Old Wine in New Bottles: Strategy Dynamics in Indonesian Banking Sector

Abstract

Banking sector is a highly regulated industry where market structure could be affected by banking regulations. With the reformation in banking regulations post 2008 crisis emphasizing on the quality of bank capital, leverage, liquidity and the consolidated move by large international banks on their core banking business, competition in banking will even be more complex than it is now. Indonesian banking sector has evolved considerably since the 1998 crisis through consolidation, change of ownership structure, and stronger capitalization which, in turn, resulting in rapid growth in Indonesian banking sector. The market dynamics, the proliferation of product varieties and the change in banking regulations over the past five (5) years have turned Indonesian banking sector into a hyper-competition market where the strategic window or life-span becomes shorter. This paper will analyze strategy dynamics in the Indonesian banking sector from the perspective of Market-Based Theory (MBT) (or Industrial Organization Theory, IOT), the Schumpeter’s Theory of Creative Destruction, the Nelson & Winter Evolutionary Theory of Economic Change, Penrose Theory of the Growth of the Firm, and the Resource-Based Theory (RBT). The article stipulates that Penrose’s theory could be best to explain the strategy dynamics in Indonesian banking sector integrating the MBT and RBT into the strategic initiatives. Further, the article also discusses the major sources of delay in competitive response, namely strategic inertia, bureaucratic inertia, and political inertia.