. (1991). Job Satisfaction and Organizational
Commitment as Predictors of Organizational Citizenship and In-Role
Behaviors. Journal of Management, 17(3):601-617.
Wofford, J.C., Whittington , J.L., & Goodwin, V.L. (2001). Follower Motive
Patterns as Situational Moderators for Transformational Leadership
Effectiveness. Journal of Managerial Issue, 13(2): 196-211.

Does Dividend Policy and Profitability Being an Intervening
Variable as a Form Monitoring Block Holder to Performance
Manager
(Study on Corporate Sector Property, Real Estate, and Building
Construction yang Listing on BEI 2012 – 2013)
Yuli Soesetio
Fakultas Ekonomi Universitas Negeri Malang

e-mail: yulisoesetio@yahoo.com
Abstract: This research tries to explain how the sequence of relationship variables that
the main concern of investors (block holder) in an effort to monitor the managers
manage the company to achieve the expected performance by the owner. First of all this
research assumed that the institutional shareholders have a significant influence and
common purpose. In addition, managers are assumed to also have different interests
and effective monitoring is required from shareholders. This study used a sample of 21
companies in the property sector, real estate and building construction listing in BEI
period 2012-2013 and always distribute cash dividends. To explain the direct or indirect
relationship between the three exogenous and endogenous variables 1 with the very
limited data are the most appropriate analytical tool used is Partial Least Square (PLS).
The results were very surprising that only dividend policy course that has an influence
on the value of firms even though the goodness of fit models on the value of the
company is worth 74.4%.
Keywords: Institutional Ownership, Corporate Value, Dividend Policy

Since the end of the 2008 global crisis, the Indonesian economy showed an increase until the
end of 2014 which is marked by the 15.9% increase in JCI. One sector that is experiencing rapid
growth is the property and construction sector.
Special in 2012 and 2013 the property business in Indonesia experienced a positive trend that
is extraordinary characterized by the property sector stock price index began in early 2012 237.167
and 363.98 at the beginning of 2014 and throughout the beginning of 2013 the average - average
435.609. In addition, the sector recorded an average profit increase of up to 57.5%, the rate of other
industries such as the chemical exceeding 33.9% and the trade, services and investment of 23.54%.
That achievement was driven by a rise in property prices on average 11.5% per year (data 2013) and
making Indonesia the world ranked seventh after Dubai, China, Taiwan, Estonia, Turkey and Brazil.
Trend is supported by several factors such as government policies set forth in state spending
for the national construction sector increased to Rp 356 trillion in the previous year was only Rp
237 trillion, the BI rate was maintained at 5.75% over the quarter I 2012 to the third quarter of 2013
and an average of Indonesia's economic growth of 6% per year. (Cash, 2013) There is also an
increasing demand for housing the data, apartment and offices marked increase in home sales in
2011 and 2012 by 7.8% and by 2013 sales increased by 15% from the year 2012 which amounted to
381 400 units (Rumah .com).
The high demand especially houses and apartments are not all intended to be occupied, but
more to invest, it is based on the fact that the growth in the population of Indonesia is getting higher
and especially their efforts to establish the selling price has been rising from year to year by the
developer as well as supported policy promotion very intensively in various media.
The company's fundamentals, macroeconomic and business conditions that pushed the stock
investors in the stock market to trade shares intents in the property sector, real estate and
construction. The intensity of the sale and purchase of shares contributed to the increase in the
company's stock price and index stock price means the value of the company also increased so as to
maximize shareholder wealth over the long term and short term if the issuer is able to maintain and
even improve the performance of the company. (Brealy, Myers & Marcus, 2007; Htay, 2012; Jesen
& Meckling, 1976). The value of the company itself indicates the magnitude of the price paid by the
investor is willing to consider the risks and the performance of the company (profit) as well as the
value of the company that it faces today and prospects for the future if an investor wants to buy
shares of the company. For companies that have gone public, the value of this company will be
reflected in the market price of its shares. The share price is a reflection of all the financial
decisions of companies thereby increasing the company's value is equal to maximizing stock market
prices with the objective of maximizing shareholder wealth.
Maximizing the value of the company and the level of profitability of the company that
became the company's goals can be achieved through the implementation of the functions of the
board of management in the implementation of business management functions are accurate and
correct, as well as the function of the commissioners to exercise control over the performance of
managers (Fama & French, 1978; Demsetz, 1983; Damodaran, 2001; Htay, 2012).
In carrying out the company's financial management functions namely investment decisions,
financing decisions and dividend policy, management had a mandate from shareholders operate
correctly with their daily business expectations in managing the company in line with shareholder

interests. Commissioners get a mandate from the shareholders is an important monitoring among
others, hiring, firing, evaluation and compensation of the management board in translating policy
and long-term corporate strategic objectives. It is accompanied by hope, able to minimize the
practice of moral hazard and adverse selection by the board of management when managing the
company. The combination of the various activities above will be able to increase the value of the
company.
Efforts to increase the company's value by a combination of the above activities properly and
proportionately, but the fact remains there is a conflict of interest among the major components of
the company, it is because there is a separation of the owner of the company (principal) entrusts the
management of the company to the manager (agent) in accordance with the interests of the
principal, be delegating some decision-making authority to the agent. (Jensen & Meckling, 1976;
Htay 2012).
Manager as the recipient of the mandate of the principal should continue to base policy
making company day to day based on the interests of shareholders, but in fact they are not able to
release his personal interest as a human being as well as a manager in the form of spending to
satisfy personal interests but financed company that can harm the interests of shareholders (Jensen
& Meckling 1976; Shleifer & Vishny, 1986; Ugurlu, 2000). Such behavior leads to increased
asymmetry of information and agency costs between shareholders and managers that will have the
effect that ultimately lowers the value of the company.
One of the efforts to resolve the conflict this agency is implementing Good Corporate
Governance (GCG) with the monitoring mechanism by shareholders mechanisms such monitoring
is able to reduce agency conflict is to increase the company's shares by management (managerial
ownership) in order for managers to share the risk of the company the policies they decide. Another
effort, by encouraging the large number of ownership and ownership by a particular institution or
organization that acts as an effective watchdog on performance management.
Distribution of shares between shareholders from outside that institutional investors and
shareholder dispersion can also reduce agency costs because ownership represents a source of
power that can support or otherwise of the presence of the management, the concentration or
distribution of power becomes a matter that is relevant in addressing the agency conflict (Sugiarto
2011).
Institutional investors is regarded as a sophisticated investor is characterized as an institution
that has a background of experience and research capabilities of academic professionals, tested and
reliable than the individual investors that are considered able to use widely available and optimal
financial information and non-financial in order to prevent the practices that lead to practice moral
hazard and adverse selection by the manager so hopefully always be able to press a manager to
continuously achieve short-term goals such as profit and the company's value in the long term.
(Jianbalvo, Rajgopal, & Venkatachalam, 2002; Nuraina, 2012). Institutional investors with a stake
that is majority (blockholder) has extensive information and many that are active in monitoring
activities. Keberdaaan their status as the controlling company were entitled to the election of the
board of directors or the management and board of directors as well as shareholders.
According to Wei., Xin, & Zhang, S (2005) states that institutional investors have more
interests to influence and control the management to fit the interests and policies of the principal to

maximize shareholder wealth and profit increases, other than that they have a better mechanism ,
scalable, and structured in supervising manager. This is due to the amount of funds invested by
institutional investors in the company that makes a very strong reason for them to carry out strict
controls over any form of behavior management to manage the company.
Thus, the expected effective monitoring process is able to reduce and even prevent
opportunistic actions that managers are detrimental to shareholders by making waste of corporate
assets. The effort is expected that any decision taken by managers to further improve the company's
performance in the form of short-term and long-term increase in profitability is increasing the
company's value and shareholder wealth. The existence of ownership institiusional the increasingly
positive effect on the profitability and value of the company as the result of research conducted
Clay (2002), Jianbalvo, Rajgopal, & Venkatachalam,(2002). More specific research conducted by
Bjuggren et al (2007) and Boone & Gunasekarage (2011) found that financial institutions positively
affect the company's financial performance. Thereby indicating that institutional kepememilikan
moreover banking institutions become a reliable mechanism so as to motivate managers to act as
the interests of shareholders. In another study resulted in the finding that the presence of the
institution as a shareholder lowers the value of the company as research dilkukan by Jennings
(2002) and Wei et al (2005) in his statement mentioned reasons inequality results with the theory of
agency because they are not in the position of the majority, or in other words the ownership
structure of the sample of companies is spread out so they are less able to perform the functions of
monitoring and impact the negative response of investors in the stock market and the decline in
trading volume and share price.
However, different results show that institutional ownership has no significant effect on the
value of the company as, as was done by Demsetz & Vilalonga (2001), Wahyudi & Pawestri
(2006).
Efforts implementation of Good Corporate Governance (GCG) optimally can be done other
than through a control mechanism in the form of monitoring but also through a control mechanism
in the form of an increase in cash dividend payments are often referred to as bonding. The effort is
in addition to increasing debt is also an increase in the dividend as a step reduces free cash flow
(free cash flow) as well as to reduce agency costs in the company because the company encourages
the possibility of obtaining funds from outside (instead of internal funds) so that companies are
increasingly being monitored by a new investor. (Rozeff, 1982).
In addition, the increase in cash dividend is expected to reduce moral hazard and managers
to ensuring the provision of company facilities for personal purposes as well as to reduce the
amount of adverse selection choosing investments unprofitable companies. Payment of cash
dividends that are not based on the ability to generate cash from core business activities the
company will further encourage managers to be monitored by external parties (creditors) as well as
providing a potential advantage for the principal in an effort monitoring managers manage
companies (Easterbrook, 1984 under Laporta et al, 2000)
Weston, Copeland & Shastri (2005) have identified factors - factors influencing the
company's dividend policy, among others, how the profit, earnings stability effort, the effort to
maintain ownership and control of the position of shareholders.

The company's ability to generate profits and stability level of profits including management
confidence in achieving earnings next year despite management practice of smoothing earnings or
dividend greatly determine how much dividend can be distributed to shareholders.
Sources of funding for the payment of cash dividends can come from internal and or external
companies, based on the pecking order theory that financing through the issuance of new shares as a
last meningat capable of influencing the control of the company, so does the choice fell by issuing
debt then able to assist the monitoring process while reducing costs agencies but on the other hand,
if excessive debt position resulting in increased the risk of the company.
The composition and the presence of shareholders, if the number of institutional
shareholders is not much and diversities shareholders are very heterogeneous, the cash dividend be
an interesting thing, nor vice versa, if the institutional shareholders polynomial will likely ratio of
cash dividends will be lower considering will improve group taxation (tax bracket). (Gumanti,
2013)
Cash dividend payment policy can be regarded as an effort to reduce asymmetric
information between parties within the company (company management) with external parties
(investors or shareholders). Dividends contains information about the cash flow now and in the
future. The manager seeks to imply personal information to the market about its current
performance and condition of the prospect of future performance of the company. The
announcement of (division) dividend increase will be considered as good news and the market price
of the stock will appreciate. Instead, the announcement (do not share) dividend reduction implies
information (bad) unfavorable to the company's prospects in the future and the company's stock
price will tend to fall (fall). Thus, only companies that have good prospects and quality (rated low
or undervalued) to use the dividends to convey information about their prospects ahead of poor
quality while companies are not able to imitate it. (Bhattacharya 1979; Miller & Rock, 1985) The
results of other studies in the context of Indonesia provide inconsistent results among others Wijaya
& Wibawa (2010) contrary to the findings made by Sukirni (2012) which states that the dividend
policy does not affect the the value of the company.
Based on the explanation of the theory and the foregoing description as well as the results of
research that are not inconsistencies several years of observation, this research, the researchers seek
to reexamine the influence of various institutional ownership variable as well as block holder,
profitabilits, dividend policy and development in the form of indirect effects as well as directly
between these variables the value of the company.
METHOD
The sample used is a company that includes the property sector, real estate and building
construction listed in Indonesia Stock Exchange during 2012 - 2013 with a purposive sampling
method obtained by The 21 companies that meet the criteria: 1) The company must be listed in the
Indonesia Stock Exchange during the period of observation and respectively have positive earnings
2) the company must be consecutive cash dividend during the observation period; and 3) the
company must have institutional ownership.

Endogenous variables) used in this study are: the value of a company that is represented by
the average closing share price (closing price) 3 days after the dividend announcement.
Consideration researchers used three days after the announcement because it is shapshot investors
with a long-term sense that this time be a proportional response to investors on the company's
important policies and major concern various interested parties. (Tandelilin, 2010)
Whereas exogenous variables include institutional ownership is measured using indicators
of the percentage of ownership of shares held by the institution than the entire number of shares
outstanding (Bathala et al,1994; Moh'd et al,1995). While the moderator variable 1 (Z1) is
represented ROE profitability and moderator 2 (Z2) which is the policy on dividends, using proxy
Dividend Per Share (DPS).
The research model in this study can be observed in Figure 1 below.
Pictured above is a representation of the track diagram should be converted into a Structural
Model. Conversion path diagram in the
measurement model is intended to determine
the effect, directly or indirectly, exogenous
variables on endogenous variables through
mediating variables:
Equation 1: Z1 = β1X1 + ε
Equation 2: Z2 = β1X1 + β2Z1 + ε
Equation 3: Y = β1X1 + β2Z1 + β3Z2 + ε
Information:
X1 = Institutional ownership (block holder)
Z1 = Profitability
Z2 = Dividend Policy
Y = The value of the company
ε = Error
Empirical Evidence Structural Model

The use smartPLS program is the most appropriate tool to use with the limited amount of data
samples, while aiming to test the hypothesis predicted effects of partial and analyze complex
structural models, in addition to the use of Partial Least Square (PLS) also does not require the
classical assumption test. (Ghozali & Latan, 2012)
a. Hypothesis testing is used to test the influence of exogenous variables on endogenous

variables
The results of each test influence of exogenous variables on endogenous variables revealed
that the only variable dividend significant effect on the value of the company with the required error
rate is 5% and the variables significantly influence the profitability of the dividend with the required
error rate of 10%. Hypothesis testing is used to test the influence of exogenous variables on
endogenous variables. Criteria testing of 5% stated that when the value ≥ T T-statistics-table (1.96)
then declared their significant influence exogenous variables on endogenous variables. Criteria
testing 10% stated that when the value ≥ T T-statistics-table (1.6448) then declared their significant
influence to variable endoge exogenous variables, as table 1 below.
Table 1. Effect of the Exogenous Variables Endogenous Variables
b. Testing Indirect Effect

Indirect effect testing was conducted to test whether there is an indirect effect of the independent
variables on the dependent variable through the variable interveningnya. Testing criteria used are
similar to earlier tests.
Table 2. Effect Indirect Effect
Based on Table 2 above, it appears there is only one equation has a significant indirect
correlation value is influenced by the company's
profitability, but first through dividend policy.
The equation has met the testing criteria of 10% stated that when the value ≥ T T-statistics-table
(1.6448), then it is declared there is significant influence indirectly exogenous variables on
endogenous variables through the variable intervening.
c. Conversion Charts Path to the Structural Model

Conversion path diagram in the measurement model is intended to determine the effect,
directly or indirectly, exogenous variables on endogenous variables through mediating variables
Table 3. Structural Model

Based on the above table it can be seen that the measurement model is formed

Equation 1:Z1=0.081X1
From equation 1 can be informed that the coefficient direct effect on the profitability of institutional
ownership amounted to 0081 states that institutional ownership is positive but not significant effect
on profitability. This means greater institutional ownership then tend to improve profitability.
Although institutional ownership can increase profitability, but the increase was not significant.
Thus the first hypothesis stated are not met
Equation 2: Z 2 = 0.121X1 + 0.195Z1
From equation 2 can be informed that
1. The coefficient of institutional ownership has a direct effect on dividend policy for 0121 states
that institutional ownership and no significant positive effect on dividend policy. This means that
the higher the institutional ownership tends to increase the dividend policy. Although
institutional ownership may increase the dividend policy, but the increase was not significant.
Thus the second hypothesis stated are not met.
2. Coefficient indirect effect on dividend policy of institutional ownership through profitability for
0016 states that institutional ownership and no significant positive effect on dividend policy
through profitability. This means greater profitability caused by increased institutional ownership
and no significant positive effect on dividend policy. Although institutional ownership may
increase dividend policy through profitability, but the increase was not significant. Thus the third
hypothesis stated are not met.
3. The coefficient of profitability direct effect on dividend policy for 0195 states that the
profitability of positive and significant effect on dividend policy. This means that the higher
profitability then tend to improve the dividend policy. Thus the hypothesis 4 is declared fulfilled
Equation 3: Y = -0.049X1 + 0.002Z1 + 0.857Z2

From equation 3 can be informed that
1. Coefficient direct effect on firm value of institutional ownership amounted to -0049 states that
institutional ownership and no significant negative effect on firm value. This means greater
institutional ownership then it tends to reduce the value of the company. Although institutional
ownership can decrease the value of the company, but the decline is not so hypothetical 5
significant otherwise not met.
2. Coefficient direct effect on the profitability of the company's value for 0002 stated that
profitability and no significant positive effect on firm value. This means greater profitability it
tends to increase the value of the company. Although profitability may increase the value of the
company, but the increase was not significant. Thus the hypothesis 6 stated are not met.
3. Coefficient direct effect on the value of the company's dividend policy for 0857 states that the
dividend policy and a significant positive effect on firm value. This means that the greater the
dividend policy it tends to increase the value of the company. Thus the hypothesis 7 otherwise
met.
4. Coefficient indirect effect on the value of institutional ownership of the company through
profitability amounted to 0.0002 stated that institutional ownership and no significant positive
effect on the value of the company through profitability. This means that the higher

profitability caused by the higher institutional ownership, tends to increase the value of the
company. Although institutional ownership may increase the value of the company through
profitability, but the increase was not significant. Thus the hypothesis 8 otherwise not met.
5. Coefficient indirect effect of institutional ownership on firm value through dividend policy for
0103 states that institutional ownership and no significant positive effect on firm value through
dividend policy. This means that the higher the dividend policy caused by the higher
institutional ownership, tends to increase the value of the company. Although institutional
ownership can increase company value through dividend policy, but the increase was not
significant. Thus the hypothesis 9 stated are not met.

6. Coefficient indirect effect on the value of institutional ownership of the company through
profitability via dividend policy for 0014 states that institutional ownership and no significant
positive effect on the value of the company through profitability via dividend policy. This
means increasing the dividend policy due to increased profitability due to increased
institutional ownership, tends to increase the value of the company. Although institutional
ownership positively affects the value of the company through profitability via dividend policy,
but the increase was not significant. Thus the hypothesis 10 otherwise not met.
7. Coefficient indirect effect coefficient indirect effect on the profitability of the company's value
through dividend policy for 0167 stated that profitability and significant positive effect on firm
value through dividend policy. This means that the higher the dividend policy caused by the
higher profitability, tend to increase the value of the company. Although profitability may
enhance shareholder value through dividend policy, but the increase was significant. Thus the
hypothesis 11 otherwise met.
d. Goodness of Fit Model

Goodness of fit model is used to determine the ability of the endogenous variables to explain
the diversity of exogenous variables, or in other words to determine the contribution of exogenous
variables on endogenous variables. Goodness of fit model in PLS analysis performed using Q-
Square predictive relevance (Q2).
Tabel 4. Hasil Goodness of Fit
From the above table it can be seen that the R-square profitability variable worth 0.007 or
0.7%. This may indicate that the diversity of profitability variable able to be explained by the
variable institutional ownership amounted to 0.7%, or in other words the contribution of
profitability able to be explained by the variable institutional ownership amounted to 0.7%, while
the remaining 99.3% is contributed by other variables that are not addressed in this study.

Furthermore, R-square variable dividend policy worth 0.056 or 5.6%. This may indicate that
the diversity of the variable dividend policy is able to be explained by the institutional ownership
variable and profitability amounted to 5.6%, or in other words the contribution of variable dividend
policy is able to be explained by the variable institutional ownership amounted to 5.6%, while the
remaining 94.4% is contributed by other variables not discussed in this study.
Then the variable R-square value of the company is worth 0.727 or 72.7%. This may indicate
that the diversity of the variable value of the company is able to be explained by the variable
institutional ownership, dividend policy, and profitability amounted to 72.7%, or in other words the
contribution of the value of the company is able to be explained by the variable institutional
ownership, dividend policy, and profitability amounted to 72.7%, while the balance of 27.3% is the
contribution of other variables that are not addressed in this study.
Q-Square predictive relevance (Q2) is worth 0744 or 74.4%. This may indicate that the
diversity of the variable value of the company is able to be explained by the model as a whole
amounted to 74.4%, or in other words the contribution of institutional ownership, dividend policy,
and the profitability of the value of the company as a whole amounted to 74.4%, while the
remaining 25.6% is a variable contribution others are not addressed in this study
Analysis of the Empirical Evidence Structural Model
In this study provides empirical evidence that the existence of institutional ownership as well
block holder in an attempt to implement Good Corporate Governance (GCG), and minimize the
agency conflict in the company, they did not use a control mechanism with the bonding form of
increased dividend payments to suppress the manager applies the interests of shareholders. These
results contrast with previous studies-other research states that high institutional ownership pay a
higher cash dividend, which is a large-scale institutional investor tend to be attracted to invest in
stocks that give dividends. It is based on the assumption that they have a relative advantage to
individual investors include the imposition of tax rates that are cheaper, besides the use of external
funds to pay cash dividends will help offset the cost of the agency for debt holder helped conduct
the control mechanism through monitoring. (Allie et al, 1993; Allen et al, 2009 and Short et al 2002
in Gumanti, 2012)
In addition, this study provides evidence that the existence of institutional ownership at once
block holder not affect the level of profitability achieved by the manager as a form of performance
and value of companies. These findings also contradicts on several previous studies that
shareholders in the short term is very concerned about the gains of the company in the form of
profitability and corporate value in the long term and institutional ownership has a positive effect on
corporate value by proxy Q. (Shleifer & Vishny, 1986; Jiambalvo,
Rajgopal & Venkatachalam 2002).
The result above is a summary unsignificant direct relationship between exogenous variables
on endogenous variables, yet another outcome of this study is the inability to prove significant
indirect relationship between institutional ownership on dividend policy through profitability and
the value of the company through profitability and dividend policy.

Based on the above findings can be thought to be caused by (during the observational
studies) total percentage of institutional ownership in the company property, real estate, and
building construction did not change significantly alias stagnant. This means that in the short term
(in accordance with the observation period) did not reduce its holdings in some firms even observed
right issue. Thus it can be assumed that they have obtained and still want to enjoy the benefits
(economic and non-economic) or still try to reach the target value of certain specified companies.
In this case, the economic benefits can be also represented form of dividend policy. In this
study, the dividend policy set was also no significant difference between the alias stagnant years of
observation and is not influenced by the profitability. DPS stagnant existence is alleged to have set
well in advance before the year observational studies that apply a fixed dividend policy or do not
grow in perspective more moderate value for money or not doing a drastic change (in accordance
with the data transformation dividends). As argued by flattening theory (Litner 1956) that the
company has had a target dividend payout ratio (payout ratio) or long-term manager did attempt to
smooth their dividends in the long run. Other economic benefit can be the use of total assets owned
by the larger companies used as collateral for a debt assets or efforts to improve its capital structure.
While the non-economic advantages, among others, reputation and good corporate image in
the eyes of outside parties such as creditors, shareholders and other parties.
In this study only one indirect relationship that proved to have a significant influence and in
accordance with the findings - the previous findings and theories is profitability a significant effect
indirectly on the value of the company through dividend policy. It is quite plausible given the proxy
enterprise value used is the average share price during the three days after the announcement of the
dividend thus be seen that the response of investors is caused by information distribution of
dividends, in addition, investors are looking at information-sharing dividend has a charge of
information compared to the earnings information companies due to direct and influence an
increase in the welfare of shareholders or investors although in general the information was
communicated to the public at the same time. It also demonstrated the greatest influence coefficient
is the value of the company's dividend policy is characterized by the greatest effect on the total
value of the company for 0857.
This study supports the argument dividend signaling theory put forward by Bhattacharya
(1979) promoted the notion that the announcement of dividend payment has responded to the
information content in the form of stock price changes. Litner (1956) argues that firms tend to
increase the dividend when the manager believes that earnings are permanently increased resilience
at once implies long-term profits. Management can use dividends as a signal change to imply
kualits information to the market that the company's prospects. Only companies that have a good
financial prospect and good performance are able to do so, whereas companies that are considered
not good performance will not be able to do it this way because they are not voting for sufficient
funds to do so.
CONCLUSION AND SUGGESTION

Conclusion
Based on the results of research and discussion, it can be concluded as follows: (1)
Institutional Ownership no significant impact directly or indirectly on corporate value, profitability

and dividend policy in the company that includes sectors Property, Real Estate and Building
Construction during the observation period 2012 -2013. This means, at the same institutional
ownership block holder as well as increased cash dividend is not a control mechanism in the form
of monitoring and bonding; (2) Dividend policy into interviening variables that mediate the
relationship to the profitability of the company's value. This suggests that the dividend policy more
information have a charge informsi capable of affecting the value of the company rather than get
profit achieved for the year.
Suggestion
First, for further research, is expected to develop other independent variables are used e.g.
ownership structure of government and private institutions, the existence of managerial ownership,
debt policy, and liquidity. The use of variables - variables can be developed by starting with the
formation of variable constructs with variable range of indicators based on the theory and findings -
earlier findings.
Second, the use of control variables such as age companies, business life cycle, as well as
the size of the company and the investment opportunity set and so on. Or, use a dummy variable
between the companies making the distribution and does not distribute dividends.
Third, the use of Tobin's Q, PBV, MVE, CFROA as a proxy for the value of the company
where it all can be used as an indicator variable forming construct variable value of the company
Fourth, further Researcher, should add years of observation and the type of industry that is
used as a sample by easing the criteria in order to obtain more accurate results and robust.
Fifth, the use of different analytical tools for the same data to be able produce conclusions
are consistent and reliable.
REFERENCES
Alli, Kasim L., A. Qayyum Khan, & Gabriel G. Ramirez, 1993. Determinants of corporate dividend
policy: A factorial analysis, The Financial Review 28 523 - 547
Allen, F., Bernardo, E.A., & Welch, I. 2000. A Theory of Dividends Based on Tax Clienteles. The
Journal of Finance (LV) No 6 pp 2499-2536.
Bhatala.C.T.; K.P. Moon, & R.P. Rao, 1994, "Managerial Ownership, Debt Policy,
and the Impact of Institutional Holdings. An Agency Perspective,"Financial Management,
23, h. 38-50
Bhattacharya, S. 1979. Imperfect Information, dividend Policy, and “The Bird in The Hand”
Fallacy. Bell of Journal Economics (10): 259-270.
Bjuggren, P., Eklund, E.J., & Wilberg, D. Institutional Owners and Firm Performance: The Impact
of Ownership Categories on Investments. Working Paper, Jonkoping International
Bussinesss School (JIBS) and Centre of Excellence for Science and Inovation Studies
(CESIS), Royal Institute of Technology, Stockholm, Sweden, pp 1-26.
Boone, N., & Gunasekarage, S.C.A (2011). Block shareholder identity and Firm Performance in
New Zealand. Pacivic Accounting Review, Vol 23 Iss 2 pp. 185-210.
Brealy, Richard A., Myers, Steward C. & Marcus, Alan J. 2007. Fundamental of Corporate Finance.
New York: McGraw-Hill/Irwin

Clay, D.G. 2002. Institusional Ownership and Firm Value. Working Paper: University of Southern
California pp 1-48.
Damodaran, A., 2001. Corporate Finance: Theory and Practice, Second Edition, Whiley and Son,
New York
Demsetz, H., 1983. The Structure of Ownership and the Theory of the Firm. Journal of Law and
Economic, Vol. 26, No.2, pp. 375 - 390
_____ & Villalonga, B. 2001. Ownership Structure and Corporate Performance. Journal of
Corporate Finance, Vol 7, Iss 3, pp 209-233.
Fama, E. F. 1978. The Effect of a Firm’s Investment and Financing Decision on the Welfare of its
Security Holders. American Economic Review 68: 272-28.
Ghozali. 2013. Aplikasi Analisis Multivariate dengan Program IBM SPSS 21 Updtae PLS Regresi.
Semarang: Badan Penerbit UNDIP
Gumanti, T.A. 2013. Kebijakan Dividen: Teori, Empiris, dan Implikasi. Yogyakarta: UPP STIM
YKPN.
Htay, Shella Nu Nu., 2012. Better Boards Towards Higher Profitability. World Review of Business
Research Vol. 2. No.2: 149 - 163
Jennings, W.W. 2002. Further Evidence on Institutional Owneship and Corporate Value. Working
Paper, U.S. Air Force Academy, pp.1-27
Jensen, M., & W. Meckling. 1976. Theory of The Firm: Managerial Behavior, Agency Cost, and
Ownership Structure. Journal of Financial Economics 3: 305-360.
Jiambalvo, J., Rajgobap, S., & Venkatachalam, M., 2002. Institutional Ownership and the Extent to
which Stock Price Reflect Future Earnings, Contemporary Accounting Research, Vol. 19,
issue 1, p 117 – 145
La Porta, R., Lopez de Silanes, F., Shleifer, A., & Vishny, R.W. 2000. Agency Problems and
Dividend Policies around The World. The Journal of Finance, Vol 55 No 1, pp 1-33.
Moh’d, M. A., Perry, L. G., and Rimbey, J. M., 1998, “The Impact of Ownership
Structure on Corporate Debt Policy : A Time Series Cross
Sectional Analysis,” Financial Review, 85-99
Miller, Merton H., & Kevin Rock, 1985. Dividend policy, growth and the valuation of shares,
Journal of Business 34, 411 – 433.
Nuraina, E. 2012. Pemgaruh Kepemilikan Institusional dan Ukuran Perusahaan Terhadap Kebijakan
Hutang dan Nilai Perusahaan (Studi pada Perusahaan Manufaktur yang Terdaftar di BEI).
Jurnal Bisnis dan Ekonomi (JBE). Vol 19(2): 110-125.
Rozeff, M. 1982. Growth, Beta and Agency Cost as Determinant of Dividend Payout Ratio, Journal
of Financial Research 5, 249 - 259
Shleifer, A., & Vishny, R.W. 1986. Large Shareholder and Corporate Control. Journal of Political
Economy, Vol 94 (3): 461-488.
Sugiarto. 2009. Struktur Modal, Struktur Kepemilikan Perusahaan, Permasalahan Keagenan dan
Informasi Asimetri. Yogyakarta: Graha Ilmu.
Sukirni, D. 2012. Kepemilikan Manajerial, Kepemilikan Institusional, Kebijakan Dividen, dan
kebijakan hutang analisis terhadap nilai perusahaan. Accounting Analysis Journal 1(2)
Tandelilin, Eduardus, 2001.Analisis Investasi dan Manajemen Portofolio. Edisi 1. Yogyakarta:
BPFE
Ugurlu, M. 2000. Agency Costs and Corporate Control Devices in the Turkish Manufacturing
Industry. Journal of Economic Studies Vol 27 (6): 566-599.

Wahyudi, U., & Pawestri, H. P. (2006). Implikasi Struktur Kepemilikan terhadap Nilai Perusahaan:
Dengan Keputusan Keuangan sebagai Variabel Intervening. Simposium Nasional
Akuntansi, 9, 1-25.
Wahyuni, T., Ernawati, E., & Murhadi, W. R. (2013). Faktor-Faktor Yang Mempengaruhi Nilai
Perusahaan di Sektor Property, Real Estate & Building Construction yang Terdaftar di BEI
Periode 2008-2012. CALYPTRA: Jurnal Ilmiah Mahasiswa Universitas Surabaya, 2 (1).
Weston, Thomas E, Copeland, J. Fred., & Shastri, Kuldeep. 2005. Financial Theory and Corporate
Policy. New York: Person
Wijaya, L. R. P., & Wibawa, A. (2010). Pengaruh Keputusan Investasi, Keputusan Pendanaan, Dan
Kebijakan Dividen Terhadap Nilai Perusahaan. Jurnal Simposium Nasional Akuntansi XIII
Solo, (Online) 1-21, (http://asp.trunojoyo.ac.id), diakses 28 Agustus 2014.
Wei, Z., Xie, F., & Zhang, S. 2005. Ownership Structure and Firm Value in China Privatized Firms:
1991-2001. The Journal of Financial and Quantitive Analysis, Vol 40 No 1, pp 87-108.
______. 2011. Bisnis Properti di Indonesia Aman dari Badai
Krisis.(Online)(http://properti.kompas.com/read/2011/08/09/1123350/Bisnis.Properti.Indone
sia.Aman.dari.Badai.Krisis). diakses pada 29 agustus 2014.
______. 2013. Hati-hati Investor Saham Properti dan Konstruksi (Online),
(http://www.kompasiana.com/read/2014/02/05/1221161/Hati.Investor.Saham.Properti.dan.K
onstruksi), Diakses 5 September 2014.
______. 2013. Saham-saham Sektor Properti Pilihan Analis. (Online)
(http://www.kontan.co.id/read/2013/05/22/2348765/Saham-
saham.Sektor.Properti.Pilihan.Analis),Diakses 29 Oktober 2014

THE INFLUENCE OF CORPORATE GOVERNANCE ON THE VALUE RELEVANCE OF
ACCOUNTING INFORMATION IN INDONESIA STOCK EXCHANGE
Dwi Fitri Puspa

Universitas Bung Hatta
Email: dwifp2012@yahoo.co.id
Abstract
Purpose. This study aims to test whether the corporate governance, specifically internal
mechanisms of corporate governance, affects the value relevance of accounting information of
listed firms in the Indonesia Stock Exchange.
Methodology/approach. The sample covers manufacturing companies in the Indonesia Stock
Exchange in 2009. The number of sample that fulfill of criteria is 55 companies and the sample
period was 2009 to 2012. The Ohlson valuation model is used to measure the value relevance of
accounting information. The interaction variables are used to capture the influence that corporate
governance lends to the value relevance of these accounting measures of value. The regression
variation approach is used to test the hypotheses.
Findings. Three main hypotheses are tested. The results of this study showed that the accounting
information in terms of earnings and book value are value relevant. The evidence relating
corporate governance variables to value relevance of accounting information show the mixed
result. The book values of equity become relevant in the presence of corporate governance,
whereas the significance of relevance of earnings information does not change but slightly
increase.
Keywords: Value relevance, Corporate Governance, Accounting
Information, 1.Background of the study
From an academic view, value relevance is an extensively researched area in the
accounting literature (Cohen et al. , 2004). The value relevance literature is related to the
usefulness of financial statement information in equity valuation. Francis and Shipper (1999)
have documented four different approaches to study the value relevance of accounting
information. These are the fundamental analysis view of value relevance, the prediction view of
value relevance, the information view of value relevance and the measurement view of value
relevance (Nilsson, 2003). This study uses fourth approach to study the value relevance of
accounting information. The value relevance research has been tested in many issues. Some
studies on value relevance have questioned the current financial reporting model such as Amir
and Lev, 1996; Collins et al.,1997; Francis and Schiper, 1999; Lev and Zarowin,1999. Other
studies compare the value relevance of accounting information among accounting standard
regime such as Ely and Waymire,1999; Puspa F.D, 2005. Several studies investigated the role of
corporate governance to enhance the financial reporting quality. Agency theory support the
argument that better structured governance mechanisms should produce better quality financial
reporting in the marketplace. Previous study documented a higher value relevance of accounting
information for companies with strong governance mechanism. Although these studies
documented mixed results such as Vafeas, 2000; Habib and Azim, 2008; Dimitropoulos and
Asteriou 2010; Fiador V.O, 2013.
Economic and monetary crisis in 1998 that in Indonesia turned into a multidimensional
crisis has caused the necessity to implement Good Corporate governance. The inconsistency of

GCG implementation by a number of companies was one of the main factors that have caused
the crisis (NCOG, 2006). The National Committee on Corporate governance (NCCG) which was
established by Decree of the Coordinating Minister for Economy, Finance and Industry Number:
KEP/31/M.EKUIN/08/1999 issued the first Code of Good Corporate Governance in 1999. The
Code has been revised several times. The Code of 2006 is the revision of the previous Code of
2001.
In November 2004, the Government has established the National Committee for
Governance (NCG) by Decree of the Coordinating Minister for Economic Affairs Number:
KEP/49/M.EKON/11/2004 consisting of Public Sub-Committee and Corporate Sub-Committee.
The Decree on the establishment of NCG replaces the Decree of the Coordinating Minister for
Economy, Finance and Industry Number: 10/M.EKUIN/08/1999 and the Decree of the
Coordinating Minister for Economy, Finance and Industry Number: KEP/31/M.EKUIN/08/2000
regarding the establishment of NCCG. The government has transformed the National Committee
for Corporate Governance in 2004 to become National Committee on Governance, which
consists of Public Governance Sub-Committee and Corporate Governance Sub-Committee
(NCOG,2006).Collectively, various policy taken by the government to improve GCG
implementation may have had positive impact on the quality of financial reporting practice in
Indonesia.
The objective of this study is to examine how corporate governance, especially internal
mechanisms of corporate governance, influence on the value relevance of accounting
information of listed firms on the Indonesia Stock Exchange. Corporate governance defined as a
set of internal and external mechanisms that exist to align corporate management interests with
those of shareholders (Fama and Jensen, 1983a; Bushman et al. (2004) ). Reported accounting
information is one of the main pillars that support corporate governance to allocate efficiently
investable funds. Sound corporate governance may improve the quality of financial statement
information with making less distortion, reducing earnings management and increasing its
relevance.
The rest of the paper is structured as follows: the next section present literature review
and hypotheses development, the methodology employed, the results of the study and the
conclusion and policy implications.
2.Literature Review and
Hypotheses 2.1.Literatur Review
2.1.1.Value Relevance
The test of value relevance represent one approach to operationalize the relevance and
reliability criteria as specified in the conceptual framework. Value relevance is operationalization
of these criteria because an accounting amount will be value relevant, only if the amount reflects
information relevant to investors in valuing the firm and is measured realiably enough to be
reflected in share price (Barth et al., 2001). In this study value relevance defined as measurement
of the ability of financial statement information to capture or summarize information, regardless
of source, that affects share values (Francis and Schipper, 1999). This concept is consistent with
a measurement perspective on accounting (Nilsson, 2003). These studies use association models
that relate the accounting metric and market metric. Collins et al. (1999) documented evidence
that book value of equity considered both as a proxy for expected future normal earnings and
liquidation value.
Value-relevance research based on direct valuation and inputs-to-equity valuation theory
(Holthausen and Watts, 2001). Under the direct valuation theory approach accounting, earnings

and equity book-values are intended to be highly associated with equity market value. In the
alternative approach, accountants provide information on inputs to valuation models that
investors use in valuing firms’equity.
2.1.2. Efforts in enhancing the quality of financial reporting in Indonesia
The Indonesia Institute of Accountant and Government have developed accounting
standard and issued some accounting regulations to tighten the financial reporting requirement.
Based on the history, development of accounting standards in Indonesia can be divided into three
regimes namely the Indonesian Accounting regime (IAPs), Financial Accounting Standard
regime (FASs) and Financial Accounting Standard based on International Financial Reporting
Standards. According to Van Greuning, (2009), compliance with the International Financial
Reporting Standards ensures that the accounting amount are relevant, have predictive value,
constitute a faithful representation of material facts, are free from bias, and are verifiable (Van
Greuning, 2009).
2.1.3. Corporate Governance
Following Almeida et al.(2009) this study defined corporate governance as a set of
internal and external mechanisms to avoid shareholder expropriation by managers, to improve
earnings quality and to protect the return of capital borrowed by lenders (Shleifer and
Vishny (1997), Bushman and Smith (2001) and Bushman et al. (2004).
To improve corporate governance regimes within the capital market, the Indonesia
government has issued rules, including a regulation requiring public companies to have
independent commissioners and comprehensive rule on responsibilities for board of directors and
independent auditors with regard to financial reporting and penalties for non-compliance.
Independent commissioners defined as those had no connections to majority shareholders, other
directors or other companies within the group (Rosser, 1999; Indriantoro et al.,2000).
The management of a limited liability in Indonesia is adapting a two board system,
namely the Board of commissioners and the Board of Directors, each of which has a clear
authority and responsibility based on their respective functions as mandated by the articles of
association and lows and regulations (NCOG,2006).
2.2. Hypotheses Development
Value-relevant accounting information becomes a desirable attribute of financial
reporting quality (Habib and Azim (2008). A key role of financial statement is to summarize
business transactions and other events. It is assumed that financial statements enable investors in
determining firm value and because of that investors demand value-relevant information from
financial statement (Nilsson,2003). An extensive body of empirical literature documents that
accounting earnings and book value of equity are value-relevant such as Joo and Lang (1994);
Collins et al (1997); Francis and Schipper (1999); Lev and Zarowin (1999); Chen et al
(2001);Puspa ( 2005); Habib and Azim ( 2008). These studies used price model based on Ohlson
(1995) to measure the value relevance. A firm’s corporate governance mosaic composed of the
board of directors, Audit Committee members, and institutional ownership, is a mechanism for
providing high quality accounting information by constraining managerial-earnings management
activities Habib and Azim ( 2008).
In this study the interaction terms between accounting variables and corporate
governance variables are included in this price model to capture the influence that corporate
governance contributes to the value relevance of these accounting information. According to
Sloan (2001) corporate governance and financial accounting are inexorably linked (Sloan ,2001)
while Collins and DeAngelo (1993) affirm that accounting information plays a role in the

corporate governance process through which managerial inefficiency is discovery and punished.
Habib and Azim (2008) states a firm’s corporate governance mosaic composed of the board of
directors, Audit Committee members, and institutional ownership, is a mechanism for providing
high quality accounting information by constraining managerial-earnings management activities.
Accounting measure plays a role to reduce informational asymmetry between firm and market,
thus corporate governance may improve the informativeness of reported accounting information
with less distortion, prevailing conservatism, reducing earnings manipulation and increasing its
relevance Almeida et al.(2009). Value-relevant accounting information becomes a desirable
attribute of financial reporting quality (Habib and Azim (2008).
Previous research have provided evidence that the impact of corporate governance
variables on value relevance are not consistent across studies. Larger Board have a positive
impact on market valuation (Habib and Azim, 2008; Fiador V.O, 2013) while other studies found
larger boards are associated with smaller market valuations (Yermack,1996; Eisenberg et al.
1998). Previous studies documented that having more independent board have no impact on
share price and having no benefit (Vafeas, 2000; Adams and Mehran, 2008; Habib and Azim,
2008; Fiador V.O, 2013).
Habib and Azim (2008) reported that audit committee size have a positive and significant
impact on market valuation. Others studies showed evidence that Audit committee have no
influence on reporting quality (Xie et al., 2003; Abbott, 2004). Based on the argument above, the
following testable hypotheses are developed:
H1: Corporate governance variables and accounting information have influence on share price.
H2: Interaction between corporate governance variables and accounting earnings information
have influence on share price
H3: Interaction between corporate governance variables and book value of equity information
have influence on share price.
3.Research Methodology
3.1.Sample and Data Source
Sample covers all manufacture companies listed in Indonesia Stock exchange in 2009.
The number of companies that fulfill the criteria is 55 companies. The sample period is 2009 to
2012. The data was obtained from company annual report and Indonesian capital market
directory.
3.2. Corporate governance variables
3.2.1. The Composition of Independent commissioners
Independent commissioners are who are not originated from an affiliated party. Affiliated
means having business and family relations with the controlling shareholders, members of the
Board od Directors and other members of the Board of Commissioners, and with the company it
self (NCOG, 2006). Independent commissioner composition measured as the ratio of number of
independent commissioner members to board of commissioner size (BC).
3.2.2.Board of Director size
Board of director defined as a company organ shall function and be responsible
collegially for the management of the company (NCOG,2006). Board size is measured as the
actual number of board members.
3.2.3.Audit Committee size.
Audit Committee shall function to assist the Board of Commissioners to ensure that (i)
financial reports are presented appropriately in accordance with the generally accepted

accounting principles; (ii) internal control structure is adequate and effective, (iii) internal and
external audits are conducted in accordance with the applicable audit standards, and (iv) audit
findings are followed up by management (NCOG, 2006). Audit Committee size is the actual
number of AC members.
3.3.Valuaotion Model
The valuation model used in this study is price model. The pooled regressions analysis
are employed to test the influence of corporate governance on value relevance of accounting
measure. Price model based on Ohlson (1995) show how a firm’s market value is related to both
book values of equity and accounting earnings. Since these two components of accounting
information play different roles in security pricing, the use of Ohlson model will expands the
scope of value relevance research (Chen et al., 2001). Based on the price model developed by
Ohlson (1995), the value of a firm’s equity can be expressed as a function of its earnings and
book value. Therefore this study uses regression model that take the following form:
2 2
Pit= β0+β1EPSit+β2BVit+β3IOit+β4BCit+β5ACit+β6AC it+ β6BODit + β7 BOD it +μit……..(1)
2 2
Pit= β0+β1EPSit+β2BVit+β3IOit+β4BCit+β5ACit+β6AC it+ β6BODit + β7 BOD it + β8EPS*IO it +
2 2
β9EPS*BC it + β10EPS*AC it + β11EPS* AC it + β12EPS*BOD it + β13EPS* BOD it+ μit……..(2)
2 2
Pit= β0+β1EPSit+β2BVit+β3IOit+β4BCit+β5ACit+β6AC it+ β6BODit + β7 BOD it + β8BV*IO it +
2 2
β9BV*BC it + β10BV*AC it + β11BV* AC it + β12BV*BOD it + β13BV* BOD it+ μit……..(3)
Where
Pit = Market value per share of firm i at year t. EPS it = Reported fiscal year accounting earnings
per share. IOit = Percentage of Institutional ownership of firm i at year t. BC it= the percentage of
external on the commissioner board of firm i at year t. AC it= Committee Audit size of firm i at
2
year t. AC = Committee Audit size is squared to capture its posited non-linear behavior. BODit=
2
Board of Director size of firm i at year t. BOD = Director size is also squared to capture its
posited non-linear behavior.
The interaction terms are included to capture the influence that corporate governance
contributes to the value relevance of these accounting information. Price, EPS and net asset value
per share were logged for standardisation.
4.Results and Discussions
This section presents results and the discussion of finding. The sections consist of statistic
descriptive of variables under study and the regression results.
4.1. Descriptive Statistics
Tabel 1 reports the descriptive statistics for the variables used in this
study. Table 1: Descriptive Statistics of Variables
Variable Mean Standard Deviation Minimum Maximum
Price 7.39 2.01 3.91 13.71
EPS 4.9 1.98 0.49 10
BV 6.9 1.55 3.59 10.51
IO 0.71 0.18 0.3 1.41
BC 0.38 0.10 0.11 0.6
AC 3.05 0.40 1.00 4.00
2
AC 9.49 2.32 1.00 16.00
BOD 5.19 2.23 2.00 11.00
2
BOD 31.9 27.28 4.00 121.00

Tabel 1 shows that the mean for price, EPS and BV over the four-year
period from 2009-2012 are 7.39 ,4.9 and 6.9, respectively. The mean for
Institutional ownership, the independent commissioners composition, audit
committee size and board size are 0.71,0.38 3.05 and 5.19 respectively while
square of audit committee size and square of board size are 9.49 and 31.9
respectively.
4.2.
Regression
results
4.2.1.POOL
ED
REGRESIO
N1
.Tabel 2 summarizes the output of regression 1. Tabel 2 reveals that
coefficient both the earnings and book value of equity are positive and
significant at 0.01 level. The findings show that accounting variables are
perceived as value relevant by investor. This results are consistent with those
reported in Collins et al. (1997) ; Graham et al (2000); Chen et al. (2001);
Puspa (2005); and Habib and Azim (2008).
Tabel 2: Regression 1 output
2
Pit= β0+β1EPSit+β2BVit+β3IOit+β4BCit+β5ACit+β6AC it+ β6BODit + β7
2
BOD it +μit……..(1)
Variable Coefficient t-Statistic Probability

EPS 0.753 15.406 0.000
BV 0.211 3.361 0.000
IO 0.402 1.611 0.108
BC 1.513 3.627 0.000
AC 0.088 0.313 0.754
2
AC 0.027 0.469 0.639
BOD 0.289 2.883 0.004
2
BOD -0.021 -2.585 0.010
Regarding the corporate governance variables, reported results reveal
that the coefficients on independent commissioners composition and the
board size are positive and significant at 0.01 level meanwhile those on audit
committee and institutional ownership are not significant. These results are in
support of findings by Habib and Azim (2008); Fiador V.O (2013) who
reported that board size has impact on market valuation. This finding
supports the proposition as suggested by Dalton et al. (1999) that larger
boards produce diverse expertise and efficient decisions, thus leading to
higher performance and ultimately higher share. However, this evidence is
not consistent with those documented by Yermack,( 1996); Eisenberg et al. ,
(1998). They reported that larger boards are associated with smaller market
valuations.

Reported results show the composition of independent commissioners
have influence on market valuation. The Indonesia’s Code of Good
Corporate Governance encourages to have independent commissioners.
Board of commissioners as an organ of the company shall function and be
responsible collectively for overseeing and providing advice to the Board of
Director. Independent commissioners represent who are not originated from
an affiliated party (NCOG, 2006). The commissioners independent who is
entirely not affiliated with board of director is expected to ensure that control
mechanism runs effectively and offer the most protection to shareholders.
This result is not consistent with those reported by Habib and Azim (2008)
and Fiador V.O (2013). Habib and azim (2008) documented that independent
director and audit committee have no influence on market valuation.
Meanwhile, Fiador V.O (2013) provide evidence that the composition of the
board in listed company in Ghana have no impact on share price. Others
studies also reported that no benefits from having non-executive director
dominance on corporate boards (Adams and Mehran (2008 ) and Belkhir
(2006).
Audit Committee is insignificant as seen in Table 2. This result is not

consistent with previous study done by Habib and Azim (2008) that provide
evidence that structural dimensions of corporate governance including board
size, audit committee size and audit committee meeting have a positive and
significant impact on market valuation. Others studies documented no effect
of Audit committee on reporting quality (Xie et al., 2003; Abbott, 2004).
Institutional Ownership is insignificant as reported in Table 2.
4.2.2 POOLED REGRESION 2
Table 3: Regression 2 output
2 2
Pit= β0+β1EPSit+β2BVit+β3IOit+β4BCit+β5ACit+β6AC it+ β6BODit + β7 BOD
2
it + β8EPS*IO it + β9EPS*BC it + β10EPS*AC it + β11EPS* AC it +
2
β12EPS*BOD it + β13EPS* BOD it+ μit……..(2)
EPS 0.477 2.151 0.032
BV 0.264 4.155 0.000
IO 0.280 0.391 0.696
BC -0.715 -0.637 0.524
AC 2.727 3.026 0.002
2
AC -0.425 -1.943 0.053
BOD -0.813 -2.308 0.022
2
BOD 0.070 2.197 0.029
EPS*IO 0.024 0.177 0.859
EPS*BC 0.469 2.407 0.016
EPS*AC -0.434 -2.162 0.031
2
EPS* AC 0.072 1.844 0.066
EPS*BOD 0.239 3.501 0.000

2
EPS* BOD -0.019 -3.237 0.001
Table 3 summarizes regression result of second equation. Table 3 reports
coefficient estimates on EPS, book values and coefficient interaction of
corporate governance variables. Equation 2 as shown on Table 3 incorporated
the interaction term between accounting earnings variable and corporate
governance variable. The interaction terms are used to capture the influence
of corporate governance on the value relevance of these accounting
information. As shown on Table..interaction coefficient between earnings per
share and composition of commissioners show that earnings per share has
more value relevant in the presence of corporate governance variable namely
independent commissioner. Earnings per share become value relevant in the
presence of audit committee , albeit with a negative sign of coefficient. This
result implies that as the audit committee gets larger earnings per share loses
its value relevance. On the other hand, earnings per share relate positively to
share price when the audit committee variable is squared. The square o f the
board size was included to capture its posited nonlinear effect (Fiador V.O
(2013). Regarding the board size, regression results show that the value
relevance of Earnings per share is improved in the presence of larger board.
Table 3 reported interaction between Institutional ownership and EPS are
insignificant.
This finding is supported by Habib and Azim (2008) that documented
that interaction between structures and independent dimensions of corporate
governance and earnings have positive and significant impact on market
valuation. Structural dimensions of corporate governance consist of board
size, audit committee size and audit committee meeting while
independent dimension of corporate governance capture board and audit
committee independent. Fiador V.O (2013) found that interaction between
board size and earnings per share have negative and significant impact on
share price. Further more, Fiador V.O (2013) demonstrated that the
composition of the board is only marginally negatively related at 10 per cent
to share prices.
4.2.3.POOLED REGRESION 3
Table 4: Regression 3 Output
2 2
Pit= β0+β1EPSit+β2BVit+β3IOit+β4BCit+β5ACit+β6AC it+ β6BODit + β7 BOD
2
it + β8BV*IO it + β9BV*BC it + β10BV*AC it + β11BV* AC it + β12BV*BOD
2
it + β13BV* BOD it+ μit……..(3)

EPS 0.691 13.843 0.000
BV 0.111 0.915 0.361
IO -0.361 -0.335 0.737
BC -3.176 -1.752 0.081
AC 5.063 3.645 0.000
2
AC -0.806 -2.604 0.009

BOD -1.611 -2.839 0.005
2
BOD 0.135 2.726 0.006
BV*IO 0.096 0.627 0.531
BV*BC 0.691 2.843 0.004
BV*AC -0.633 -3.142 0.001
2
BV* AC 0.104 2.517 0.012
BV*BOD 0.279 3.505 0.000
BV* -0.022 -3.355 0.000
2
BOD
Table 4 reveals that variables of corporate governance namely
independent commissioners size, board size, audit committee size improve
the value relevance of book value equity. The coefficient estimates on
independent commissioners size, board size, audit committee size are
positive and significant but coefficient estimate on square of board size have
negative sign. Institutional Ownership does not help the value relevance of
book value of equity. Previous studies documented the positive effect of large
Audit Committee on financial reporting quality (Yang and Krishnan, 2005;
Lin et al., 2006).
5.Conclusion
From the findings of this study, it can be concluded that interaction
between corporate governance mechanism and accounting information may
improve the value relevance of accounting measure of value. Book value of
equity become value relevant in the presence of Board size, audit committee
size and independent commissioner. On the other hand earnings per share
have more value relevance in the presence of corporate governance variables.
However institutional ownership in three regression results have no impact
on value relevance of accounting measures of value.
References
Abbott, L. (2004).Audit committee characteristics and

restatements.Auditing: A Journal of Practice & Theory, Vol. 23
No. 1, pp. 69-88.
Adams, R. and Mehran, H. (2008).Corporate perfor mance, board structure
and their determinants in the banking industry.Staff Report No. 330,
Federal Reserve Bank of New York, New York, NY.
Amir, E., & Lev, B. (1996). Value-relevance of non financial information:
the wireless communications industry. Journal of Accounting and
Economics, 22(1), 3-30.
Barth, M.E., Beaver, W.H., & Landsman, W.R. (2001). The Relevance of the
value relevance literature for financial accounting standard setting:
another view. Journal of Accounting and Economics, 31 (1), 77-104.
Belkhir, M. (2006). Board structure, ownership structure, and firm per
formance: evidence from Banking. Working Paper 02, Laboratoire
d’Economie d’Orleáns, Orleáns.

Bushman, R.M. and Smith, A.J. (2001). Financial accounting information
and corporate Governance. Journal of Accounting and Economics. Vol.
32, pp. 237-333
Chen, J.P.C., X.Su., & Chen, S.(2001). Is accounting information value-
relevant in the emerging Chinese stock market? Journal of International
Accounting, Auditing & Taxation, 10(1), 1-22.
Collins, D.W., Maydew, E.L. and Weiss, I.S. (1997). Changes in the value-
relevance of earnings and book values over the past forty years.
Journal of Accounting and Economics , Vol. 24, pp. 39-67.
Dalton, D.R., Daily, C.M., Johnson, J.L. and Ellstrand, A.E. (1999). Number
of directors and financial performance: a meta-analysis. The Academy
of Management Journal, Vol. 42, pp. 674-86.
De Almeida, J.E.F., de Lima, G.A.S.F. and Lima, I.S. (2009). Corporate
governance and ADR effects on earnings quality in the Brazilian capital
markets, Corporate Ownership and Control, Vol. 7 No. 1.
Dimitropoulos, P.E. and Asteriou, D. (2010). The effect of board
composition on the informativeness and quality of annual earnings:
empirical evidence from Greece. Research in International Business and
Finance, Vol. 24 No. 2, pp. 190-205.
Eisenberg, T., Sundgren, S. and Wells, M.T. (1998). Larger board size and
decreasing firm value in small firms. Journal of Financial Economics ,
Vol. 48 No. 1, pp. 35-54.
Fama, E.F. and Jensen, M.C. (1983a). Separation of ownership and control.
Journal of Law & Economics, Vol. 26 No. 2, pp. 301-25.
Fiador V.O (2013). Corporate governance and value relevance of financial
information: evidence from the Ghana Stock Exchange. Corporate
governance journal Vol. 13 No.2, pp. 208-217 Francis, J., & Schipper, K.
(1999). Have financial statements lost their relevance? Journal of
Accounting Research, 37 (2), 319-351.
Graham, R.C., & King, R.D. ( 2000). Accounting practices and the market
valuation of accounting numbers: evidence from Indonesia, Korea,
Malaysia, the Philippines, Taiwan, and Thailand. The International
Journal of Accounting, 35(4), 445-470.
Habib, A. and Azim, I. (2008). Corporate governance and the value-
relevance of accounting information: evidence from Australia.
Accounting Research Journal, Vol. 21 No. 2, pp. 167-4.
Lev, B.,& Zarowin, P. (1999). The boundaries of financial reporting and how
to extend them. Journal of Accounting Research, 37 (2), 353-384.
Lin, J.W., Li, J.F. and Yang, J.S. (2006). The effect of audit committee
performance on earnings quality. Managerial Auditing Journal , Vol. 21
No. 9, pp. 921-33.
National Committee on Governance (2006). Indonesia’s Code of good
corporate governance. Nilsson, H. (2003). Essay on the value relevance of
financial statement information, Umea

School of Business and Economics. Umea University.
Ohlson, J. (1995). Earnings, book values and dividends in security
valuation. Contemporary Accounting Research, Vol. 11 No. 2, pp.
661-88.
Puspa,D.F.(2005). Value relevance of accounting information in Indonesia.
Thesis, Universiti Pura Malaysia
Rosser, A. (1999). The Political economy of accounting reform in developing
countries: The Case of Indonesia. Working Paper. Murdoch University.
Shleifer, A. and Vishny, R. (1997), “A survey of corporate governance”,
Journal of Finance , Vol. 52, pp. 737-83.
Sloan, R. (1996). Do stock prices fully reflect information in accruals and
cash flows about future earnings? The Accounting Review. Vol. 71, No.
3, p. 289-315.
Vafeas, N. (2000). Board structure and the informativeness of earnings.
Journal of Accounting and Public Policy, Vol. 19, pp. 139-60.
Van Greuning, H. (2009), International Financial Reporting Standards: A
Practical Guide, World Bank Publications, Washington, DC.
Yang, J. and Krishnan, J. (2005). Audit committees and quarterly earnings
management.International Journal of Auditing , Vol. 9, pp. 201-19.
Yermack, D. (1996). Higher market valuation of companies with a small
board of directors. Journal of Financial Economics, Vol. 40, pp. 185-211.
Xie, B., Davidson, W.N. III and DaDalt, P.J. (2003). Earnings
management and corporate governance: the roles of the board and the
audit committee. Journal of Corporate Finance , 95-314.

IMPLEMENTATION OF PROJECT MONITORING AND EVALUATION
TO IMPROVE PROJECT EFFECTIVENESS AND EFFICIENCY
Freddy Fransisko
Institut Teknologi Bandung, Indonesia
Abstract
One activity that support oil and gas production in CINTA Corp is project activity. One issue
that found in project activity is lack of project monitoring and evaluation that make schedule
delayed and over budget on project completion. Fishbone diagram is used to identified the
root cause of the weaknesses of project monitoring and evaluation activity in CINTA. 5WHY
method combine with fishbone and benchmarking to same industry ware performed to
understand the possibility to strengthening implementation of project monitoring and
evaluation at CINTA. Earned Value Analysis is used as technical analysis to know how the
effectiveness and efficiency of project performance at CINTA. The results of the research are
management commitment and availability of procedure implementation monitoring and
evaluation are suggested to improve the performance of project implementation in CINTA.
Keywords: Project Monitoring and Evaluation, Fishbone Diagram, 5WHY Method, Earned
Value Analisis (EVA).

Introduction
CINTA Corp is an Oil and Gas Company that known as pioneer of contractor which operated
at Indonesia offshore field. CINTA Corp location as shown at figure 1 was bordered by
Bangka and Belitung islands in the north, Sumatra Island in the west, Pertamina Hulu Energy
Offshore Northwest Java field in the east, and Java Island in the south. CINTA Corp divides
its working area into three business unit. They are north area, central area and south area with
total production around 39,000 barrel of crude oil per day.
In performing project, CINTA Corp facing bellow challanges:

1. PSC contract that will be over on 2018 makes no CAPEX allowed by the management.
2. High turnover of employee and many employee already on retirement period makes
knowledge and experience gap is still high for new employee. End of PSC contract not
allow CINTA Corp to hire new employee. This makes CINTA should maximized the
performance of current engineers to handle projects.
3. Low oil price in upcoming year and effciency in CINTA oil production process and
business process is also one challange need to be considered.
Figure 1. Operational Area of CINTA Corp
Since it is being usual that project is delayed and over budget, also realized that there is
lacking implementation of project monitoring and evaluation, CINTA Corp need to identify
what are the problem in implementation of project monitoring and evaluation. By doing this
CINTA can find out the solution to solve the root cause of low performance of project
monitoring and evaluation in execution phase. The result can be used to prepare what kind of
monitoring and evaluation can be used for ongoing project or for the next project so CINTA
can have better project performance. When CINTA perform a good project monitoring and
evaluation, it will keep improving project team knowledge and experience to perform project
with better project performance; in the end it will be a new competitive advantage to CINTA
Corp. The research have two research questions to be solved:
1. What are the root cause of project monitoring and evaluation being not well implemented
in CINTA Corp?

2. How CINTA Corp could improve project performance in term of schedule achievement
and budget achievement by implement project monitoring and evaluation?
Method
Meeting time and budget goals are only small part of successful project. Project success
should also consider: (i) Project efficiency is reflected how the project meet the schedule,
meet the budget; (ii) Impact to customer/stakeholder is reflected how the project meet the
requirements and specification, customer satisfactory; (iii) Impact to the project team is
reflected how the project affect the team satisfaction, team morale, skill development, team
member growth; (iv) Impact to Business is reflected how the project impact on profit and
service quality; and (v) Future preparation reflected how well the project helps CINTA Corp
to prepare its infrastructure for the future (A. Shenhar, 2007,p.27).
Table 1. Summary differences monitoring and evaluation
Monitoring Evaluation
Objective To track changes from baseline condition To validate what results were
to desire outcomes achieved and how and why they
were or were not achieved
Methodology Tracks and assesses performance through Evaluate achievement or outcomes
analysis and comparison of indicators by comparing indicators before and
over time. after the intervention
Characteristics Continuous and systematic by program or Time bond, periodic, in-depth
Project Manager and key partners
Why To observe, to check, To judge and to value,
To Record, To assess,
For day to day decision, For Major decision,
Provide information for evaluation Provide information for future
planning
When During implementation Before and after a major decision
Continuous make
Periodic
One weakness found in doing a project is lacking of monitoring and evaluation for actual
expenditure againts budgeting. There is only monitoring in schedule performance with little
or even no project evaluation. Earned Value Analysis (EVA) is a technique which provides
integrated schedule (time), progress and cost management information related to scope, and
quality. EVA also a tools and technique applied in project management used to forecast
potential outcomes based on possible variations of project or environmental variables and
their relationships with other variables. In the day-to-day activities of the project manager,
EVA provides “alarm” signals and facilitates decisions that keep the project on time and on
budget. The main objective of implementing EVA was to ensure that the project finished on
time and on budget, also educating the project team. Schedule progress indicator could be
seen in Schedule Variance (SV). If SV is greater than 10%, the project manager should began
to consider immediate corrective action. PMBOK methodology dictates that a project with
SV greater than 20% cannot be accomplished within the baseline constrains without major
action taken.
This research is done based on combination of quantitative and qualitative analysis. Research
framework is shown in figure 2.

General Topic
Problem Statement
Research Objective, Research Question and

Research Limitation
Internal and External Secondary Data

PMBOK, Cost and Schedule report for HYSY project -> analyse with EV
Check and Clarification
Primary Data Collection

Qualitative data: Interview, Benchmark
Quantitative data: Questioner
Check and Clarification Quantitative data

Qualitative data
Root Cause Analysis
Quantitative Data
Analysis
Qualitative Data
Analysis
Finding and Discussion
Conclusion and
Recommendation
Writing Report
Figure 2. Research Design Framework
Discussion
Root Cause Analysis

Fishbone diagram shown on figure 3, where four major categories are developed to determine
the root cause, they are: (i) People/Staff; (ii) System; (iii) Environment and (iv) Unforseen
Condition. A factor can be categorized as root cause when it either mentioned frequently
(more than once), strongly emphasized by respondents, or become root cause for more than
one category (frequently contributing to the other problems). It also shall be specific,
measurable, and controllable. Resume of root cause for project monitoring and project
evaluation is not well implemented in CINTA Corp is described as bellow:
a. No Standard of Procedure (SOP) for project monitoring and evaluation: currently in
CINTA no SOP or system to implement project monitoring and evaluation especially in
term of project progress schedule and project budget spending. Management commitment
which shown on regulation and standard procedure to practice project management
process including project monitoring and project evaluation will drive project team to do
monitoring and evaluation as per standard.

b. Limited personnel: the organization structure where each engineer not only performs
one project but also several projects, are very nuisance to implemented project monitoring
and project evaluation. With many responsibility need to do by each engineer, make the
engineer is not focus to implement project monitoring and evaluation. Whenever CINTA
perform a project, when the engineer have high experience in performing a project, the
project itself is perform better; they know what activity is more critical than the other
activities and everyone with their own style performing project monitoring. However, no
standard of performing a project and when the engineer is changing the successor will
need more time to learn about the project status; not good documentation also different
type of project report will make it more difficult to understand the project status and the
project problem.
In big project which use EPCI service, it was difficult to perform project monitoring and
project evaluation when there is time limitation and personnel limitation in doing
coordination with EPCI Company. Availability contractor representative as project
control engineer will help to do project monitoring and evaluate.
Unforseen r ls
Condition o Environtment a
o
d
n g
e
in
a
Limitation 110% of underbudget,
v
of c
e
Low Coordination with m
an ject e
means the project is still success
Change of Management i ng m
procurement section e
v
o
Priority o w
f or r h
i
n r p
c
ot k pe
The need of very critical item No reward system i f
a
Culture of to achieve project goals
y
p only instead of project KPI
N
Change scope ap
Miss H
Bad weather for offshore Wrong selection of vendor in Low management commitment
Change PIC
operation
Too
enginee
PIC
d
Habit of delay in project
Unp ro fession al act o fsu b pe
r e
ing expen No Project evaluation in the end of

contractor Unprofessional act of vendor d t
rid project and midle of project
e
a enon
i
l ce
No Standard for project
monitoring and
Project Monitoring and
evaluation
Project Evaluation (MonEv)
Unclear responsibility of project Limited allocation of time and is not well implemented
No dedicated team effort Never perform project evaluation Project final evaluation only for
project team f budget review
o d No Standard for project
e a
l o
o m l Limited personnal
r a k monitoring and Project report not describe all
No formal e e r
t
in t o Low commitment of project team evaluation important information

assignment f
e
c w
e j h
d o g t t
r i WIP only for safety performance c
por
Un p H e
j
No Master report
Change of project PIC e
Low management pro
Project MonEv is less efficient t
r
No Reward system commitment st ec t
Safety is 1 j en
Limited l o
r
No standard form or project report
priority or o p fer
r f
personnal t t i
tr co N ren
Not aware of Project MonEv act n OOC d
e Lack of experience to perform n t C ce ffe for No Standard for project

he
t
t
c
c at
e
f
f
D
i
rm
d j project MonEv o o monitoring and

n o N roj s fo
a r p p evaluation
t P v e
s r
er f E
d o n
n e o Too d ep en do n
u n M
t PIC experience
o se s
System
People N e
Figure 3. Fishbone Diagram - Project Monitoring and Evaluation is Not Well Implement
c. Culture to achieve main project goals only instead of project KPI (on time and on
budget): there is KPI regarding budget spending which is not more than 110% of original
budget and time schedule is not more than 110% of time work allocation. In CINTA, if
the project has meet the project main goals which in this case is generator already
delivered its power to CINTA system, the project team and even management are feels
the project is success even though the project performance did not meet its KPI (not on
time or over budget).
d. No reward system: a reward system can be an additional energy to project team when
performing a project. No differences to the project team when project is meeting its KPI
(on time and on budget) and with project which completed but not meets its KPI.

Personnel, who perform a project, treat a project as same activity with their normal
activity.
Quantitative analysis and qualitative analysis is shown the same result. Quantitative analysis
result shown in table 2. It shown that, in CINTA Corp the first priority to assess project
success is Project achieving its main goals. In case of Installation generator project, project is
success when generators already deliver power to CINTA system. This result meets with root
cause analysis, where one root cause of low implementation of project monitoring and
evaluation is culture to achieve project main goals only, instead of project KPI.
Table 2. Survey Summary of Project Success Criteria Priority in CINTA – with total entire
population is 25 respondents
Priority
No. Of Project Success
ID Criteria Number
Respondents Criteria Priority
Possibility
(a) Project efficiency 1 2
2 1
3 8 4
4 6
5 3
(b) Impact on the customer 3 10
4 5 3
5 5
(c) Impact on project team 3 1
4 3
5
5 10
6 6
(d) Business and direct success 1 4
2 14
3 1 2
5 1
6 0
(e) Preparation for the future 2 4
4 1
6
5 1
6 14
(f) Achieve project main goals 1 14
2 1 1
4 5
Criteria of preparation for the future are in priority number 6 and criteria of impact on project
team are in priority number 5. Both criteria are the last priority in project success criteria. It is
emphasize root cause analysis, which is no or less lesson learn to improve the next project
performance. This is the reason that same mistake is happened on future project. Besides that,
no development of infrastructure to perform project monitoring and is one problem in
performing project monitoring and evaluation.
The use of EVA on Project Monitoring and Evaluation

EVA analysis is used to analyze HYSY 902 project performance in term of schedule
performance index (SPI) and cost performance index (CPI). In this research, critical path is

chosen as the baseline for EVA analysis. Critical path is the sequence of activities which add
up to the longest overall duration. It is the shortest time possible to complete the project. Any
delay of an activity on the critical path directly impacts the planned project completion date
(Project Management Institute, PMBOK, 2013).
EVA analysis can be used to identify risk of additional budget if there is delay. Variable that
used to identify this risk is estimated to completion (ETC); estimated at completion (EAC)
and variance at completion (VAC) as shown in figure 6. In CINTA Corp project KPI is stated
should be completed not more than 110% planned budget and not more than 110% project
schedule target. Through EVA analysis, risk of delay and risk of over budget can be
described and project manager can decide whether accept or not accept the budget variance.
Figure 4. EVA Chart
Table 3. Baseline for HYSY 902 Phase 1 Project Performance
Date SV CV SPI CPI Remark

18-Jan-15 (+) (-) 0,01 0,00 HYSY 902 On hire date
23-Jan-15 (-) (-) 0,06 0,02 Bridge Installed, deliver skid of (GTG, LV and MV
switchgear)
30-Jan-15 (-) (-) 0,13 0,05 Deliver LV PCR and G#12 enclosure
17-Feb-15 (-) (-) 0,44 0,65 Deliver MV PCR
19-Mar-15 (-) (-) 0,67 0,91 Plan for target completion, 2 months after on hire
10-Apr-15 (-) (-) 0,90 0,87 Start-up and Commissioning GT#12
30-Apr-15 (-) (-) 1,00 0,77 Project HYSYS GT#12 completed
Figure 5. Project Performance Index HYSY 902 Phase-1

From figure 4, can be conclude:
 Project CPI always bellow 1, means utilizing efficiency in utilizing the budget or
resources allocated to the project is not good; also SPI always bellow 1, means the project
 team is less efficienct in utilizing the time allocated to the project.
 Cost Variance (CV) and Schedule Variance (SV) always shown negative value, this
negative variance indicate the project progress are almost always behind schedule and
 overbudget.
 Cost Variance when the project completed is around -20%, means the project will be over
budget around 20% from its plan budget. While Schedule Variance on planned completed
is -33%, means the project progress is delayed for 33% from its original schedule plan.
Detail Project
Plan EVA report to
START EVA Analysis VAC, EAC, ETC Project
 Budget
110% or No Manager
Schedule Yes
No Project Manager
No
Variance take decision:
Accepted Add resources or
EVA report amend project plan
collected for Yes
further
evaluation
Continue the
Execution
phase
Finish
Figure 6. Implementation of EVA Analysis on Project Monitoring and Evaluation
Figure 7. Project Performance Index HYSY 902 Phase-2
Figure 6 and 7 shown how implementation of EVA analysis affects the project performance.
Using EVA report for integration project cost and project schedule not only provide complete
review of project condition, but also provide signal alarm for project manager to make a
decision. From figure 7, can be concluded:
 Phase 2 project, generally SPI always bellow 1, means the project team is less efficient in
utilizing the time allocated to the project. While for CPI is near 1 which means efficiency
in utilizing the resources allocated to the project is quite good.

 Cost Variance when the project completed is around -7%, means the project will be over
budget around 7%. This is still acceptable for project success criteria not more than 110%
of budget plan.
Benchmarking
In this research, PEP and CTI are chosen as benchmarking target. PEP is chosen because it
still works in a project and also used EPCI services for its current project. Beside that PEP
also work at the same industry with CINTA and operated also in Indonesia. CTI is chosen
since it has well performed project management including project monitoring and project
evaluation since project management is the core business of this company. The scoring for
performance and procedure availability of project monitoring and evaluation are:
 Level 0:Implementation or procedure not available
 Level 1:Implementation or procedure is available separately
 Level 2:Implementation or procedure is available in semi-integrated system
 Level 3:Implementation or procedure is available and fully integrated
Benchmarking factor in this research are refer to PMBOK 5th edition, where project
monitoring and evaluation are involves: (i) Monitoring and evaluation of project scope; (ii)
Monitoring and evaluation of project schedule; (iii) Monitoring and evalution of project cost;
(iv) Monitoring and evalution of project quality; (v) Monitoring and evaluation of project risk
(including HSE); (vi) Monitoring and evalution of procurement; and (vii) Monitoring and
evaluation of stakeholder comunication engagement.
Figure 8. Benchmarking Implementation of Project Monitoring and Evaluation at CINTA,

CTI and PEP
All project perform by CTI is comply with ISO 9001:2000. Commitment of management to
always perform monitoring and evalution makes for most categories of project monitoring
and evaluation is in level 3. CTI is specialize in its project management office (PMO) and
project management practices including project monitoring and evaluation. For project
monitoring and evaluation purpose, CTI use some computerize tools such as microsoft
project which integrater cost, schedule and resources. CTI also uses scrum application (taiga)
to track the progress. Each member of project team has their own account in taiga, so
everyday they can see what’s their pending items. Open database makes all project member
easily to update the progress; and with all the data, project manager will review and together

with its project team will makes preventive or mitigation plan to avoid any issue spread out.
For project evaluation, CTI uses a standard weekly report. Every project manager in a field
reporting to the PMO at the end of the week (every Friday/Saturday). PMO will make a
report every Sunday to the management. In the report, PMO always show the work
summaries, targets and obstacles in the field for each projects. Except for monitoring and
evaluation of project risk in CTI is score as level 2 for it is semi integrated to stakeholder
regulation.
PEP also has its own project management office, but most of project management activities
are performed by its EPCI contractor. All project that perform in PEP is comply to ISO
9001:2001. Regarding with project monitoring and evaluation practices, PEP have Project
Quality Program (PQP) and quality audit. This is in line with the scope that already desing by
their engineering team and QHSE team in HAZOP and HAZID. This three criteria are
integrated in a Integrated Document Management System (IDMS). Thus for criteria
monitoring and evaluation of project scope, project quality and project risk that already
integrated with all criteria is in level 3. In performing of project evaluation, PEP also
implemented evalution before start the project, in the middle of project and after the project
completed. In PEP, construction team prepared Construction Requred Date (CRD) as a guide
and monitoring and evaluation tools for procurement to provided required equipment or
material in project execution date beside SAP system. Project control also developed Project
Master Schedule (PMS) that integrated with project cost spending and used this as tools for
project monitoring and evaluation.
Figure 9. Benchmarking Procedure Availability of Project Monitoring and Evaluation at

CINTA, CTI and PEP
In CINTA, Project evaluation implementation level 2 was exist on evaluation of

procurement. During project execution phase, evaluation related to project procurement
always perform and integrated with evaluation of project cost as per regulation of PTK 007.
However for categories evaluation of project scope, evaluation of project cost, evaluation for
project risk, evaluation for project quality and evaluation of stakeholder communication and
engagement during project execution phase is limited performed but still not integrated with
other aspect. One problem that also describe in root cause analysis in CINTA during project
execution phase, evaluation of project schedule and evaluation of project cost are never been
performed, thus in both aspect is score as level 0. This is different in phase of project closing,
implementation of project evaluation of project quality, project scope, project cost and

stakeholder communication engagement is score as level 2 for this is already semi integrated
in a PIS and closing AFE meeting with SKK Migas.
CTI have integration system for most criteria in project monitoring and evalution and it
makes for most criteria are put at level 3. In Quality Management System (QMS) CTI not
only describe about performing project monitoring and evaluation but also for a whole
project management process like in planning phase, executing phase and closing phase. The
aim of implementation of quality system priciples is to provide quality to the product and
services in an effective, systematic and controlled manner complying with requirements of
ISO 9001.
Same as CTI, PEP also has a procedure for implementation of project management and
evaluation. Project management already esthablish organization for controlling and managing
quality assurance activities, where QA Coordinator (QAC) is assigned for a project. All the
record is standardize as per internal regulation. There is Integrated Document Management
System (IDMS) for all document which each project team can update and easily find
documents. Procedure for monitoring and evaluation of quality, risk and scope is fully
integrated with all project monitoring and evaluation that not only refer to PMS but also refer
to HAZID and HAZOP result.
Result
Based on qualitative and quantitative research methodology, bellow solutions are the most
possible sollution to be implemented to solve problem that project monitoring and evaluation
is not well implemented in CINTA Corp. Thus by implemented project monitoring and
evaluation will increase project performance in CINTA Corp:
1. Develop/improve procedure for project monitoring and evaluation and put it in project
cycle.
Integration between monitoring and evaluation of project cost and monitoring and
evaluation of project schedule is also needed to have clear information about project status
and make preventive or mitigation plan. EVA method could be used as monitoring tools
for that integration. Figure 7 and figure 8 shown propose procedure for implemented
project monitoring and evaluation.
Make Monitoring
Plan
Monitoring the
Implement the
actual output and
plan
record it
Take corrective Report the actual,

action on the the plan parameter
variation and variations

 Daily Report
 
Immediate corrective action when Update gant chart, S curve and
there is variation in schedule and Developed EVA report.
cost; or perform evaluation when

there is possibility variation more
than 20%
Figure 10. Propose Project Monitoring Procedure

(1) Confirm the purpose of

 What is the purpose of evaluation?
evaluation
 
 Who are the potential user of the result?

 
Grasp the contents of the project plan
(2) Organize information of
the project target
 
 Grasp the current situation of the project


What is the evaluation methodology?
(3) Formulate evaluation  (could or using data from
be interview
work plan monitoring report)

Consider evaluation question, basis for
judgement, dataneeded and data
 collection method

 
(4) Collect data Conduct evaluation study at project site
 
Conduct evaluation with related personnel
(5) Analyze and interpret  

data  Interpret data and make value judgement
 
Make recommendation and draw lesson learn


 Put result on evaluation report
(6) Report evaluation result  
Convey result to potential user
FEEDBACK
Figure 11. Propose Procedure for Project Evaluation
2. Create a database for monitoring and evaluation.

In benchmarking analysis, PEP have a databasing system which called IDMS, while CTI
has scrum application which each project team to track the progress. Each member of
project team has their own account in the database. Everyday project team can see what’s
the pending items and project leader can decide which activity will be more important than
others.
Currently Powersystem section already have a project database but this is used only for
internal powersys. Creating a new database specialize for project where project report can
be updated by each related project team and by updating the report will automatically
update the project progress.
The new database should inform:
  Project name
 Project S Curve
 Integration of project schedule and project cost, use EVA report from MS Project
 Pending item for each section
 Update progress from each section
  Progress summary from each section and problem facing by each section
3. Create a ballance project base organization with mix project team between experience
personnel and new personnel, also mix organization structure between functional and
matrix organization.
CTI and PEP have its own project management office for they have enough resources to
develop project body organization. To have fully dedicated project body organization in
CINTA Corp is difficult, for in CINTA there are employee limitation issue and almost all
senior level engineer have dedicated job description. It is propose to use modified balance

matrix structure for this type of project as shown on figure 9. Modification of this
organization structure is done by add project engineer from related EPCI company. With
this organization structure Project leader can focus on decision making and by using
integrated document system; while team member can be more focus to project execution.
VP Operation VP SCM
Procurement
PGF Manager
Manager
Sr Head of Sr Head of
Head of
Powersystem & Engineering &
Procurement
support Construction
Head of
Powersystem Head of Cost Head of Head of
(as project Control Engineering Construction
leader)
Staff Staff Staff Staff Staff
Project control
Reps of Consultant
Project Team Coordination
Figure 12. Propose Project Organization Structure
4. Knowledge sharing for how to performing project monitoring and evaluation.

CINTA Corp has a program for knowledge sharing program which called STARC
program. This is a new program related to knowledge sharing. Put sharing knowledge
program about how to implemented project monitoring and evaluation will help to develop
junior engineer capability to perform project monitoring and evaluation.
5. Assign additional personal using a contract base.
Availability of project control consultant representative at CINTA Corp head office during
project execution to do project monitoring and evaluation have benefit as bellow:
 Communication with project consultant/EPCI will easier, for CINTA used service of
 EPCI employee in the same project.
 Capability of the personnel is suitable with project requirement and easier to find for
 EPCI will also provide the project engineer.
 CINTA engineer can focus to project execution and learn many things from EPCI for
how to perform project monitoring and evaluation.
6. Reward system for achieving project KPI.
A reward system need management comitment to be implemented. A reward system for a
project that meet its KPI is not only give benefit to project team in direct financial benefit.
The reward could be:
 Point to project leader and project team in Personal Management System (PMS) when
the project meet its KPI. PMS is a system in CINTA Corp to grading each employee
performance in a year. The result of PMS is related to employee performance
 bonusess and promotion recommendation.
 Point to employee who perform sharing knowledge or being a lecturer in inhouse
training for STARC program related to sharing knowledge about how to perform
project management including project monitoring and project evaluation

Reference
Ansah, Samuel K., & Emmanuel Bamfo, n.d. Effectiveness of Monitoring Systems for
Controlling Project Cost in the Construction Industry. 85- 96. Retrieved October 25,
2015 from: http://www.ppml.url.tw
Brown, Norm. (1998). Earned Value Management (EVM) and Software Development.
Retrieved October 25, 2015 from http://www.oocities.org
Cleland, D., & Ireland, L. (2007), Project Management: Strategic Design and
Implementation (5th ed.). New York: McGraw-Hill.
Creswell, John W. (2003). Research Design Qualitative, Quantitative and Mixed Method
Approaches (2nd ed.). London: SAGE Publication.
Dwivedi, Umesh. (2010). Earned Value Management Explained. Retrieved August 13, 2015
from Projectsmart.co.uk
Educational-business-articles.com. (2015). Retrieved November 5, 2015 from
http://www.educational-business-articles.com/fishbone-diagram.html
Evaluationtoolbox.net. (2010). Developing a Monitoring & Implementation Plan. Retrieved
November 6, 2015 from http://evaluationtoolbox.net.au
Higher Educating Innovating Fund University of Oxford. (January, 2014). A step by step
guide to Monitoring and Evaluation: Project Monitoring and Evaluation for
Sustainable Communities. Retrieved October 25, 2015 from http://www.
geog.ox.ac.uk/research/technologies/ projects/ monitoringandevaluatin. Html
JICA Guideline for Project Evaluation. (2004). Practical Methods for Project Evaluation,
Planning and Coordination Department Japan International Cooperation Agency
(JICA), Office of Evaluation and Post Project Monitoring, Planning and Evaluation
Department, September: 1-25.
Johnston, D. (1994). International Petroleum Fiscal Systems and Production Sharing
Contract. Oklahoma: Pennwell Publishing Company.
Ointotwenty.com. (2014). PERT/CPM Scheduling for Time/Cost Management. Retrieved
October 25, 2015 from http://www.ointotwenty.com/services.htm
PMWEB module. (2006). Project cost planning and control. Retrieved August 13, 2015 from
http://home.cogeco.ca.
Project Management Institute. (2005). Practices Standard for Earned Value Management.
Pennsylvania: Project Management Institute, Inc.
Project Management Institute. (2013), A Guide to the Project Management Body of
th
Knowledge (5 ed.), Pennsylvania: Project Management Institute, Inc.
Shenhar, Aaron J., & Dvir Dov. 2007, Reinventing Project Management: the Diamond
Approach to Successful Growth and Innovation, Boston: Harvard Business School
Press.
Smith, J. Greg. (2011). The Practice Standard for Earned Value Management. Retrieved
November 6, 2015 from http://www.mycpm.org/what-is-evm/evm-best-practices/.
Tache, Florin. Developing the New Dimension of Monitoring and Evaluation Processes
within Project Management, Faculty of Management the Bucharest of Economic
Studies, 398-407.
Wordpress.com. (2012). Implementation of the Earned Value Management Process for
Housing Project: The Process Step 3 – Organization and Responsibility Assignment.
Retrieved November 5, 2015 from https://aacecasablanca.wordpress.com

ANTECEDENT OF CUSTOMER SATISFACTION : EMPIRICAL STUDY IN HOKA
HOKA BENTO BANDUNG
Nandan Limakrisna1
Hapzi Ali2
1
Associated Professor of Doctoral Management Science UPI YAI, Jakarta Indonesia.
2
Professor of Management Mercubuana University, Jakarta Indonesia.
Correspondent : amarta-nandan@gmail.com
Abstract:
This research aims to establish: (1) Impacts of pricing in HokBen Bandung on the customer’s
satisfaction (2) Impact of service quality improvement on customer satisfaction. This research
used purposive sampling methods with pricing (X1) and quality service (X2) as the
independent variable and customer satisfaction as dependent variable. The population of this
research is the customers and prospective customers who were visiting HokBen Bandung
which was located in South Bandung on June 2015.
Methods of data collection include questionnaire, observation, and interview. The data
analysis used was multiple linier regression, F test and T Test. The Multiple Regression
Analysis results in Y = 11,207 + 0,311X1 + 0,157X2 + e.
The above equation shows: (1) There is a positive impact between pricing and customer
satisfaction, proven by the analysis from regression coefficients value of 0,311 and service
quality impacts positively to customer satisfaction, proven from the analysis from regression
coefficients value of 0,157; (2) there is also impact between pricing towards customer
satisfaction proven by the analysis report shows T calculated (2,568) > Ttable (1,984) with
significance level of 0,05 and there is impact between service quality towards customer
satisfaction, proven by C value and significance level of 0,05; (3) there is significant impact
between pricing and service quality on customer satisfaction , proven by the analysis from
Fcalculated (28,263) > Ttable (2,70) with the level of significance of 0,000.
Keywords: Pricing, Service Quality, Customer Satisfaction
1. Introduction:
Development of science and technology not only impact education sector, but also impact the
economic and cultural sector. The cultural changing is also inevitable. One of the emerging
cultural changing is fast food life style. It does not exist previously in Indonesia, however
with the development of the new era, there has been wide numbers of fast food has been sold
in Indonesia. The phenomenon happening in third world countries including Indonesia lately
shows the life style changing as a result of food industry development manifested in Fast
Food restaurants. The young generations prefers eating, and spend most of their time in Malls,
Cafes, and western food or fast food restaurant such as HokBen, McD, Pizza Hut and many
others. The condition was supported by modern trade system. It successfully influences
Indonesian to consume even Japanese Food such as Hoka Hoka Bento. The type of food was
very popular among Indonesian ranging from all ages because the taste has been adjusted with
Indonesian taste. In order to be able to compete the industry, the company has to be market
oriented. All activities done by the company have to bring satisfaction to the customer, so the
marketing can be considered holding a significant role in supporting the sales improvement.
According to Kotler regarding marketing strategy (2005:22):
“Marketing principle emphasize that the key of a successful organization is to enable the
company to be more effective than the competitor in creating, delivering, and communicating
the value of customer towards the targeted market”
In order for accompany to be able to survive even excellent in the market, the company need
to have the methods used as a guidelines especially in marketing. Marketing strategy is the
most accurate method to increase customer satisfaction. Because when the customer feels
satisfied with the products or services offered by a company, then they will buy the product
continuously and become a loyal customer from the particular company.
When the customer feels they expectation regarding one product/services was fully served
they will also be advertising channel for a company. According to Kotler (2004:114)
explained that customer satisfaction is the level of feeling the customer has after comparing
the service/ result they get and their own expectation. If the service given by the company in
line with the customer expectation that was when the satisfaction happen.
HokBen (Hoka Hoka Bento) for instance is the example of fast food industry widely
distributed in Java and Bali. It should have special marketing strategy to make the customer
satisfied, so they can increase the sales and keep surviving the competitions among the similar
industry. Customer satisfaction is important because the key of a business to run is holding by
the customer.
There are factors affecting customer satisfaction includes; pricing, service, facility, services,
and product quality (Kotler, 2014: 215). Leliana & Suryandari in Margaretha (2004: 111)
explained that:

“Pricing becomes the most dominant signals in marketing, it was because price places in
every transaction, price also the signal used by the customer in perception process in which
price will impacts customer’s evaluation towards one product”
Pricing is associated with the quality offered to the customer. The suitable price and quality
will make the customer trust the product thus will build brand image of the product among the
customers. Besides pricing the quality of the products, the company services also highly
impact the customer satisfaction. The service quality is the beginning of the customer
satisfaction. In evaluating the service quality, customers not only see the result of a service
but also the process of delivering the services.
The customer satisfaction towards the service given is an important factor for a running
business. The satisfaction is the level of feeling after comparing the services experienced and
the expectation thus the satisfaction from the customer is obtained after the service is
delivered. Customer generally feel one level of satisfaction, if the service quality is in line
with their expectation the customer will satisfied, while they will feel disappointed the
service quality is not in line with their expectation .
It is in line with the explanation if Tjiptono (2002:59) “Service quality is the expected
excellence and the control of the level of excellence to fulfill the customer expectation”.
In orderto fulfill the customer satisfaction of a company, adequate pricing and service
quality need to be well managed. We can conclude that customer satisfaction can be reflected
from the suitable pricing and good service quality. Customer perception of priceandservice
quality is atotalassessmentof the excellenceof a productor service.
Based on the above introduction, the author did the researchentitled “TheImpact of
Pricing and Service Quality on the Customer Satisfaction in HokBen Bandung Pusat”.
2. Methods
The researchmethod used was purposive sampling /Judgmental Sampling). Sample method
was selected based on particular criteria. The data sources used in this research consist of
primary and secondary resources. Primary data are those related to the pricing and service
quality in HokBen Bandung. Data were obtained by questionnaire, observation, and interview
conducted in order to determine pricing and service quality in the company. Secondary
sources, are those obtained from the company itself (internal data source), internet/websites,
library, and mass media.

3. Result & Discussion
Hoka Hoka Bento also known as HokBen is a franchise networking - fast food restaurant
serving Japanese food located in Bandung, Indonesia.
Until now, HokBen has 141 outlets distributed around Java and Bali. The brand Hoka Hoka
Bento comes from Japanese Language which means “various kinds of Bento” (Lunch Box)
since 18 April 1985. HokBen was firstly established under PT Eka Bogainti. The company
was firstly founded by Hendra Arifin in 1985 in Bandung.
The very first restaurant was located in Bandung. Hokben serves various kinds of Japanese
Food, hygienic, fastwithrelatively affordablepricesanda cozy atmosphere. It makes HokBen
the biggest restaurant with Japanese Fast-food concept in Indonesia.
Hendra as the owner of PT Eka Bogainti is interested to develop the Japanese Fast Food
Restaurant because in 1985 there was no such restaurant in Indonesia. He took an exchange
study to Japan and then buy the license to use the brand and technical assistance HokBen in
Indonesia. Initially, Hokben in Japan was using “Take away” Concept food business.
Nowadays Eka Bogainti has the full ownership of HokBen brand. While the similar brand in
Japan no longer exist. Even it serves Japanese Food, the ownrship of HokBen is 100 percent
belongs to Indonesian. 1990 HokBen for the first time open the branch outside Bandung,
which was Bandung. Until now there are 17 of its outlets in this city. Hokben for the first time
open the branch in Surabaya on 2005, until now there has been 13 branches operate in
Surabaya. In 2008 HokBen open its branch in Malang. In 2010 Hokben expand its business to
Central Java, Yogyakarta, and Bali. Since 15 October 2013 Hoka Hoka Bento presented with
the new Brand “HokBen” with the new performance, offer, services, and more fresh and
friendly nuance.
Hokben serves various kinds of Fast Food Japanese Food. However, this restaurant outlets
were arranged length wise like a side board café teriaw here customers move along the
stainless steel side board table while choosing the menu (including food, and desserts), unlike
the general presentation of the other Japanese Fast Food Restaurant. Hokben serves both unit
(a la carte) menu and package menu.
Food served in this restaurant are Japanese popularfood such as yakiniku and teriyaki (with
the choice of beef and chicken) sukiyaki gyoza, katsu, and other kinds of fries such as ebifurai
(shrimp), kani roll (and rolled crabs), and etc. Although it appears .as Japanese Restaurant, all
Japanese food served in this restaurant has been adjusted with Indonesian taste. For example
stronger taste and it serves spicy sweet spices as well which was very popular among
Indonesians. The restaurant was founded and owned by Indonesia thus it does not serve
original Japanese Recipe.
HokBen also serves kid’s package called “Kidzu bento” which includes toys, and birthday
party package in their outlets. The logo and toys offered are usually related or associated with
HokBen mascot
This research consist of independent variable Pricing & Service Quality, the objective is to
identify the customer satisfaction of Hokben Bandung. The variable of this research are:
1. Independent variable (X1) is Pricing
Pricing is the Policy of a company to shows the price of the product to the market or
how much the customer will have to pay /spend in order to be able to buy the product
and it should be profitable to the company. Pricing can be operationalized through the
following dimensions:
 Product compatibility: the compatibility of the price and product quality, and the
compatibility with the variety of the products
 Competitor: pricing of the similar products
 Discount: the implementation of discount, buying in package
 Affordability : the price should be affordable for the customer
2. Independent variable (X2) Service Quality
Service Quality refers to the service process from the company in order to deliver
satisfaction to the customer, by creating service which in line with customer
expectation or even more. Service quality is operationalized as follows:
 Tangible : Store appearance , hygiene, location, the hospitality of employees, the

facility and technology sophistication, and product packaging

 Reliability: Skills and speed in serving the product, speed and accuracy in
responding the customer demand.
 Responsiveness: awareness to help the customer’s problem. Skills and speed in

solving their problem
 Assurance : Product knowledge of the employee, Product quality assurance, and

employee communication skill
 Empathy : Care for the customer need
3. Dependent Variable (Y) Customer satisfaction
Customer satisfaction is expectation level of the customer after using the product
service of a company whether in line with the reality thus produces satisfaction and
insatisfaction if expectation is not in line with the reality. Customer satisfaction is
operationalized as follows:
 Princing : Customer satisfaction regarding the Price given
 Service Quality: customer satisfaction regarding the service quality given
4. Results
4.1 Vailidity Test & Reliability
4.1.1 Validity Test
The instrument validity value will indicates how far the collected data will not deviate
from the general purposed variable. Each statement is considered valid if corrcted
item-Total Correlation item is more than r Product Moment Table with level of
significance of 0,005.
In order to obtain the score of each item, Valid or invalid statement, the selected
criteria are as follows:
1. If r calculated > r table and the value is positive, thus the item tested was
considered valid

2. If r calculated < r tabel, thus the item tested was considered invalid
3. If r calculated > r table but the value is negative, thus H0 will still be denied and
H1 is accepted
From the bove mentinoed criteria, we can conclude that if r calculated > r table
thus the item tested was valid, meanwshile if r calculated< r table thus the item
tested were invalid.
Table 4.6 Result of Validity Test Variable X1

No. r calculated r table status
1 0,625 0,197 valid
2 0,581 0,197 valid
3 0,770 0,197 valid
4 0,542 0,197 valid
5 0,727 0,197 valid
6 0,806 0,197 valid
7 0,800 0,197 valid
8 0,735 0,197 valid
Source: Researcher’s data processing
Based on validity test result to a number of respondents on Variable X 1 with significance

level 0,05, We canconclude that 8 statements can be considered as valid because they have
value of r calculated > r table
Table 4.7 Validity Test Result of Variable X2

r
No. r table status
calculated
1 0,686 0,197 valid
2 0,503 0,197 valid
3 0,695 0,197 valid
4 0,673 0,197 valid
5 0,785 0,197 valid
6 0,674 0,197 valid
7 0,828 0,197 valid
8 0,815 0,197 valid
9 0,794 0,197 Valid
10 0,557 0,197 Valid
11 0,843 0,197 Valid
12 0,202 0,197 Valid
13 0,230 0,197 Valid
Based on the validity test result to a number of respondents on Variable X2 with significance
level 0,05. We can conclude that 13 statements can be considered as valid because they have
value of r calculated > r table
Table 4.8 Result of Validity Test Variable Y

No. r calculated r table status
1 0,738 0,197 valid
2 0,689 0,197 valid
3 0,638 0,197 valid
4 0,509 0,197 valid
5 0,669 0,197 valid
6 0,702 0,197 valid
7 0,543 0,197 valid
Based on the validity test result to a number of respondents on Variable Y with significance
level 0,05, we can conclude that that 8 statements can be considered as valid because they
have value of r calculated > r table
4.1.2 Reliability Test
Reliability Test can be carried out using SPSS software which enable us to measure reliability
of a variable using Cronbach’s Alpha α
1) Cronbach’s alpha< 0,6 means data is not reliable
2) Cronbach’s alpha>0,6 means data is reliable
Table 4.9 Reability Test
Cronbach's
Alpha N of Items
.837 8
Source: Researcher’s data processing.

Table 4.10 Reliability Test
Cronbach's
Alpha N of Items
.872 13

Table 4.11 Reliability Test
Cronbach's
Alpha N of Items
.748 7

Based on the result of reliability test, we got four output from known variable X 1, X2, and Y,
each of variable has reliability value (Cronbach's Alpha) above 0,6. Thus we can imply that
the measurement units in this research is reliable.
4.2 Classic Regression Assumption Test Result
4.2.1 Normality Test
Normality test used to check if the independent variables; pricing and service quality,
also dependent variable; customers satisfactions are normally distributed or not.
The chart shows normality test result using Normal Probability Plot which spreads
around diagonal line. We can conclude that data used in this research are distributed or, in
other word, fulfil normality assumption. Thus regression model is eligible to use:
Picture 4.1 Diagram Chart of P-P Plot
4.2.2 Autocorrelation test

Autocorrelation test is regression assumption testing in which dependent variable isn’t
correlated with itself. Auto correlated with itself means value of dependent variable didn’t
correlated with value of variable itself, be it in previous variable or value of next period.
The basis of decision making are as follows:
1. Value of D-W bellow du means positive autocorrelation
2. Value of D-W between duand 4 - du means no autocorrelation
3. Value of D-W above 4 - du means negative autocorrelation
Table 4.12 Autocorrelation Test
Model Durbin-Watson
1 1.780
a. Predictors: (Constant), service quality, pricing

b. Dependent Variable: customers satisfaction
From the table, value of Durbin-Watson (DW calculated) is 1,780 meanwhile value
of du 1,74. Based on specified criteria DW calculated is between 1, 74 and 2, 26 (4 - du). It
means no autocorrelation. Thus can be concluded that Autocorrelation test is fulfilled.
4.2.3 Heteroskidastity Test
Based on scatterplot bellow, the spreading of data dots are as follows:

1. Data dots spread above and below or around zero
2. Data dots do not concentrated above or below only
3. Data dots spreading should not form wavy pattern, wide then narrow then wide again
4. Data dots spreading would be better if it has no pattern
Picture 4.2 Scatterplot Chart Diagram

Based on explanation above, we can conclude that the data is negative of
Heteroskidastity
4.2.4 Multicolinearity Test
Multicolinearity is event that inform whether independent variable has similarity with
other independent variable in one model. Multicolinearity can be observed from Varience
Inflation Factor (VIF) and Tolerance (TOL).
Based on multicolinearity test table we can see that VIF 2,589 and TOL 0,386 means
each independent variable has VIF no more than 10 (VIF<10) and TOL > 0,1. Thus we can
conclude that this regression multiple linear model is free of multicolinearity asumption.
Table 4.13 Multicolinearity test
Collinearity Statistics
Model Tolerance VIF
1 (Constant)
Pricing .386 2.589
Price .386 2.589
a. Dependent Variable: customers satisfaction

4.3 Multiple Linear Regression Analysis
Multiple linear regression analysis is used to analyse influence of independent

variable to dependent variable
Regression equation in this research is written as follows:

Y = a+b1X1+b2X2+e
Where:
Y : Customer satisfaction
X1 : Pricing
X2 : Service quality
a : constant number
e : tolerable error (5%)
b : Regression coefficient
To read SPSS result of regression equation, you can read coefficient table in
SPSS output.
Table 4.14 Multiple Linear Regression Equation
Unstandardized Coefficients
Model B Std. Error
1 (Constant) 11.207 2.492
Pricing .311 .121
Service quality .157 .066
a. Dependent Variable: customers satisfaction
Based on the table, the obtained regression equation is:

Y = 11,207 + 0,311X1 + 0,157X2 + e
Interpretation of regression as follows:
a. Constant (a)
It means if all independent has value of zero (0) then all dependent variable (customer
satisfaction) is 11,207.
b. Pricing (X1) to Customer satisfaction (Y)
Coefficient number of pricing for variable X1 is 0,311. It means that every effort of
good pricing increase one unit will increase customer satisfaction (Y) by 0.311 with
assumption that other independent variable from regression model is constant.
c. Service quality (X2) to Customer satisfaction (Y)
Coefficient number of service quality for variable X 2 is 0,157. It means that every one unit
increment of service quality will increase customer satisfaction by 0.157 with assumption
that all other independent variables in regression model is constant.
4.4 Coefficient of determination Analysis
Coefficient of determination (R2) is used to measure how good regression line

according to the actual data. Coefficient of Determination measure total percentage variation
of dependent variable Y which is explained in regression line. Value of Coefficient of
determination is between 0 and 1 (0<R2<1). The closer R2 to1 will make regression line
better and closer to 0 will make it worse.
Tablee 4.14 Coefficient of

determination
R Adjusted R
Model R Square Square
1 .607a .368 .355
a. Predictors: (Constant), service

quality, pricing
b. Dependent Variable: costumers
satisfaction
Based on “Model Summary” table, we can conclude that pricing and servcie
qualityinfluence about 36,8% to customers satisfaction. Meanwhile 63,2% is influenced other
variables which are not examined. Because R2 less than 50% or tend to away from 1 thus we
can conclude that the ability of independent variables to explain dependent factors is quite
poor.
4.5 Hypothesis

Hypothesis should be tested based on empirical data to create a decision whether to
accept or reject Ho which has been stated in research hypothesis. This research use t test and
F test.
4.5.1 t Test
t test is used to analyze whether independent variables is partially influencing or not to

dependent variable. Significance degree used is 0,05. If the significance value is less than
degree of trust then we accept alternative hypothesis, which state that an independent variable
partially influence dependent variable. t test analysis also can be seen in table bellow:
Table 4.15 t Test
Model t Sig.
1 (Constant) 4.496 .000
Pricing 2.568 .012
Service quality 2.380 .019
a. Dependent Variable: customer satisfaction

Hypothesis formula:
Ho: 𝛽1 = 0
There is no partial influence between pricing and customer satisfaction
Ha: 𝛽1 = 0
There is partial influence between pricing and customers satisfaction.
Ho: 𝛽2 = 0
There is no partial influence between service quality and customers satisfaction.
Ha: 𝛽2 ≠ 0
There is partial influence between service quality and customers satisfaction
1) Pricing (X1) to customers satisfaction (Y)
In t test column above model 1 we can see sig value 0,012. Sig value less than
probability value 0,05, or value 0,012<0,05, then Hais accepted and Horejected. Variablee
X1has tcalculated 2,568withttable=1,984. So tcalculated>ttablewe can conclude that variablee X1has
contribution to Y. t value is positive, show that variablee X1has inline relation with Y. We
can conlude that pricing has significant influence to customers satisfaction.
2) Service Quality (X2) to customers satisfaction (Y)
In t test column above model 1 we can see sig value 0,019. Sig value less than
probability value 0,05, or value 0,019<0,05, then Hais accepted and Horejected. Variablee
X2has tcalculated2,380withttable=1,984. So tcalculated>tablewe can conclude that variablee X1has
contribution to Y. t value is positive, show that variablee X2has inline relation with Y. We
can conlude that service quality has significant influence to customers satisfaction.
4.5.2 F Test
F test is used to analyze whether simultaneously independent variables significantly

influence dependent variable. Trust degree that is used is 0,05. If the F number fro
calculation is greater than F number from table then alternative hypothesis which state all
simultaneous independent variable significantly influence dependet variable.
Hypothesis formula:
Ho: 𝛽1 =𝛽2 =0
No influence simultaneous variable X (pricing and service quality) to Y (customer
satisfaction)
Ha: 𝛽𝑗 ≠ 0
At least there is one Variable X(pricing and service quality) which influence Y (customer
satisfaction)
Table 4.16 F Test
Sum of Mean
Model Squares Df Square F Sig.
1 Regression 357.414 2 178.707 28.263 .000a
Residual 613.336 97 6.323
Total 970.750 99
a. Predictors: (Constant), service quality,

pricing

Table 4.16 F Test
Sum of Mean
Model Squares Df Square F Sig.
1 Regression 357.414 2 178.707 28.263 .000a
Residual 613.336 97 6.323
Total 970.750 99
a. Predictors: (Constant), service quality,

pricing
b. Dependent Variable:customers satisfaction
Analysis from F test table, the obtained sig probaility is 0.000 which means sig
probability number is less than probability value 0.05 or (0,00<0,05). Meanwhile value of F
calculated 28,263 and F tablee 2,70. In other words Fcalculated(28,263)>Ftable(2,70). It means Ha
is accepted and H0rejected. We can conclude that X1and X2siultaneously influence variable Y.
4.6 Research Discussion
Result of this research indicating that increment or decrement customers satisfaction in time
the reasearch was partially influenced by pricing variable which is based on t test result,
where the t calculated is greater than t table which are tcalculated 2,568 andttable=1,984.
Result also indicating that increment or decrement customers satisfaction was partially
influenced by service quality variable, based on t test result, where the t calculated is greater
than t table which are Tcalculated2,380andTtable=1,984.
Lastly, result gave conclusion that increment or decrement of customer satisfaction was
simultaneously influenced by pricing and service quality variables based on F test that F
calculated is greater than F table, which are Fcalculated28,263>Ttable2,70. We can see that
Coefficient of Determination was obtainedthat pricing and service quality influence about
36,8% to customer satisfaction. Meanwhile 63,2% was influenced by other unobserved
variables.
5. Conclusion and Sugestion

5.1 Conclusion

1. There is an impact of pricing on customer satisfaction with Tcounted is higher than
Ttable, with Tcounted value 2.268 is higher than T table1,984
2. There is an impact of service quality on customer satisfaction . it is identified from
Tcounted value 2,380 is higher than t Table 1,984
3. There is an impact of pricing on services quality along with customer satisfaction . we
identified that Fcounted Value 28,263 > Ftable 2,70 on a =0,05 , Fcounted Value is
higher dan F table , Thus proposed Hypothesis Nol (H0) is denied and Ha is accepted .
It menas that the independent variables which consist of pricing & service quality
simultaneously impact the customer satisfaction of Hokben
4. The multiple linear regression equation obtained is Y=11,207+0,311X1 + 0,157X2+e .
the research identified that pricing and service quality impacts the customer satisfaction
positively
5. The research shows that pricing and service quality has 36,8 % impacts on the
customer satisfaction. The next research is suggested to expand the research on the
other impacting factors related to customer satisfaction such as service speed, product
quality and etc
5.2 Sugestion
A. Based on regression formula, the obtained value of regression coefficient for pricing is
greater than regression coefficient for service quality. Thus if the company want to
improve customers satisfaction, pricing should come first in every evaluation
compared to other services.
B. The company should be morecareful in pricing policy with observing competitors’

price because there are a lot of competitors in market.
C. The company should be able to balance food quality with the price in order to attract
more customers to buy their product. It is important to strengthen the company
position in market.
D. The research shows that pricing and service quality has 36,8 % impacts on the
customer satisfaction. The next research is suggested to expand the research on the

other impacting factors related to customer satisfaction such as service speed, product
quality and etc
Bibliography
Aldana, Oldy, 2010, “Analisa Pengaruh Kualitas Pelayanan, Harga dan Lokasi Terhadap
Kepuasan Pelanggan (Studi Pada Bengkel Caesar Semarang)”, Thesis Tidak
Dipublikasikan, Semarang : Universitas Diponegoro.
Alma, Buchari. 2000, Manajemen Pemasaran dan Pemasaran Jasa, Bandung : Alfabeta.
Aryotedjo, 2005, “Pengaruh Kualitas Jasa, Kepuasan dan Komitmen Pelanggan Terhadap
Loyalitas Konsumen Pada Bisnis Retail”, Jurnal Bisnis dan Manajemen, Vol. 5, No. 2:
223-232.
Chandra, Filicia dan Theresia Widyaratna Danny, 2001, “Analisis Kepuasan dan Loyalitas
Konsumen Terhadap Tingkat Penjualan di Warung Bu Kris”, Jurnal Manajemen dan
Kewirausahaan, Vol. 3, Vol. 2: 85-95.
Endah, Rayi, 2008, “Analisa Pengaruh Kualitas Pelayanan, Kualitas Produk dan Harga
Terhadap Kepuasan Pelanggan (Studi Pada Warung Makan Singosari Semarang)”,
Thesis Tidak Dipublikasikan, Semarang : Universitas Diponegoro.
Ghozali, Imam, 2006, Aplikasi Analisis Multivariate Dengan Program SPSS, Semarang :
Universitas Diponegoro.
Handoko, T, Hani. 2003. Manajemen, Edisi ke-2. Yogyakarta : PT. BPFE.
Irawan, D, Hadi . 2002, 10 Prinsip Kepuasan Konsumen, Bandung : Elekmedia Komputindo.
Kotler, Philip. Amstrong Garry. 2001, Dasar – Dasar Pemasaran, Jilid 1, Terjemahan Benjamin
Molan, Bandung : PT. Indeks.
Kotler, Philip. 2004, Manajemen Pemasaran, Edisi Milenium 1, Terjemahan Hendra Teguh dan
Ronny A Rusli, Bandung : Prenhallindo.
Kotler, Philip. 2005, Manajemen Pemasaran, Edisi Keduabelas, Jilid 1, Terjemahan Ancellawati,
Bandung : Salemba Empat.
Kotler, Philip. 2006, According To Kotler, Terjemahan Damos Sihombing, Bandung : PT. Bhuana
Ilmu Populer Gramedia.
Krisyantono,Rachmat. 2006, Teknik Praktis Riset Komunikasi, Bandung : Kencana Prenada

Media.
Kuncoro, Mudrajad, 2001, Metode Kuantitatif, Yogyakarta: AMP YKPN.
Lopiyadi, Rambat & Hamdani. 2001, Manajemen Pemasaran Jasa, Bandung : Salemba 4
Marzuki, 2005, Metodologi Riset, Yogyakarta: Ekonisia..

Margaretha, Moureen, 2004, “Studi Mengenai Loyalitas Pelanggan Pada Divisi Asuransi Kumpulan
AJB Bumi Putera 1912”, Jurnal Sains Pemasaran Indonesia, Desember, Vol. III, No. 2: 289-
308.
Martianawarti, 2009. “Analisa Pengaruh Brand Image, Kualitas Pelayanan dan Fasilitas SPBU
“Pasti Pas” Terhadap Kepuasan Konsumen Pengguna Kendaraan Bermotor”, Thesis Tidak
Dipublikasikan, Semarang : Universitas Diponegoro.
Ruslan, Rusady . 2005, Manajemen Public Relation dan Medai komunikasi : Konsepsi dan Aplikasi,
Bandung : PT. Raja Grafindo Persada.
Singarimbun, Masri, Effendi, Sofian. 2006, Metode Penelitian Survai, Bandung : LP3ES Indonesia.
Stanton, William, J. 2001, Marketing Management, Terjemahan Wilhelma W Bakowaton, Bandung

: PT. Indeks.
Supranto, J. 2007, Pengukuran Tingkat Kepuasan Pelanggan, Bandung : PT. Rhineka Citra.
Supranto, J. 2001, Teknik Riset Pemasaran dan Ramalan Penjualan, Bandung : Rana Cipta.
Sugiyono. 2004, Metode Penelitian Bisnis, Bandung : Alfabeta.
Tjiptono, Fandy. Chandra, Gregorius. Andriana, Dadi, 2008. Pemasaran Strategik, Jogyakarta : Andi
Tjiptono, Fandy. 2002, Strategi Pemasaran, Jogyakarta : Andi.
Tjiptono, Fandy dan Gregorius Chandra, 2005, Service, Quality and Satisfaction, Yogyakarta:
ANDI.
Widiyanto, Ibnu. 2008, Pointers: Metodologi Penelitian, Semarang: Badan Penerbit Universitas
Diponegoro.
Wimmer D Roger & Dominick R Joseph, 2000, Mass Media Research :An Intriduction 9 Edition,
Bandung : Wadsworth.
Website Resmi HokBen, 2015, www.hokben.co.id
Website Resmi Kentucky Fried Chicken (KFC), 2015, www.kfc-indonesia.co.id

The Influence of Human Capital Entrepreneurship and Business
Strategy to Manager Performace and Business Success
Cooperative in North Minahasa
Written by :
Jessylistina H. Langie
Lenny Leorina Evinita
Faculty Economy UNIMA at Tondano, North Sulawesi Indonesia
ABSTRACT
This research aims at for examining the influence between human capitals,
entrepreneurship and business strategic with manage performance and business
succes in North Minahasa. This research data was collected with used
questionnaires methode from cooperative manage in North Minahasa.
The method used in this study is primer data from direct visit to
respondent. Questionnaires were sent to cooperative manage in Minahasa Utara.
In addition to questionnaires and interviews also use documentation techniques
that are generally in the form of annual report to analyze the question of using
Structure Equation Modeling (SEM).
Results obtained indicate that : (1) Human Capital, Entrepreneurship and
Business Strategy has positive and significant on Manage Performance. (2)
Human Capital, Entrepreneurship and Business Strategy has positive and
significant impact on Business Success. (3) Manage Performance positive and
significant impact on Cooperative Business Success.
Keywords : Human capital, entrepreneurship, business strategic, manage

performance and business success

INTRODUCTION
The growth of cooperatives in various sectors should be able to implement
and grow and develop the initiative of all stakeholders, especially those relating to
aspects of the investment and the creation of a conducive business climate,
harmonious cooperation and synergy between government, business and society
at national, provincial and district / city. Given the role of cooperatives that can
withstand the economic crisis, the initiative of the parties involved is expected to
continue to increase the role of cooperatives in achieving economy.
In order to improve the performance of the cooperative, through the
achievement of goals and objectives, both to improve services to members and
improve the ability of cooperatives to obtain windfall profits, the cooperative as
an economic institution needs to improve its competitiveness, in order to conduct
the business based on the efficiency and effectiveness of business. To have a good
business should be based on the elements of the efficiency and effectiveness of
the business through the implementation of good management system.
Theoretical-empirical study on Cooperatives has been devoted to impress
many facets that are only "vitality ideology and normative principles only, and it
does not work" (Yuyun Wirasasmita, 2000), so it felt not to be a great
contribution to the advancement of the theory of Cooperatives. Studies that are
"positive" seems to be time to be widened and sharpened for cooperatives, rather
than the nature of "normative" meaning that only rely on cooperation as a tangle
of values that are social. If you skip the discussion of which is "positive", will
result in a weak ability of cooperatives to achieve "cooperative effect" the
maximum for its members. This factor is expected to even become one of the
reasons why cooperatives are less enthused by the public as well as many other
factors. Basics Cooperative distinguishes non-cooperation with the company lies
in the principles of ownership, ie "dual identity" (dual identity). While the
business aspects equally in terms of profit or cooperative called the Business
Profits (SHU). But the level of profit achieved by the company and its distribution
adjusted Cooperative Cooperative idealism.
Cooperatives, the Government is expected to expand opportunities for the
community in productive activities and can obtain the maximum benefit for the
public welfare. Cooperative increasingly important role in promoting economic
growth due to the cooperative to be one alternative for the community to raise
funds in an effort to improve their quality of life, day-to-day needs and develop
the business. Apart from being an alternative source of obtaining funds,
cooperatives also be an option to invest (save). Cooperative Society will have
saving in addition to practical and can earn interest at the end of the year, coupled
with the hope of gaining the funds of Business (SHU). Performance of the work
done by the SMEs (Structure Equation Modeling) is inseparable from strategy. In
the books of strategic management theory generally agreed that the strategy
contribute to business performance. That managerial decision (strategies) to be
one determinant of the future of the company

(Muhammad, 2000).
Influence the value of an entrepreneurial personality to company achievement is
not only directly but also indirectly, through the use of functional strategies
(Suhairi, 2006). Subanar (2001) found the role of the entrepreneur or
entrepreneurial behavior dominates business and determine the future direction
for the small and medium enterprises. Hodgetts and Kuratko, 2001; Kickul and
Gundry, 2002 (in Boohene, et.al. 2008) explains that personal values associated
with a proactive strategy, often referred to as the entrepreneurial values.
According to Blackman, 2003 (in Boohene, et.al. 2008) proposed in the literature
suggests that the owner-managers with entrepreneurial values that adopt proactive
strategies perform much stronger / better than their less entrepreneurial values-
oriented strategy reactive.
Human resources are human capital for the company, where human capital
is an intangible asset that is formed when supported by the expertise, talent, and
knowledge, when these components are met, it will form a formidable human
capital. Strong human capital to support the expected realization of business
strategy.
Circumstances where the low quality of human resources in the cooperative
will be seen in the development of the cooperative effort. It is also felt in the
Cooperative's in North Minahasa
The quantitative development of cooperatives has increased, especially in
the number of members is growing every year. But when viewed as a qualitative
apparently increasing number of members are not proportionally balanced by the
increased quality of the cooperative.
The volume of business than face the fluctuating sharply lower capabilty
businesse also faces the potential demand members. From the development of
SHU showed an increase in each year. However, the relative contribution to
income of members is small.
Lack of managerial skills and a lack of professional skills in managing
cooperative manager is perceived as a phenomenon which has become an obstacle
for the development of cooperatives. However, if viewed as normative,
cooperative managers in organizations have a very strategic function, which is
acting as the co-operative Sustainability as an efficient economic institutions
(Hanel, 1985). Also on the other hand the development of managers and
employees do not meet the necessary requirements, mechanism of action and the
relationship between the board and the manager has not been performing well. It
is the result of cooperative management process is weak, so that the direction and
goals to be achieved cooperative unachievable, particularly the addition of a
cooperative development effort.
The low quality and lack of ability to think strategically caretaker manager
as executor duties in the field of business caused by various factors such as the
lack of understanding of the need and potential benefits of strategic management
and strategic skills, and behavior management as an entrepreneur possessed
inadequate.

Entrepreneurial cooperative work based on creativity and innovation,
supported by expertise in business management and understanding. Therefore
cooperative entrepreneurship is an important instrument in implementing
cooperative principles and normative values in practice cooperatives and also
requires creative thinking and action, which grew out of the initiative and
confidence of the executive. On the basis of this, the Ropke (1990a) puts
entrepreneurship as a key variable for the success of a cooperative effort.
As the movement grows from below as appropriate non-governmental
organizations, cooperatives require attendance figure of a leader who not only
understand the internal state and the members of his organization but also needed
the ability to capture and anticipate the movement of factors external to the
organization. With both the ability of the leader will have the ability to put the
organization and dynamics that exist in achieving the success of the cooperative
effort.
According to Lee (2000) that the success of the business relies heavily on
the role of entrepreneurs themselves, and in entrepreneurial human factor plays an
important role in addition to other factors (Shane, 2003). In addition, Navanhandi
(1997) suggests the performance of a business is influenced by the characteristics
of the entrepreneurial manager / owner, business strategy and organizational
structure. Previous study found that entrepreneurial characteristics have an
influence on performance (Solichin, 2005; Herri, 2003; Yonggui, 2003). Baum
(2001) found that, dimensional nature of entrepreneurship, entrepreneurial
motivation and entrepreneurial competence has a positive influence on the
implementation of the strategy directly kopetitif.
Cahyono (1995) suggested that in the context of business strategy, business
direction that follows describes the chosen environment and a guideline for
allocating resources and effort of an organization. The performance of a business
can be affected by the strategy (Pearce, 2000) and previous studies have shown
that this factor has a positive influence business strategy directly to business
performance (Kotey, 1997; Baum, 2001; Yonggui, 2003; Herri, 2003; Aragun-
Sanched, 2005).
Referring to the above problems, the author wanted to investigate further
the influence of Human Capital, Entrepreneurship, and Business Strategy to
Performance Manager and Business Success Cooperative in North Minahasa
regency.
METHODS
Data retrieval is done in this study and the questionnaire survey method of
research that has been designed based on the research variables to achieve the
desired objectives. Research questionnaire is intended to obtain primary data
directly from survey respondents objectively, therefore before the questionnaires
distributed to a sample of respondents selected in this study the researchers gave

the first description and test questionnaires to each manager and member of the
cooperative which is the object of research.
In addition to collecting data through questionnaires, the study was also
conducted in the collection of data through interviews with the respondents, so
that researchers can obtain information that is complementary and strengthen the
accuracy of the data obtained through questionnaires. Data collection in addition
to questionnaires and interviews, researchers also used the technique to study the
documentation that is generally in the form of annual report.
The populations in this study are all cooperatives that exist at the sites.
Based on the data in the North Minahasa District Cooperative amount in 2013 and
still active as much as 255 (two hundred fifty five) pieces by the number of active
members of 28,903 people and the number of cooperatives that in 9 District is in
North Minahasa regency. Than 255 the numbers of cooperatives are active, and
which have the manager was 217 cooperatives with total membership of 27,574
people. The sampling technique of the study population was referring to the
consideration of aspects of the program was structural equation modeling (SEM)
that will be used in this study that recommends the number of samples between
100 - 300 and not more than 400 samples, in order to obtain or goodness on the
feasibility of the model fit the good (Hair, 1992). The respondents were the
sample in this study was the manager of the cooperative. And this study will use a
sample of 150 people manager.
Operational Definition of Research Variables
The variables used in this study can be classified as follows :
a. Exogenous variables
Which variables are identified and suspected as causes affecting the dependent
variable. In this study identified as exogenous are :
1. Human Capital (X1)
Human Capital is the result of skill, knowledge one has, including the
accumulation aktfitas investments include education, job training and
migration (Backer 1993) added by Elionor Ostrom (2000) which says that
human capital is the knowledge and skills needed so that the individual
can do activities, diverse forms, can be formed consciously through
education and training, and can also be formed unconsciously through
experience. In this study, human capital variable is the manager's
capabilities to take advantage of all the knowledge along with other
resources to make adjustments in carrying out any activity in order to
achieve its goals. Human capital indicators used in this study :
1.1. Level of Education (X1.1), an indicator of the level of education is the
level of education of the latter, the relevance between education level
of the work done by the unit, the number of training courses attended

and other time spent, number of seminars relevn with business units
or irrelevant that followed.
1.2. Skills (X1.2), the indicator is on the skills of basic skills appropriate to
the type of business and the types of activities / tasks performed, the
level of persistence in carrying out a task or activity, there is
satisfaction in work, long time to work more quickly.
1.3. Experience (X1.3), the indicator is the experience of previous work
experience in the same field, with the ability to overcome barriers to
employment in their respective fields of work. Porter (1989) said that
a person's business experience relevant only for himself and not
necessarily relevant when someone emulate when dealing with the
same business conditions.
1.4. Competence (X1.4) The operational definition of a variable is the
capacity of the existing competence of someone who can make a
person able to fulfill what is required by the job in an organization so
that the organization is able to achieve the expected results. The scale
of the data used is an ordinal scale using a Likert scale, from the value
of 1 for strongly disagree to agree the value of 5 for the answer.
2. Entrepreneurship (X2)
Entrepreneurial traits that must be possessed by a manager who deals with
his duties in the field of business management in the development of
cooperatives, the indicators of this variable is :
2.1. Willing to take the risk (X2.1), dare to take risks is needed to deal with a
variety of opportunities both positive and negative as such "courage"
means a systematic work based on skills and experience that.
2.2. Innovation (X2.2), yag attitude shown to accept and apply the method
or technology is completely new as well as modifying or longer so
impressed new technologies and new ways of applying old
technology.
2.3. Capital accumulation (X2.3) capabilities in attracting capital from both
inside and outside of the business and position the business as a
rational investment vehicle.
2.4. Leadership (X2.4), the ability to collect, develop and cultivate the
potential is there to be something useful for the organitation purpose.
2.5. Managerial (X2.5), which is associated with kebersediaan and
availability of managers to perform management functions properly
and professionally.
The scale of the data used is an ordinal scale using a Likert scale, from the
value of 1 for strongly disagree to agree the value of 5 for the answer.
3. Business Strategy (X3)

Business strategy is a plan of action in using the resources and
competencies to gain competitive advantage. The indicators of this
variable is :
3.1. Cost advantage (X3.1), the indicators used to measure the cost of the
strategy is the sum of costs incurred to produce one unit of product /
price products cheaper than competitors given the value / quality of
the same product.
3.2. Differentiation strategy (X3.2), the indicators used to measure
difrensiasi strategy is fame product, service after the sale, the service
time of purchase, the ease of getting the product, and the speed of
delivery of products to customers.
3.3. Strategies focus (X3.3), the indicators used to measure market
strategy is to direct focus on one group of prospective buyers into the
target market.
b. Endogenous Variables
Variable is identified and suspected as a variable that is affected by the
independent variable. In this study, variables thought to be an endogenous
variable is the performance of managers.
1. Performance Manager (Y1)
Performance Manager is a process and the work of someone both
qualitatively and quantitatively in the performance of duties and
responsibilities assigned to him. The indicators of this variable is :
a. Planning goals of (Y1.1)
b. Implementation coordination to members (Y1.2)
c. Monitoring and evaluation on a regular basis (Y1.3)
d. Timeliness in completing the task (Y1.4)
e. Completion of work as per target (Y1.5)
2. Cooperative Business Success (Y2)
The success of cooperatives in the study from the point of business
success. Cooperatives, as well as other types of businesses should also
improve and develop themselves in order to guarantee their survival,
although the main goal of the cooperative is not for profit, but the return is
expected to provide cooperative welfare of its members. From this angle
of the indicator variable of this study are :
a. Number SHU achieved (Y2.1), is the amount of revenue generated from
its operations for a year.
b. Turnover of business assets (Y2.2), turning speed of business assets
(operating assets) in a particular period

c. The amount of capital held (Y2.3),
d. Financial feasibility (Y2.4).
Data Analysis
Based on the problems and hypotheses and study design, the study will be used in
the SEM analysis techniques with the help of SPSS and AMOS and analyzed first
before testing the validity and reliability.
Image : Structural Model Conceptual Framework
The data analysis :

Y1 = f (X1, X2, X3)
Y2 = f (X1, X2, X3, Y1,)
Reduce calculation process form :
Y1 = α0 + α1 X1 + α2 X2 + α3 X3 + µ1
Y2 = β0 + β1X1 + β2X2 + β3X3 + β4Y1 + ε2
Y2 = β0 + β1X1 + β2X2 + β3X3 + β4 (α0 + α1X1 + α2X2 + α3X3 + ε1) + ε2
Y2 = β0 + β1X1 + β2X2 + β3X3 + β4α0 + β4α1X1 + β4α2X2 + β4α3X3 + β4ε1 + ε2
Y2 = (β0 + β4α0) + (β1 + β4α1)X1 + (β2 + β4α2)X2 + (β3 + β4α3)X3 + (β4ε1 + ε2)
Y2 = θ0 + θ1X1 + θ2X2 + θ3X3 + µ2

Based on the analysis of structural equation modeling, which already meet the
criteria of goodness of fit, and then tested the functional significance of the
relationship between variables as in the appendix. To make it easier to analyze the
functional relationships between the variables then the value of the coefficients
are arranged in the form of Table 1, as displayed in Table 1 below:

Table 1. Functional Relationships Between Variables
estimate
Affecting Variables Dependent Variable d T Value Prob
1 Manager Performance 0,0301 4,709 0,00
Human Capital
2 Bussiness Success 0,012 3,520 0,00
Entrepreneurship
2 Business Success 0,166 3,867 0,00
Business Strategy
2 Business Success 0,08 4,028 0,00
Manager 1 Business Success 0,939 12,340 0,00
Performance
Sources : output SEM
Effect of Human Capital, Entrepreneurship, Business Strategy to

Performance Manager and Business Success Cooperation.
1. The Direct (Direct Effect)
The direct effect (direct effect) is the influence of the independent variables to
the dependent variable, or the model of the path described by the arrows.
While the indirect path through a variable or variables interverning between.
Variable interverning or in terms called variables control the variables that
have the ability to change direction, the coefficient and a significant degree of
influence or relationship when there is one or more variables included in the
model. To determine the direct effect is significant, it can be seen in the value
of t values or the probability alfanya values as shown in Table 1 above. From
the calculation of these statistics have the following meanings :
a. Human Capital positive and significant direct effect on the performance of
managers
b. Entrepreneurship positive and significant direct effect on the performance
of managers
c. Business strategies and significant positive direct effect on the performance
of managers
d. Human Capital and significant positive direct impact on business success
e. Entrepreneurship positive and significant direct effect on the success of
business
f. Business strategies and significant positive direct impact on business
success
g. Performance Manager directly influence a positive and significant impact
on the success of the business
2. Indirect Effect (Indirect Effect)
Based on the scheme, as shown in Figure 5.1 above, obtained by indirect
effects (indirect effect), each of the exogenous variables, ie, Human Capital,
Entrepreneurship, Business Strategy for Business Success through
Performance Manager are as follows :

a. Indirect influence via X1 to Y1 Y2 (δ4α1) is equal to 0.02910, This
indicates that human capital can affect the success of the business through
performance manager at 0.02910
b. Indirect influence X2 to Y2 through Y1 (δ4α2) is equal to 0.546498, This
indicates that entrepreneurship can affect the success of the business
through performance manager at 0.546498
c. Indirect influence through the X3 to Y1 Y2 (δ4α3) is equal to 0.282639,
This indicates that business strategy may impact the success of the business
through performance manager at 0.282639
Overall it appears that the indirect effects of the exogenous variables in this
Human Capital, Entrepreneurship, Business Strategy to Performance Manager
and Business Success is positive and significant
3. Total Effect
Total effect of each exogenous variable is Human Capital, Entrepreneurship,
Business Strategy to Performance Manager and Business Success is a
significant positive.
CONCLUSION
According to the existing problems in the study, and the results of the data
analysis and discussion of the results of the analysis, the following conclusions
can be drawn : The results show that human capital, entrepreneurship, and
business strategy have a positive and significant impact on the performance of the
manager and the success of cooperative efforts both directly and indirectly
through the performance of managers. This indicates that if a co-operative to
improve the success of their business, then where possible enhance the human
factor capitalnya, increased entrepreneurship and improvement of business
strategy and performance improvement manager.
Suggestion
The implication of this conclusion is that if a cooperative effort to increase their
success then as far as possible to increase the quality of human capital and
entrepreneurship by conducting training and training in cooperative managers and
conduct business improvement strategy and thus the improvement of business
success will be achieved.
REFERENCES

Aragon Sanchez and Sanchez Marin, G. 2005. Strategic Orientation Management
Characteristic and Performance : A Study of Spanish SMES. Journal of
Small Business Management : 43 (3), 287.
Backer, G. S. 1993. Human Capital : A Theoretical and Empirical Analysis with
rd
Special Reference to Education (3 ed). Univercity of Chicago Press.
Chicago.
Baum., et al. 2001. A Multidimensional Model of Venture Growth. Academic
Management Journal. Vol. 44
Boohene, ed al. 2008 in Moh. Fatkhul Mujib. , 2010. Analysis of Factors
Influencing Direct and Indirect Performance Against Small and Medium
Enterprises (KUKM) Fac. Economic UNDIP Semarang.
Cahyono, B.T. 1995. Strategic Management Module. IPWI. Jakarta.
Elinor Ostrom. 2000. Social Capital a Fad Fundamental Concept ? dalam Social
Capital Multifaceted Perspective. The World Bank Washington DC
Hanel A., 1985. Basic Aspects of Cooperative Organizations and Cooperative
Self-Help Promotion in Developing Countries. Marburg.
Hair, et al. 1992. Multivariate Data Analysis With Readings. Macmillan.
Herri and Wafa, S. a. 2003. The Influence of Internal and External Factors to The
Performance of Indonesian Small and Medium Enterprices.
Lee, Don Y. dan Eric WK Tsang, 2001. The Effect of Entrepreneurial
Personality, Backgroud and Network Activitiees on Venture Growth.
Journal of Management Studies Vol. 38 No.4.
Muhammad. 2000. Strategic Management. Concepts and Cases Third Edition.
UPP AMP YKPN. Yogyakarta.
Navanhandi, A., and Malekzadeh, A.R., 1997. Leadership Style in Strategy and
Organization Performance : An Integral Approach. Journal of Management
Studies. 3.
Pearce, J.A., and Robinson Jr. R.B. 2000. Strategic Management Formulation,
Implementation and Control. Eigth Edition. Mc Graw-Hill. New York.
Porter, M.E. 1980. Competitive Startegy, New York; Free Press
Porter, Michael E., 1985. Competitive Advantage, Creating and Sustaining
Superior Performance. The Free Press. New York.
Shane (2003) in Adnan Hakim. , 2010. Characteristics of Entrepreneurship,
Business Environment and Enterprise Performance (Studies in Cooperation
in Southeast Sulawesi). Journal of Management Application. Vol. 8.
Mailbox. 1.
Solichin (2005) in Adnan Hakim. , 2010. Characteristics of Entrepreneurship,
Environmental Bisnia and Business Performance. Journal of Management
Application. Vol. 8. Mailbox. 1
Subanar. , 2001. Small Business Management. BPFE. Yogyakarta.

Suhairi, 2006 in Moh. Fatkhul Mujib, 2010. Analysis of Factors Influencing
Direct and Indirect Performance Against Small and Medium Enterprises
(KUKM) Fac. Economic UNDIP Semarang.
Yonggui, W., et al. 2003. The Key Factors Distinguishing High Growth Small and
Medium Sized Enterprices from Those Poor Performance : Evidence From
China. Development of Management Sciences, City Univercity of
Hongkong.

COMPARATIVE ANALYSIS OF ENVIRONMENTAL MANAGEMENT DISCLOSURE
IN ASEAN COUNTRIES
(STUDY ON OIL, GAS, AND MINING COMPANIES)
Lufi Yuwana Mursita
STIE Perbanas Surabaya
Abstract
This research aims to measure and compare the extent of environmental management disclosure
in ASEAN countries. It also extends the research to examine the effect of corporate governance
score towards environmental disclosure and identify the cause of extent difference among
ASEAN countries. This study is explanatory sequential mixed research which after using
quantitative approach it continues with qualitative approach. It uses data from 17 oil, gas, and
mining companies in ASEAN for period of 2012-2014 and utilizes SPSS 22.0 to find the result.
The qualitative approach refers to related prior studies, books, and official websites. The results
show that (1) environmental disclosure in ASEAN is still averagely low and there is significant
difference in disclosure extent among the countries, (2) corporate governance score significantly
affects the extent of disclosure, and (3) the extent difference among countries is identified as the
effect of the existing regulations, company policy, and national cultures.
Key words : environmental management disclosure, ASEAN countries, corporate governance

score, difference, external factors
Introduction
The increasing number of company is followed by the coming up of environmental

problems. Environmental crisis because of high level waste which is resulted by production or
exploration process and product remains. Several studies mentioned that some companies have a
set of reputational problem because of the irresponsibility in environmental problems, especially
companies which exploit and get the resources from the nature. The example is explained by
Eljayash (2012) that oil and gas company has high demand to be more aware to the
environmental problems such as pollution which is resulted. Another case is mining company
that often makes a damage in the environment because of the exploration activity (Foncesa et al,
2012). In other hand, both of these companies product are the inseparable needs of the human in
the world. Therefore, the oil, gas, and mining company now is increasing the trend of
environmental issues involvement to maintain the society trust and their sustainability.
Business and society can be most fully understood in relationship to the broader natural
environment which they interact each other (Lawrence & Weber, 2014:212). Hadi (2011:37) stated
that environment side of the company closely related to local community, issue community,
employee, and customer, which the relation is in the form of sustainable development, waste
management, emission, energy usage, and product life cycle. Burnett et al (2011) states that eco-
effective management increases firm value and it is sustained beyond the current period. After
realizing this fact, the stakeholders demand towards this kind of information is being relatively high.

The fulfillment of information demand by the company points out the awareness of management that
sustainability is inseparable with society acceptance. Given the importance of both financial and non-
financial disclosure from the stakeholders, Global Reporting Initiatives, a non-profit organization,
since 2000 issued a guideline for preparing annual report. GRI (2013:5) stated that they support
company sustainability by setting a reporting guidelines, including reporting principles, standard
disclosures, and implementation manual.
Previous study by Schadewitz and Niskala (2010) resulted information that GRI reporting
is an important explanatory factors for a firm market value. This reporting helps firm to achieve
higher number of investor and increased stock price indirectly. It then coincides with the
existence of OECD Principles of Corporate Governance that company used to assess the level of
corporate governance. This principle also contains requirements of disclosure which then can be
used to decide whether a company is in good corporate governance or not. This matter motivates
the author to also examine the association between corporate governance score and
environmental management disclosure in which the corporate governance score may the one of
environmental management disclosure determinant.
Several studies about environmental disclosure have been held, especially in measuring the
extent of disclosure. Ullah et al (2014) investigates the environmental disclosure practices in annual
report in Bangladesh. The result suggests that the extent of environmental disclosure is still low. In
other research was also shown that the differences in environmental disclosure in Arab oil countries
is still low compared with the other oil companies in develop countries (Eljayash et al, 2012). In
other hand, Salama (2012) proved that for company in United Kingdom, the extent of disclosure is
positively affected by the size and industry type. While Mukherjee et al research (2010) suggests that
in India, the influencing factors of disclosure are effective tax rate, liquidity, and leverage. Closely
related with this study, Walls et al (2012) mentioned that there is significant association between
corporate governance and environmental performance. Foncesa et al (2012) suggested that
promotion is to provide stakeholders more meaningful and accurate information about
sustainability progress through the annual report because of some mining factors had changed.
ASEAN countries in ASEAN Economic Community, according to www.asean.org (2015),
continue to be actively engaged in addressing global environmental issues in accordance with the
principle of common but differentiated responsibilities. It means that environmental aspect is one
of emphasis in the countries cooperation. Each country government encourages the all of the
society and company to play a role in this effort. Environmental disclosure should be a way for
company in the ASEAN countries to perform their synergy to this objective. Besides that, to
fulfil both national and cross-national investor demand of information, the companies now are
developing the quantity and quality of the information, both in financial statement and annual
report. Therefore, this study seeks to analyze ASEAN countries annual report information
disclosure.
This study contributes in investigating the extent of oil, gas, and mining company
environmental management disclosure in ASEAN countries. Generally, oil, gas, and mining
company gives higher responsibility towards the environment because its activity which explores
more natural resources. Besides that, this study also examine the correlation between corporate
governance score and environmental disclosure. The last, there is also qualitative approach to further
explore the causes of difference in environmental management disclosure among the countries.
According to the previous study, this research initially has two hypothesis as below. H1 : There is
significant difference in environmental management disclosure extent of oil, gas,
and mining company among ASEAN
H2 : There is significant association between corporate governance score and environmental
management disclosure in oil, gas, and mining company of ASEAN countries.
Method
Sample and Data
There are ten countries in ASEAN covering Indonesia, Malaysia, Singapore, Philippines,
Vietnam, Thailand, Cambodia, Myanmar, Laos, and Brunei Darussalam. The criteria of the
sample company are go public oil, gas, and mining company; originally come from the subjected
countries; issue and publish annual report in company or stock exchange website; and use
English as reporting language. Data of those companies for the process of analysis is taken from
annual report in period of 2012-2014.
Based on the identification, the selected companies are 17 companies. They are oil, gas,
and mining companies from Indonesia, Malaysia, Singapore, Philippines, Thailand, and
Vietnam. While the remaining ASEAN countries : Cambodia, Laos, Brunei Darussalam, and
Myanmar do not have companies which match to the criteria. Furthermore, the total samples
used in this research is 51 annual reports.
Data Analysis Technique

This study uses three kinds of analysis. First is descriptive analysis which can describe data
by identifying the mean, deviation standard, variance, maximum, minimum, sum, range,
kurtosis, and skewness (Ghozali, 2013:19). Using this technique, the general condition of data
can be identified. This technique is especially used to overview the extent of environmental
management disclosure in ASEAN companies. Second analysis utilizes Kruskal Wallis to
examine the means difference among three or more groups by determining the difference
significance between a group with another group, especially for non-parametric data. This
analysis is utilized since data used in this study cannot fulfil the assumption of parametric data
test. The result of this analysis is going to be further identified using qualitative approach which
is to find some factors affecting the difference of environmental management disclosure among
ASEAN countries.
The last analysis technique used is regression analysis to measure both the direction and
strength of association among variables to measure the impact of the influence (Ghozali,
2013:40). In this research, regression analysis helps to measure the association between
corporate governance score as independent variable and environmental management disclosure
as dependent variable. However, before conducting regression analysis, it needs to conduct test
of classic assumption. In this case, normality test is utilized to ensure that the data used for the
analysis is normally distributed.
Result
Descriptive Analysis
The measurement of environmental management disclosure is conducted by content
analysis in annual report to find 34 aspects ruled in GRI Disclosure Index. The extent of
disclosure is the result of found aspect divided by 34 as the total number of aspects. This
research examines disclosure of 17 oil, gas, and mining companies’ activity from six countries in

ASEAN. The number taken from the calculation is transformed to the form of percentage of
disclosure. Descriptive analysis is utilized to result descriptive statistics both based on company
and country. Analysis by company is to identify the score mean of company disclosure and also
to point out the company with the maximum and minimum score of disclosure along the period.
While analysis by country is to identify the mean of country disclosure and to know which
country in the minimum and maximum score of disclosure.
Within the period of 2012-2014, oil, gas, and mining companies in ASEAN countries
disclose environmental management disclosure in their annual report averagely about 26,53
percent. The maximum disclosure among 17 companies is 61,76 which is found in Padaeng
Industry Public Company Limited annual report. While the minimum disclosure is 9,8 percent
that is the result of content analysis in SGS Singapore annual report.
It is also known that oil, gas, and mining company in ASEAN countries discloses
environmental management in 2012 in average of 23,70 percent. The biggest extent of disclosure is
58,82 percent. Otherwise, the minimum disclosure in the year is 8,82 percent. Different with 2012,
the average extent of disclosure in 2013 increases about 3,46 percent to be 27,16 percent. The highest
extent of environmental disclosure is 58,82 and the minimum disclosure is 11,76. In 2014, companies
in ASEAN countries averagely disclose about 28,72 percent by increase of 1,56 percent. The
maximum disclosure also increases to be 67,65 percent. However, the minimum disclosure decrease
to be back to 8,82 percent. The minimum extent of environmental disclosure is found in the same
company along 2012-2014 respectively. As well as the maximum extent is also identified in the same
company along the taken period. A company with the highest disclosure is Padaeng Industry Public
Company Limited, while the lowest one is SGS Singapore.
Table 1.
Environmental Management Disclosure of Observed Companies
Disclosure (%)
No. Company Country
2012 2013 2014
1 PT Aneka Tambang Tbk Indonesia 35,29 44,12 44,12
2 PT Energi Mega Persada Tbk Indonesia 20,59 14,71 17,65
3 PT Surya Esa Perkasa Tbk Indonesia 26,47 17,65 20,59
4 Malaysia Smelting Corporation Bhd Malaysia 29,41 26,47 29,41
5 Gas Malaysia Berhad Malaysia 23,53 26,47 26,47
6 Petronas Gas Berhad Malaysia 26,47 52,94 50,00
7 Dialog Group Berhad Malaysia 20,59 20,59 23,53
8 Lepanto Consolidated Mining Co. Philippines 26,47 17,65 20,59
9 Philex Mining Corporation Philippines 23,53 26,47 29,41
10 Phoenix Petroleum Philippines, Inc. Philippines 20,59 20,59 20,59
11 SGS Singapore Singapore 8,82 11,76 8,82
12 CNMC Goldmine Holdings Limited Singapore 17,65 35,29 35,29
13 China Aviation (Singapore) Co. Ltd. Singapore 11,76 17,65 17,65
14 Padaeng Industry Public Co. Ltd. Thailand 58,82 58,82 67,65
15 PTT Public Company Limited Thailand 17,65 29,41 50,00
16 Masan Group Vietnam 14,71 26,47 14,71
17 PetroVietnam Drilling Vietnam 20,59 14,71 11,76

Total 23,70 27,16 28,72
In other hand, based on the analysis by country, along the period of 2012-2014, country
with the highest mean of environmental disclosure is Thailand by the extent of 47,06 percent.
Otherwise, the lowest extent of disclosure is 17,16 percent which is owned by Vietnam. The
average extent of environmental management disclosure analyzed by countries is 26,98 percent.
According to yearly analysis, in 2012, the minimum disclosure score is performed by Singapore
of 12,75 percent, while in 2013-2014 is performed by Vietnam of 20,59 percent and 13,24
percent respectively. Besides that, the maximum score is found in Thailand about 38,24 percent,
44,12 percent, and 58,82 percent in each year 2012-2014. The yearly average of disclosures are
24,10 percent, 27,49 percent, and 29,33 percent respectively.
Comparative Analysis
The main objective of the research is to investigate difference in environmental
management disclosure of oil, gas, and mining companies among the ASEAN countries. Table 2
depicts that there is significant difference among ASEAN Countries in the period of 2012-2014
(sig. 0,002). The result of analysis ensures that the overall environmental management disclosure
is significantly different. In 2012, the level of difference significance is 0,115 or 11,5 percent
which is more than 0,05 or 5 percent. It means that the difference of environmental management
disclosure among ASEAN countries in 2012 is not significant.
Along 2012, oil, gas, and mining companies in ASEAN countries report the environmental activity
in the range of 12,74 percent up to 38,24 percent and show contiguous extent of disclosure
difference. The average extent of environmental management disclosure in 2013 of the comparative
sample countries is in range of 20,59 percent up to 44,12 percent. The maximum and minimum
disclosure in 2013 increases from 2012 about 5,88 percent and 7,85 percent respectively. The
Kruskal Wallis result represents the difference magnitude of environmental management
disclosure among the countries in 2013. The level of significance is 0,387 or 38,7 percent which
is also more than 0,05 or 5 percent. The difference significance decreases from 2012. In 2014,
the oil, gas, and mining companies in ASEAN countries disclose their environmental
management disclosure averagely in the range of 13,24 percent up to 58,82 percent.
Environmental management disclosures among ASEAN countries in 2014 are still
insignificantly different in 0,091 or 9,1 percent. However, the wide range of disclosure by
countries is found making the higher significance of difference than the previous years.
Table 2.
Comparative Analysis of Environmental Management Disclosure by Country
a,b
Test Statistics
Environmental Environmental Environmental
Disclosure 2012 (%) Disclosure 2013 (%) Disclosure 2014 (%)
Chi-Square 8,857 5,239 9,501
df 5 5 5
Asymp. Sig. ,115 ,387 ,091
a. Kruskal Wallis Test
b. Grouping Variable: ASEAN Countries

From all above analysis, it is known that by yearly identification along 2012-2014, the
environmental management disclosures of ASEAN countries have insignificant difference in all
years. Otherwise, by the simultaneously identification, the disclosures are generally different
among the countries. This fact provides evidence that there is difference in extent of oil, gas, and
mining company environmental management disclosure quantity in each ASEAN countries.
Regression Analysis
The second objective of this research is to examine the association between corporate
governance score and oil, gas, and mining company environmental management disclosure in
ASEAN countries. After analyzing the extent difference among the oil, gas, and mining
companies in ASEAN countries, the effect of corporate governance score which identified as
one of determinant of the disclosure is also examined. Prior studies mentioned that good
corporate governance in each countries have a significant effect towards environmental
performance of the company.
To find the best result, normality test is utilized to ensure that data used in the analysis is
normally distributed. However, from this test, it is known that the data contains several outliers
which causes the test should be conducted more than once. This research then successfully finds the
normally distributed data after missing nine outliers data at the significance of 0,136 (≥ 0,05).
This abnormal is strongly alleged as the effect of each company uses same corporate governance
score within the observed period. This is caused by the usage of Disclosure and Transparency
aspect of ASEAN Corporate Governance Scorecard as the basis of measurement which produces
only one corporate governance score in each company along the three years period.
Nevertheless, with the data, it is found a good result of regression analysis.
Table 3.
Regression Analysis Result
a
Coefficients
Model Coefficients Coefficients t Sig.
B Std. Error Beta
1 (Constant) -31,610 11,911 -2,654 ,011
,608 ,135 ,579 4,494 ,000
Score (%)
a. Dependent Variable: Environmental Disclosure (%)
Locating the corporate governance score as independent variable and environmental

management disclosure as dependent variable, according to regression analysis above, it is
identified that the significance level is on 0,000. It means that corporate governance has a
significant relation (≤ 0,05) with environmental management disclosure of oil, gas, and mining
companies in ASEAN Countries. The F test resulted Adjusted R Square of 0,319 or 31,9 percent.
It means that environmental management disclosure extent by oil, gas, and mining companies is
31,9 percent affected by their corporate governance score, while the rest (68,1 of 100 percent) is
affected by other determinants or factors. This result is successfully shows the support the
hypothesis formulation. It proves that there is significant association between corporate
governance score and oil, gas, and mining company environmental management disclosure of
the ASEAN countries. This result is relevant with the prior study.
.
Discussion
Extent of Environmental Disclosure in ASEAN Countries
Finding the result of descriptive analysis by country, the extent of environmental
management disclosure in ASEAN along 2012-2014 is 26,98 percent. It means that from 34
items listed on GRI guideline, only about nine items which can be found inside the annual report
of ASEAN countries. In 2012, mean of environmental management disclosure reaches 24,10
percent or about eight items disclosed. It found an increase to be 27,49 percent in 2013. It shows
that for about nine items related with environmental activity which are provided by the
companies. While in 2014, the disclosure is about 28,72 percent or almost ten items disclosed in
the annual reports.
According to the extent number of disclosures within 2012-2014, generally, Thailand is
countries with the highest one of 47,06 percent or 16 items disclosed. In this research, Thailand
represents two companies with average extent of 61,67 percent and 32,35 percent, respectively.
It shows that one of the companies reports a high environmental issue which then dominates the
country extent of disclosure. In other hand, Vietnam is the country with the lowest extent of
environmental disclosure of 17,16 percent or almost 6 items disclosed in their annual reports.
The result of the analysis shows that the environmental management disclosure in oil, gas,
and mining companies’ annual report is generally still low. This result is similar with previous
study conducted by Ullah et al (2013) which mentioned that textile companies listed in
Bangladesh Stock Exchange reports a low level of environmental disclosure with the mean of
16,17 percent. It also supports study by Buniamin (2010) which results conclusion that
environmental reporting of all types of company in Malaysia is still low by the mean of 3,24
percent
However, based on the data, it is always found an increase of environmental management
disclosure of ASEAN countries in every year. It also supports the prior study by Foncesa et al
(2012) which resulted conclusion that the promotion to provide stakeholders more meaningful
and accurate information about sustainability progress through the annual report because of some
mining factors had changed, especially to be better.
Comparative Analysis of Environmental Disclosure in ASEAN Countries

As the main objective in this study, the result of comparative analysis are highlighted. This
research examines whether there is a difference of environmental management disclosure in
ASEAN countries addressing the oil, gas, and mining companies. The analysis consists of two
types, they are through the comparison by country overall and yearly.
The 2012 yearly comparison results a significant number of 0,115 or more than 0,05. In
2013, the result mentions significance of 0,387 or more than 0,05. Also in 2014, the significance
is on 0,091 or more than 0,05. This presents that according to yearly comparative analysis, the
difference of environmental management disclosure is always insignificant. The insignificant
difference in 2012-2014 is identified because of the enactment of new regulations related
corporate social responsibility or environmental management disclosure in ASEAN countries. In
2011 and 2012, there are emerging mandatory regulations in Indonesia, Philippines, and
Singapore, while the rests have ruled by regulations which issued before 2011. This indicates
that Indonesia, Philippines, and Singapore are responding the regulations by increasing the level
of disclosure. The result is the insignificant difference of disclosure among the countries.

However, the result of general analysis depicts significance number of 0,002 or less than
equal to 0,05. This means that generally, the environmental management disclosure within 2012-
2014 in oil, gas, and mining companies annual reports are significantly different among those
countries. This result support the hypothesis that there is difference in extent of oil, gas, and
mining company environmental management disclosure in each ASEAN countries. Besides that,
this is also relevant with Eljayash et al (2012) which proved that the differences in environmental
disclosure in Arab oil countries is still low compared with the other oil companies in developed
countries. Even ASEAN countries does not all consists of developed countries, but the research
object of both researches is oil companies. It means that environmental management disclosures
in ASEAN companies and Arab companies are comparable.
Correlation Analysis of Corporate Governance Score and Environmental Disclosure

The second main objective is answered by the result of regression analysis mentioned in
the last sub-chapter. Besides testing the difference of environmental management disclosure
among ASEAN countries, this research also examine one of the disclosure extent determinants
that is corporate governance score. This is to know whether corporate governance score will
affect the extent of environmental management disclosure.
The regression result shows the significance number of 0,000 or less than equal to 0,05 which
means that the corporate governance score has correlation with extent of environmental management
disclosure of oil, gas, and mining companies in ASEAN countries. It also performs that corporate
governance score impacts about 26,6 percent towards the extent of disclosure. Finally, it is concluded
that the second hypothesis is also accepted. This correlation test result supports the prior study held
by Walls et al (2012) which mentioned that there is significant association between corporate
governance and environmental performance. Although the dependent variables are rather different, in
which the current study is using environmental management disclosure, it has to be noted that
environmental disclosure is the part of environmental performance. Furthermore, the relevance of the
study also can be accepted.
Factor Influencing Environmental Management Disclosure

Many factors can affect the extent and focus of environmental management disclosure.
One of determinant found in this study is corporate governance score which in ASEAN
countries, it gives a significant effect towards the environmental management disclosure. The
prior studies also find other internal factors, such as company size and environmental sensitivity
(Buniamin, 2010) and organizational image and reputation (Zeng et al, 2011). In other hand,
external factors are also indicated to affect the extent of environmental management disclosure.
Prior research by Ioannou and Serageim (2011) showed that after the adoption of mandatory
sustainability reporting laws and regulations in the company or country level, the social
responsibility of business increases. This means that environmental management disclosure
extent is affected by the existence of rules which cause environmental management disclosure in
the form of sustainability report to be a mandatory.
Most company in the world arranges the annual report with same elements of information
disclosed but there is no report standards or rule for the arrangement. Generally, the systematic
of annual report is made by the stock exchange and company joins the standard made by stock
exchange where it listed. Because of that, the company discloses their information in different
extents even with in same section of information. This goes to be the constraint of this study
which not all companies discloses environmental management disclosure within annual report in
high level extent. However, all company issue annual report along the period. Thus, this research
stands to utilize the annual report to determine the extent of environmental management
disclosure to maintain comparability of the data resources.
Sustainability reporting is the best way and report to inform all company aspects
comprehensively, including environmental aspect. Otherwise, the issuance of sustainability
report is not a mandatory in all countries. It is based on the existing regulation which can be
issued by market regulator/stock exchange, government, or both of them (Carrots and Sticks,
2013:13). The literature review informs that national stock exchange of each country has
different policy for the disclosure of sustainability reporting. Three aspects are considered, they
are the existence of reporting guideline, existence of sustainability index, and information of
sustainability reporting as listing requirement. There are two of six countries with stock
exchanges mandate the listing company to publish sustainability report, they are Malaysia
(Malaysia Stock Exchange) and Thailand (Thailand Stock Exchange). While the rests are not
required to issue sustainability report although the stock exchange provides reporting guideline,
sustainability index, or both. Companies are encouraged to report on their sustainability
performance with the existing standards.
Company in the country with mandatory regulation of sustainability reporting, at the end of
year, also issue sustainability report besides the annual report. Along the process of collecting the
annual report from the website, it is found several companies issue both annual report and
sustainability report as expected. However, some of them only issue annual report and unexpectedly,
there is also annual report which is combined with sustainability report to be a set. Unfortunately,
there is also companies which only issues annual report but the contents is overall about financial
statement. In fact, there are companies that provide both annual report and sustainability report,
either as mandatory or as voluntary. However, for the comparability reason, sustainability report
is not used as additional information of the disclosure extent. According to the result of annual
reports content analysis, this reporting condition induces some companies do not disclose
environmental management description in annual report since they have issued the sustainability
report. It causes lack of environmental management disclosure analyzed in annual report. One of
the company is SGS Singapore which has low level of disclosure. In other hand, there are also
several companies which disclose environmental aspects in average extent of disclosure although
they do not publish sustainability report.
The company which combined annual and sustainability reports result high extent of
disclosure. Padaeng Industry Public Company Limited (Thailand) is the only one company
which combines both of annual report with sustainability report. As the analysis result, the
annual report generates maximum extent of environmental management disclosure that leads
Thailand to be the highest rank. From this analysis, it is concluded that the existence of
regulation affects the environmental management disclosure extent. It can causes either increase
or decrease of the extent, depends on the policy taken by company for their report issuance. The
existing condition and policy had by ASEAN countries causes the low level of environmental
management disclosure even they are operating in environment highly impact business, in this
case is oil, gas, and mining company.
Another factor which can influence the extent of environmental management disclosure
also found by Orij (2010) who examined the relationship between corporate social responsibility
levels and national cultures. The study suggests that culture is clearly associated to corporate
social responsibility. The national cultures itself is based on Hofstede’s cultures dimensions
which consist of power distance, individualism, masculinity, uncertainty avoidance, long term
orientation, and indulgence. Since this is a cross-national research which compares
environmental management disclosure among six ASEAN countries, the national culture
dimensions influence towards the environmental management disclosure also can be taken into
account.
Figure 1.
Level of Hofstede’s National Culture Dimensions

This research refers to Geert Hofstede website which becomes the center and provides
culture dimensions scoring of all countries in the world. Geert Hofstede’s website (www.geert-
hofstede.com) provides information about each dimension definitions. It explains the elaboration
about country’s score in all dimensions. Using logical thinking, this research also relates the
information provided in the website with the environmental management disclosure condition, in
which the national culture is one of disclosure determinants by assuming score of ≤ 50 is
categorized as low and > 50 is high.
According to the website, it is found that all ASEAN countries power distance are high. It
means that those countries accept the hierarchical order which the power is centralized in the
manager or another higher position, in this case is in the company, while the lower position is
following the chosen decision. Relating with environmental management disclosure, it shows
that companies in ASEAN countries disclose environmental management disclosure based on the
mandate given by manager or another higher position. There is no compromise from the lower
position to strive for power equality which means they cannot report the environmental
management disclosure by their idea. This fact is considered leading the extent of disclosure to
be low because the environmental policy depends on the mindset of the leader.
In the individual dimensions, all of countries are categorized on low level or generally
called as collectivism. This suggests that the member of a country or organization has highly
interdependence each other. This is relevant with social contract theory which mentions that
company has a contract to the social or environment since their establishment. The collectivism
character of ASEAN countries describes the environmental management disclosure is the
representation of the awareness towards public interest related to environmental issue. This
dimension category is considered causing the higher environmental management disclosure since
the dimension is matched with social need.
Five of six ASEAN countries are identified in the low level of masculinity, or in other
word is called femininity. It means that the country or company prioritizes relationship, caring
each other, and life quality. By this fact, it is shown that environmental management disclosure is
one of media to protect relationship of the company and society, environment balance, and
maintain the society life quality. It is considered to lead the environmental management
disclosure to be higher because the femininity level should be proportional with number of
environmental activity.
Uncertainty avoidance are low in five of six countries. It shows that most of countries in
ASEAN are flexible and relax towards new things and tolerable to deviance. It describes the
attitudes and responds of the company to emerging regulation related with the company. Many
new environmental regulations were enacted since 2011 and 2012. By the low uncertainty
avoidance, it is estimated that the company has no explicit respond to follow the rule. The
decision to obey or disobey the rule is affected by the flexibility character of the company. This
causes environmental management disclosure going to be low than if the company are in high
level of uncertainty avoidance.
A half of countries have long term orientation (pragmatic culture) while the other has short
term orientation (normative culture). In the pragmatic culture, the company or country shows its
ability to adapt new change and persistence in achieving goals. In other hand, normative culture
respect to existing tradition and quickly in achieving goals. Pragmatic culture maintains their existing
tradition rather than paying attention to societal change. It means that although the present trend of
environmental management disclosure is high, but the focus to improve the economic aspect of
company is also still the most attention. This is different with normative culture which respect to
tradition but considers the low propensity to save the future so it has to adapt to societal change.
The environmental issue is one of the key in the future business, not only the economic aspect.
Hence, country with pragmatic culture will have lower environmental management disclosure
than the normative one.
The last dimension, five of six countries are categorized to low level of indulgence or
called as restraint. This means that the country has high tendency to cynicism and pessimism and
has low preference to having fun. This character leads the company finds themselves are
restrained by social norm and holds that taking take for indulgence is a wrong. Therefore,
country with this such dimension is considered to have higher environmental management
disclosure because by the existence of new regulations concerning with the practice, the
company will feel being restrained by the regulation and budget their expenditure for
environmental expense, rather than only focusing in economic activity.
Based on all national culture influence analysis, following the definition and the likelihood to
respond towards environmental activity suggestion, it is concluded that environmental management
disclosure in ASEAN countries are led to be higher by the dimensions of high collectivism,
femininity, and restraint. However, the other dimensions, including high power distance and low
uncertainty avoidance, also affect the disclosure conversely to be lower. As the statistical analysis
result which shows that environmental management disclosure in ASEAN is still low, it is considered
as the effect of very high level of power distance and lower level of uncertainty avoidance that lead
more the company to disclose lower rather than to be higher. It is also affected by the level of
orientation and evidently is more by the pragmatic culture.
According to all discussion above, it is known that the significant difference of
environmental management disclosure by oil, gas, and mining companies in ASEAN is affected
by many factors, including the external factor they are existing regulations and the policy taken
by companies as the response towards the regulations. The difference regulation in each country
and company policy results the difference in level of environmental management disclosure even
though it is examined from same types of information resource that is annual report. Besides
that, the extent of disclosure is also affected by the national culture.
Based on the purposes of study, all analysis, and discussions, it results three main conclusion
of the study. First, the result of content analysis shows that the average disclosure by ASEAN
countries is still low. Besides that, it is proved that there is a significant difference in oil, gas, and
mining companies’ environmental management disclosure. Second, according to the result of
Regression Analysis, there is significant correlation between corporate governance score and
environmental management disclosure. It presents that corporate governance score affects the extent
of environmental management disclosure in ASEAN countries. Third, the difference exist on
environmental management disclosure in ASEAN countries is caused by many factors which also
including external factors. In this country comparative analysis, regulations related environmental
management activity and disclosure issued by each stock exchange or government affects the extent
of disclosure. In the company perspective, the policy taken by company in responding the existing
regulation also affects the extent of disclosure. In addition, since this is a cross-national research,
national cultures is considered also gives influence to the disclosure.
Out of the result, this research has several limitations. In this research, variable used as
determinant of environmental management disclosure is only utilized corporate governance score.
This is because correlation analysis is an extended research after the measurement and comparative
analysis of disclosure extent. As the second limitation, the measurement of corporate governance
score is still limited to the aspect of Disclosure and Transparency, while the ASEAN Corporate
Governance Score consists of five aspects can be assessed. However, Disclosure and Transparency
aspect is used after being considered as the most related aspects with environmental management
disclosure. The last, the result of corporate governance score assessment is abnormally distributed in
the early normality test. The data is found normally distributed in the fifth normality test after
missing some outliers. This data abnormal distribution is indicated because of the corporate
governance score for each company along 2012-2014 has the same number as the effect of using
ASEAN Corporate Governance Scorecard.
Based on the result and limitation of this study, there are recommendations which given to
shareholder and future researcher. For shareholder, the trend of environmental management
disclosure should be an important consideration in investment. Somehow, environmental
management disclosure is an emerging trend of reporting which performs the company
responsibility and awareness towards environmental issue besides focusing on economic side. In
other hand, future researcher is also expected to conduct next research by utilizing other or all
types of company in order to result more comprehensive extent of disclosure and involve all of
ASEAN countries, enlarging the period of analysis to compare the extent of environmental
management disclosure with also comparing pre and post period of regulations enactment or by
another comparison basis, and using the limitation identified in this research as the reference for
future researcher to conduct the similar research.
References
Anonym. (2006), Challenges and Prospects for the ASEAN Economic Community, accessed
from: <http://www.asean.org/> [September 21, 2015]
Anonym. (2011), ASEAN Sets Another Landmark for Economic Integration, accessed from:
<http://www.asean.org/> [April 25, 2015]
Anonym. (2012), Mandatory Reporting: Does It Make a Difference?, accessed from:
<http://www.csr-asia.com/ > [January 06, 2016]
Anonym. (2012), Sector Guidance for G4, accessed from: <https://www.globalreporting.org/>
[October 30, 2015]
Anonym. (2015), ASEAN Stars by Market, accessed from: <http://www.aseanexchanges.org/>
[April 25, 2015]
Anonym. (2015), Environmental Management Systems EMS, accessed from:
<http://www.epa.gov/ems/> [April 24, 2015]
Anonym. (2015), Tanya Jawab ISO 14000, accessed from: <http://www.menlh.go.id/> [April 25,
2015]
Anonym. (2015), The Effects of Oil Drilling, accessed from: <http://www.rainforestfoundation.org/ >
[October 29, 2015]
Anonym. (2016), National Cultures, accessed from: <http:// www.geert-hofstede.com/> [January
12, 2016]
Buniamin, S. (2012). The Quantity and Quality of Environmental Reporting in Annual Report of
Public Listed Companies in Malaysia. Issues in Social and Environmental Accounting, 42,
115-135.

Burnett, R. D., Skousen, C. J., & Wright, C. J. (2011). Eco-Effective Management: an Empirical
Link between Firm Value and Corporate Sustainability. Accounting and the Public
Interest, 111, 1-15.
Carrots and Stick. (2013). Sustainability Reporting Policies Worldwide – Today’s Best Practice,
Tomorrow’s Trends. Africa : GRI.
Clarkson, P. M., Li, Y., Richardson, G. D., & Vasvari, F. P. (2008). Revisiting The Relation
Between Environmental Performance and Environmental Disclosure: An Empirical
Analysis. Accounting, Organizations and Society, 33(4), 303-327.
Creswell. (2014). Research Design : Quantitative, Qualitative, and Mixed Methods Approaches.
New Delhi : SAGE.
Eljayash, K. M., James, K., & Kong, E. (2012). The Quantity and Quality of Environmental
Disclosure in Annual Report of National Oil and Gas Companies in Middle East and North
Africa. International Journal of Economics and Finance, 4(10), 201-217.
Fonseca, A., McAllister, M. L., & Fitzpatrick, P. (2014). Sustainability Reporting Among
Mining Corporations: a Constructive Critique of the GRI Approach. Journal of Cleaner
Production, 84, 70-83.
Ghozali, I. (2013). Aplikasi Analisis Multivariate dengan Program IBM SPSS 21 Update PLS
Regresi. Semarang : Badan Penerbit Universitas Diponegoro.
GRI. (2013). Reporting Principles and Standard Disclosures. Netherlands : GRI. Hadi, N. (2011).
Corporate Social Responsibility. Yogyakarta : Graha Ilmu.
Hansen, D., Mowen, M., & Guan, L. (2007). Cost Management : Accounting and Control.
Singapore : Cengage Learning.

Hofstede, Hofstede, and Michael Minkov. (2010). Cultures and Organizations: Software of the
Mind. Revised and Expanded (3rd ed.). New York: McGraw-Hill USA.
_______. (2001). Culture’s Consequences: Comparing Values, Behaviors, Institutions, and
Organizations Across Nations (2nd ed.), Thousand Oaks CA: Sage Publications. Ioannou, I., &
Serafeim, G. (2014). The Consequences of Mandatory Corporate Sustainability
Reporting: Evidence from Four Countries. Harvard Business School Research Working
Paper, (11-100).
_______. (2011). The Consequences of Mandatory Corporate Sustainability Reporting. Harvard
Business School Research Working Paper, (11-100).
Ismail, M. S., Ramli, A., & Darus, F. (2014). Environmental Management Accounting Practices
and Islamic Corporate Social Responsibility Compliance: Evidence from ISO 14001
Companies. Procedia-Social and Behavioral Sciences, 145, 343-351.
Mbekomize, C. J., & Wally-Dima, L. (2013). Social and Environmental Disclosure by
Parastatals and Companies Listed on the Botswana Stock Exchange. Journal of
Management and Sustainability, 33, p66.
Noor, Juliansyah. (2013). Metodologi Penelitian. Jakarta : Prenada Media Group. Orij, R. (2010).
Corporate Social Disclosures in The Context of National Cultures and
Stakeholder Theory. Accounting, Auditing & Accountability Journal, 23(7), 868-889. Plessis,
J.J., McConvill, J., & Bagaric, M. (2007). Principles of Contemporary Corporate
Governance. Australia : Cambridge University Press.
Post, J. E., Frederick, W. C., Lawrence, A. T., & Weber, J. (2014). Business and society:
Corporate Strategy, Public Policy, Ethics. Singapore : McGraw-Hill.
Salama, A., Dixon, R., & Habbash, M. (2012). An Examination of Environmental Disclosures in
UK Corporate Annual Reports. Journal of Accounting, Business & Management, 191.
Sekaran, U., Bougie, R. (2013). Research Methods for Business – A Skill-Building Approach.
United Kingdom : John Wiley & Sons Ltd.
Sen, M., Mukherjee, K., & Pattanayak, J. K. (2011). Corporate Environmental Disclosure Practices
in India. Journal of Applied Accounting Research, 122, 139-156.
Smith, M. (2012). Research Methods in Accounting. Singapore : SAGE Publication. Solomon, J.
(2007). Corporate Governance and Accountability. New Jersey : John Wiley &
Sons.
Sugiyono. (1999). Metode Penelitian Bisnis. Bandung : CV Alfabeta.
Ullah, H., Hossain, M. M., & Yakub, K. M. (2014). Environmental Disclosure Practices in
Annual Report of the Listed Textile Industries in Bangladesh. Global Journal of
Management And Business Research, 141.
Walls, J. L., Berrone, P., & Phan, P. H. (2012). Corporate Governance and Environmental
Performance: is there really a link?. Strategic Management Journal, 338, 885-913.
Weber, R. P. (1990). Basic Content Analysis. London : SAGE.
Zeng, S. X., Xu, X. D., Yin, H. T., & Tam, C. M. (2012). Factors That Drive Chinese Listed
Companies in Voluntary Disclosure of Environmental Information. Journal of Business
Ethics, 109(3), 309-321

Financial Regulation Violations and Corporate social responsibility
disclosure: A test of legitimacy theory in Indonesia Stock Exchange
Habib Muhammad Shahib

Affiliation, Universitas Fajar, Makassar, Indonesia
E-mail address: muh.shahib@gmail.com
ABSTRACT
This study aims to examine the empirical facts related to the legitimacy theory within the
scope of financial regulation violations and corporate social responsibility disclosure (CSRD)
of non-financial companies in Indonesia Stock Exchange. The data in this study was obtained
from the Indonesia Stock Exchange. 24 non-financial violator-companies of financial
regulation during the 2010-2013 period were chosen as the samples. The research hypotheses
were analyzed by using a PLS statistics and SmartPLS 3.0 software. The empirical result of
this study shows no effect of the financial regulations violations on the level of corporate
social responsibility disclosure in Indonesia Stock Exchange. Thus this study confirms
legitimacy theory in different socio-economic condition. Originality of this study lies on its
research method that uses a value of fine in measuring the severity of company’s financial
regulation violation and its empirical result that describes the form of legitimacy on different
contexts, especially in the context of the Indonesian capital market.
Keywords: Legitimacy theory, Financial regulation violation, CSRD
1. INTRODUCTION
After entering the reform era, various illegal acts such as corruption, collusion and other
abuses still continue undermining Indonesia in the private and public sector. These are
confirmed by the Transparency International’s Corruption Perception Index data
(Transparency International, 2015), which still puts Indonesia as a country with the high level
of corruption and lawlessness in the public and private sectors. Although, reform of the
bureaucracy and a lot of new regulations related to the achievement of good governance in
various fields have been implemented, many abuses still happen. For examples, cases of
violation of financial rules that lead to acts of fraudulent financial reporting occurred in
government (KPK, 2015) as well as several companies listed on the Indonesia Stock
Exchange. As found by Indonesia Stock Exchange Supervision Bureau (BAPEPAM,
nowadays is OJK) (BAPEPAM LK, 2015), some companies did accounting records which
were not in accordance with the rules, even tend to lead to fraud acts which led to the
imposition of sanctions against the companies (Ansar, 2013). Moreover, as the case in the
field of taxation known as aggressive tax, which is a taxpayer or a company effort to
minimize the taxes to be paid with using a gap in taxation rules (Minnick and Noga, 2010).
These conditions above become interesting to examine, especially in accounting
perspective using the legitimacy theory. According to legitimacy theory, the company can
only maintain its business operations if it can get the legitimacy of the public and the
government by obeying the rules and norms in its operation place (Deegan, 2007). In
harmony with this theory, some researchers and writers who use the legitimacy theory as a
tool of analysis, find companies that do not follow or violating any rules or norms that apply
in their operation fields, tend to try to divert the public attention by using media such as
annual reports. Particularly, related to corporate social responsibility disclosure which is
nowadays becoming one of the economic decision-making references for investors,
consumers, governments and other stakeholders (Islam and Deegan 2010; Gamerschlag,
Moller & Verbeeten, 2010; Lanis and Richardson, 2013). The companies expect that by using
corporate social responsibility disclosure that embedded in annual report, they can avoid the
mass judgement as the rules or norms violators. So, the companies’ good image can sustain
time to time (Deegan, Rankin & Tobin, 2002; Lanis and Richardson, 2013).
In Indonesia case, in line with the rising of public expectations in order to achieve good
governance, effective-efficient capital markets and improving corporate social responsibility
after the 1998 reform movement, Indonesia Stock Exchange Supervision Bureau is getting
ready to deliver and revise the financial regulations that rule go-public companies in
Indonesia. Furthermore, related to corporate social responsibility disclosure in Indonesia
which is based on Republic of Indonesia’s Act No. 40 of 2007 (UU No. 40 Tahun 2007). In
August 2012, the supervisory authority of the capital market has strengthened the disclosure
obligations of corporate social responsibility by issuing XK6 regulation (Peraturan XK6
Bapepam 2012) that binds all companies that listed on the Indonesia stock market (BEI) to
deliver corporate social responsibility disclosure in their annual report. Based on the time
span of the regulations issuance that have not been too long and the rules are not clearly set
the things that need to be disclosed (UU No. 40 Tahun 2007; Peraturan XK6 2012). It can be
assumed firms in Indonesia are still expressing corporate social responsibility report
voluntary and that report can be used to shift the public focus of other rules which the firms
have violated. In order to maintain the company's reputation (Deegan et al 2002; Bebbington,
Larrinaga & Moeva, 2008; Lanis and Richardson, 2012; Lanis and Richardson, 2013).
Furthermore, previous research found there were still limited evidences to support the
legitimacy theory as an explanation of the relationship between management acts and
corporate social responsibility disclosure. These are based on the inconsistency of empirical
results that associated with the explanation of rules or norms violations influence on the level
of corporate social responsibility disclosure. Particularly, in the context of different rules
violations and different research environments (Wilmshurt and Frost, 2000; Deegan et al,
2002; Bebbington et al, 2008; Lanis and Richardson, 2012; Lanis and Richardson, 2013).
Thus, there is a research gap for further testing, particularly, related to the observation of the
effects of financial rules violations on the level of corporate social responsibility disclosure in
different countries. This is consistent with legitimacy theory which asserts that a legitimacy
on companies rely heavily on geographic and socio-economic factors in their operation
locations (Deegan, 2007). This study then tries to develop research based on Lanis and
Richardson (2013), Zeidan (2012), Gamerschlag et al (2010) studies by taking a sample of
companies that listed in the Indonesia Stock Exchange to analyze the influence of violations
of Indonesia Stock Exchange Supervision Bureau’s financial Rules on the level of corporate
social responsibility disclosure, in order to assess the implications of the legitimacy theory in
the Indonesian capital market.
2. THEORY AND HYPOTHESIS DEVELOPMENT
2.1 Legitimacy Theory

Legitimacy theory in accounting understood as a descriptor for the actions of an
organization in maintaining business actions and the organization's image in harmony with
the value system that held by public (Gray, Kouhy & Lavers, 1995; Deegan, 2007). From this
statement, it can be seen that the organization will seek to create social values in its activities
in accordance with the norms in the social system. This is because; the organization is part of
the system, Harmony between the two systems (company and social system) then
establishing the legitimacy of the company.

The harmony of values between community and the company acts is very important. The
differences in knowing value between the company and the community will lead to the
legitimacy gap and would threaten the company's going concern (Deegan, 2007). However,
the company can change the social values or public perception about it as a tactic of
legitimacy in several ways. For instance, the company tries to perform a lawful operation, to
seek a legal loophole that could be violated (Lanis and Richardson, 2013), to do more
disclosure about activities that related to company’s operations that have a social impact
(Gray et al, 1995) and even up, lobbying the legislators so the law does not interfere with
their business activities (Hadi, Daeng, Afrimadona, Darmastuti, Pratiwi & Nataprawira,
2012).
2.2 Social-Legitimacy Context in Financial Regulations and Corporate Social

Responsibility Compliance
The social context cannot be separated from the relationship between the role of the State,
individuals and social groups (Fakih, 2001). So, in understanding the company disclosure, it
must be seen in a relation that connect individuals, social groups and countries where the
company operates (Gray et al, 1995). Even to other stakeholders such as shareholders,
creditors, and communities across the country (Global Society). Based on these, it is
understandable why financial regulation that aims to create efficiency and effectiveness of
the market become mandatory. Because, if the rules are violated, it can negatively impact the
overall performance of the company (Zeidan, 2012). Furthermore, the financial regulation
and corporate social responsibility compliances are examples of the interaction forms
between the company and all stakeholders who affect the company performance (Gray et al,
1995; Deegan, 2007). In particular, to obtain and maintain the social and economic
legitimacies of the social environment in which company operates (Gray et al, 1995; Deegan,
2007).
2.3 Hypothesis Development

2.3.1 The relationship between the level of Financial Regulations Violations and
Corporate Social Responsibility Disclosure
Legitimacy theory stated that the companies will tend to seek legitimacy from the public
for ensuring their business sustainability, even, they did the regulations or norms violations
(Deegan, 2007). Several previous studies have also found some companies that try to divert
public view to not focus on their law violations with disclosing more information related to
corporate social responsibility in the companies’ annual report (Patten, 1992; Brown and
Deegan, 1998; Deegan et al., 2002; Lanis and Richardson, 2013). It is then interesting to
study in the different social environment and law violations objects such as in Indonesia
Stock Exchange in order to test the legitimacy theory and the effectiveness of capital market
regulations. Thus the hypothesis that will be tested is:
H1: The level of financial rules violation has positive effect on the level of corporate
social responsibility disclosure.
Based on the theory and discussions that have been described previously, the framework
of this research is structured as below:
3. METHOD
Variables observed in this study was measured using the proxies from previous research
that have been developed. Which comprises of two main variables (independent and
dependent) and three control variables. The independent variable in this study is the level of
financial rules violation that given by Indonesia Stock Exchange Supervision Bureau
(Bapepam/OJK) (BAPEPAM LK, 2015). As for the main proxy of this variable is the
company's total annual sanctions in the Rupiah fine form that given by Indonesia Stock
Exchange Supervision Bureau. With an assumption, the greater fine which imposed by
Indonesia Stock Exchange Supervision Bureau meant the company is violating financial
regulations heavily. Here proxy used in this study, Financial Rule Violation Level (FRVL):
The proxy specifically developed for this study, with the aim to get more valid results in
measuring the level of financial regulations violation. It moved from the limitations and
suggestions from previous studies that always using a dummy variable for measuring the
regulations or norm violations (Langus and Motta, 2007; Zeidan, 2012; Lanis and
Richardson, 2013) and found, it was difficult to see and measure the direct influence of the
laws or regulations violation of the company.
The dependent variable in this study is the level of Corporate Social Responsibility
Disclosure. This study adopts an indicator for measuring corporate social responsibility
disclosure from Said, Zainuddin and Haron, (2009) and Lanis and Richardson (2013) also in
line with the categories of social information according to GRI (Global Reporting Index)
version 4.0 (GRI 4.0) which consisted of the environment, energy, health, and safety of labor,
product, community involvement, and the public. Number of items disclosed by the company
is 82 items that consists of environmental categories (34 items), categories of workers (16
items), Category Human Rights (12 items), the category of social (11 items), category of
product (9 items). Then the formula for measuring the level of corporate social responsibility
disclosure (CSRD), namely:
The variable controls used in this study are Size = Ln (Total Assets of company),
Leverage (LEV = Total Debt/Total Assets), and the company’s environmental impact (EI)
which is based on research Gamerschlag et al., (2010) and the context of the industry in
Indonesia as measured by a score of extensive environmental impact of the company
(Farm/plantation=7; Mining= 6; basic materials/chemicals=5 ;Automotive/textile/electronic=
4; Food=3; Construction/infrastructure/property=2 ;Trade/service= 1). The population in this
study is the registered companies in Indonesia Stock Exchange in 2010-2013. Purposive

sampling method is used. So, the sample is limited to non-financial companies that commit
violations of financial regulations as well as getting fine from Indonesia Stock Exchange
Supervision Bureau, and publish their annual report in a period of observation. As depicted in
the following table:

Table 1: Description of The Research Data
Sample Numbers Percentage
Non-financial companies as violator of financial regulations 31 100%
(2010-2013)
Non-financial companies that did not publish annual report 7 22%
(2010-2013)
Total of sample that can be used in research 24 78%
Industry Companies Number Percentage
Farm/plantation 1 4.17%
Mining 6 25%
Basic Materials/chemicals 1 4.17%
Automotive/Textile/Electronic 6 25%
Food 1 4.17%
Construction/Infrastructure/property 3 12.50%
Trade/Service 6 25%
Total 24 100%
This research used Software Partial Least Square (PLS). In accordance with the opinion
of Ghozali (2012), the choice of using that software, it can be based, on the research data
used does not meet with the assumptions of the classical linear, the number of sample data is
small, there are a missing value and a multicollinearity problem. Furthermore, the analysis
stage that needed for reaching the research conclusion by using PLS approach consists of
assessing the measurement model (outer model) and assessing the structural model (inner
model) of a research model.
4. RESULTS AND DISCUSSION
4.1 Descriptive Statistics
Table 2: Descriptive Statistics of Variable Research

N Min. Maks. Mean Std. Dev
FRVL (Rp) 96 0 1,000,000,000 82,645,833.33 154,929,320.33
CSRD 96 0.040 0.770 0.24531 0.168660
Asset (Rp) (in
96 51,660 74,653,257 10,382,746.12 18,117,718.85
millions)
SIZE 96 24.668 31.944 28.49160 1.912192
LEV 96 0.006 0.966 0.47030 0.245700
EI 96 1 7 3.41667 1.966384
Source: SPSS 21 output (2015)
Notes: Variable definitions: FRVL= Rupiah Fine that given by Indonesia Stock Exchange
Supervision Bureau; CSRD= the total number of CSR sentences disclosed in the annual report;
Asset= The real value of firm’s assets; SIZE= the natural logarithm of total assets; LEV= Total
Debt/Total Assets; EI= Firm’s environmental impact that measured by scores 1 to 7, bigger its
score, bigger its environmental impact.
Table 2 shows the amount of data used in this study is 96 data derived from the annual
reports of 24 companies in the period 2010-2013. The descriptive overview illustrates the
independent variable, FRVL, has a mean of Rp 82,645,833.33 and a range of 0 to Rp
1,000,000,000.-. CSRD, the dependent variable, has a mean of 0.245 (24%) and a range of
0.040 (4%) to 0.77 (77%).The Statistics for the control variables are as follows, SIZE has a
mean of 28,49 (Rp 10.38 trillion) and a range of 24.66 (Rp 51.66 billion) to 31.94 (Rp 74.65
trillion). LEV has a mean of 0.47 (47%) and a range of 0.006 (0.6%) to 0.96 (96.6%). EI has
a mean of 3.4 and a range of 1 to 7. Overall, I find, the data does not meet with the
assumptions of the classical linear, so PLS approach can be an alternative for measuring the
statistical results.
4.2 Assessing Measurement Model (Outer Model)

Analyzing the observed variables using SmartPLS software does not need to measure the
model, so it can directly estimate the structural model (Ghozali, 2012). Caused the research
construct is a formative shape, then the evaluation of research measurements model is
performed with seeing the weight significance value of research model. So that the validity
and reliability tests of construct are not required (Ghozali, 2012). Furthermore, for gaining
the significant weight, it must go through the resampling procedure (bootstrapping), with a
significance value (two-tailed) t-value is above 1.96 (significance level= 5%) (Ghozali,
2012). Moreover, according to Ghozali (2012) multicollinearity test for formative construct is
absolutely needed to calculate Tolerance value. Recommended VIF value is <10 or <5 and
Tolerance value is > 0.10 or > 0.20.
Table 3: Weights Outer Test Results After bootstrapping

Standard Standard T Statistics
Original Sample
Deviation Error (|O/STERR|)
Sample (O) Mean (M)
(STDEV) (STERR)
FRVL-> FRVL 0.000000 0.000000 0.000000 0.000000 2.331992
CSRD -> CSRD 5.960210 6.074986 0.584240 0.584240 10.201646
SIZE -> SIZE 0.525705 0.532533 0.031094 0.031094 16.907138
LEV -> LEV 4.091364 4.130474 0.216843 0.216843 18.867822
EI -> EI 0.511217 0.516990 0.023903 0.023903 21.387547
Source: Smart PLS 3.0 M3 Output (2015)
Table 3 shows the weight value after bootstrapping of this study’s constructs variables,
entirely gain significant value (t-value) over 1.96 (significance level = 5%). It can be
concluded that the model is feasible to analyze with using PLS approach. Furthermore, Table
4 also shows the correlation magnitude between the independent variable correlation levels
are still below 95%, which means, the serious multicollinearity does not happen.
Table 4: Latent Variable Correlations

CSRD FRVL SIZE LEV EI
CSRD 1.00
FRVL 0.18 1.00
SIZE 0.76 0.12 1.00
LEV 0.35 -0.08 0.41 1.00
EI 0.51 0.14 0.30 0.17 1.00

4.3 Assessing Structural Model (Inner Model)
Table 5: R-Square Test

R Square
CSRD 0.692
Statistical output results in Table 5 shows the R-Square value. This means that the
influence of all variables in this research model is 69.2% and the remaining 30.8% is
influenced by other variables outside of this study. Evaluation model (inner model) is then
performed to see the significant and the influence values between research variables with
using bootstrapping procedure (Ghozali, 2012). In this study, the significance value used
(two-tailed) t-value> 1.96 (significance level = 5%). The following table illustrates the output
of the t-statistics using the Smart PLS 3.0 M3:
Table 6: Path Coefficients (Mean, STDEV, T-Values)

Original Sample Mean St. Error T Statistics
Sample (O) (M) (STERR) (|O/STERR| P Values
FRVL-> CSRD 0.070 0.068 0.062 1.130 0.259
SIZE -> CSRD 0.669 0.668 0.042 15.744* 0.000
LEV-> CSRD -0.002 0.004 0.069 0.025 0.980
EI -> CSRD 0.275 0.275 0.054 5.123* 0.000
Source: Smart PLS 3.0 M3 Output (2015
Notes: * indicate that the paired t-test (P Values) results of the research variables influences
significantly at the 5 percent levels (two-tailed p-values), respectively. Variable definitions:
FRVL= Rupiah Fine that given by Indonesia Stock Exchange Supervision Bureau; CSRD=
the total number of CSR sentences disclosed in the annual report; SIZE= the natural
logarithm of total assets; LEV= Total Debt/Total Assets; EI= Firm’s environmental impact
that measured by scores 1 to 7, bigger its score, bigger its environmental impact.
The hypothesis (H1) said there are a positive and a significant correlation between the
level of financial regulations violations (FRVL) that set by Indonesia Stock Exchange
Supervision Bureau (Bapepam/OJK) against the level of corporate social responsibility
disclosure (CSRD). The PLS method used to test the hypothesis found the coefficient value
of FRLV against CSRD is 0.07 with T-statistical value is 1.13 that smaller than the T-
statistics value expected (≥1.96) as seen in Table 6. It explains the relationship of financial
regulation violations on the level of corporate social responsibility disclosure is statistically
insignificant. Provided further explanations about legitimacy theory testing, particularly, in
the different area of norm or law violations and environmental disclosures happened
(Wilmshurt and Frost, 2000; Deegan et al., 2002; Bebbington et al., 2008; Gamerschlag et al.,
2010; Lanis and Richardson, 2012; Zeidan, 2012; Lanis and Richardson, 2013). Also, this
study provides a new perspective of legitimacy theory explanations. Especially, in the
different context of socio-business environment.
Table 6 also shows that some of the coefficients of control variables are significant. SIZE
is positive and significant (≥1.96) as expected. Due to their higher visibility, larger
companies tend to disclose more extensive CSR information in the annual report than smaller
companies (Gamerschlag et al., 2010; Lanis and Richardson, 2013). The coefficient for EI is
also positive and significant (≥1.96) as expected. It appears that companies with wider
environmental impacts disclose more CSR information to keep their socio-legitimacy in their
business-operations fields (Gamerschlag et al., 2010). Finally, the coefficient for LEV is not
significant.
5. CONCLUSION
This study empirically tests legitimacy theory by comparing the CSR disclosures of
companies that violated financial regulations in Indonesia Stock Exchange. Based on
purposive sampling method, there is 24 companies as the samples in period of 2010 to 2013.
This study used Partial Least Square (PLS) statistics for testing the hypothesis that financial
regulation violator companies with the high level of violation have greater the corporate
social responsibility disclosure to shift public concerns from their violation activities and to
show that the companies are still in a harmony with public expectations in other ways.
Overall, the result of this study shows statistically insignificant association between
financial regulation violations and the level of corporate social responsibility disclosure, thus
confirming legitimacy theory in the different perspective. Some things then indicated as the
cause of the different results of this study and the previous studies (Patten, 1992; Brown and
Deegan, 1998; Deegan et al., 2002; Lanis and Richardson, 2013). First, violations of financial
regulations conducted by listed companies in the Indonesia Stock Exchange (IDX) has not
become the stockholders and the general public concern. So the violator companies have not
felt social depressed and obliged to pay more attention on compliance with the company's
financial regulations issued by Indonesia Stock Exchange Supervision Bureau
(Bapepam/OJK). Second, market participants on the Indonesia Stock Exchange has not put
attention to the financial rule violations committed by companies listed on the Indonesia
Stock Exchange. So, there is no social pressure to divert the violations experienced by
companies such as disclosing more the corporate social responsibility disclosure in the annual
report as well as the results of previous studies (Lanis and Richardson, 2013). Third, the
company has yet to feel a significant negative impact on the sentence issued by Indonesia
Stock Exchange Supervision Bureau (Bapepam/OJK). This ultimately led, the companies are
not necessary to divert public focus in the form of disclosing more corporate social
responsibility disclosure in companies’ annual reports. On that basis, it can be concluded that
the financial regulation violators are not under legitimacy-threat. So that the companies have
no interest to transfer the public focus by increasing the corporate social responsibility
disclosure in their annual report (Brown and Deegan, 1998; Deegan, 2007; Lanis and
Richardson, 2013). Finally, this study provides a novel test that contributing in testing and
development of legitimacy theory in different socio-economic conditions.
This study is subject to a number of limitations. First, the sample of this study is only
focused on non-financial companies who violate financial regulations and listed on the
Indonesia Stock Exchange. Second, the method that used for measuring the level of financial
regulations violations may have ineffectively actual facts described. Suggestions from this
study, future research could examine the types of financial regulation violations of finance
and non-finance industries together in different socio-economic conditions and can try to use
a qualitative approach in researching the facts that may lie behind political-business leaders
lobbying in order to prevent their companies from government punishment as an another way
to maintain business legitimacy that often happen in emerging countries (Hadi et al.,
2012)(Transparancy International, 2013).

REFERENCES
Ansar, M. (2013). Analisis Faktor-Faktor yang Mempengaruhi Kecurangan Pelaporan

Keuangan pada Perusahaan Publik di Indonesia. Unpublished Master Thesis,
Diponegoro University.
BAPEPAM LK. (2015). Laporan Tahunan 2010-2013. Retrieved October 15, 2015, from
http://bappepam.go.id
Bebbington, J., Larrinaga, C., & Moeva, J.M. (2008). Corporate Social Reporting and
Reputation Risk Management. Accounting, Auditing & Accountability Journal, 21(3),
337-361.
Brown, N., & Deegan, C. (1998). The Public Disclosure of Environmental Performance
Information: a test of Media Agenda Setting Theory and Legitimacy Theory.
Accounting and Business Research, 16(4), 558-581.
Deegan, C., Rankin, M., & Tobin, J. (2002). An Examination of the corporate social and
environmental disclosure of BHP from 1983-1997. Accounting, Auditing and
Accountability Journal, 9(2), 50-67.
Deegan, C.G. (2007). Financial Accounting Theory. McGraw-Hill Irwin, Australia.
Fakih, M. (2001). Runtuhnya Teori Pembangunan and Globalisasi, InsistPress, Yogyakarta.
Gamerschlag, R., Moller, K., & Verbeeten. (2010). Determinants of Voluntary CSR
disclosure: Emperical Evidence from Germany. Review Management Science, 5(1),
233-262.
Ghozali, I. (2012). Aplikasi Analisis SmartPLS 2.0, UNDIP, Semarang.
Gray, R., Kouhy, R., & Lavers, S. (1995). Corporate Social and Enviromental Reporting: a
Review of The Literature and a Longitudinal Study of UK Disclosure. Accounting,
Auditing and Accountability Journal, 8(2), 47-77.
GRI 4.0. (n.d) Retrieved October 15, 2015, from https://www.globalreporting.org
Hadi, S., Daeng, S., Afrimadona, Darmastuti, S., Pratiwi, E., & Nataprawira, I. (2012).
Kudeta Putih: Reformasi and Pelembagaan Kepentingan Asing dalam Ekonomi
Indonesia, Bentang Pustaka, Jakarta.
Islam,M., & Deegan, C. (2010). Media Pressure and Corporate Disclosure of Social
Responsibility Performance: a Case Study of Two Global Clothing and Sports Retail
Companies. Accounting Business Research, 40(2), 131-148.

KPK. (2015). Statistik penanganan tindak pianda korupsi. Retrieved October 15, 2015, from
http://acch.kpk.go.id/statistik-penanganan-tindak-pidana-korupsi-berdasarkan-jenis-
perkara
Langus, G., & Motta, M. (2007). The Effect of EU Antitrust Investigations and Fines on The
Firm's Valuation. Working Paper, European University Institute, Florence.
Lanis, R., & Richardson, G. (2012). Corporate Social Responsibility and Tax
Aggressiveness: an Emperical Analysis.”Accounting Public Policy, 31(1), 86-108.
Lanis, R., & Richardson, G. (2013). Corporate Social Responsibility and Tax Aggresiveness:
a Test of Legitimacy Theory. Accounting, Auditing & Accountability Journal, 26(1),
75-100.
Minnick, K., & Noga, T. (2010). Do corporate governance characteristics influence tax
management? Journal of Corporate Finance, 16(2), 703-718.
Patten, D. (1992). Intra-Industry Environmental Disclosures in Response to The Alaskan Oil

Spill: a Note on Legitimacy Theory. Accounting,Organisations and Society, 7(1), 471-
475.
Peraturan XK6 2012. (n.d) Retrieved October 15, 2015, from http://bappepam.go.id
Said, R., Zainuddin,Y, H., & Haron, H, (2009). The relationship between corporate social
responsibility disclosure and corporate governance characteristics in Malaysian public
listed companies. Social Responsibility Journal, 5(2), 212 – 226.
Transparancy International. (2014). Corruption Perception Index. Retrieved October 15,

2015, from http://cpi.transparancy.org/reseacrh/cpi/overview
UU No. 40 Tahun 2007. (n.d) Retrieved October 15, 2015, from http://bappepam.go.id
Wilmshurst, T., & Frost, G.R. (2000). Corporate Enviromental Reporting: a Test of
Legitimacy Theory, Accounting, Auditing & Accountability Journal, 13(1), 10-26.
Zeidan M.J. (2012). The Effects of Violating Banking Regulations on The Financial
Performance of The US Banking Industry. Journal of Financial Regulation and
Compliance, 20(1), 56-71.

RETIREMENT AS NICHE MARKET
(A CASE of INDONESIAN CIVIL SERVANT)
Selvi Novianti, Beta Budisetyorini, Sophia Rebelo
Sekolah Tinggi Pariwisata Bandung, Indonesia

Leeds Becket University, UK.
Abstract
Retirement tourism has attracted attention from countries whose taking benefits from this global
issue on demographic changes. The size of civil servants in Indonesia is continuously growing
and predominated with baby boomer generation, therefore researcher tried to utilized its’ benefit
trough a study which aim is to investigate Indonesian civil servants lecturers within tourism
higher education perception and expectation towards retirement tourism. This study used
deductive approach with non-hierarchal method and crosstabs analysis. There are 110
participants from three different universities located in Bandung, Indonesia. The finding
generated four types of lecturers segments which are type 1 (challenger), type 2 (loner), type 3
(diplomat) and type 4 (fenceless). Afterward, results shown positive results on their perception
also varied expectation towards retirement. Finally, researcher suggests broadening the range of
sample to examine whether the finding of this research is valid for other segment of Indonesian
civil servants in general.
Keywords : Retirement Tourism, Niche Market, Consumer Behaviour, Perception and

Expectation.
INTRODUCTION
In order to serve and fulfill public needs, government of Indonesia has provided for more
than 4.5 million civil servants (per Desember 2012) equivalent to less than 2% of approximately
250 million populations (JakartaGlobe, 2013). Nevertheless, the percentage is considered to be
deficient in comparison to other country such as Malaysia with 3.67% (Krisbiyanto, 2012). After
the policy of suspending civil servants enrolment being withdrawn, the needs for civil servant are
highly demanded because number of Indonesians’ population is also increasing with average
addition of almost 4 million people per year (BPS, 2013).
Meanwhile, new trends are emerging in international tourism. Moreover, Glover &
Prideaux (2009) argued that demographic changes are one of the most important causes. The
example of demographic changes is a vast growth of old population. Beside low birth rate, high
death rate and increasing life expectancy of people, the existence of “Baby boomer” generation
contributes to most part of the older population growth (Bates, 2004). A bulk number of recent
retirees and predicted retirees are example of direct impact from “baby boomer” generation.
Research has proven that retirees in general have healthier and richer quality of life because they
ICAMESS 2016 page825
have a stable income, more educated, more independent and more obligation free, had been
travelled alone or in group for business purposes or leisure, savvy technology and easy to access
information as resultant of globalization (Patterson, 2006; Nimrod, 2008). Moreover, Nimrod
(2008) argued that tourism has become one of retirees’ main priorities. “Baby boomer” who soon
to be elderly boomer, within this context retirees, categorized as a niche market because they
share the same demographic criteria in a group where their need has not been well served (Kotler
& Keller, 2011).
Further issue is to actually define the profile of retirees, which eventually extend to
providing the best tourism products accordingly; hence marketing research is a necessary action
to be undertaken. As part of marketing research, the analysis of consumer behavior has played an
integral part that needs to be underlined. The study of consumer behaviour will then extend to the
process of how and why consumer determine their decision either to purchase or not to purchase
tourism products, service products, etc. It is broadly known that internal and external factors of
consumer are the basic outline of consumer behaviour (Noel, 2009). One of the internal factors
which consider as personal factor of the consumer are psychological process called perception
(Noel, 2009; Kotler & Keller, 2011). Furthermore, despite experiences which are considered as
the core of perception (Morgan et al., 2010), Burns & Novelli (2008) stated that expectations are
also influence consumers’ perception. The importance of consumers’ perception and expectation
is fundamental, because it is built upon the relevance that it will create image towards tourism
products.
However, most of the researches associated expectation with the study of customer
satisfaction. There has only been a little discussion about expectation as a pre-purchase decision
process. In addition, how retirement tourism is perceived by retirees as niche market is often
being investigated after they are retired (Breuer, 2005; Nimrod, 2008; Campbell & Yang 2011;
Toyota & Xiang 2012). In other words, subject related to how tourism is perceived by
prospective retirees related to retirement tourism is still an under research subject. Therefore, this
research is intended to investigate prospective retirees’ perception and expectation in the context
of retirement tourism. Considering current size of civil servant in Indonesia, assurance of their
income stability, social and demographic forecast such as 2.7 million civil servant is expected to
retired in 2015 (Pratomo, 2012) and the increasing amount of travel on duty
purposes, as well as the policy of Indonesia government to support the development of
retirement tourism in Bali justify the opportunity that may need to be discovered.
Further, the scopes of Indonesians’ civil servant retirees in the following research will
focus on lecturer in tourism higher education. Ever since tourism declared and recognized as
field of science education in 2008, there has been growth in higher tourism education
establishment for 12% (Dimyati, 2013). The intention of these establishments is to create
professional tourism workforces in order to fulfill international and national demands towards
rapid development of tourism. Therefore, the necessity to increase number of lecturer within
tourism higher education is prioritized. Moreover, the context of retirement tourism is chosen
because most of “baby boomer” generation, including “baby boomer” within the Indonesian
civil servants specifically as lecturer in higher tourism education, will be retired and changing
the game of tourism development in Indonesia (Mihelj, 2010). Subsequently, by evaluating
lecturers’ perception and expectation, it will lead to achievement of research aim which is to
investigate Indonesian civil servants’ in this case lectures in tourism higher education perception
and expectation towards retirement tourism as niche market in Indonesia.

LITERATURE REVIEW
Market Segmentation
Fundamentally, market segmentation is the process to distinguish or subdividing groups
of homogeneous people from varied potential buyers who share similar characteristic and share
the same needs and wants (Hudson, 2008; Gilligan & Wilson, 2009; Lamb et al., 2009; Kotler &
Keller, 2011). Market segmentation bases consist of different segmentation variables. Farther,
Batra & Kazmi (2008; p. 31) defined the meaning of segmentation variable as “…a characteristic
of individuals, groups or organizations that marketers use to divide and create segments of the
total market”. Moreover, most researchers divided segmentation variables into two broad
cohorts, which are a priori (identifier) and a posteriori (response profile) (Huh & Singh 2007;
Batra & Kazmi , 2008; Gilligan & Wilson, 2008; Zimmerman & Blythe, 2013).
A priori segmentation variable category or identifiers or macro variables (Zimmerman &
Blythe, 2013) or consumer characteristics (Batra & Kazmi, 2008) is a predetermined
segmentation variable which comes from prejudgment of researchers that naturally attached to
the consumers and being obtained from secondary resources. Nevertheless, a posteriori
segmentation variable category or response profile or micro variables (Zimmerman & Blythe,
2013) or consumer responses (Batra & Kazmi, 2008) or post hoc (Huh & Singh, 2007; Gilligan
& Wilson 2009) is an after-the-fact variables which is gained from research findings. That is to
say, that each market will be segmented based on research finding about their responses towards
products offered in a form of attitudes, attributes or benefit that has become customers’ concern.
Therefore, researchers (organizations or firms) are able to gathered profound knowledge about
consumers hence they will understand the reason of consumers buying behaviour, market
changes and latest trends.
Furthermore, (Lamb et al., 2009) the most common and major segmentation variables are
based on geographic, demographic, psychographic and behavioural segmentation (Gilligan &
Wilson, 2009; Kotler & Keller, 2011). However, this study utilized two types of segmentation
only, which are demographic and psychographic segmentation. The reason because it is not time
consuming, data collected will be easier to be evaluated and analyzed, and lastly, this study is
considered as the initiation of new issues to be implemented in Indonesia since there were not
such research existed before.
Afterwards, Kotler & Keller (2011; p. 216) mentioned common variables on demographic
segmentation, consist of age, family size, family life cycle, gender, income, occupation,
education, religion, race, generation, nationality and social class.
Another segmentation variable which profoundly relates to consumer behaviour is
psychographic segmentation. Psychographic segmentation is applied based on consumers’
thought, opinions, interests, activities and attitude which is highly influence consumers’ decision
(Batra & Kazmi, 2008; Lamb et al. 2009; Kotler & Keller 2011). The basic and pioneer of a
psychographic analysis which is used to measure lifestyle of a consumer is AIO analysis. It is
derived from activities (how they spend their time), interest (the importance of things in their
surroundings) and their opinions (their beliefs on broad issues and themselves) (Batra & Kazmi,
2008; p. 33). Numbers of statements related to AIO components are given to respondents where
they will show their responses in the degree of agreement or disagreement.
Figure 1: AIO components
Adapted from Hawkins et. al in Chitty et. al (2012;p.82)
Niche Market in Tourism

Kotler & Keller (2011; p. 232) has defined target markets into four categories which are:
mass, multiple segments, single (or niche) segment, and individuals. Furthermore, definition of
niche market as a narrowed segment of defined group require organizations and firms to tailor
their products hence a niche will not only gain benefit as it will fulfill their complex needs but
also willing to pay at maximum price for the benefit which has not been well served by other
providers (Hudson, 2008; Barringer, 2009; Kotler & Keller, 2011).
Moreover, Kotler & Keller (2011) pointed out features of an attractive niche market. First
of all, it is ascertained that targeted niche market possess its own uniqueness and exceptionally
different from other market. Second, niche market is expected to have willingness to pay
organizations’ which best satisfy their needs at premium price. Moreover, it is compulsory that
they are formed in appropriate size and importantly have growth potential as well as profitable.
Farther, niche market has just brought attention from only one or few organizations as
competitors. Lattermost, based on this specialty products given, niche market obtains economic
benefits through consume it.
Researchers have stated that specific cohort which based on peoples’ generation
influence their preferences for tourism (Nimrod, 2008; Glover & Prideaux, 2009). One of
generation that contributes to the change of tourism pattern on demand is baby boomer
generation (Glover & Prideaux, 2009). Baby boomer market who soon to be elderly people are
often called as grey or senior or mature market (Bates, 2004). Sniadek (2006; p. 104), these aged
base sub-segments may be varying in every country pertaining national regulation and policy
(Bates, 2004). Moreover, Bates (2004; p. 18) define grey tourism as “individual 60 years or over
travelling more than 40 kilometers from their place of residence for less than 12 months”.
Nonetheless, the effect of tourism and leisure activities towards retiree wellbeing and quality of
life has indicated prone to be true (Dann, 2001; Bates, 2004; Sniadek 2006; Nimrod 2008).
Although tourism is conveyed as another form of leisure, several reasons are stated as the main
consideration towards the involvement of tourism in retirees’ life which are retiree are healthier
and richer; more educated and independent, obligation-free, have travel experience, have more
spare time. Tourism provides challenge as retirement is viewed as new beginning (for some) that
increase psychological wellbeing (Nimrod, 2008; pp. 861-862). Bates (2006; pp. 9-10) added
that tourism will increase life satisfaction, happy memories and socialising opportunities, sense
of accomplishment and achievement, present desired lifestyle, also health is not yet considered
as substantial obstacle. Mihelj (2010) stated that aging consumers will force global hospitality
industry to modify their products and service.
Profile of Indonesian Civil Servants

The existence of civil servants (*pegawai negeri sipil/PNS) in Indonesia has been
identified since Dutch colonial era more than 350 years ago as low class servants (Krisbiyanto,
2012). Furthermore, definition of civil servants according to Republic of Indonesia regulation
No. 43, 1999 about employee affair clause 1: civil servant is every Indonesian citizen which is
eligible based on predetermined requirements, appointed by official authorities and entrusted
with role as official state functionary or any other state assignment and paid according to prevail
legislation (BKN, 1999).
Each year, with exception of moratorium in 2011-2012, Indonesian government issued
thousands formation of vacant position for civil servants. In the beginning of January 2013, there
are 4,467,982 civil servants decreased for more less 1 hundred thousand because of moratorium
2011-2012. Furthermore, it is reported in 2011 number of functional incumbent (expertise) is
2.161.633 civil servants with distribution of less than 83% were teachers, lecturers and professors
(BKN, 2013). In the other hand, total number of higher education under the ministry of education
and culture is 3.244 colleges consist of 92 public universities and 3.124 private universities
(Napitupulu, 2012). In addition, number of tourism education and training providers in Indonesia
is 80 schools with 1.135 lecturers (civil servants and non-civil servants). Afterwards, retirement
age limit for civil servant in general is 56 years old based on government regulation No. 32,
1979. However, because its functional expertise, lecturers are given retirement age limit up to 65
years old (legislation No. 14, 2005), 70 years old for professor (legislation no. 12, 2012) and 75
years old for professor emeritus (regulation of the ministry of education No. 09, 2008)
(Kemendikbud, 2012). Moreover, it is predicted that in 2025 there will be 2.5 million civil
servants who retire (Abubakar, 2012). In addition, based on presidential decree no. 8, 1977 to
support retirement period, every month salary of Indonesian civil servants is deducted by 10 %
for pension insurance and allowance.
Consumers’ Perception and Expectation towards Retirement Tourism
Perception is about how consumer will act once he/she has motivated based on their
perception towards situation around them (Kotler & Keller, 2011). Therefore, perception can be
defined as “the process by which consumers select, organize and interpret stimuli to create a
coherent and meaningful picture of the world around them” (Noel, 2009; p. 94). Furthermore, the
reason why each consumer has different perception is based on their perceptual process.
In order to create perception, consumers will create cognitive mapping regarding how
they want their environment to be perceived through information received. This action will be
influenced by several factors such as subjectivity, categorization, selectivity, expectation, past
experience/law of primacy (Blythe, 2013).
Moreover, expectation which aforementioned, exhibit information that is influenced with
past experience and familiarity of certain tourism products or services (Batra & Kazmi, 2008).
Skinner & Theodossopoulos (2011) argued that expectation predominantly becomes an important
role to define the failure and success of travel experience. However, researchers often related
expectation as part of motivation theories because expectation is earlier formed before persons’
motivation and likewise for measurement of consumers’ satisfaction through service quality as
post-consumption studies (Kotler & Keller, 2011). Expectation is investigated as one of demand-
side factors in order to conceal the actual tourism product that is demanded (Sund &
Bloksberger, 2007). Therefore it is important to gain information from prospective consumers’
expectation towards tourism product as an independent factor in a pre-consumption stage aside
from motivational aspect. In addition, Lohmann & Danielsson (2001, cited in Sedgley, 2011) the
study of customers’ expectation will provide information for designing future product which
meet consumers’ needs and wants as well as beneficial towards forecasting process of marketing
strategies.
Subsequently, Nimrod (2008; p. 859) did research in order to gain an understanding of
how tourism is perceived as a value towards retirees. The result suggested four themes as
retirees’ perception towards tourism which are as a new life phase (retirement as an opportunity),
as a lifelong interest (tourism may preserve old interest), as leisure activities (“spillover” between
leisure and tourism), and as retirees’ social networks and perceived constraints (negotiating
constraints).
To explain, tourism as an opportunity refers that retiree often view retirement as an
opportunity to do travel. The reasons are reduction on daily activity hence retirees have lot of
spare time and also decrease in responsibilities for families and occupation. Nimrod (2008) also
confirmed that retirees perceive tourism (travel-leisure) as main part in retirement where they can
fulfill their long-term desired activities which are pursued within their pre-retirement phase.
Tourism as lifelong interest in the course of retirement phase, will preserve retirees’ function
(psychologically and socially) and continuity from their previous activities pattern. Furthermore,
because retirement has provided possibility for retirees to conduct leisure activities in their
retirement phase, tourism seems to be fused by this influence. Therefore, Nimrod (2008) stated
that tourism often seen as more serious leisure activities. This reason related to other themes
where tourism within retirement considered becoming a networking channel to maintain their
roles within social life, tourism act a pathway to have high quality time with loved ones such as
visiting family and friends, chances to have trips together with children and their grandchildren,
and tendency to initiate family and friends gathering outside the city where they lives. The last
theme, tourism is perceived by retirees with negotiating constraints, where in spite any kind of
constraints, they will select the activities, optimize their available resources, and compensate
with substitutes to adjust tourism which meet their condition.
Furthermore, retirees’ expectation may vary based on generation, as researchers
confirmed that age is not only the ultimate factors which influence consumers’ behaviour but it
is also of which generation they come from (Glover & Prideaux, 2009). Soon to be retirees
from baby boomer generation may express a different expectation than previous generation.
Moreover, baby boomer generation mostly resist the aging process, therefore they are expecting
to experience tourism which will return back their “youth” time. Hence, tourism product and
services which will be offered is highly sensitive to not offend the later life stage of baby
boomer generation as elderly or senior people even in their retirement phase. Subsequently, the
most common expectation of soon to be retiree, baby boomer generation is collected from
several researchers (Bates, 2004; Sniadek, 2006; Hudson, 2008; Nimrod, 2008; Kotler &
Keller, 2011):
 Getting involve with type of tourism where most people do

 Facilitating social life interaction
 Tourism products are offered with details information
 Enhance their quality of life and wellbeing
 Offer novelty, escaping and authentic experiences and activities
 Offering physically challenging and ‘adrenalin-driven’ activities
 Providing safety, accessibility and facility that will support their aging condition
 Propose greater choices (with unconditional restriction to choose)
 Personalized and tailored travel experience
This study can be categorized as descriptive and explanatory research. This is align
with the meaning of descriptive research which is intended to gain factual picture of an issue
that being investigated and explanatory research which is often utilized descriptive elements to
proceed the analysis further by explaining the cause behind factual condition and natural
relationship between them (Khotari, 2004; Brotherton, 2008). This research tries to explain an
issue with cause-effect relation from universal theory that can be categorized as deductive
research in which examine the existing theories with researched phenomena.
Researcher aimed to gain an understanding that concentrate on subject’s factual
condition rather than opinions, therefore a positivism approach is appropriate for this research.
Other approaches which are prominent among researcher are qualitative and quantitative
approach. Brotherton (2008) stated that quantitative approach is likely to be associated with
experimental and survey research design. This approach predominantly associated with
positivism philosophy. Therefore, for using survey as one of researcher method, this research
used quantitative approach because it is based on amount of data which is measurable
(Khotari, 2004). Meanwhile, qualitative data is often associated with behavioural science
especially human behaviour motivation (Khotari, 2004). It examine human perception and
opinion to explain and answer why and how related with an issue or phenomena of a research.
Moreover, the base of qualitative approach is philosophy of interpretivism (Denscombe, 2007).
This research used two kinds of data, both primary and secondary. Secondary data is
collected and used in the study of literature review, while primary data is collected by using
survey. One of the instruments for self-completion surveys to obtain primary data is a
questionnaire which “…consists of a number of questions printed or type in a definite order on a
form or set of forms” (Kothari, 2004; p. 100). Questionnaires which have been distributed, used
drop off/pick up procedure to ensure that all questionnaires are sent to the respondent and
returned back. Type of questionnaire which is used is a structure close ended questionnaire where
each question is constructed sequentially by number where each questions has been provided
with answers that fall into categories where respondent is permitted only to choose between those
answer which they feel most suitable with (Denscombe, 2007). Nevertheless, to avoid the
ambiguity of questions and miss interpretation, researcher has to translate questions into national
language which is Bahasa Indonesia.
Sampling Frame and Method

The method applied in this research is simple random sampling, where sample is chosen
randomly and considered representative of cross-section population. Probability sampling means
that each person in a population shares the same chance to be selected and the sample chosen is
considered as representative of the whole population (Denscombe, 2007). Moreover, it is selected
because the result will be more accurate and be spared from biases.
The total population of this study is 169 people. They are all lecturers in three different
universities who share the same characteristic as full time registered civil servants from two
ministries. These three locus were determined because it is geographically easy to be reached and
all of them are registered as public universities. The first locus is Sekolah Tinggi Pariwisata
Bandung (STPB), with total number of population 148 people and registered as civil servants
under the ministry of tourism and economy creative. The second locus is Universitas Pendidikan
Indonesia (UPI), with total number of population 14 people and registered as civil servants under
the ministry of culture and education. The last locus is called Institute Teknologi Bandung (ITB),
with total number of population 7 people and registered as civil servant under the ministry of
culture and education.
Sample of the research is 118, taken form the online sample calculator from Creative
Research system at www.surveysystem.com mentioned by O’Leary with confidence interval
“(the range you will accept above and below the mean) is 5% and confidence level “(how sure
you want to be that your finding are more than coincidental) at 95% (2010,p. 164). However,
because the size of population in second and third locus is small, then all population is
considered as sample. Therefore, total sample for first locus is: 118-(14+7)= 97. Samples are
recruited by researcher through observation of directly to each locus, and questionnaire
distributed to each locus towards each head of the study program and addressed only for lecturers
who has been registered as civil servants.
Data Analysis
Results are entered manually in software called SPSS. Pilot test is being conducted first
with 15% of total sample 118 which are 17 participants. Pilot test was conducted in small scale
of participant in order to review research validity and reliability, therefore questionnaire will
eligible to be distributed to the entire sample. Through validity and reliability analysis, using
Cronbach’s Alpha, section two was truncated into 21 questions, section three into 13 questions
and section four into 19 questions. Data analyses which are used are cluster analysis with non-
hierarchal method to clustered participant based on similarity and crosstabs analysis to identified
tendencies of every dimension in questionnaire and then categorised into cohorts.
The first step of doing primary research according to Leeds Becket University regulation,
researcher has to submit research ethics approval forms. Researcher has gained approval and
continued the primary research. Survey introduction contain brief introduction and information
about the survey and issue raised. Participant information sheet described the procedure of
survey, the participant information sheet is given and to be kept by participant. The last page is
consent form. Moreover, each set of questionnaire are coded. Therefore, participant who have
second consideration regarding their data which has been collected by researcher, are able to
request withdrawal by mention their code with time span of one week. Code is used because not
all participant willing to give their name.
Limitations
Researcher found several limitations particularly related with primary research. First of
all, the population of other two locus which are ITB and UPI are small because most of the
lecturers are not registered as civil servants but part time lecturer or lecturers which are registered
in another faculty. Second is the time frame of the research. Because questionnaires were
distributed by mid of December, most of lecturers have been taking end year vacation. Third
limitation which cause second limitation is the internet literacy of every lecturer is varying.
Therefore researcher decided to distributed questionnaire manually. Hence, to guarantee the
effectiveness of questionnaire distribution, a drop off/pick up procedure was chosen.
Nevertheless, most of participants have response the study with positivity, a lot of
question being addressed toward researcher while questionnaire was distributed. Some of
participant deliberately sent text message to researcher in order to inform researcher that they
have filled and complete the questionnaire.
FINDING AND DISCUSSION
From total number of civil servants in 2013 (figure 2.5, chapter 2) 74.21% of them are
categorized as baby boomer generation based on age who become prospective retirees.
Therefore, it opens opportunity to aim Indonesian civil servants as niche market for retirement
tourism. Afterwards, in order to analyse Indonesian civil servants as an attractive niche market.
Several characteristics have to be fulfilled. First of all is the uniqueness of the targeted market.
The market of Indonesian civil servants is unique because they share the same identification as
other baby boomer generation in addition that they are registered officially as government
employees which have stability income and future retirement benefits guaranteed by government.
This redundancy identified Indonesian civil servants into second criteria of attractive niche
market which are willing to pay for their needs, because Indonesian civil servants are not aimed
specifically as one of tourism target market, therefore tourism product which are provided has
not been satisfied their needs. Though it grows in size, Indonesian civil servants not only has
potential but also profitable considering their retirement benefits. Lastly,
organizations which are specified aimed for the needs for civil servants are not existed.
Therefore, through this criterion identification, Indonesian civil servants can be considered as an
attractive niche market.
Terminology used as participant intended to lecturers in tourism higher education who,
registered as Indonesian civil servants. Response rate is considered to be high which is 93,2%,
interpreted as from 118 questionnaires distributed as samples, 110 questionnaires were succeed
to be collected. Results shown that most of participants are 35-40 years old (26.4%).
The result provides information which clarifies tendencies in some demographic dimension.
Most of participants were male with total number of 73 people (66.4 %) out of 110 participants.
Moreover, the most common highest education of participant are master degree with 75 people
(68.2%). Furthermore, in accordance to age, 99 people out of 110 participants are married.
Meanwhile, incumbency status of most participants is classified as IIIc/d with 41 people (37%),
48 people (43.6%) of married participant have 1 or 2 children and staying independently without
their parents coded with 1-2 c(children) + np (no parent). The total amount of participant who
married and has children and staying without their parents are 70 people (63.6%).
The highest percentage of participant length of service was 4-7 years with 24 people
(21.8%). 42 people (38.2%) out of 110 participant, stated their take home pay/month as much as
between Rp. 4-5 million (± £200-250). Based on statistics, 58 people of participant (52.7%) are
lecturer within hospitality scope.
Subsequently, based on results on demographic segmentation, the indication of baby
boomer generation is aligned with research results by Bates (2006) and Nimrod (2008) in the
study about retirement tourism. The independency of baby boomer generation was shown from
the result of family size dimension, where 63.6% of participants are no longer stayed with their
parents. They have built their own family and living their own house. Another indicator is health
issue. According to statistic results on length of service dimension, 56.4% of participant has been
serving as civil servants for more than 15 years. It shows how baby boomer generation has
generated their consciousness towards their health and wellbeing. Afterwards, although the most
incumbency status of respondent is between IIIc/d with 37%, the most amount of take home pay
to be stated is between Rp. 4-5 million (± £200-250) with 38.2% in total. According to
government rules on civil servants salary with incumbency IIIc/d, the amount to be taken at
home should between Rp. 2-3 million (± £100-150). The reason behind this is because they are
able to have higher education so that they can obtain additional income from another allowance
and less independency from other family member.
Moreover, the most important indicator was shown on statistic results of participant
responses which is as high as 102 (93%) people from 110 participant are interested with
retirement tourism while only eight (7%) of them which are not. Three of eight participant stated
that they have their own plan. Furthermore, the other two participants mentioned that there will
be no difference between tourism activities now and when retired. Moreover, one participant
each mentioned that they don’t have any idea yet and the other one was not willing to state the
reason. The last one participant stated that age factor and preference to stay at home with family
are the main reason. However, figure 4.10 described that there is an opportunity of retirement
tourism application as most participant of (93%) stated they are interested with retirement
tourism.
The result of analysis on psychographic dimension has produced four types of cluster which
is then categorized as type 1, type 2, type 3 and type 4. Furthermore, to define the profile of each
cluster or type, explanations are given as follow :
1.1 Cluster 1 or Type Challenger
Cluster 1 or type challenger is consisting of 30 participants. Most of them are between 35-40
years old and female. Another demographic characteristics are their take home pay are
predominated from between Rp. 2-3 million (± £100-150) and Rp. 3-4 million (± £150-200),
married and few singles, have higher education as master and some bachelor degree, job criteria
are lecturers in hospitality and have 1-2 children and staying without their parents and some are
stay with small addition from each categories. Another tendencies, is they have been serving for
4-7 years with incumbency of IIIc/d and some are IIIa/b.
Psychographic characteristic of this cluster are they are satisfied with their friend, but they are
eager to meet new friends for their retirement phase. They like to socialize and tend to be an

organizer. However, they are also typical of family man/woman, and satisfied with their current
situation but willing to search for new knowledge. Prefer to have nature based tourism. Willing
to try adrenalin drifted tourism activities and yet prefer quiet and relaxing places company by
closest people. They want to be a better person when they are retired.
1.2 Cluster 2 or Type Loner

Cluster 2 or type loner is consisting of 19 participants. Their age are from some of 35-40 and few
41-45 years old with almost equivalent number of male and female. Some of them have master
degree as highest education and few with bachelor degree. Next characteristic are predominated
with single and small portion of singles. Participants who have 1-2 children and staying with no
parents are not quite different with participants who have 1-2 children and stay with parents.
Most of them have been served for 4-7 years and some of them for 8-11 years. Participants also
share almost the same amount of IIIa/b incumbency and IIIc/d as well as take home pay between
Rp. 2-3 million (± £100-150) and Rp. 3-4 million (± £150-200) and few Rp. 5-6 million (± £250-
300) with various job criteria from hospitality, travel and tourism.
Furthermore, the psychographic characteristics of this cluster they are satisfied with their current
friends for retirement and they are not intentionally in purpose meeting new people in their
retirement phase. They are not considered as an organiser and socialize is not their main
characteristics. They like to seclude sometimes, and don’t have high interest in searching for new
information. They also prefer to have nature based tourist attraction. They like to be their closest
people sometimes in the retirement phase. They want to be secure and they are not keen with
changes.
1.3 Cluster 3 or Type Diplomat

This cluster of type diplomat consisting of 16 participants, with equal amount of age between 41-
45, and 46-50 and addition few of 51-55 years old. Most of participant are male and possess
master degree. They are all married and shared almost the same amount of having 1-2 children
with no parents and more than 2 children with no parents. Most of them have served for 19 -21
years and some for 16-18 years. They are predominated with incumbency at IIIc/d and few IV
a/b. Take home pay for most of the participant is between Rp. 4-5 million (± £200 -250) with
some between Rp. 3-4 million (± £150-200). They job criteria mostly are lecturers in hospitality
with equal addition of lecturers in travel and tourism and small amount of lecturer in sport.
Characteristics of psychographic variable for this cluster they want to meet new people for their
retirement phase. They like to socialize and be with their family and friends. They like to follow
any update information but not intentionally search. They prefer to have nature based tourist
activities but not so quite places. They don’t like adrenalin drifted tourism activities. Sometimes,
they like to be organized.
1.4 Cluster 4 or Type Fenceless

This cluster known as type fenceless consist the highest total of participant which is 34
participants. Most of their age are > 60, 56-60 and 51-55 years old. They are mostly male and
some female, with predominated highest education is master and addition of doctor degree. Most
of them are also married and very few singles. They have highest amount on participant that have
1-2 children and staying without parents, followed with more than 2 children with no parents.
The have been served for 22-24 years, with additional equal amount for 28-30 years and 31-33
years and more than 40 years. Most of participant have incumbency at Iva/b followed with IVc/d

with highest percentage on take home pay for Rp. 4-5 million (± £200-250) followed with Rp. 5-
6 million (± £250-300), Rp. 7-10 million (± £350-500) and Rp. 10-15 million (± £500-750). They
have almost job criteria with most of them are from hospitality and language, followed with
tourism, religion and urban planning.
In the other hand, their psychographic characteristics are they are satisfied with their current
friends but openly to have new friend. They like to socialize and flexible. Their family is
important. They also like to go to natural based tourist attraction. They are not willing to search
for information but willing to accept new knowledge. They want to feel comfortable.
1.5 Perception and Expectation towards Retirement Tourism

Each and every cluster is agreed with how retirement is perceived as an opportunity to be able to
do tourism activities which they cannot do at present time (90.8%). Furthermore, they are also
agreed that tourism is perceived as a lifelong interest, with indicators that they can do their
hobbies any time they want (90.9%) and they have list of places to visit when they are retired
(66.4%). The third perception of how retirement is perceived as a spill over for leisure activities
shown by indicator that they can indulge themselves when they are retired (71.8%). And the last
perception indicates how they perceived retirement as a way for social networking and they can
also negotiating their constraints, shown by the indicator that they can gather with old friends
when they are retired (90.9%) as well as they can meet new people when they do travelling in the
retirement phase (83.8%).
From the results it is explained that only cluster 1 which expect the entire expectation dimension
to be provided in retirement tourism. Furthermore, cluster 4 comes as second where their
expectation of retirement tourism will not include physically challenging and ‘adrenalin-driven’
activities. Meanwhile cluster 2, beside not expected physically challenging and ‘adrenalin-
driven’ activities, they are also not expecting to be involved in social interaction and what most
people do as well as novelty, escaping and authentic experiences and activities are not so
important. The difference with last cluster, which is cluster 3, they are expecting to have social
interaction for retirement tourism; nevertheless they are expected to be offered with novelty,
escaping and authentic experiences and activities.
CONCLUSION
The opportunity of retirement tourism indicated as 93% of participants are interested.
Hence, to analyse and investigate their perception and expectation towards retirement tourism in
order to produce tourism products which meet their needs and wants segmentation and profiling
is important. Based on primary research, it is generated four types of market segment within
lecturers in tourism higher education where the most of participants are categorized into type 4 or
fenceless. Second type that is found popular is type 1 or challenger followed with type 2 or loner
and type 3 or diplomat. Each of cluster or types, shared the same perception towards retirement
tourism and agreed with result study by Nimrod (2008) related with perception towards
retirement tourism. However, differences found within each types expectation where only type 1
or challenger which expected all of dimension which taken from result studies by Bates, 2004;
Sniadek, 2006; Hudson, 2008; Nimrod, 2008; Kotler & Keller, 2011.
This study is expected as a stepping stone to develop retirement tourism in Indonesia.
However, samples taken are from one geographical area with one type of civil servants.
Therefore, other institution may conduct future researches which include sample from different
types of civil servants. The result may also vary when civil servants which is selected are
assigned in different position such functional and structural, or state and region. Moreover, to
support the findings of this research, it is suggested to also utilize another approach such
phenomenology or qualitative research or mixed qualitative and quantitative research. Hence, a
deeper knowledge on Indonesian civil servants perception and expectation towards retirement
tourism will be obtained and justify or support or examine the finding of this research.
It is expected that through this research will gain attention from the interested parties,
especially in Indonesia to generate and develop retirement tourism in Indonesia. However,
further comparison study for to other countries will give a general overview of how retirement
tourism is being conducted. The importance is to be prepared because retirees are very different.
Facilities and infrastructure which is compatible are needed. Therefore, further research may also
include survey on facilities and infrastructure that prospective retiree expected to support
retirement tourism. However, it is important to notify the opportunity from this market as civil
servants are forever needed in a country.
REFERENCES
Abubakar, A., (2012). 2,5 Juta PNS Pensiun Serentak, Negara Bakal Rogoh 175 Triliun.
[Online] Available at: http://www.rmol.co/read/2012/11/15/85386/2,5-Juta-PNS-Pensiun-
Serentak,-Negara-Bakal-Rogoh-175-Triliun- [Accessed 26 October 2013].
Barringer, B., (2009). The Truth about Starting a Business. New Jersey: Pearson Education, Inc.
Bates, L., (2004). The Value of Grey tourism: Maximising the Benefits for Queensland.
Queensland: Queensland Parliamentary Library Queensland Parliamentary Library.
Batra, S.K. & Kazmi, S.H.H., (2008). Consumer Behaviour; Text and Cases. 2nd ed. New Delhi:
Excel Books.
BKN, (1999). Undang- undang Republik Indonesia Nomor 43 Tahun 1999. [Online] Badan
Kepegawaian Negara Available at: www.bkn.go.id [Accessed 26 October 2013].
BKN, (2013). Distribusi Jumlah PNS dirinci Menurut Tingkat Pendidikan dan Jenis Kelamin 1
Januari 2013. [Online] Available at: http://www.bkn.go.id/in/profil/unit-
kerja/inka/direktorat-pengolahan-data/profil-statistik-pns/stribusi-jumlah-pns-dirinci-
menurut-tingkat-pendidikan-dan-jenis-kelamin-31juni-2012.html [Accessed 26 October
2013].
Blythe, J., (2013). Consumer Behaviour. 2nd ed. Los Angeles: SAGE.
BPS, (2013). Badan Pusat Statistik. [Online] Available at:
http://www.bps.go.id/brs_file/kemiskinan_01jul13.pdf [Accessed 2 October 2013].
Breuer, T., (2005). Retirement Migration or rather Second-Home Tourism? German Senior
Citizens on the Canary Islands. Contributions to Human Geography, 136(3), pp.313-33.
Brotherton, B., (2008). Researching Hospitality & Tourism. London: SAGE.

Burns, P. & Novelli, M., (2008). Tourism Development; Growth, Myths and Inequalities.
Oxfordshire: CABI.
Campbell, A. & Yang, J., (2011). Leisure Innovation among Post-retirement women in North-
eastern China. Annals of Leisure Research, 14(4), pp.325-40.
Chitty, W., Barker, N. & Michael Valos, T.A.S., (2012). Integrated Marketing Communications;
3rd Asia Pacific Edition. South Melbourne: Cengage Learning.
Dann, G.M.S., (2001). Senior Tourism and Quality of Life. Journal of Hospitality & Leisure
Marketing, 9(12), pp.5-19.
Denscombe, M., (2007). The Good Research Guide; for small-scale social research projects. 3rd
ed. Berkshire: McGraw-Hilll.
Dimyati, V., (2013). Ilmu Pariwista Masih Jadi Anak Tiri. [Online] Available at:
http://www.jurnas.com/news/95911/Ilmu_Pariwisata_Masih_Jadi_Anak_Tiri/1/Sosial_Bud
aya/Humaniora [Accessed 2 October 2013].
Gilligan, C. & Wilson, R.M.S., (2009). Strategic Marketing Planning. 2nd ed. Oxford:
Macmillan.
Glover, P. & Prideaux, B., (2009). Implications of Population Ageing for the Development of
Tourism Products and Destinations. Journal of vacation Marketing, 15(25), pp.25-37.
Hudson, S., (2008). Tourism and Hospitality Marketing; A Global Perspective. London: SAGE.
Huh, C. & Singh, A.J., (2007). Families Travelling with a Disabled Member: Analysing the
Potential of an Emerging Niche Market Segment. Tourism and Hospitality Research,
7(3/4), pp.212-29.
Jakarta Globe, (2013). Jakarta Globe. [Online] Available at:
http://www.thejakartaglobe.com/archive/indonesia-lifts-moratorium-on-hiring-civil
servants / 566714 / [Accessed 2 October 2013].
Kemendikbud, (2012). Daftar Batas usia Pensiun Pegawai Negeri Sipil yang Mengacu pada
Peraturan Saat Ini. [Online] Available at: http://www.kopertis12.or.id/2012/11/06/daftar-
batas-usia-pensiun-pegawai-negeri-sipil-yang-mengacu-pada-peraturan-saat-ini.html
[Accessed 26 October 2013].
Khotari, C.R., (2004). Research Methodology; Methods and Techniques. 2nd ed. New Delhi:
New Age International Publishers.
Kotler, P. & Keller, K.L., (2011). Marketing Management. 14th ed. New Jersey: Prentice Hall.
Krisbiyanto, N., (2012). Portalhr.com. [Online] Available at:
http://www.portalhr.com/komunitas/opini/mengurai-masalah-pns-dengan-pendekatan-sdm/.
Lamb, C.W., HairJr., J.F. & McDaniel, C.D., (2009). Mrketing. 10th ed. Canada: Cengage
Learning.
Mihelj, V., (2010). New Tourist Products for New Tourists' Expectations. In Tourism &
Hospitality Management., 2010.
Morgan, M., Lugosi, P. & Ritchie, J.R.B., (2010). The Tourism and Leisure Experience,
Consumer and Managerial Perspective. Bristol: MPG Books Group Ltd.
Napitupulu, E.L., (2012). Moratorium untuk PTS Baru. [Online] Available at:
http://edukasi.kompas.com/read/2012/08/21/12322020/Moratorium.untuk.PTS.Baru
Nimrod, G., (2008). Retirement and Tourism, Themes in Retirees' Narratives. Annals of Tourism
Research, 35(4), pp.859-78.
Noel, H., (2009). Basic Marketing 01; Consumer Behaviour. Switzerland: AVA Publishing SA.
O'Leary, Z., (2010). The Essential Guide to Doing Your Research Project. London: SAGE.
Patterson, I.R., (2006). Growing Older, Tourism and Leisure Behavior of Older Adults.
Massachusetts: CABI.
Pratomo, H.B., (2012). Umur Orang Indonesia Makin Panjang, Beban Pensiun Makin Tinggi.
[Online] Merdeka.com Available at: http://m.merdeka.com/uang/umur-orang-indonesia-
makin-panjang-beban-pensiun-makin-tinggi.html merdeka.com. [Accessed 4 april 2013].
Sedgley, D., Pritchard, A. & Morgan, N., (2011). Tourism and Ageing; A Transformative
Research Agenda. Annals of Tourism Research, 38(2), pp.422-36.
Skinner, J. & Theodossopoulos, D., (2011). Great Expectation; Imagination and Anticipation in
Tourism. New York: Bergham Books.
Sniadek, J., (2006). Age of Senior-A Challenge for Tourism and Leisure Industry. Studies in
Physical Culture and Tourism, 13, pp.103-05.
Sund, K.J. & Bloksberger, P., (2007). Senior and Non-Senior Traveller Behaviour:Some
Exploratory Evidence from the Holiday Rental Sector in Switzerland. Tourism Review,
62(3), pp.21-26.
Toyota, M. & Xiang, B., (2012). The Emerging Transistional "Retirement Industry" in Souteast
Asia. International Journal of Sociology and Social Policy, 32(11/12), pp.708-19.
Zimmerman, A. & Blythe, J., (2013). BUsiness to Business Marketing Management; A Global
Perspective. 2nd ed. New York: Routledge.

DECOMPOSED THEORY OF PLANNED BEHAVIOUR (DTPB) IN
PREDICTING CUSTOMERS’ INTENTION TO PURCHASE HALAL
COSMETICS AND PERSONAL CARE PRODUCTS: THE
MODERATING ROLE OF
PRODUCT KNOWLEDGE
SULAIMAN BIN NAWAWI

ARSAD AYUB GRADUATE BUSINESS SCHOOL (AAGBS)
UNIVERSITY TEKNOLOGI MARA (UITM)
Abstract
Purpose – The purpose of this paper to examine the basic determinants of customers’
intention to purchase halal cosmetic and personal care products using decomposed theory of
planned behaviour (DTPB). It also aims to identify the relevant factor that may moderate the
relationships between the independent and dependent variables.
Design/methodology/approach – Based on the existing literature on Islamic financial
services and halal product consumptions as well as the theoretical and empirical research on
halal cosmetic and personal care products, a conceptual model based on decomposed theory
of planned behaviour (DTPB) is developed. The model is used as a basis to investigate the
relationships between attitudes, subjective norm, perceived behavioural control and
customers’ intention to purchase halal cosmetic and personal care products.
Findings – The study shows that intention to purchase halal cosmetic and personal care
products is not only affected by attitude, subjective norm and perceived behavioural control
but also influenced by relevant moderating factor such as customers’ product knowledge.
Originality/value – To the best of the authors’ knowledge, this is the first study to identify
the relevant factors influencing customers’ intention to purchase halal cosmetic and personal
care products using the decomposed theory of planned behaviour (DTPB). The paper will be
useful for researchers, professionals, and marketers who are directly or indirectly involved in
halal cosmetic and personal care products industry.
Practical implications - The framework proposed in this study is very much relevant to
marketers, business owners, and product managers since it enables them to evaluate the
factors that specifically influence the customers’ intention to purchase halal cosmetic and
personal care products. Understanding factors influencing customers’ purchase behaviour
could help them recognize, promote, and reach out the influential and crucial individuals in
the market, thus helping them in their marketing efforts and decision-making process.
Keywords – Halal cosmetic and personal care products, purchase intention, attitude,
subjective norm, perceived behavioural control, product knowledge, and customer behaviour

1 Introduction
Due to the booming market of the cosmetic and personal care products, growing
number of firms throughout the world are putting a lot of efforts to offer various types
cosmetics and personal care products aimed at fulfilling and meeting their customers’ needs
and expectations (Nordin et al., 2010; Rastogi, 2003). However, the global cosmetic and
personal care product industry is dominated, and to certain extend, monopolised by non-
Muslim companies and Muslim companies appears to be taking the back seat (Swidi et al.,
2010). Thus, the issue of halal ingredients in cosmetic and personal care products today poses
serious challenges particularly to the Muslim customers (GIFR, 2015; Hashim and Musa,
2014). In fact, the cosmetics and personal care products industry have become the focus of
greater concern and scrutiny on the suspicion that many of these international brands are
making use of preservative enzymes extracted from pork and dog meat, thus generating great
deal of uneasiness and criticism among Muslim scholars and customers all over the world
(Mukhtar and Butt, 2012). Additionally, many cosmetics and personal care products contain
alcohols such as humectants which is mainly used as a cleansing agent to beautify and
smoothen users’ body and skin (Ahmad et al., 2015). Equally, some of the fatty acids,
collagen and gelatine used in products such as make-up, anti-ageing skin products, nail
polish, sunburn cream, moisturisers, shampoos, face masks, and lipsticks are derived from
carcasses of dead animals such as pigs, dogs, livestock and other poultries (Gandhi, 2008).
In fact, cosmetics and personal care products is one of the most popular industry in
Malaysia and their sales are reported to be increasing every year (Hunter, 2012). In the
personal care segment, whitening creams is the most popular products especially among
Malaysian women (Zakaria, 2015). However, a study by Nordin et al. (2010) claimed that
some customers seemed to overuse these products and that they randomly chose them without
thoroughly inspecting their usefulness and possible site effects towards their body and skin.
According to Zulaikha et al. (2015), some imported and locally produced cosmetics and
personal care products contain substances which are harmful and hazardous. For example, the
Health Ministry has recently banned two locally produced cosmetic products which were said
to contain a high level of mercury that can cause kidney and nerve damage (Malay Mail,
2015).
In addition, this lucrative and profitable cosmetic and personal care products has also
lead to an influx of unsafe and counterfeit products from overseas (Zakaria, 2015). A recent
case of this involved two Ireland-based brands whose products was said to contain
hydroquinone and tretinoin, the two most hazardous and harmful chemical substances that
can cause skin problem and cancer (Simon Pitman, 2014). Back in 2012, the Health Ministry
has also banned the sale of several Chinese cosmetics products following warning by the US
Food and Drug Administration (FDA) concerning toxic levels of mercury in its skin
lightening and anti-ageing products (Chemical Watch, 2012). This scenario seems to be

related to the manufactures’ desire to generate a huge profits without taking into
consideration the safety interest of the customers (Zakaria, 2015).
These ingredient and safety issues have become main reason why Muslim customers
are now more inclined towards halal cosmetic and personal care products whose ingredients
and manufacturing process have been proven to be clean, safe, and wholesome (Ahmad et al.,
2015). Despite the cleanliness, safety, and goodness characteristics attached to halal cosmetic
and personal care products, the Muslim customers’ response towards them is, however, still
not overwhelming and encouraging (HDC, 2014b). In other words, Muslim customers in
Malaysia are still prioritising imported and conventional brands whose halal status are
questionable and doubtful (Mokhtar et al., 2012). According to Euromonitor’s Trade Sources
and National Statistics 2012, only 0.5 percent of the Muslim customers in Malaysia are using
Safi, the leading halal local brand for cosmetics and personal care products (Ramlee, 2010).
This problem is mostly due to the customers’ awareness and knowledge with regards
to the halal concept in cosmetics and personal care products (Rahman et al. 2015). A survey
conducted by KasehDia Consulting has indicated that the level of awareness and knowledge
towards halal cosmetic and personal care products among Muslims in Malaysia is still low
(Kamaruzzaman, 2008). For instance, both Muslim and non-Muslims are almost familiar and
aware with the concept of halal foods products but the term halal cosmetics and personal care
products are relatively new even for Muslim consumers (Hajipour et al., 2015). They believe
that the halal concept is only meant for meat or food-related products and it has got nothing to
do with non-food products such as cosmetics and personal care products (Hajipour et al.,
2015). In addition, not all Muslims look for the halal certifications when they purchase
cosmetic
and personal care products (Teng and Wan Jamaliah, 2013) and majority of them will buy
these products without the halal certifications when there are no alternatives (Hunter, 2012).
Having identified this main issue, a study to further investigate the factors that may
affect customers’ intention to purchase halal cosmetic and personal care products, therefore,
needs to be conducted and pursued further. Consequently, a framework is needed to provide a
deeper understandings of consumers’ intention to purchase these two products. In this study,
a framework is built based on the previous theoretical and empirical research on behavioural
intention (Ajzen, 1991; Fishbein and Ajzen, 1975; Taylor and Todd, 1995). These intention-
behaviour theories assume that consumers’ intention to purchase halal cosmetic and personal
care products depends on three direct effects of consumer behaviour namely attitude,
subjective norm, and perceived behavioural control. Based on the extensive review of past
literatures, some important determinants which may affect these three main constructs are
identified. Other relevant external factor which may affect the proposed framework is also
suggested. By incorporating this particular external factor, the proposed framework seems
relevant and appropriate in the context of product marketing.
The outline of the paper is as follows. In the next section, first, the literature review on
halal concept, halal cosmetic and personal care products, and theories of intention-behaviour

is reviewed. Second, a framework containing all determinants that may affect consumers’
intentions to purchase halal cosmetic and personal care products is introduced. Third, the
basic determinants of consumers’ attitude, subjective norms and perceived behavioural
control are examined. Fourth, the moderating effect of customers’ product knowledge
towards the relationship between the three basic constructs and customers’ purchase intention
are explored. Finally, the findings of the research which will include both the implications
and limitations of the study are discussed.
2 Literature reviews
2.1 Halal concept
The Arabic word halal means permissible or lawful in contrast to haram, which means
prohibited or unlawful (Alam and Sayuti, 2011; Al-Qardawi, 1997; Wilson and Liu, 2010).
More specifically, halal refers to permissible objects or activities that are in line with the
Islamic teachings (Haque et al., 2015). Based on the halal point of view, any foods or
products that are meant for consumption should not be contaminated with pork or alcohol and
that cattle should be slaughtered in accordance with the Islamic principles (Rahman et al.,
2015). However, the halal concept is not purely confined to food and the slaughtering of
animals but may also include all consumables such as pharmaceutical, cosmetics, personal
care products as well as service sector components such as logistics, marketing, printing and
electronic media, packaging, branding, and financing (Fernandez, 2011; Hashim and Mat
Hashim, 2013; Hunter, 2012; Lada et al., 2009; Rahman et al., 2015).
Toyyibaan is an even wider concept than halal, which means good, clean, wholesome,
and ethical (Al-Harran and Low, 2008; Che Man et al., 2005; Noordin et al., 2009). Under the
concept of Toyyibaan, food and other consumables must be good or wholesome in terms of
quality, safety, cleanliness, purity, and authenticity (Che Man and Mustafa, 2010; Hunter,
2012; Nurliza, 2007). Toyyibaan would also mean that agriculture must be managed and
pursued on a sustainable management practices (Hunter, 2012), raw materials should be
produced sustainably and ethically (Al-alak and Eletter, 2010), and the business effort should
be conducted with good objectives and intentions (Alserhan, 2011). Therefore, in the
stringent term of these concepts, Toyyibaan may affect the day-to-day running of the business
activities such as management styles, human capital management, business integrity, product
quality, raw material selection, and manufacturing practices (Hunter, 2012).
2.2 Halal cosmetic and personal care products

Cosmetics and personal care products are an important component of people’s basic
needs and necessities (Teng and Wan Jamaliah, 2013). These products may include make-
ups, anti-ageing skin products, moisturisers, shampoos, bath products, oral care products,
skin care products, and personal hygiene products (Gandhi, 2008; Hunter, 2012). In line with
the government safety’s rules and regulations, halal cosmetics and personal care products
must be free from any harmful and hazardous substances (Amat, 2006; DSM, 2008; Hunter,
2012; Rajikin et al., 1997). However, for Muslims consumers, these products must also be

permissible and lawful i.e. halal (Hashim and Musa, 2014; Hussin et al., 2013; Teng and Wan
Jamaliah, 2013). The concept of halal cosmetics and personal care products covers all critical
aspects of production such as ingredients, safety issue, manufacturing process, storage,
packaging, and delivery (Hashim and Mat Hashim, 2013; Hussin et al., 2013).
As far as the products’ ingredients are concerned, Islamic laws clearly states that
ingredients that are derived from human body or animal by-products such as pigs and dogs
are forbidden in Islam (HDC, 2014a). It is further stated that only permitted animal by-
products such as chickens, cows, buffaloes, turkeys, sheep and goats are permissible and
allowed in cosmetic and personal care products. However, these animals must be slaughtered
according to Islamic laws before their by-products can be used and processed (Che Man and
Mustafa, 2010). Additionally, accessories accompanying them such as brushes, bottles,
containers, equipment, and mirrors must also be in line with Islamic teachings (Hunter, 2012;
Hussin et al., 2013).
2.3 Intention-behaviour theories
Theory of reasoned action (TRA) is a theory indicating that both attitude and
subjective norm will influence intention, which in turn influences behaviour (Ajzen and
Fishbein, 1980). Basically, intention indicates the probability of a person acting in a certain
way (Fishbein and Ajzen, 1975). Attitude toward the behaviour reflects an individual’s
evaluation and general feelings towards a target behaviour (Ajzen and Fishbein, 1980).
Meanwhile, subjective norm refers to an individual’s perceived social pressure to perform or
not to perform a target behaviour (Ajzen and Fishbein, 1980). TRA is able to explain,
understand, predict as well as influence virtually any human behaviour in applied settings and
is not limited to a specific behaviour domain (Ajzen and Fishbein, 1980). The application of
TRA has also been used in explaining the consumer behaviour in Islamic financial services
and halal products consumptions (e.g. Amin, 2013; Amin et al., 2013; Lada et al., 2009;
Mukhtar and Butt, 2012; Rahman et al., 2015). However, the applicability of TRA was found
inadequate in predicting the customers’ behaviour to choose something freely (Ajzen and
Fishbein, 1980; Ajzen and Madden, 1986). In other words, the theory did not take into
consideration conditions where an individual has full or complete control against their own
behaviour (Ajzen, 1991). To overcome this, Ajzen (1991) has introduced the perceived
behavioural control into the model and this new model is later known as the theory of planned
behaviour (TPB). The term perceived behavioural control represents individual perceptions of
the ease or difficulty of performing the behaviour of interest (Ajzen and Madden, 1986). The
applicability of theory of planned behaviour (TPB) has been utilized in various empirical
research in social psychology (e.g. Ajzen, 1991; Taylor and Todd, 1995). TPB has also been
the basis for several studies on Islamic financial services and halal product consumptions
(e.g. Alam and Sayuti, 2011; Amin et al., 2013; Bonne et al., 2007; Haque et al., 2015;

Hashim and Musa, 2014; Ibrahim and Ismail, 2015; Omar et al., 2012). Although the TRA
and TPB are regarded as a universal model of consumer behaviour, both model have been
criticised for not being able to propose specific operational components or determinants of
behavioural attitudes, subjective norm, and to some extent, behavioural control. To meet this
criticism, Taylor and Todd's (1995) decomposed theory of planned behaviour (DTPB) has
extended the original theory of planned behaviour (TPB) into specific factors or components.
Inspired by Roger's (1995) diffusion of innovation theory (DOI), Taylor and Todd (1995)
included relative advantage, complexity and compatibility as the determinants of attitude. The
proposed determinants of subjective norm are proposed to be peer influence and superior
influence, while, perceived behavioural control was decomposed into three determinants,
namely self-efficacy, resource facilitating condition and technology facilitating condition.
The DTPB has been applied in various information system researches (e.g. Bhattacherjee,
2000; Chau and Hu, 2001; Lau, 2002; Tan and Teo, 2000; Taylor and Todd, 1995) and
Islamic financial service consumptions (e.g. Husin and Rahman, 2013). However, it is yet to
be conceptually and empirically tested in research of other nature including halal products
consumptions. Although DTPB is specifically meant to understand the adoption of
information technology (IT), the proposed determinants of attitude, subjective norm, and
perceived behavioural control in the original theory are also relevant and appropriate in
predicting the customers’ intention to purchase halal cosmetics and personal care products.
3 Framework for customers’ intention to purchase halal cosmetic and personal care
products
In developing an in-depth understanding of consumers’ intentions to purchase halal
cosmetic and personal care products, a framework has been built as shown in Figure 1 below.
Figure 1. Research framework
Halal Halal Sales

Awareness Certification Promotion
H6
H8 H9
H5 H7

H4
Attitude
H1
Intention to
H10
purchase
Word-of-Mouth
H2 halal
Influence Subjective Actual
cosmetics
Norm purchase
H11 and
personal
care
Media Influence
products
Perceived
H12
Behavioural
H3
Control H15, H16,
Self-Efficacy H17

H14
Resource H13
Facilitating
Conditions
Moderating
Product Knowledge
Variable
Indicators:
________ = Direct Effect
= Moderating Effect
Source: Taylor and Todd (1995), Ajzen (1991)
The main structure of the framework is adopted from the DTPB by Taylor and Todd (1995), a
powerful research model in the information systems setting. Although this model is
specifically designed to understand the adoption of information technology, some of the
determinants are relevant and applicable in predicting the customers’ intention to purchase
halal cosmetic and personal care products. Originally, DTPB identified three determinants of
a person’s attitude which are perceived usefulness, perceived ease of use and compatibility.
However, due to the different nature of the study, three important dimensions of the “attitude”
construct, namely “halal awareness”, “halal certification”, and “sales promotion” (Abdul Aziz
and Chok, 2013; Awan et al., 2015; Hussin et al., 2013; Wan Omar et al., 2008) have been
proposed. To the researchers’ knowledge, these salient belief factors i.e. halal awareness,
halal certification, and sales promotion have been discussed in the previous studies on Islamic
financial service and halal product consumptions but they are yet to be tested in a systematic
manner using the decomposed theory of planned behaviour (DTPB).
The original DTPB also decomposed the subjective norm into two important
determinants namely “peer influence” and “superior influence”. Taylor and Todd (1995)
decomposing of the subjective norm into peer influence and superior influence seems
justified in an organisational setting because it is rationale to presume that one’s purchase
behaviour is most likely influenced by their peers and superiors in the workplace. However,
since the nature of this study is more towards customers’ intentional behaviour towards halal
product, it is suggested that the original determinants of subjective norms are to be replaced
with the element of “word-of-mouth” or better known as “personal influence” and “media
influence”. The rationale is that one may believe that his personal influence such as friends,
family members, and colleagues may encourage him to purchase halal cosmetics and personal
care products or else he may believe that media influence such as television, newspaper, and
magazines may also influence him to purchase the products. In fact, these personal influence
and media influence are related to the second stage of consumer buying-decision process.
According to Perreau (2016), the five stages of consumer buying-decision process includes
need recognition, information search, alternative evaluation, purchase decision, and post-
purchase behaviour.
The original DTPB also identifies three important determinants of perceived
behavioural control which are self-efficacy, resources facilitating condition and technology
facilitating condition (Taylor and Todd, 1995). Again, due to different nature of the study,
only two of the determinants namely self-efficacy and resources facilitating condition are
adopted in the study. The technology facilitating condition was deemed inappropriate since
the main purpose of this study is to predict customer purchase behaviour towards halal
consumer products and it has got nothing to do with technology. In this study, the authors
also identified one external factor that is believed to moderate the relationship between
attitude, subjective norms, perceived behavioural control and intention to purchase halal
cosmetic and personal care products. By incorporating this external factor, the proposed
framework seems relevant and appropriate in the context of product marketing.
4 Attitude, subjective norm, and perceived behavioural control and Hypotheses

4.1 Attitude
Attitude is the psychological tendency that is expressed through favourable or
unfavourable evaluation of a particular object (Ajzen, 1991) and this will enable human
behaviour to be predicted and explained (Ajzen and Fishbein, 1980). Therefore, having a
negative attitude toward products and services or placing little value on the outcomes of this
behaviour will reduce the possibility of the action (Ajzen, 2002; Ajzen and Madden, 1986).
Numerous studies have recognised a significant relationship between attitude and intention to
consume halal food and food-related products (e.g. Alam and Sayuti, 2011; Bonne et al.,
2007; Haque et al., 2015; Lada et al., 2009; Mukhtar and Butt, 2012; Omar et al., 2012;
Rahman et al., 2015). Similarly, various studies in the halal cosmetics and personal care
products also reported the significant influence of attitude on intention to purchase and use
them (e.g. Aziz et al., 2010; Hashim and Musa, 2014; Ibrahim and Ismail, 2015; Rahman et
al., 2015).
Selectively, Alam and Sayuti (2011) found a significant positive relationship between
attitude and intention to purchase and consume halal products. In addition, Mukhtar and Butt
(2012) also found a significant relationships between attitude and halal food products.
Further, Aziz et al. (2010) revealed that positive attitude is one of the factors that determine
the customers’ decision to purchase halal cosmetics. Based on theory of planned behaviour
(TPB), Hashim and Musa (2014) argued that attitude has a positive effects on young adult
urban Muslim women towards halal cosmetics. In a recent study, Rahman et al., (2015) also
found a significant positive relationship between attitude and intention to purchase halal food

products and halal cosmetic products. Hence, adapting the attitude construct in this study
seems justified and the first hypothesis is proposed as follows:
H1: There is a positive relationship between attitude and intention to purchase halal cosmetic
and personal care products
4.2 Subjective norm
Subjective norm assesses the social pressure on individuals to perform or not to

perform certain behaviour (Ajzen, 1991). Basically, social pressure can affect one’s
behaviour in different ways and means (Fishbein and Ajzen, 1975). Numerous studies have
documented the significant relationship between subjective norm and intention to consume
halal food products (Alam and Sayuti, 2011; Lada et al., 2009; Mukhtar and Butt, 2012;
Omar et al., 2012) and halal cosmetic and personal care products (Aziz et al., 2010; Hashim
and Musa, 2014; Ibrahim and Ismail, 2015; Rahman etal., 2015). Using theory of reasoned
action (TRA), Lada et al. (2009) investigated Malaysian customers’ behaviour to choose halal
products and they found that subjective norm influences intention to choose halal products. In
addition, Alam and Sayuti (2011) also found a significant positive relationship between
subjective norm and intention to purchase and consume halal products. Mukhtar and Butt
(2012) further concluded that subjective norm appears to be the most influential factor
influencing the customers’ intention to choose halal products. Based on theory of planned
behaviour (TPB), Hashim and Musa (2014) later revealed that subjective norm has a positive
effects on young adult urban Muslim women towards halal cosmetics. According to Aziz et
al. (2010), subjective norm has to be recognized as the significant indicators of Muslim
customers’ behaviours to purchase halal cosmetics. Therefore, adapting the subjective norm
construct in this study deems relevant and appropriate, thus, the subsequent hypothesis is
proposed as follows:
H2: There is a positive relationship between subjective norm and intention to purchase halal
cosmetic and personal care products
4.3 Perceived behavioural control

Perceived behavioural control refers to people’s perception of the ease or difficulty of
performing the behaviour in questions (Ajzen and Madden, 1986). In other words, an
individual’s confidence in performing a specific task significantly influences behaviour
(Ajzen, 1991). For instance, when people are not equipped with enough resources and
knowledge to initiate the behaviour, their intention to perform the behaviour may be reduced,
even if they have favourable attitudes and/or subjective norms to execute the behaviour
(Madden et al., 1992). In other words, individuals are likely to get involved in certain
behaviour if they believe that they have the required resources and knowledge to perform the

behaviour (Ajzen, 1991). Numerous studies have revealed the positive effect of perceived
behavioural control on intention to purchase and consume halal food products (e.g. Alam and
Sayuti, 2011; Bonne et al., 2007; Haque et al., 2015; Omar et al., 2012). Similarly, various
studies in the halal cosmetics and personal care products also reported the significant
influence of perceived behavioural control on intention to purchase and use them (e.g. Aziz et
al., 2010; Hashim and Musa, 2014; Ibrahim and Ismail, 2015). Selectively, Alam and Sayuti
(2011) found a significant positive relationship between perceived behavioural control and
intention to purchase and consume halal products. Additionally, Aziz et al. (2010), also
revealed that perceived behavioural control was considered as one of the significant
indicators of Muslim customers’ behaviours to purchase halal cosmetics.
Using theory of planned behaviour (TPB), Hashim and Musa (2014) later concluded that
perceived behavioural control has a positive effects on young adult urban Muslim women
towards halal cosmetics. Thus, adopting the perceived behavioural control construct in this
study seems reasonable and justified and the next hypothesis is suggested as follows:
H3: There is a positive relationship between perceived behavioural control and intention to
purchase halal cosmetic and personal care products
5 Determinants of attitude, subjective norm, perceived behavioural control and

Hypotheses
5.1 Attitudinal constructs
Ajzen and Fishbein (1980), argued that “a person’s attitude towards a behaviour is
determined by a set of salient beliefs he holds in performing the behaviour”. In order to
understand a person’s certain attitude towards a behaviour, it is important to assess the
person’s salient beliefs about the object and behaviour (Ajzen, 1991). In this study, three
important dimensions of the “attitude” construct, namely “halal awareness”, “halal
certification”, and “sales promotion” (Abdul Aziz and Chok, 2013; Awan et al., 2015; Hussin
et al., 2013; Wan Omar et al., 2008) have been proposed.
5.1.1 Halal Awareness

Bickford and Reynolds (2002) defined awareness as the knowledge or understanding
of a particular subject or situation. The word “awareness” in the context of halal literature
means having knowledge of something and being well-informed of the existing development
of halal food, products and services (Ambali and Bakar, 2014). Thus, awareness refers to
human understanding and rational responses to a condition of what they consume, drink and
use (Abdul Aziz and Chok, 2013). Numerous studies have recognised a significant
relationship between halal awareness and intention to consume Islamic financial services
(Ayinde and Echchabi, 2012; Bashir, 2013; Husin and Rahman, 2016) and halal food
products (e.g. Abdul Aziz and Chok, 2013; Ambali and Bakar, 2014; Awan et al., 2015). To
illustrate, in their study to investigate Malaysian customers’ willingness to adopt Islamic
insurance services, Ayinde and Echchabi (2012) found that awareness is one of the factors
that affect their decision to participate in Islamic insurance services. Similarly, Ambali and
Bakar's (2014) study to examine customers’ awareness on halal food and products in
Malaysia further revealed that halal awareness plays a significant role in influencing

customers’ intention to purchase those products. Consistent with the above studies, Awan et
al. (2015) also found a significant relationship between halal awareness and intention to
purchase halal food products.
The direct relationship between halal awareness and attitude to consume Islamic
financial services and halal food products has also been reported in a few studies (e.g. Golnaz
et al., 2010; Husin and Rahman, 2016). For example, in their study to investigate the factors
influencing Muslim to participate in family takaful scheme, Husin and Rahman (2016)
revealed that the attitude to participate in the scheme was positively influenced by their level
of awareness towards the Islamic insurance principles. Similarly, Golnaz et al. (2010) studied
the non-Muslims awareness of halal principles and food products in Malaysia and they found
that the level of awareness was the main factor influencing the customers’ attitude towards
halal principles and halal food products. Based on the above-mentioned literature reviews, the
following hypotheses are, therefore, proposed:
H4: There is a positive relationship between halal awareness and intention to purchase halal
H5: There is a positive relationship between halal awareness and attitude to purchase halal
5.1.2 Halal Certification

Halal certification refers to the official acknowledgement of the proper procedure of
preparation, slaughtering, cleaning, handling, and other relevant management practices by the
relevant authority such as JAKIM in Malaysia (Wan Omar et al., 2008). It may also indicate
that the food and products observe the stringent term of cleanliness, purity, quality, and safety
(Lada et al., 2009). Additionally, consuming certified halal food and products is a condition
for the Muslims as part their religious obligations (Abdul Aziz and Chok, 2013). In order for
food and products to be halal-certified, the manufacturers must obtain the halal certification
as an indication that the food and products produced are in line with the teachings of Islam
(Guntalee and Unahannda, 2005).
A number of studies have acknowledged a positive relationship between halal
certification and intention to consume halal products (e.g. Abdul Aziz and Chok, 2013; Awan
et al., 2015; Hussin et al., 2013). For example, Abdul Aziz and Chok (2013)
studied the role of halal certification in determining halal purchase intention among non-
Muslims in Malaysia and they found that halal certification was positively related to
customers’ intention to purchase halal food products. Similarly, Awan et al.'s (2015) study to
investigate the factors affecting halal purchase intention in Pakistan’s halal food sector
further revealed that there was a significant relationship between halal certification and
intention to purchase halal food products. Consistent with the above studies, Hussin et al.
(2013) also found a positive relationship between halal certification and intention to purchase
halal-related products.
The direct relationship between halal certification and attitude to consume halal food
products has also been stated in a few studies (e.g. Golnaz et al., 2010; Wan Omar et al.,
2008). To elaborate, in their study to examine the non-Muslims awareness of halal principles
and food products in Malaysia, Golnaz et al. (2010) revealed that halal certification has a

positive relationships with attitude, which in turn may influence their intention to purchase
halal food products. However, Wan Omar et al.'s (2008), study to examine the Muslim’s
consumers’ attitudes towards halal food products found a negative relationship between halal
certification and attitude towards halal food products. Based on the preceding literature
reviews, the following hypotheses are, therefore, proposed:
H6: There is a positive relationship between halal certification and intention to purchase halal
H7: There is a positive relationship between halal certification and attitude to purchase halal
5.1.3 Sales Promotion

Sales promotions can be defined as an inducement by companies to encourage
customers to purchase the company’s products and services at the point-of-sales (Gilbert and
Jackaria, 2002; Shimp, 2003). It is considered as an important marketing tools for both the
manufacturers and retailers worldwide (Alvarez and Casielles, 2005; Ndubisi and Chiew,
2005; Peattie, 1998). According to De Run and Jee (2008) and De Run (2010), the most
widely used and liked sales promotion techniques for
customer products in Malaysia were coupon, price discount, free samples, and bonus packs.
A lot of studies have investigated the effect of sales promotion on intention to purchase a
product and service in general (e.g. Alvarez and Casielles, 2005; De Run and Jee, 2008; De
Run and Jee, 2009; De Run et al., 2010; Ndubisi and Chiew, 2006). However, only a few
studies have examined the effect of sales promotion on customers’ intention to purchase halal
food products (e.g. Abdul Aziz and Chok, 2013; Awan et al., 2015; Hussin et al., 2013). To
explain, Abdul Aziz and Chok's (2013) study to examine the role of sales promotion in
predicting halal purchase intention among non-Muslims in Malaysia found that sales
promotion was positively related to customers’ intention to purchase halal food products.
Similarly, Awan et al. (2015) also revealed that there was a significant relationship between
sales promotion and customers’ intention to purchase halal food products.
The direct relationship between sales promotion and attitude towards brand (Alvarez
and Casielles, 2005) and halal food products (Wan Omar et al., 2008) has also been reported.
For example, Alvarez and Casielles's (2005) study to examine the effect of sales promotion
on attitude towards brand revealed that there was a significant relationship between sales
promotion and customers’ attitude towards brand. Similarly, Wan Omar et al. (2008) studied
the Muslim’s consumers’ attitudes towards halal food products and they found that sales
promotion has a positive relationships with attitude, which in turn may influence their
intention to purchase halal food products. Based on these literature reviews, it is, therefore,
hypothesised that:
H8: There is a positive relationship between sales promotion and intention to purchase halal
H9: There is a positive relationship between sales promotion and attitude to purchase halal
5.2 Subjective norm constructs

Two determinants of subjective norm, namely “word-of-mouth influence” and “media
influence” have been included in the study. “Word-of-mouth influence” refers to personal
influence such as family members, friends, and colleagues while “media
influence” refers to the influence of mass media such as newspaper, television, and
magazines which might influence one’s intention towards the behaviour in question (Zolait
and Sulaiman, 2009). In fact, these personal influence and media influence are related to the
second stage of consumer purchasing-decision process. According to Perreau (2016), the five
stages of consumer purchasing-decision process includes need recognition, information
search, alternative evaluation, purchase decision, and post-purchase behaviour. Previous
studies have investigated and found a significant relationship of word-of-mouth influence and
media influence on subjective norm (e.g. Bhattacherjee, 2000; Limayem et al., 2000; Zolait
and Sulaiman, 2009).
Selectively, Bhattacherjee (2000) investigated human motivations to adopt business-
to-consumer (B2C) electronic commerce services among e-brokerage users and they found
that both personal influence (word-of-mouth) and external influence (mass-media) are
significantly related to subjective norm. Similarly, in their study to identify the influence of
communication channels (word-of-mouth and mass media) on the intention to use internet
banking (IB) among Yemenis, Zolait and Sulaiman (2009) found that both factors were
significant determinants of subjective norms. Although the impact of word-of-mouth
influence and media influence on subjective norm has yet to be tested in the context of halal
products consumptions, the relevancy of both determinants cannot be overlooked. Hence,
proposing both of these determinants into the framework are justified and the subsequent
hypotheses are, therefore, proposed:
H10: Personal influence of purchasing halal cosmetic and personal care products will
positively affect subjective norm.
H11: Media influence of purchasing halal cosmetic and personal care products will positively
affect subjective norm.
5.3 Perceived behavioural control constructs
The original DTPB model proposed three determinants of perceived behavioural
control which is self-efficacy, resources facilitating condition and technology facilitating
condition (Taylor and Todd, 1995). Due to the different nature of the study, only two of the
determinants namely self-efficacy and resources facilitating condition are adopted in the
study. The technology facilitating condition was deemed inappropriate since the main
purpose of this study is to predict customers’ purchase behaviour towards halal consumer
products and it has got nothing to do with technology.
Basically, self-efficacy reflects one’s self-confidence in the ability to conduct a
behaviour and is defined as a person’s judgement of their capabilities to organize and execute
courses of action required to attain designated type of performances (Bandura, 1986). With
respect to this study, we anticipate that individuals who have high self-confidence (i.e. self-
efficacy) towards halal cosmetic and personal care products will perceive they have the
ability (i.e. high perceived behavioural control) to purchase them. Meanwhile, resource
facilitating conditions refers to beliefs about availability of resources such as time, money,
information, and other resources that are needed to purchase a product and service (Triandis,

1980). We hypothesize that individuals who believe that they have the resources such as
time, money, information, and other resources (i.e. high resource facilitating conditions) will
perceive they have the ability (i.e. perceived behavioural control) to purchase halal cosmetic
and personal care products.
The effect of self-efficacy and resource facilitating conditions on perceived
behavioural control has been supported by several studies (e.g. Bhattacherjee, 2000; Taylor
and Todd, 1995). To illustrate, in their study to investigate student’s intention to use a
computing resource centre, Taylor and Todd (1995) found that both self-efficacy and
resource facilitating conditions were significant determinants of perceived behavioural
control. Similarly, Bhattacherjee's (2000) study on individuals’ underlying motivation to
accept electronic brokerage technology among e-brokerage users showed that perceived
behavioural control was significantly affected by one’s self-efficacy and resource facilitating
conditions. Again, even though the effects of self-efficacy and resource facilitating conditions
on perceived behavioural control have yet to be tested in the context of halal products
consumptions, the applicability and relevancy of these two determinants cannot be ignored.
Hence, the next hypotheses are therefore proposed:
H12: Self-efficacy will positively affect perceived behavioural control
H13: Resource facilitating conditions will positively affect perceived behavioural control
6 External Factor
In this section, the author identified product knowledge as a relevant external factor
that may affect customers’ behavioural intention to purchase halal cosmetic and personal care
products. The main reason to propose this explanatory factor into the framework is to
improve the predictive nature of DTPB and facilitate its application in the context of halal
cosmetic and personal care products. Generally, factors that may influence the intention to
purchase halal cosmetic and personal care products are likely to vary among customers.
Therefore, additional explanatory factor is needed beyond the attitude, subjective norm and
perceived behavioural control constructs. It is anticipated that this explanatory factor may
provide a better understandings of the relationship between the independent and dependent
variables. This particular external factor is discussed below.
6.1 Product Knowledge

Product knowledge refers to the amount of precise information about products and
services kept in the customers’ memory (Rao and Wanda, 1992). Customers intend to make a
purchase decision based on their knowledge related to the product and service in questions
(Cowley and Andrew, 2003; Frank and Michael, 2013). In today’s competitive world,
customers rely heavily on their existing knowledge to assess the relevant product
characteristics before they reach into a decision to purchase them (Aertsens et al., 2011;
Frank and Michael, 2013). In the customer behaviour studies, product knowledge has been
found to have both direct and moderating effects on behavioural intentions (e.g. Aertsens et
al., 2011; Chiou, 1998; Frank and Michael, 2013; Hamdan et al., 2013). The direct and
moderating effects of product knowledge towards the relationship between attitude,

subjective norm, perceived behavioural control and customers’ intention to purchase halal
cosmetic and personal care products are discussed in the following sections.
6.2 Direct Effects of Product Knowledge

Previous studies related to product knowledge has demonstrated that product
knowledge concerning organic foods has a positive influence on intention towards those
foods (e.g. Aertsens et al., 2011; Gracia, 2007; Stobbelaar et al., 2007). However, only a few
studies (e.g. Abdul Aziz and Chok, 2013; Hamdan et al., 2013) have explored the direct
influence of product knowledge on intention towards halal food products. To illustrate, in
their study among Muslim customers’ purchase intention towards processed halal foods,
Hamdan et al. (2013) found that there is a weak relationship between product knowledge of
processed halal foods and purchasing decision among Muslim’s customers. In contrast, Abdul
Aziz and Chok (2013) revealed that product knowledge about halal food products was
positively related to purchase intentions among non-Muslim consumers. Although much has
been revealed about the influence of product knowledge on customers’ intention towards food
in general, an understanding of whether product knowledge directly influences purchase
intention towards halal cosmetics and personal care products is rare. Thus, it is hypothesised
that:
Hypothesis 14: Customers’ product knowledge is positively related to their intention to
purchase halal cosmetic and personal care products.
6.3 Moderating Effects of Product Knowledge

Customers’ product knowledge has also been hypothesized as one of the moderators
of the attitude-intention, subjective norm-intention, and perceived behavioural control-
intention relationships (e.g. Berger et al., 1994; Chiou, 1998; Cowley and Andrew, 2003;
Frank and Michael, 2013). For example, in their study to investigate the moderating role of
perceived product innovativeness and product knowledge on new product adoption, Frank
and Michael (2013) found that perceived product innovativeness and product knowledge do
not only influence customers’ purchase intention directly but also moderate the effects of
attitude and subjective norm on their purchase intention. They further revealed that the
relationships between attitude and purchase intention is stronger for customers who have a
high level of product knowledge than customers who have a low level of product knowledge.
On the other hand, the relationships between subjective norm and purchase intention is
stronger for consumers who have a low level of product knowledge than customers who have
a high level of product knowledge. Similarly, Berger et al. (1994) also found that the
relationship between attitude and purchase intention is greater for consumers who have a high
level of product knowledge than customers who have a low level of product knowledge.
Additionally, in their study to examine the moderating effect of product knowledge
and attention to social comparison information (ATCSI) on customers’ purchase intention,
Chiou (1998) found that subjective knowledge moderates the relationship between perceived
behavioural control and purchase intention, while, ATCSI moderates the relationships
between attitude and purchase intention, and for the relationships between subjective norm
and purchase intention. They further revealed that the relationships between perceived

behavioural control and purchase intention is stronger for consumers who have a low level of
product knowledge than customers who have a high level of product knowledge.
Although much has been learned about the moderating effects of product knowledge
on behavioural intention in general, a specific understanding of whether product knowledge
moderates the relationships between attitude, subjective norm, perceived behavioural control
and customers’ intention to purchase halal cosmetic and personal care products has yet to be
attempted before. Therefore, it is hypothesised that:
Hypothesis 15: The effect of consumers’ attitude on their intention to purchase halal cosmetic
and personal care products will be stronger when consumers have a high level of product
knowledge than when they have a low level of product knowledge.
Hypothesis 16: The effect of consumers’ subjective norm on their intention to purchase halal
cosmetic and personal care products will be stronger when consumers have a low level of
product knowledge than when they have a high level of product knowledge.
Hypothesis 17: The effect of consumers’ perceived behavioural control on their intention to
purchase halal cosmetic and personal care products will be stronger when consumers have a
low level of product knowledge than when they have a high level of product knowledge.
7 Implications and limitations of the study

7.1 Implications for researchers
From the theoretical viewpoint, the research results contribute to existing literatures in
numerous ways. First, this study enriches halal literatures by providing understandings into
the factors that appear to affect consumers’ intention to purchase halal cosmetic and personal
care products. For instance, the research framework of this study shows that the customers’
intention to purchase halal cosmetic and personal care product is not only influenced by
attitude, subjective norms, and perceived behavioural control but also by their level of
product knowledge. Therefore, this study seems to be extending the work of Hashim and
Musa (2014), Ibrahim and Ismail (2015), and Rahman et al. (2015) who have studied halal
cosmetic and personal care products from different context and perspectives.
Second, the study also provides a list of determinants and components influencing
each of the construct that may affect the customers’ intention to purchase halal cosmetic and
personal care products. This provides a better understanding of the specific factors that may
influence the customers’ purchase behaviour, thus giving benefits to both future researchers
and scholars in structuring the theory and recognising the most influential factors affecting
customers’ intention to purchase these products. In comparison with previous research on this
area, this study seems to be providing a more integrated and comprehensive framework in
predicting the customers’ behaviour to purchase halal cosmetic and personal care products.
However, future research may enhance and improve the conceptual framework of this study
by proposing other determinants and constructs that are deemed appropriate and important.
7.2 Implications for practitioners

The framework proposed in this study is very much relevant to marketers and product
managers since it enables them to evaluate the factors that specifically influence the
customers’ intention to purchase halal cosmetic and personal care products. Understanding
factors that encourage them to purchase these products is one of the major strategies in
segmenting these products into the appropriate target market. For instance, the research
framework of this study shows that customers’ intention to purchase halal cosmetic and
personal care products is not only influenced by attitudes, subjective norm, and perceived
behavioural control but also by their level of product knowledge. Therefore, in order to
encourage customers to purchase halal cosmetic and personal care products, both marketers
and product managers should come up with an appropriate marketing technique aimed at
improving the customers’ knowledge about the products.
7.3 Limitations
As with any conceptual paper, our model also has its limitations. First, although the
framework of this study is based on a combination of results from many different studies in
the context of customer decision-making process, future research may enhance and improve
them by suggesting other determinants and constructs that are deemed more relevant and
significant. However, the authors are of the opinion that an overview of the most relevant
factors have been appropriately discussed in this study. The second limitation of this study is
that although the framework of this study is based on the extensive review on the relevant
literatures, it is yet to be tested empirically. Therefore, some cautions should be taken in order
to empirically test this framework. Finally, due to limited publication, only a limited number
of previous researches on customers’ intention to purchase halal products were discussed in
this study. Notwithstanding of the above limitations, this study contributes towards a better
understanding of the factors influencing customers’ intention to purchase halal cosmetic and
personal care products.
7.4 Conclusions
In this study, the authors adopted decomposed theory of planned behaviour (DTPB) in
order to provide a better understanding of the factors that drive customers’ intention to
purchase halal cosmetic and personal care products. Based on the extensive literature review,
the authors identified relevant determinants of attitude, subjective norm and perceived
behavioural control as well as the relevant moderating factors that are believed to influence
consumers’ intention to purchase these products.
To the best of the authors’ knowledge, this is the first study to identify the relevant factors
influencing customers’ intention to purchase halal cosmetic and personal care products using
DTPB. Although DTPB is specifically meant to understand the adoption of information
technology (IT), the proposed determinants of attitude, subjective norm, and perceived
behavioural control in the original theory can also be adopted into the research of different
nature including halal cosmetic and personal care products.

References
Abdul Aziz, Y. and Chok, N. V. (2013). The role of Halal awareness, Halal certification,
and marketing components in determining Halal purchase intention among non-
Muslims in Malaysia: a structural equation modeling approach. Journal of
International Food and Agribusiness Marketing, 25(1), 1–23.
Aertsens, J., Mondelaers, K., Verbeke, W., Buysse, J. and Van Huylenbroeck, G. (2011).
The influence of subjective and objective knowledge on attitude, motivations and
consumption of organic food. British Food Journal, 113(11), 1353–1378.
Ahmad, A.N., Rahman, A.A. and Rahman, S. A. (2015). Assessing Knowledge and
Religiosity on Consumer Behavior towards Halal Food and Cosmetic Products.
International Journal of Social Science and Humanity, 5(1), 10–14.
Ajzen, I. (1991). The theory of planned behaviour. Organizational Behaviour and
Human Decision Processes, 50, 179–211.
Ajzen, I. (2002). Perceived behavioural control, self-efficacy, locus of control, and the
theory of planned behaviour. Journal of Applied Social Psychology, 32, 665–683.
Ajzen, I. and Fishbein, M. (1980). Understanding Attitudes and Predicting Social
Behaviour. Prentice-Hall, Eaglewood Cliffs, NJ.
Ajzen, I. and Madden, T. J. (1986). Prediction of goal-directed behaviour: attitudes,
intentions, and perceived behavioural control. Journal of Experimental Social
Psychology, 22(5), 453–474.
Al-alak, B. and Eletter, S. (2010). “Islamic entrepreneurship: an ongoing driver for
social change.” Interdisciplinary Journal of Contemporary Research in Business,
1(12), 81–97.
Alam, S.S. and Sayuti, N. M. (2011). Applying the Theory of Planned Behavior (TPB)
in halal food purchasing. International Journal of Commerce and Management,
21(1), 8–20.
Al-Harran, S. and Low, P. (2008). Marketing of Halal products: the way forward. Halal
Journal, 44–46.
Al-Qardawi, Y. (1997). The lawful and the prohibited in Islam, El Falah Publication. El
Falah.
Alserhan, B. A. (2011). The Principles of Islamic Marketing. Gower Publishing Limited,
Surrey.
Alvarez, B.A. and Casielles, R. V. (2005). Consumer evaluations of sales promotion: the
effect of brand choice. European Journal of Marketing, 39(1/2), 54–70.
Amat, S. H. (2006). Halal - new market opportunities. In 9th Efficient Consumer
Response (ECR) Conference, November 15, 2006, Kuala Lumpur, Malaysia.
Ambali, A.R. and Bakar, A. N. (2014). People’s Awareness on Halal Foods and
Products: Potential Issues for Policy-Makers. Procedia-Social and Behavioral
Sciences, 121, 3–25.

Amin, H. (2013). Factors influencing Malaysian bank customers to choose Islamic
credit cards: Empirical evidence from the TRA model. Journal of Islamic
Marketing, 4(3), 245–263.
Amin, H., Abd Rahman, A.R. and Abd Razak, D. (2013). An integrative approach for
understanding Islamic home financing adoption in Malaysia. International Journal
of Bank Marketing, 31(7), 544–573.
Awan, H.M., Siddiquei, A.N. and Haider, Z. (2015). Factors affecting Halal purchase
intention-evidence form Pakistan’s Halal food sector. Management Research
Review, 38(6), 640–660
Ayinde, L.O. and Echchabi, A. (2012). Perception and adoption of Islamic insurance in
Malaysia: an empirical study. World Applied Sciences Journal, 20(3), 407–415
Aziz, A., Amin, M. and Isa, Z. (2010). The perception to choose halal cosmetic
products: An empirical study for Malaysian customers. In 6th International
Conference on Business, Management and Economics, Turkey.
Bandura, A. (1986). Social Foundations of Thought and Action. Prentice-Hall,
Eaglewood Cliffs, NJ.
Bashir, M. S. (2013). Analysis of Customer Satisfaction with the Islamic Banking
Sector: Case of Brunei Darussalam. Asian Journal of Business and Management
Sciences, 2(1), 38–50.
Berger, I. E., Brian T. R. and George, H. J. (1994). Subjective Product Knowledge as a
Moderator of the Relationship Between Attitudes and Purchase Intentions for a
Durable Product. Journal of Economic Psychology, 15(2), 301–314.
Bhattacherjee, A. (2000). Acceptance of e-commerce services: The case of electronic
brokerages. IEEE Transactions on Systems, Man, and Cybernetics-Part A: Systems
and Humans, 30(4), 411–420.
Bickford, D.M. and Reynolds, N. (2002). Activism and service-learning: reframing
volunteerism as acts of dissent pedagogy. Critical Approaches to Teaching
Literature, Language, Composition and Culture, 8(2), 229–252.
Bonne, K., Vermeir, I., Bergeaud-Blackler, F. and Verbeke, W. (2007). Determinants of
halal meat consumption in France. British Food Journal, 109(5), 367–386.
Chau, P.Y.K. and Hu, P. J. (2001). Information technology acceptance by individual
professionals: A model comparison approach. Decision Sciences, 32(4), 699– 719.
Che Man, Y.B., and Mustafa, S. (2010). Updates of Halal products authentication. In
Proceedings of World Halal Research Summit 2010, Kuala Lumpur, Malaysia.
Che Man, Y.B., Syahariza, Z.A., Mirghani, M.E.S., Jinap, S. and Bakar, J. (2005).
Analysis of potential lard adulteration in chocolate and chocolate products usinf
Fourier transform infrared spectroscopy. Food Chemistry, 90, 815–819.
Chemical Watch. (2012). Malaysia bans mercury-containing cosmetics. Retrieved from
http://www.chemicalwatch.com/10882/malaysia-bans-mercury-containing-
cosmetics (Retrieved on February 27, 2016)
Chiou, J. . (1998). The Effects of Attitude , Subjective Norm , and Perceived
BehavioralControl on Consumers ’ Purchase Intentions : The Moderating Effects

of Product Knowledge and Attention to Social Comparison Information. In
Proceeding of the National Science Council, ROC, China (Vol. 9, pp. 298–308).
Cowley, E. and Andrew, A. M. (2003). The Moderating Effect of Product Knowledge on
the Learning and Organization of Product Information. Journal of Consumer
Research, 30(3), 443–454.\
De Run, E.C. and Jee, T. . (2009). The influence of personal values on sales promotion
techniques for convenience product. SEGi Review, 3(2), 16–24.
De Run, E.C. and Jee, T. W. (2008). Sales promotion preferences: techniques by product
type. In The 3rd International Borneo Business Conference, Universiti Malaysia
Sabah (UMS), Malaysia.
De Run, E.C., Jee, T.W. and Lau, W. . (2010). Malaysia. Asia Business Research
Corporation Limited, Wellington.
DSM. (2008). Malaysian Standard MS 2200: Part 1: 2008 Islamic Consumer Goods :
Cosmetics and Personal Care - General Guidelines. Department of Standards
Malaysia, Printing Department, SIRIM Berhad, Shah Alam, Malaysia (Vol. 1).
Fernandez, E. (2011). Halal - A Badge of Honour. Retrieved from
http://www.kippreport.com/2011/02/badge-of-honour/bnr (Retrieved on February
3, 2016)\
Fishbein, M. and Ajzen, I. (1975). Belief, attitudes, intention and behaviour: An
introduction to theory and research. Reading, MA: Addison-Wesley.
Frank, Q.F. and Michael, T. E. (2013). The Moderating Effect of Perceived Product
Innovativeness and Product Knowledge on New Product Adoption: An Integrated
Model. The Journal of Marketing Theory and Practice, 21(3), 257–272.
Gandhi, M. (2008). Use of Animals Fats in Cosmetic Industries. The Bihar Times.
Retrieved from http://www.bihartimes.in/maneka/cosmetics.html (Retrieved on
January 21, 2016)
GIFR. (2015). The Global Halal Industry: An overview. Global Institute of Forensic
Research. Retrieved from http://www.gifr.net/gifr2013/ch_13.pdf (Retrieved on
February 6, 2016)
Gilbert, D.D. and Jackaria, N. (2002). The efficacy of sales promotions in UK
supermarkets: a consumer view. International Journal of Retail & Distribution
Management, 30(1), 315–322.
Golnaz, R., Zainalabidin, M., Mad Nasir, S. and Eddie Chiew, F. C. (2010). Non-
Muslims awareness of halal principles and related food product in Malaysia.
International Food Research Journal, 1, 667–674
Gracia, A. (2007). Organic food product purchase behaviour: a pilot study for urban
consumers in the South of Italy. Spanish Journal of Agricultural Research, 5(4),
439–451.
Guntalee, R. and Unahannda, S. (2005). Needs, behaviour and attitudes of people in the
United Arab Emirates towards consuming Thai-Halal packaged food. The Business
Review, 4, 274.

Hajipour, B., Gharache, M., Hamidizadeh, M.R. and Mohammadian, F. (2015). Raising
Halal Cosmetic Awareness among the respective Consumers. International
Journal of Academic Research in Business and Social Sciences, 5(7), 338–349.
Hamdan, H., Issa, Z.M., Abu, N. and Jusoff, K. (2013). Purchasing decisions among
Muslim Consumers of processed halal food products. Journal of Food Products
Marketing, 19(1), 54–61.
Haque, A., Sarwar, A., Farzana, Y., Tarofder, A.K. and Hossain, M. A. (2015). Non-
Muslim consumers’ perception toward purchasing halal food
products in Malaysia. Journal of Islamic Marketing, 6(1), 133–147.
Hashim, A.J.C.M. and Musa, R. (2014). Factors Influencing Attitude towards Halal
Cosmetic among Young Adult Urban Muslim Women: A Focus Group Analysis.
Procedia-Social and Behavioral Sciences, 130, 129–134.
Hashim, P. and Mat Hashim, D. (2013). A review of cosmetic and personal care
products: Halal perspective and detection of ingredient. Pertanika Journal of
Science and Technology, 21(May 2011), 281–292.
HDC. (2014a). Opportunities in Halal Economy. Halal Industry Development
Corporation, Malaysia, (8th January 2014).
HDC. (2014b). The Halal Industry: the new source of economic growth. Retrieved from
Retrieved from http://www.hdcglobal.com (Retrieved on January 31, 2016)
Hunter, M. (2012). “The emerging Halal cosmetic and personal care market:
integrating the organization towards the philosophy of Tawhid.” Working Paper,
University Malaysia Perlis.
Husin, M.M. and Rahman, A. A. (2013). What drives consumers to participate into
family takaful schemes? A literature review. Journal of Islamic Marketing, 4(3),
264–280.
Husin, M.M. and Rahman, A. A. (2016). Do Muslims intend to participate in Islamic
insurance? Analysis from theory of planned behaviour. Journal of Islamic
Accounting and Business Research, 7(1), 419–432.
Hussin, S. R., Hashim, H., Yusof, R. N., & Alias, N. N. (2013). Relationship between
product factors, advertising, and purchase intention of Halal cosmetic. Pertanika -
Journal of Social Science and Humanities, 21, 85–100.
Ibrahim, H. and Ismail, H. (2015). A Generational Cohort Study of the Relationship
between Religious Intensity and Religious Assurance for the Purchase of Non-
food Products. International Journal of Economics and Financial Issues, 5(Special
Issue), 330–334.
Kamaruzzaman, K. A. (2008). Halal cosmetics: Between real concern and plain
ignorance. The Halal Journal, (March & April), 26–28.
Lada, S., Tanakinjal, G. H., & Amin, H. (2009). Predicting intention to choose halal
products using theory of reasoned action. International Journal of Islamic and
Middle Eastern Finance and Management, 2(1), 66–76.
Lau, S. M. (2002). Strategies to motivate brokers adopting on-line trading in Hong Kong
financial market. Review of Pacific Basin Financial Markets and Policies,
5(4), 471–489.

Limayem, M., Khalifa, M. and Frini, A. (2000). What makes consumers buy from
internet? A logitudinal study of online shopping. IEEE Transactions on Systems,
Man, and Cybernatics - Part A: Systems and Humans, 30(4), 421–432.
Madden, T.J., Ellen, P.S. and Ajzen, I. (1992). A comparison of the theory of planned
behaviour and the theory of reasoned action. Personality and Social Psychology
Bulletin, 18(3), 3–9.
Malay Mail. (2015). Health Ministry bans Qu Puteh beauty product for containing high
mercury level. A.S.A.R. Publishing. Retrieved from
http://www.themalaymailonline.com/malaysia/article/health-ministry-bans-qu-
puteh-beauty-product-for-containing-high-mercury (Retrieved on February 27,
2016)
Mokhtar, A., Nooreha, H. and Nik Mustapha, N. H. (2012). Guidelines for Implementing
Value-Based Total Performance Excellence Model in Business Organizations.
Presentations at the Islamic Perspective Forum. Manila, Philippines.
Mukhtar, A. and Butt, M. M. (2012). Intention to choose Halal products: the role of
religiosity. Journal of Islamic Marketing, 3(2), 108–120.
Ndubisi, N.O. and Chiew, T. . (2005). Customer behavioral responses to sales
promotion: the role of fear of losing face. Asia Pacific Journal of Marketing and
Logistics, 17(1), 32–49.
Ndubisi, N.O. and Chiew, T. . (2006). Awareness and usage of promotional tools by
Malaysian consumers: the case of low involvement products. Management
Research News, 29(1/2), 28–40.
Noordin, N., Noor, N.L., Hashim, M. and Samicho, Z. (2009). Value chain of Halal
certification system: a case of the Malaysia Halal industry. In European and
Mediterranean Conference on Information Systems (EMCIS), 1-14 July 2009,
Izmir, Turkey.
Nordin, M., Desnika, E.M. and Rafi, M. (2010). Cosmetic usage in Malaysia,
understanding the major determinants affecting the users. International Journal of
Business and Science, 1(3), 273.
Nurliza, R. (2007). Halal - The New Global Market Force, Halal Journal. Retrieved
from http://www.halaljournal.com/article/635/branding-halal-food-as-safe,-
healthy-and-clean. (Retrieved on February 3, 2016)
Omar, K.M., Nik Mat, N.K., Imhemed, G.A. and Ahamed Ali, F. M. (2012). The Direct
Effects of Halal Product Actual Purchase Antecedents among the International
Muslim Consumers. American Journal of Economics, 2(4), 87–92.
Peattie, S. (1998). Promotional competitions as a marketing tool in food retailing.British
Food Journal, 100(6), 286–294.
Perreau, F. (2016). The 5 Stages of Consumer Buying Process. Retrieved from
http://www.consumerfactor.com/en/5-stages-of-consumer-buying-decision-
process (Retrieved on March 20 2016)
Rahman, A.A., Asrarhaghighi, E. and Rahman, S. A. (2015). Consumers and Halal
cosmetic products: knowledge, religiosity, attitude and intention. Journal of
Islamic Marketing, 6(1), 148–163.
Rajikin, M.H., Omar, B., and Sulaiman, S. (1997). Pemakanan dan Kesihatan. Dewan
Bahasa dan Pustaka, Kuala Lumpur, Malaysia.
Ramlee, J. (2010). Safi rebrands products to reach younger men. Business Times, New
Straits Times, 9–10.
Rao, A.R. and Wanda, A. S. (1992). The Effect of Prior Knowledge on Price
Acceptability and the Type of Information Examined. Journal of Consumer
Research, 19(September), 256–270.
Rastogi, S. C. (2003). Natural ingredients based cosmetics (Content of selected
fragrance sensitizers). Ministry of Environment and Energy, National
Environmental Research Institute, Roskilde, Denmark.
Rogers, E. M. (1995). Diffusion of Innovations. Collier Macmillan, New York. NY.
Shimp, T. . (2003). Advertising, Promotion, and Supplemental Aspects of Intergrated
Marketing Communications, 6th Edition. Thomson South-Western, Bostan, MA.
Simon Pitman. (2014). Malaysia Health Ministry advises consumers against two
cosmetic products. Retrieved from http://www.cosmeticdesign-
asia.com/Regulation-Safety/Malaysia-Health-Ministry-advises-consumers-against-
two-cosmetic products (Retrieved on February 27, 2016)
Stobbelaar, D.J., Casimir, G., Borghuis, J., Marks, I., Meijer, L. and Zebeda, S. (2007).
Adolescents’ attitudes towards organic food: a survey of 15 to 16 year old school
children. International Journal of Consumer Studies, 31(4), 349–356.
Swidi, A., Wie, C., Hassan, M.G., Al-Hosam, A. and Mohd Kassim, A. W. (2010). The
Mainstream Cosmetics Industry in Malaysia and the Emergence, Growth and
Prospects of Halal Cosmetics. In Proceeding of the Third International
Conference on International Studies (ICIS), 1st and 2nd December, 2010, Kuala
Lumpur, Malaysia (pp. 1–20).
Tan, M. and Teo, T. S. H. (2000). Factors influencing the adoption of Internet
banking.Journal of the Association for Information Systems, 1, 1–42.
Taylor, S. and Todd, P. (1995). “Understanding information technology usage, a test of
competing models.” Information Systems Research, 6(2), 144–176.
Teng, P.K. and Wan Jamaliah, W. J. (2013). Investigating students awareness and usage
intention towards halal-labelled cosmetics and personal care products in Malaysia.
In Proceeding of the 4th International Conference on Business and Economic
Research (4th ICBER 2013) ,4th - 5th March 2013, Bandung, Indonesia, 367–376.
Triandis, H. C. (1980). Values, attitude, and interpersonal behaviour, in Husin, M.M.
and Rahman, A.A. (Ed.), What drives consumers to participate into family takaful
schemes? A literature review. Journal of Islamic Marketing, 4(3), 264–280.
Wan Omar, W.M., Muhammad, M.Z. and Che Omar, A. (2008). An analysis of
Muslim’s consumers' attitudes towards Halal food products in Kelantan. In ECER
Regional Conference 2008, UiTM Kelantan.
Wilson, J.A.J. and Liu, J. (2010). “Shaping the Halal into a brand?” Journal of Islamic
Marketing, 2(2), 107–123.
Zakaria, Z. (2015). Regulation of Cosmetics: What has Malaysia Learnt from the
European System? Journal of Consumer Policy, 38, 39–59.
Zolait, A.H.S. and Sulaiman, A. (2009). The influence of communication channels on
internet banking adoption. Asian Journal of Business and Accounting, 2(1/2), 115–
134.
Zulaikha, S.R., Praveena, S.M and Norkhadijah, S. I. (2015). Hazardous Ingredients in
Cosmetics and Personal Care Products and Health Concern: A Review. Public
Health Research, 5(1), 7–15.
35

THE EFFECT OF KNOWLEDGE MANAGEMENT FOR INNOVATION, IMPLEMENTATION
STRATEGIES AND ORGANIZATIONAL PERFORMANCE
(STUDY ON LAVALETTE HOSPITAL MALANG)
Rofiaty
Try Noviyanti
Faculty of Economics and Business, University of Brawijaya
Abstract
Purpose – The purpose of this research to examine, and evaluate the influence of knowledge
management on innovation, implementation strategy and organizational performance on
Lavalette Hospital.
Design/methodology/approach - Studies conducted at the Lavalette Hospital in Malang, with
respondents all employees RS Lavalette. The questionnaires were distributed to 176
participants. 168 questionnaires returned. Data collected using a survey method directly with
questionnaires. The analysis technique used Partial Least Square (PLS).
Results - Research shows that knowledge management is mainly knowledge utilization has
effect on innovation and implementation strategies but innovation does not affect on
organizational performance. An interesting result of this research is shown to influence the
knowledge management directly to organizational performance is smaller in value than, the
influence of knowledge management on organizational performance mediated by the
implementation of the strategy. These results indicate that, knowledge management, especially
knowledge utilization not a major determinant of the success of the organization's performance,
but its presence is an important input from the implementation of the strategy, in order to
improve organizational performance.
Keywords: knowledge management, innovation, strategy implementation, and
organizational performance.
Introduction
Population growth continues to rise in Indonesia, causing the growth of various

industries in various regions, one of which is the hospital industry. Competition between the
Hospital, especially in the city of Malang is tighter both organized by the government and private
sectors. It is characterized by the increasing number of hospitals in Malang and their hospitals
which have the status of International Hospital which is Persada Malang Hospital (Malangpost,
2014). Leibold et al., (2005) mentions that companies realize when the environment changes,
competition and information-based enterprise management method has changed fundamentally
toward knowledge-based where strategic collaboration becomes important as the mindset and
practices of competitive strategy.
As the health services industry, hospitals must be responsive and able to adapt the
change of environment that very fast and complex accompanied by the rapid flow of information.
Complex changes can be sourced from two things, the environmental change from an internal
source hospital or external environment of the hospital, where internal factors hospitals that
affect environmental change is resource management, management activities and overall
management, while external factors of hospital that affects the changes of environment from the
external such as increasing public awareness of health needs, increased competition of the
quality of hospital services, the rising cost of providing hospital as a result of the increasing

sophistication of medical technology or medical, pharmaceutical technology or pharmacology
and information technology as well as increasing awareness of the costs and efficiency of
providing hospitals (Sintaasih, 2011).
Today the manager admitted that the knowledge contained within the organization, is a
form of intangible assets is no less valuable than the tangible assets of the other, even the
intangible asset is an element that is most valuable because of the human factor is actually the
deciding factor (driver) of other intangible assets other (Devie and Joshua, 2006). Knowledge is
viewed as an important tool to achieve sustainable competitive advantage and marked the birth
of a new economic era is the era of knowledge-based economy which is indicated by the
increasing proliferation of competition based on knowledge. Knowledge as the fundamental
basis of competition (Grant, 1996; Agarwal, et al, 2012) and, in particular tacit knowledge, can
be a source of advantage because of their unique moves are not perfect, can not be perfectly
replicated and can not be substituted. However, the management of knowledge itself does not
guarantee a strategic advantage (Zack, 2002); otherwise, this knowledge must be managed.
Besides a change of paradigm from a resource-based view into knowledge management
requires companies to further improve the management and use of all the knowledge
possessed by the company and its employees (Tobing, 2007). In such a context, knowledge-
based economy is no longer simply rely on natural resources, but the resources of knowledge,
ideas and creativity. Management here is not limited to setting up, but also create a culture of
learning in an environment of employees through the process of knowledge exchange. So in the
next few years, companies that create new knowledge and apply it effectively and efficiently be
managed to create a competitive advantage.
Knowledge management process is divided into three parts. Honeycutt (2001), the first
is the process of knowledge creation (creation). Knowledge creation is an activity for creating
knowledge, while knowledge itself is the stock of knowledge in the form of individual experience
and expertise. The second is knowledge utilization, is an activities related to the knowledge
application in the form of technical devices include machines and equipment used for value
added or productivity. The Third is a knowledge sharing, is an activity involves the transfer of
knowledge from one party to another party. Sharing knowledge means that individuals can work
together and realize the importance of knowledge to the company and sharing the knowledge
gained with other individuals.
The Government through the Departemen Kesehatan issued a strategic policy and
program of hospital services that require a hospital to be oriented on economic principles,
equity, and quality. This policy requires the hospital so that the management should be carried
out effectively and efficiently (economic), services for all range from poor to rich (equity) and the
professional service and quality (quality). In addition to knowledge management implementation
of functional strategies are indispensable in the success of organizational performance, Rapert
et al, (2002) found a positive relationship when vertical communication is often carried out and
implementation of the strategy improved the performance of marketing and organizational
performance increases, it is evidenced by the increase of profit clean operation, gross revenue
and net revenue growth. Besides, under PP No. 23 on financial management of Public Service
Agency, it is mentioned that the government hospital which has become the agency of Public
Service Agency (BLU) is obligated to prepare five-year strategic plan with reference to the
Strategic Plan for Ministry / Agency or the Regional Medium Term Development Plan. Thus, the
Hospital is required to draw up a strategic plan and its implementation strategy appropriately.
The environmental changes also requires companies to be more proactive and

innovative. Innovation is considered as an important mechanism to become more competitive
and to survive in the global business world (Salaman, and Storey, 2002). Innovations provided

the company with several strategic advantages such as eliminating the cost, differentiation
through new product and service development and quality improvement (Salih Yesil et al., 2013;
Eren, 1987). Scholl (2005) states that if there is no innovation then no one can talk about growth
and competitiveness. Specifically Samsons (1989) in Lena Ellitan Lina Anatan (2009) suggest
that there are three types of innovation that is technical innovation, the innovation of
administrative and managerial system innovation.
As with any other hospital in Lavalette Hospital Malang is inseparable from the
competition. Lavalette Hospital established in the early 20th century as a clinic that serves
patients from the plantation and the sugar industry. When the nationalization of foreign private
companies in 1957, Lavalette Hospital became part of the BPU PPN Gula. In a further
development, Lavalette Hospital is a business unit of PTP XXIV-XXV later after restructuring
BUMN Plantation in 1996 turned into a PTPN XI. Furthermore, in January 2014 RS Lavalette
transformed into PT. Nusantara Sebelas Medika, a subsidiary of state-owned enterprises (RS
Lavalette, 2014). In the face of such competition, emphasis on the importance of knowledge
management in Lavalette Hospital employees and the implementation of appropriate corporate
strategies considered to be essential for the achievement of organizational performance
improvement, especially when the company is undergoing a transitional period first year
became a subsidiary of state-owned enterprises.
In addressing this Lavalette Hospital are also constantly working to improve the quality
and service. In 2010, Lavalette Hospital planned Bed Occupation Rate (BOR) of 79%, Turn-On
Internal (TOI) of 1.3 and a Bed Turn-Over (BTO 58). Number of beds of 141, the number of
patients of 8,231 (823 of internal and 7408 of external ), Average Lengh Of Stay of 4.9 (4.8 of
internal and 5.0 of external ), Day Care of 40.664 ( 36.753 of internal and 3.911 of external )
(RS Lavalette , 2014).
Lavalette Hospital continues to innovate by complementing existing equipment and

facilities in an effort to provide the best service for patients, One of it is hemodialysis unit for
patients with kidney failure. Lavalette Hospital patients not only from employees and family
PTPN XI, but also the wider community who need better medical services. Malang as a cool
atmosphere city is allowing patients to feel comfortable and a faster healing process. In line with
efforts to improve the service, Lavalette Hospital is also working with several other hospitals in
Malang (RS Lavalette, 2014).
Next research is Zehir et al, (2011) examine the relation between relationship
orientation, innovation orientation and organizational performance in the company's ancestry in
Turkey gives the findings of the influence of innovation on organizational performance. The
performance assessment of public organizations is very important to do, to be able to improve
the quality of public services. The performance assessment is used to assess the success of
the performance of a public organization in providing services for the community. Basically, the
orientation of the public not for profit (profit-oriented), but prefer the public service (public
service oriented). In addition to the performance assessment of public organizations are used
as a tool for evaluating the performance of the previous period, and used as the basis for further
corporate strategy (Srimindarti, 2004).
Research Kaya et al, (2013) shows that the capability of Human Resources
Management (HRM) has positive influence to the capability of Knowledge Management (KM)
are turned into innovations. Furthermore, HRM capability has direct and indirect effect mediated
by KM capability on Innovation. Research Lopez et al, (2011) also support to this research that
the findings of the two strategies Knowledge Management (codification and personalization)

effect on innovation and organizational performance are directly or indirectly (through an
increase in the ability of innovation).
The research results indicate that one of the dimensions of knowledge management that
is knowledge sharing affect the performance of innovation, but the study's findings from Yesil et
al. (2013) provides another input that hypothesis influence the process of knowledge sharing on
innovation performance is not realized, while the effect of innovation on the performance
capability of innovation is another finding of the study (Rofiaty, 2012).
2. Existing Literature
Management Strategies
Management strategy is a series of managerial decisions and actions that determine the
performance of the company in the long term. Management strategies include environmental
scanning, strategy formulation (strategic planning or long-term planning), strategy
implementation, and evaluation and control of (Hunger and Wheelen, 2003).
Depth Strategy
Wheelen and hunger (2003: 24) dividing three levels of strategy: 1) Corporate Strategy
formulated to achieve the goal of corporate or business as a whole include how to integrate and
manage all business and product lines to achieve a balance portfolio of products and services
and ensure that the business will operate in the long term. The decision in this strategy include
investments in diversification, vertical integration, acquisition and downsizing. 2) Business
Strategy includes strategies at the level of subsidiaries, divisions, or other product lines that
have autonomous management of his own business. Issues in business strategy is how to
coordinate the functions of the business / management for improving the position of competing
products or services of companies in specialized industries or market segments served by the
division. If the company wants to win or just to survive, in an industry he must adopt a business
strategy to create a competitive advantage over competitors that the business strategy is often
referred to the competitive strategy. 3) Functional strategy formulated and implemented at the
level of each business management functions in order to maximize the productivity of
resources. Functional departments to develop a strategy to gather together a wide range of
activities and their competence to improve performance. This level is at the center of information
management strategies at a level above that of business and corporate.
Implementation Strategy
Implementing strategy Affects an organization from top to bottom, Including all the
fuctional and divisional areas of business (David, 2015). Implementation of the strategy is the
process by which companies implement strategies and policies into action through the
development of programs, budgets and procedures (Wheelen and Hunger, 2003). Resource-
Based View (RBV) aims at presenting the importance of specific organizational resources in
achieving a competitive advantage that supports (Nothnagel 2008). RBV view each company as
a unique package of resources, are generally divided into three categories: tangible assets,
intangible assets, and capabilities (Galbreath and Galvin, 2004). In particular, RBV treat
knowledge as a common resource, rather than having specific characteristics. From that
perspective, it is known that the strategy of RBV were developed towards KBV strategy. Theory
of Knowledge-Based assume knowledge strategy is the most important resource for the
organization.

Intellectual Capital
To take advantage of the intellectual capital of the company need to understand whether
the intellectual capital. Through understanding the meaning of the intangible assets of the
company can prepare and establish strategies and policies -kebijakan to evaluate and maximize
the productivity of their most valuable assets are. or ideas about intellectual capital began in the
mid-1980s, indicated by a shift from production-based to service to the knowledge based
economy.
Knowledge Management
Knowledge management is a discipline that treats intellectual capital as assets managed

(Honeycutt, 2001). Medium (Ellias, 2004: 33) implies that knowledge is understanding gained
through experience is study. It's "Know-how or familiarity with how to do something that enables
a person to perform a specialized task. Also it may be an accumulation or facts, procedural
rules or heuristics. According to Davenport defined Knowledge Management is the process of
translating the lessons learned, which is inside / mind of someone into information that can be
use for everyone.
Data, Information, Knowledge and Wisdom
Data : unprosessed or raw fact a static set of transactional elements
Information : Processed Data; an aggregation of the data that have meaning or an aggregation
of the data that the make decision making Easier.
Knowledge : a Person's range of information, embracing a wider sphere that information. It

includes perception, skills, training, common sense, and experience
Dimensions of Knowledge Management
Knowledge management is basically a series of data transformation process and

information into useful knowledge. In the broadest sense, knowledge management is the
business concept, which comprises activities organized by mutual consent, coordinated and
deliberately to manage knowledge organizations through the process of creating, structuring,
dissemination and implementation to improve organizational performance and create value
(Bose, 2003; Massa & Testa, 2009).
Innovation
According Damanpour and Schneider (2008), innovation is an introduction to equipment,

systems, laws, products or services, new technology production process, a structure or
administration of the new system, or a new planning program for the adoption of an
organization. While the type of innovation is the adoption of behavior and the decisive factor of
such innovations. In the study Damapour (1991) and Gilbert (2003) classifies innovations into
several types, among others: managerial innovation, administrative innovation, technical
innovation, product / service innovation, process innovation, radical innovation, incremental
innovation.
Managerial innovation is a change in management poses where products and services

are developed, built and given to the consumer, Administrative innovation is related to the
organizational structure and administrative processes that are not directly related to the basic
activities of an organization and its work is directly related to the company's management.

Technical innovation is associated with changes in physical appearance or performance of a
product or service and production processes. Product innovation is a new product or service
that was introduced on the outside or because of market needs. Process innovation is a new
element introduced in a company's production or service operations, input raw materials,
specification of tasks, jobs and information, and equipment used for the production of a product
or making services.
Radical innovation and incremental innovation can be defined as the degree of the
changes made in the implementation of enterprise adoption. Radical Innovation is a non-routine
reorientation and innovation which is the basic procedure and the Company's activities show a
clear beginning of an implementation of innovation. While incremental innovation is innovation
that are routine, varied and instrumental. This study draws on research Samsons (1989) in Lena
Elitist and Lina anatan and research Rofiaty (2012) which divides the type of innovation in three
types: technical innovation, the innovation of administrative and managerial innovation.
OrganIzational Performance
Performance is a process used by the leadership to meenentukan if an employee

performs work in accordance with the duties and responsibilities or not, so the steps that are
used to represent the performance of selected based on the organization that is being
observed. The performance assessment is an important activity for an organization as a
process of evaluating all of its activities. The nature of the organization's performance and its
measurement became a topic experts and practitioners since the organization was first formed.
Research Hypothesis and Conceptual Framework
The hypothesis was formulated with the intention to be empirically tested to address the
problem of research. Thus, the relationship between variables can be plotted on Figure 1 below:
Figure 1
Conceptual Framework
Note :
: Direct Link
: Indirect Link
KM : Knowledge Management
INO : Innovation

IS : Strategic Implementation
OP : Organizational Performance
Operational Definition of Variables
Knowledge Management (X)
Knowledge Management by Dalkir (2005) is the deliberate and systematic coordination

of the people in the organization, technology, process, and organizational structures in order to
add value through reuse and Innovation. indicators of this study are described as follows :
1. Knowledge Creation (X1) Process-oriented management to create knowledge.
2. Knowledge utilization (X2) Activities related to the application of knowledge in the form
of technical devices include machines and equipment used for value added or productivity
3. Knowledge sharing (X3) Regarding the transfer of knowledge activities from one party
to another party. Sharing knowledge means that each individual aware of the importance of
knowledge to the company and sharing the knowledge gained with other individuals.
Innovation (Y1)
1. Technical innovation (Y1.1) Innovation related to products, services, technology and

production processes.
2. Administrative Innovation (Y1.2) Innovation that implements ideas for new policies
and resource allocation.
3. Managerial Innovation (Y1.3) Changes in management poses where products and

services are developed, built and given to the consumer.
Implementation Strategy (Y2)
1. The marketing strategy (Y2.1)
2. Operational Strategy (Y2.2)
3. HR Strategy (Y2.3)
Organizational Performance (Y3)
This research indicators adapted and developed from research Sintaasih (2011), an
indicator of this study is defined as follows:
1. The Financial Perspective (Y3.1)
2. The customer perspective (Y3.2)
3. Internal business process perspective (Y3.3)
4. The learning and growth perspective. (Y3.4)

Methodology
This research can be classified into basic research because it is done with the intention
of generating knowledge to understand a phenomenon that interests researchers (have now,
2006: 11). While this type of research is explanatory research. The study population was the
employees who are under the management of Malang Lavalette Hospital totaling 312 people.
While the unit of analysis in this study are Lavalette Hospital. Thus the survey respondents are
employees at every level of management Malang Lavalette Hospital based organizational
structure. In this study observed that the entire population of all employees who are under the
management of Lavalette Hospital Malang, amounting to 312 people. The determination of the
sample using the formula Slovin (in Umar, 2004: 108) with an error rate of 5% or 95%
confidence level, obtained a sample of 176 people. While the selection of samples using
stratified random sampling method is based on an organizational structure that includes the
Administration / Finance / Public service parts 59 and 117 people. Data collection method used
is the method of survey and documentation. Measurement scale with Likert scoring scale of five
categories, namely: 1 strongly disagree to 5 strongly agree. This study uses Validity and
reliability by using descriptive analysis and inferential analysis. Overall the data analysis stage is
done with the help of linearity program SPSS (Statistical Package for the Social Sciences) for
Windows version 22.0. and Smart Modelling PLS version 2.0 uses descriptive analysis,
inferential analysis, Partial Least Squares (PLS), Test of Goodness of Fit and hypothesis
testing.
Inner Model
Structural models (inner model) were evaluated with regard Q2 predictive relevance
model that measures how well the observed values generated by the model. Q2 is based on the
coefficient of determination throughout the dependent variable. Magnitude Q2 has a value with
a range of 0 <Q2 <1, the closer the value of 1 means that the model is getting better. The
results of the structural model can be seen in Figure 2 below.
Figure 2
Result of the Structural Model
Source: Data processed in 2014

Table 2
Inner Model
Original Standard
T Statistics P-value or
Inner Model Sample Error Information
(|O/STERR|) Significance
(O) (STERR)
Knowledge
Management (X1) - 0.5556 0.065 8.5465 0.0000 Significant
> Inovation (Y1)
Inovation (Y1) -
Not
>Organizational -0.1115 0.0703 1.5866 0.1145
Significant
Performance (Y3)
Knowledge
Management (X1) -
0.1696 0.067 2.5315 0.0123 Significant
>Organizational
Performance (Y3)
Knowledge
Management (X1) -
0.5781 0.0688 8.3999 0.0000 Significant
> Implementasi
Strategi (Y2)
Implementasi
Strategi (Y2) -
0.7307 0.061 11.9851 0.0000 Significant
>Organizational
Performance (Y3)
Table 2 The results of hypothesis testing against all variables simultaneously study
showed that the four-lane direct relationship is a significant effect because the value of t-statistic
greater than t-table (1.97) ie the variable knowledge management innovation path coefficient
0.5556 with t-statistic value 8.5465; knowledge management to organizational performance
coefficient 0.1696 path with a value of t-statistics 2.5315; knowledge management on the
Implementation Strategy path coefficient 0.5781 to 8.3999 the value of t-statistic; and
Implementation Strategy of the organizational performance coefficient 0.7307 path with a value
of t-statistic 11.9851, while the one-lane direct correlation effect is not significant, because the t-
statistic value is smaller than t-table (1.97) ie, variable innovation to organizational performance
-0.1115 path coefficient with a value of t-statistics 1.5866.
Indirrect Effect
Based on Figure 2 can be tested indirect influence between knowledge management to

organizational performance through innovation and implementation strategies. The test results
indirect influence can be seen in Table 3 below:

Table 3
Indirect Influence
P-value
Z
Indirect Effect Estimate atau Information
Sobel
Significant
Knowledge
Management >
No Influence of
Inovation > -0.0619 1.5594 0.1189
Mediation
Organizational
Performance
Knowledge
Management >
Implementasi Influence of
0.4224 6.8790 0.0000
Strategi > Mediation
Organizational
Performance
Based on Table 3 shows that the p-value of knowledge management influence on

organizational performance through Innovation > 0.05 so that knowledge management is not a
significant influence on organizational performance mediated by Innovation. While the p-value of
knowledge management influence on organizational performance through the implementation of
the strategy of < 0.05 so that knowledge management significantly affect organizational
performance mediated by the Implementation Strategy.
Hypothesis Testing Results
Based on Table 5:16 and 5:17 obtained results of hypothesis testing as follows:
a. Testing the hypothesis 1 variable knowledge management (X1) to innovation (Y1)
Testing the hypothesis 1 (H1) show that the direct effect of the variable knowledge
management innovation path coefficient values obtained at 0.5556 with a t-statistic value of
8.5465, the value is greater than the value of the t-table (1.97). These results prove that
knowledge management significant effect on innovation. So hypothesis 1 (H1) which states that
knowledge management influence on innovation received. Path coefficient of 0.5556 and
marked "positive", this indicates that the relationship significantly influence the knowledge
management innovation is "unidirectional". Knowledge Management significant effect on
innovation, better knowledge management will increase the inovation.
b. Testing the hypothesis two variables innovation (Y1) on organizational performance

(Y3)
Testing the hypothesis 2 (H2) suggests that the direct effect of variables on
organizational innovation performance values obtained path coefficient of -0.1115 to 1.5866 t-
statistic value, the value is smaller than t-table (1.97). This result proves that innovation is not a
significant effect on organizational performance. Hypothesis 2 (H2) which states that the
innovation effect on organizational performance declined. Moreover path coefficient of -0.1115
and marked "negative", indicating that the relationship of innovation no significant effect on
organizational performance is the "opposite". Innovation no significant effect on organizational
performance, the more innovation increases, does not affect organizational performance.

c. Testing the hypothesis 3 variables knowledge management (X1) to organizational
performance (Y3)
Testing the hypothesis 3 (H3) show the direct influence of variables knowledge
management to organizational performance values obtained path coefficient of 0.1696 to 2.5315
t-statistic value, and that value is greater than t-table (1.97). These results prove that knowledge
management positive significant effect on organizational performance. Hypothesis 3 (H3) which
states that knowledge management accepted an effect on organizational performance.
d. Testing the hypothesis 4 variables knowledge management (X1) on the implementation

of the strategy (Y2)
Testing the hypothesis 4 (H4) show the direct influence of variables knowledge
management of the strategy implementation path coefficient values obtained at 0.5781 with
8.3999 t-statistic value, and that value is greater than t-table (1.97). These results prove that
knowledge management has a significant positive effect on the implementation of the strategy.
Then hypothesis 4 (H4) stating that affect the implementation of the knowledge management
strategy is received.
e. Testing the hypothesis 5 Implementation Strategies variable (Y2) to organizational

performance (Y3)
Testing Hypothesis 5 (H5) show the direct influence of variables on organizational

performance strategy implementation obtained path coefficient value of 0.7307 with a t-statistic
value of 11.9851, and the value is greater than the value of the t-table (1.97). These results
prove that the implementation of strategy a significant positive effect on organizational
performance. So Hypothesis 5 (H5) which states that the implementation strategy acceptable
effect on organizational performance.
f. 6 Hypothesis Testing knowledge management (X1) mediated innovation (Y1) effect on

organizational performance (Y3)
Testing the hypothesis 6 (H6) variable knowledge management to organizational

performance through innovation based on Sobel test obtained by value p-value of 0.1189 where
the value of the P-value> 0.05. These results prove that knowledge management is not a
significant influence on organizational performance mediated by Innovation. Then the
hypothesis 7 (H7) which states that knowledge management innovation mediated effect on
organizational performance declined.
g. Hypothesis Testing 7 knowledge management (X1) mediated strategy implementation

(Y2) effect on organizational performance (Y3)
Testing the hypothesis 7 (H7) variable knowledge management to organizational

performance through the implementation of strategies based on Sobel test obtained by value p-
value of 0.0000 where the value of the P-value of <0.05. These results prove that knowledge
management significantly influence organizational performance mediated by the implementation
of the strategy. Then the hypothesis 7 (H7) which states that the implementation of knowledge
management mediated effect on organizational performance strategy is received.

Discussion of Results
This study proposes a model relationship directly or indirectly, the variable knowledge
management, innovation, strategy implementation, and organizational performance in Malang
Lavalette Hospital. Based on the analysis and description of the test model or hypothesis testing
that has been done, the next will be discussed relevance to the related theory, previous
research and empirical fact (observed) and is expected to reveal their findings.
Discussion of Direct Impact
1. Knowledge management (X1) effect on innovation (Y1)
Knowledge management significant effect on innovation. This illustrates that the better
knowledge management, the adoption of innovations consisting of technical innovation,
innovation admnistratif and managerial innovation will increase.
2. Innovation (Y1) effect on organizational performance (Y3)
Results of testing the hypothesis states that the Innovation no significant effect on
organizational performance. This illustrates that the innovation increases, does not affect
organizational performance (the performance of the company).
3. Knowledge management (X1) effect on organizational performance (Y3)
Knowledge management has a significant positive effect on organizational performance.

These results can be interpreted that the better implementation of knowledge management, the
better the performance of the organization Malang Lavalette Hospital.
4. Knowledge management (X1) affect the implementation of the strategy (Y2)
Results of testing the hypothesis states that knowledge management has a significant
positive effect on the implementation of the strategy. This indicates that the better
implementation of the functional strategy that consists of a marketing strategy, operational
strategy and human resources strategy that will increase organizational performance.
5. Implementation Strategy (Y2) effect on organizational performance (Y3)
Results of testing the hypothesis states that the implementation of strategy a significant
effect on organizational performance, It can be interpreted that the better implementation of the
functional strategy that consists of a marketing strategy, operational strategy, and human
resources strategy, the organizational performance will also increase.
Discussion of Indirect Influence
1. Effect of knowledge management (X1) mediated innovation (Y1) on organizational

performance (Y3)
Knowledge management is not a significant influence on organizational performance

mediated by Innovation. These results can be interpreted that the better knowledge
management of the Innovation will increase but will not improve organizational performance.
This finding is not in line with the research and Hasan Al hakim (2013) entitled "Knowledge
management strategies, innovation, and organizational performance", indicates that knowledge
management strategy has a positive and significant impact on organizational performance
through the mediating effect of innovation.

2. Effect of knowledge management (X1) mediated strategy implementation (Y2) to
organizational performance (Y3)
Knowledge management significantly influence organizational performance mediated by

the implementation of the strategy. These results can be interpreted that the better
implementation of Knowledge management through support for implementation of the strategy,
the better the performance of the organization at Lavalette Hospital. In other words, that the RS
Lavalette implementing knowledge management well tend to have better organizational
performance through the implementation of the strategy implementation is good too.
Research Implications
Based on the research findings of the managerial implications on RS Lavalette should

be focused on knowledge management activities are comprised of Knowledge Creation,
Knowledge utilization and Knowledge sharing for the achievement of the organization's
performance. Knowledge Management activities, especially knowledge utilization must be done
thoroughly at every level of management, not least from the level of top management to the
lowest level of management. Important findings and draw from this research is demonstrated
that innovation is not effected significantly to the performance of an organization so that
management must evaluate innovation applied whether it is appropriate and acceptable to both
customers and employees well besides theoretical innovation will significantly influence the
performance of the organization when in mediation by the implementation of the strategy. Other
findings from this study that the implementation of the functional strategy played a crucial role it
is evident that a good application of knowledge management will be able to support the
implementation of strategies that will enhance the organization's performance compared with
the influence of knowledge management on organizational performance directly.
Research Limitations
1. Indicator used on variables of innovation only technical innovation, administrative, and

managerial, further research is expected to include or test indicators radical innovation and
incremental innovation.
2. The data presented in this study is a cross sectional represents only a certain time point
conditions, especially during the transition period of management turnover. S
Conclusion
1. Knowledge management is reflected through knowledge creation, knowledge utillization and

knowledge sharing, while most reflect the role of knowledge management is knowledge
utilization. Knowledge management significant effect on Innovation, the better the knowledge
management Innovation will increase.
2. Innovation is reflected through technical innovation, administrative innovation and innovation

manjerial. While the greatest role in innovation are reflecting technical innovation. Innovation no
significant effect on organizational performance, the more innovation increases, does not affect
the organization's performance.
3. Knowledge management significant effect on organizational performance, the better the

organizational knowledge management will increase performace. Besides knowledge
management significant effect on organizational performance through the implementation of the
strategy, the better the knowledge management strategy, the implementation will be the better
so that organizational performance will be the better. However, knowledge management is not a

significant influence on organizational performance mediated by Innovation, better knowledge
management, the Innovation will increase but will not improve organizational performance.
4. Knowledge management significantly influence the implementation of the strategy, the better
knowledge management, the implementation will be the better strategy.
5. Implementation of the strategy reflected through marketing strategy, operational strategy, and
human resources strategy, while most instrumental reflect Implementation of the strategy is the
operational strategy. Implementation of the strategy significant effect on organizational
performance, the better the implementation of the strategy will increase organizational
performance.
Suggestions
1. Lavalette Hospital should always pay attention and increase the activity of knowledge
management (KM) primarily knowledge intensive utilization by continuing to instill the values
and emphasizes a system that supports, for example, embed an understanding of knowledge
management on all elements, consider that Knowledge Management is a long-term investment
2. With the finding that innovation does not affect the performance of the organization is
expected Lavalette Hospital need to evaluate the innovation applied and conduct training -
intensive training related to the need for innovation, for example: training the use of the latest
medical equipment, socialization overall policy implementation, training, application usage the
latest IT systems as well as other training medukung in the process of implementing innovation.
3. With the finding that the implementation of the strategy mediates the relationship between
knowledge management and organizational performance Lavalette Hospital then commit
themselves to improve implementation of the strategy both in the field of marketing, Human
Resource, operations, as well as in the field of finances in order to achieve optimal
organizational performance.
4. To study further recommended reviewing researchers hypothesized relationship between

innovation to the implementation of strategies and innovation to organizational performance
through the implementation of the strategy.

References
Agarwal Ravi, Wolfgang Grassl dan Joy Pahl. 2012. Meta-SWOT: Introducing A New Strategic
Planning Tool . Journal of Marketing Management, VOL. 33 NO. 2, pp. 12-21.
Awad, Elias M. dan Ghaziri, Hassan M. 2004. Knowledge Management. Prentice Hall, Inc., A
Pearson Education Company.
Dalkir, Kimiz. 2005. Knowledge Management in Theory and Practice. Elsevier

Butterworth-Heinemann. Oxford.
Damanpour, F. 1991. “Organizational innovation: A Meta-Analysis of effect of Determinants and

Moderators”. Academy of Management Journal. 34/3: 555-590.
Damanpour, Fariborz., dan Marguerite Schneider. 2008. “Characteristics of Innovation and

Innovation Adoption in Public Organizations: Assessing the Role of Managers”. Journal of
Public Administration Research and Theory.
David, Fred R, 2015. Strategic Management Concept and Cases, 15th Edition, Pearson India
Education Service Pvt. Ltd. Pp. 214
Departemen Kesehatan Republik Indonesia Undang-Undang Republik Indonesia

Nomor : 23 Tahun 1992 Tentang Kesehatan.
DepKes RI. 1992. Keputusan Menteri Kesehatan RI No.983/MenKes/SK/XI/1992. Pedoman

Organisasi Rumah Sakit Umum
Devie dan Joshua Tarigan. 2006. Merancang Knowledge Management Model Dengan Balance
Scorecard: Dari Intangible Asset Menjadi Tangible Outcomes.Seminar Knowledge
Management. KKMI FTI ITB – Universitas Widyatama.
Elitan, Lena dan Lina Anatan, 2009. Manajemen Strategi Operasi : Teori dan Riset di Indonesia,
CV.Alfabeta, Bandung.
Galbreath, J. dan Galvin, P. 2004. Which Resources Matter? A Fine-Grained Test of The
Resource-Based View of The Firm, In Weaver, K.M. (Ed.), Creating Actionable
Knowledge. Academy of Management Proceedings, pp. L1-L6.
Gilbert, C., 2003. The Disruption Opportunity. MIT Sloan Management review, 44 (4), 27-32.
Grant, R. M. 1996. Towards A Knowledge-Based Theory of The Firm. Strategic Management

Journal, 17(10), 109–122.
Honeycutt, Jerry. 2001. Knowledge Management Strategies. Penerbit Elex Media Computindo.
Hunger, J.David dan Thomas L. Wheelen. 1996. Manajemen Strategis, Penerjemah Julianto
Agung, 2003, Penerbit ANDI, Yogyakarta.
Hunger, David dan Wheleen, Thomas, L. 2003. Strategy Management and Business Policy.
Fifth edition. Ad dison- Wesley Publishing Company. Inc Wokingham.

Joanna L.Y. Ho , Anne Wu, dan Steve Y.C. Wu. 2014. Performance Measures, Consensus On
Strategy Implementation, And Performance: Evidence From The Operational-Level Of
Organizations. Journal of Accounting, Organizations and Society 39 , 38–58.
Kaya, Gonul, Murat esen, dan Dilek esen. 2013.The Impact of HRM Capabilities on Innovation
Mediated by Knowledge Management Capability. Journal of strategic management,
Published by Elsevier Ltd.
Keputusan Menteri Kesehatan Republik Indonesia. No.983/Men.Kes/SK/XI/1992. Tentang

Kesehatan.
Leibold, Marius, Gilbert Probst, dan Michael Gibbert. 2005. Strategic Management in the
Knowledge Economy, New Approaches and Business Application. 2nd Edition. Germany,
Corporate Publishing and Wiley-VCHVerlag GmbH & Co KgaA.
Liputan6. 2014. Hadapi MEA, Industr Konstruksi RI harus Dongkrak Daya Saing.
http://bisnis.liputan6.com/read/2139803. Diunduh pada 27 November 2014
MalangPost. 2014. Persada Hospital Berikan yang Terbaik dengan Fasilitas lebih Canggih.
http://malang-post.com/kota-malang. Diunduh pada 21 maret 2014
Massa, Silvia & Stefania Testa. 2009. A Knowledge Management Approach To

Organizational Competitive Advantage: Evidence From The Food Sector. European
Management Journal, 27, 129–141.
Nothnagel, Katja. 2008. Emprical Research within Resource-Based Theory: A Meta-Analysis of

Central Propositions. Gabler Edition Wissenschaft. Berlin.
Paisittanand Sineenad, L. A. Digman, dan Sang M. Lee. 2007. Managing Knowledge

Capabilities For Strategy Implementation Effectiveness. International Journal of
Knowledge Management ,Volume 3, Issue 4 edited by Murray E. Jennex © 2007, IGI
Global.
Pearce, John A. dan Richard B. Robinson. 2008. Manajemen Strategis- Formulasi,

Implementasi, Dan Pengendalian. Edisi 10, Penerjemah Yanivi Bachtiardan Christine,
2009, Salemba Empat, Jakarta.
Rapert Molly Inhofe, Anne Velliquetteb, dan Judith A. Garretson . 2002. The Strategic
Implementation Process Evoking Strategic Consensus Through Communication. Journal
of Business Research 55, 301– 310.
RS-Lavalette. 2014. Sekilas Tentang RS Lavalette. Http://www.ptpn-11.com/rs-lavalette.html.

diunduh pada 12 Mei 2014.
Rofiaty. 2012. Inovasi & Kinerja. Knowledge Sharing Behavior pada UKM , A collection of
readings. Brawijaya University Press.
Salaman, JG, and Storey, J .2002. Managers Theories About The Process Of Innovation,
Journal of Management Studies, vol. 39, no. 2, pp. 147-165.

Scholl, H. 2005. Innovationas Driver Growth. CBI Conference Synopsis Sharing Knowledge
With The Business and Academic Communities, Carnegie Bosch Institute for Applied
Studies in International Management.
Sekaran, Uma. 2006. Research Methods for Business, 4th Edition. Yon, Kwan Men
(penerjemah). Metodologi Penelitian Bisnis, Edisi 4. Salemba Empat. Jakarta.
Sintaasih, Desak. 2011. Knowledge Management Dan Peran Strategic Partner Sumber Daya
Manusia: Pengaruhnya Terhadap Perencanaan Strategik dan Kinerja Organisasi (Studi
Pada Rumah Sakit Di Bali). Desertasi, Fakultas Ekonomi & Bisnis, Universitas Brawijaya
Malang.
Solimun, 2013. Penguatan Metodologi Penelitian General Structural Component Analysis –

Gsca. Modul diklat Statistik- Universitas Brawijaya.
Srimindarti, Ceacilia. 2004. Balanced Scorecard sebagai Alternatif untuk Mengukur Kinerja.
Fokus Ekonomi.
Tobing, Paul L. 2007. Manajemen Pengetahuan: Konsep, Arsitektur dan Implementasi. Graha
ilmu.
Umar, Hussein 2004. Metode Penelitian Untuk Skripsi Dan Tesis Bisnis, Cet ke 6, Jakarta : PT
RajaGrafindo Persada.
Yesil, Salih, Alaeddin koska, dan Tuba buyukbese. 2013. Knowledge Sharing Process,
Innovation Capability and Innovation Performance: An Empirical Study. Journal of
Technology and Innovation Management, Published by Elsevier Ltd.
Zack, M. H. 2002. Developing A Knowledge Strategy: Epilogue. In N. Bontis, & C.W. Choo
(Eds.), The Strategic Management Of Intellectual Capital And Organizational Knowledge:
A collection of readings. Oxford University Press.
Zehir, Cemal , Erkut Altindag, dan A.Zafer Acar. 2011. The Effects of Relationship Orientation
Through Innovation Orientation on Firm Performance: An Empirical Study on Turkish
Family-Owned Firms. Journal of strategic management, Published by Elsevier Ltd.

Icamess 2016

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Icamess 2016

Încărcat de

Drepturi de autor:

Formate disponibile

I

Aida Nur Mohd Kodri

Keywords: customer satisfaction, SERVQUAL

Nowadays, customer satisfaction has been subject of great interest to organization

Customer satisfaction measures products or services provided by a company meet its

Moreover, service quality viewed as a significant issue in the banking industry by

In addition, approaches to the measurement of service quality have typically been a

In developing SERVQUAL, Parasuraman (1988) recast the 10 determinants into

Parasuraman (1988) defined element of service quality as follow:

1. Tangibles – the appearance of physical artefacts and staff members connected

ICAMESS 2016 page 3

SERVICE QUALITY ELEMENTS

Figure 1: Theoretical Framework was developed from SERVQUAL, Parasuraman (1998)

ICAMESS 2016 page 4

Section B – This section will be identified the customer satisfaction.

Once data collected, it is analysed and summarized in a readable and easily

ICAMESS 2016 page 5

Blanchard, O., S. Commander, and F. Coricelli. (1993). Unemployment and restructuring in

Bowen, J. W. and Hedges, R. B. (1993). Increasing service quality in retail banking.

Brysland, A. and Curry, A. (2001). Service improvements in public services using

Gronroos, C. (1982), Strategic Management and Marketing in Service Sector, Marketing

ICAMESS 2016 page 6

Newman, K. (2001). “Interrogating SERVQUAL a Critical Assessment of Service Quality

Wisniewski, M. (2001), "Using SERVQUAL to assess customer satisfaction with public

Zamalia Mahmud. (2009). Handbook of research methodology: a simplified version.

ICAMESS 2016 page 7

Keywords: Consumer behavior, TPB, purchase intention, availability, information, halal

ICAMESS 2016 page 20

Theory of Planned Behavior

Figure 1. Theory of Planned Behavior (TPB) (Ajzen, 2002)

Perceived Behavioral Control

Perceived behavioral control is one's perception of the ease or difficulty to perform a

RESEARCH MODEL AND HYPOTHESES

ICAMESS 2016 page 22

Figure 2. A Schematic Diagram of The Conceptual Framework

RESULTS AND DISCUSSION

Mean Std. Deviation

Table 2: Test of Construct’s Validity and Reliability

Construct Item Cronbach Alpha Factor Loading

Availability AV1 0.752 0.771

Table 3: Pearson’s Correlation Coefficients on Understanding Halal Food

Table 4: Regression Analysis on Understanding Halal Food

ICAMESS 2016 page 25

ICAMESS 2016 page 26

Jusmaliani and Nasution, Hanny. (2009). “Religiosity Aspect in Consumer Behaviour:

Lin, H. F. (2007). “Predicting Consumer Intentions to Shop Online: An Empirical Test of

ICAMESS 2016 page 27

ICAMESS 2016 page 28

Keywords: Small and Medium Enterprise(SMEs) Empowerment

ICAMESS 2016 page 29

Table. 1. Contribution of SMEs to GDRP of Medan

7 Transportation and Communication 17.804.019,19 19,02

8 Finance, Insurance, Business in Renting 14.142.262,49 15,11

9 Services 10.182.878,36 10,88

ICAMESS 2016 page 32

ICAMESS 2016 page 33

Table 2.Descriptive Statistics of SMEs Empowerment in Medan

ICAMESS 2016 page 34

Transformation of the Picture above into mathematics model:

Tabel 3. Goodness of Fit Confirmatory Factor Analysis in Exogenous Construct of SMEs

ICAMESS 2016 page 35

Tabel 4. Regression Weights Confirmatory Factor Analysis in Exogenous Construct of SMEs

In the context of society, empowerment constitutes an individual capacity which is integrated