IJERD – International Journal of Environmental and Rural Development (2015) 6-1

Research article
erd

The Influence of External Environment on Operation
Strategy and Corporate Performance in IndonesianGarment Industry
ATTY TRI JUNIARTI*
Pasundan University, Bandung, West Java, Indonesia
Email: Tri_lo03@yahoo.com
Received 13 December 2014

Accepted 1 April 2015(*Corresponding Author)

Abstract This study examined the phenomenon of production and competition of thegarment Industry in Indonesia. Indonesian garment products have not been competitive in
the international market. The quality of the resulting garment products have not been able tocomply with the international quality standards. In addition, Indonesia has not been
included in the Trans-Pacific Partnership community that provides reduction of importduties for its member. This research extends the work performed by other researchers byperforming the study in a diferent environment not studied before and by expanding theenvironment dimension. The study used the management approach and integrating thestrategic management, operation management, human resource management and marketing
management. The purpose of this study is to describe and analyse 1) The external
environment, operation strategy and corporate performance of Indonesian garment industry;2) The influence of external environment towards operation strategy; and 3) The influenceof operation strategy towards the corporate performance. The types of this research aredescriptive and verificative while the methods used both descriptive and explanatory
surveys. Using the random sampling technique from collection data, the sample size were
71 companies with 395 respondences which consist 71 operation managers, 71 agents and
253 employees. The using interview as a technique from collection data with threequestionaire models. The data collected at February until July 2013, using the descriptive
analysis and path analysis. The results show 1) The external environment (supplier,technology, and consumer), operation strategy and company performance generally goodenough; 2) The external environment have significant influence simultaneously andpartially towards operation strategy, the consumer influence on the operating strategy is
greater than the influence of technology and suppliers; 3) The operation strategy have asignificant influence towards corporate performance and the operating strategy has a huge
influence on company performance and there is any other influence.
Keywords external environment, operation strategy, corporate performance

INTRODUCTION
Recently, Indonesian garment industry (IGI) face a fiercer challenge due to increasing number ofimported products and great demand by consumers, in addition to the several weaknesses of thenational garment products. For example, in the case of the design product, Indonesia does not haveenough expertise, so it must pay higher salary for foreign designers. Indonesian garment products
actually have the potential to grow because people cannot be separated from garment products, andIndonesia is a big market.
Indonesian textile and garment market share in the international market (Asosiasi Pertekstilan
Indonesia, 2012) is only about 1.82% and there has never been a significant increase. Indonesian
textile and garment products are not competitive in United States (US) and Europe market, and oneof the reasons is because Indonesia has not been included in the Trans-Pacific Partnership (TPP)
community, which provides a reduction of import duties for its member. In comparison, afterⒸ ISERD

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IJERD – International Journal of Environmental and Rural Development (2015) 6-1

Vietnam joined the TPP they get 5% - 12% of import duty reduction for the products that areexported to America, while Indonesia according to the Chairman of the Indonesian Textile
Association (April 2014), burdened with 12% - 31% duty, even though has become textile andgarment producer earlier than Vietnam.
The fact of the national garment industry nowadays is that it faces a fierce competition with
imported products that dominate the national market. The main competition is in the garment
design; imported products have better design that is preferred by consumers than local products.
This condition is cause by the limited ability of local manufacturers to design the products as wellas the used machinery which is still a constraint. Ultimately this situation leads to the national
garment industry acts as a 'tailor' for foreign manufacturers.
As one of the economic center in Southeast Asia, Indonesia has a dynamic economic growth.
According to World Bank’s data, Indonesia's Gross Domestic Product (GDP) growth in 2013reached 5.8% and Gross National Income Indonesia grew from US $ 2,200 in 2000 to US $ 3,563
in 2013. The problem then arises on the challenges of free trade, especially in Southeast Asia.
Indonesia as a member of Association of Southeast Asian Nations (ASEAN) will face theimplementation of the ASEAN Economic Community (AEC), but the government has not held adiscussion on this subject to gain opinions from the public, entrepreneur and academics. There isconcern that when the AEC is enacted, Indonesian producer will have great difficulties to competewith the foreign products and services, because of the legal and economic policies do not exist or
are not ready to face the sophistication of free trade mechanism.
To measure the industry’s performance, one of the benchmarks used by the Indonesian
government is the achievement of value added, so that the effort to increase the added value along
the chain of events is one of the strategies to increase the competitive advantage. Meanwhile,according to Johnson and Scholes (1993), strategy is the direction and scope of the organization toachieve excellence through the configuration of the existing resources to adjust to environmental
changes.
Lowe (1995) stated that in order to implement the strategy of technology, companies canconduct an analysis of the position held technology. The analysis is about market capability and thepossessed technological capability that is reflected in the production function.
OBJECTIVESThis study aims to reveal and analyse the external environment (suppliers, technology andconsumer), operating strategy, and the performance of the garment industry in Indonesia. This
study is a continuation of the prior research that has been done in 2007. In addition, it also aims toreveal the problems faced by the garment industry, particularly related to the performance.
In order the company can compete favourably with industry domestically and abroad, theindustry needs a good competitive strategy, such as determining the operating strategy that will be
implemented in the company. Porter (1980) stated that if a company can achieve and maintainoverall cost advantage, then it will perform above average, as long as it can maintain the pricearound the industry average.
METHODOLOGY
The method used in this study is descriptive and verificative, which aims to get an idea about theexternal environment and operations strategy, as well as to observe their effects on the performanceof the garment industry. The population target is the garment industry in Indonesia especially thosethat are listed as a members of the Indonesian Textile Association. A sample withdrawal techniquewith simple random sampling is used, with a sampling frame made first. Using the random
sampling technique from collection data, the sample size were 71 companies with 395
respondences which consist 71 operation managers, 71 distributor/agents and 253 employees. The
using interview as a technique from collection data with three questionaire models. The datacollected at February until July 2012, using the descriptive analysis and path analysis. There areⒸ ISERD

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IJERD – International Journal of Environmental and Rural Development (2015) 6-1

three variables that become the object of research; external environment that includes suppliers,
technology and consumer; operations strategy; and performance of the company. Data analysis has
been conducted using path analysis, which is used to analyze the causal correlation between thevariables studied. Path diagram is used to describe causal correlation between variables under study,
which graphically depict the structure of a causal correlation between the independent variables,
the intervening variables and the dependent variable. Data processing is conducted using Lisrel 8.7
with an ordinal scale.
RESULTS AND DISCUSSION
The garment industry is a clothing company that produces apparel, namely shirts, t-shirts, blouses, sport
shirts, polo shirts, under wear, trousers, jackets and rock & blouses. Various types of products producedby the garment industry can be classified into men's apparel, ladies apparel and children's apparel.
Textile and garment industry in Indonesia began to grow since 1920 (Asosiasi Pertekstilan Indonesia,2012) but Indonesia does not have a factory in the country yet. The development of this industry wasstarted from the development of Indonesian traditional batik clothes.
The external environments referred in this study are the factors that are beyond the company
which can affect the development of Indonesian garment industry. In this study, the external
environment is consists of suppliers, technology and consumer. Based on the eight indicators of
suppliers, it can be concluded that these suppliers belong to intermediate level. It means that
suppliers of raw materials have yet to reach the performance level expected by the garment industry
in general.
The majority of Indonesian garment industry is facing the competitors that have a relatively
good marketing strategy and performance, especially in achieving sales growth, profitability, andcustomer satisfaction (Atty, 2012). Companies that deal with such situations need to systematicallycollect information of the main competitors or industry averages and analyze it. The results are thenused as a basis for developing appropriate strategies, so that it can be used to overcome andminimize the threat of competitors or even can be utilized to seek for a new opportunity in themarket.
Approximately, there are about 11 types of machines with a variety of functions that are
generally used in the garment industry. Technology that is used heavily affects the garment
production quality (e.g. when machines used are relatively old and not using the latest technology,
the result will not be satisfactory). The results obtained indicate that the influence of consumers on
the operating strategy is greater than the influence of technology and suppliers for operating
strategy. The results of data analysis that has been conducted to test the hypothesis are based on the
diagram and mathematical model approach. Influence of the external environment on the operating
strategy and its impact on the performance of the garment industry in Indonesia is shown in Fig. 1.
The test is conducted by calculating the path coefficient of each variable studied.
Supplier

0.514

0.370

0.311

0.575

Technology

0.632

0.301

Operation
Strategy

0.326

ConsumerFig. 1 Path diagramⒸ ISERD

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0.296

0.839

Corporate
Performancee

IJERD – International Journal of Environmental and Rural Development (2015) 6-1

Fig. 1 shows that each external variable (suppliers, technology and consumers) has a positive
correlation. It can be said that all the three sub-variables of the external environment are supporting
each other as they are interconnected.
The results of the path analysis calculation were obtained using following equations:
Y = 0.311 X1 + 0.301 X2 + 0.326 X3 + €1

(1)

Z = 0.839 Y + €2

(2)

Where Y=Operation strategy, X1=Supplier, X2=Technology, X3 =Consumer, Z=Company
performance and €=Epsilon/out of research scope.
The amount of influence from the external environment, i.e., suppliers, technology andconsumer to the operating strategy is then calculated. The results are as shown in Table 1.
Table 1 The effect of external environment of operations strategy and influence on company
performance
Variable

DirectImpactSupplier
Technology
Consumer
Total
Strategy

9.7%
9.1%
10.6%
29.4%
70.4%

Supplier------------5.4%
5.2%
10.6%
-------------

Indirect Impact
Technology
5.4%------------6.2%
11.6%-------------

Consumer
5.2%
6.2%------------11.4%-------------

Total
Indirect Impact

Total
Impact

10.6%
11.6%
11.4%
33.6%
-------------

20.3%
20.6%
22.0%
63.0%
70.4%

Source: Author’s evaluation based on field research

Table 1 shows that the greatest influence on the operating strategy in the garment industry
have consumers (22%), followed by the influence of technology (20.6%) and the influence of
suppliers (20.3%). This happens because consumer is the direct user of the product.
The result of this study indicates that consumers have strong impact on the operating strategyof the garment industry in Indonesia due to their strong bargaining position. As a consequence, if
the products of Indonesian garment industry cannot meet costumers’ requirements, they can easily
switch to another similar imported product by other world companies. The operating strategy
should be proposed to accommodate the tastes, purchasing power and requirement of customers. If
Indonesian garment industry could fulfil the requirements, the probability to be abandoned by the
consumer is lower.
In addition, this study also shows that Indonesian garment industry should concern more on
customer demand rather than on technology or supplier in terms of composing their operation
strategy. The result of this study shows that technology and supplier are also important factor thatshould be considered in preparing the operating strategy, because the effect of these factors are notsmall, even though not as big as the influence of consumer. Consumers of Indonesian garment
industry have good taste, but their requirement has not been fulfilled by domestic manufacturers
yet. Indonesian consumers will be interested and feel more prestigious if they can use imported
garment products. If consumer is willing to purchase and use clothes from the domestic garment
industry, it will significantly reduce the consumption level of the imported clothes. Kreitner andKinichi (2001) stated that trust is the belief of a party concerning the purpose and behaviour of theother party.
The technology used in the garment industry in Indonesia nowadays (especially the machinery
technology) is still an old technology, therefore it has big influence on the production process result.
It means that existing technology is still not capable enough to produce garments to meet customer
expectations and compete with imported products. Technology plays an important role inencouraging industrial structure changes and the creation of new industries. Nevertheless, theinfluence of technology to the operation strategy is not too significant due to the fact that theexisting operation strategy has already consider the technological capabilities of the current
industries. Advance in technology encourages domestic garment industry to improve their productsⒸ ISERD

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continuously which would lead to consumers higher demand on the product and value of the
product itself.
Respondents response on operation strategy indicates that Indonesian garment industry tend to
implement flexibility and quality operation strategy. Quality strategy is a condition in which the
production process of a product meet the specifications or consumer expectations (Atty, 2012).
Demand for Indonesian garment products is getting higher, where the quality is not limited to theusage of its products, but also evolving towards consumers needs explicitly. In other word,
consumer will state that product has a good quality if it can meet their needs explicitly. The results
also show that the garment industry needs to be more concern about products quality byimplementing continuous improvement in that matter. Eventually, the results of this study indicatethat the garment industry in Indonesia should not have been confronted with the difficulties to
produce a good quality product, since the employees have already understood the importance of
product quality and continuous quality improvement. The quality of a product will be depends on
the production process. In order to produce a good quality garment product, better machinery
technology is a must, in addition to well qualified and creative employees.
Flexibility strategies used in the garment industry in Indonesia are intended to meet thecustomer demand in both volume and the variety of products. Production process of IGI use an
operating strategy with a flexible approach, which means that production is adjustable to theconsumers desires. In this rapidly changing business environment, flexibility strategies play more
important role due to technology advancement and flexible manufacturing system (FMS). These
strategies are used to respond to the rapid changes of a product or process which often expressed as
a combination of volume. According to Wheelwright (1984), flexibility strategy is a plan that
supposed to change from one product to another or almost suddenly from one part to another.
Krajewski and Ritzman (2005) stated that some companies give top priority to flexibility as a meanof beating competitors.
In addition, this study also found that consumers easily switch from one brand to anotherbrand, thus in these conditions the consumer has strong bargaining power. This is supported by theopinion of most direct empirical research by Ward et al. (1995) and Swamidass and Newell (1987)
have provided supportfor a connection among operations strategy, environment and performance.
Similarly, business strategy researchers have provided evidence that business unit performance isrelated to competitive strategy choicefor particular environment.
This is another indication that consumers have high expectations on every garment products
and services. Sucherly (2003) stated that the demands shifts of customer are relatively dynamic,
whereas the level of flexibility and adaptability of the company to respond was relatively low.
Therefore, the level of consumers expectations or demands needs to be further analysed.
The findings from this study also pointed out that flexibility and quality strategy requires more
intensive efforts to successfully face the global competition. Management of the garment industry
dynamically change according to the demands of the environment, both internal and external.
Performance measurement in this study only focuses on financial performance by looking at thelevel of production achievement, efficiency, targeted sales and profit. The financial performance
should be seen from the indicators of funds allocation in each activity, structure and value of theassets, the ease of obtaining credit, support of financial resources and its efficient usage. The results
also stated that not all of the garment industry in Indonesia can allocate funds effectively so it
would impact the efficiency of these funds. Moreover, the result suggests that industry that has agood asset value and structure will get the ease of obtaining credit and financial support. The levelof efficiency achievement is relatively lower than the production target, lead to high prices ofgarment product.
The implication of this study is that every garment industry in Indonesia should review theapplied policies in order to achieve the company's performance, target efficiency and in line withthe production targets achievement. The relatively high price of these garments would certainly
impact on purchasing power, buying interest and consideration of the quality and design ofproducts to be bought by consumers, then lead consumer do reconsideration to make purchasedecisions.
According to Badri et al. (1999), dimension of uncertainty affects the environment and theⒸ ISERD

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operating strategy of the company's performance. In addition, the results of Daniel and Reitsperger(1991) found out that if a company uses an iterative strategy, it will provide more feedback to
improve company performance.
The implication of this research is that the product development should refer to the realconditions and consumer demand, particularly design and product quality has to be able to lower
the price, in order to reduce lagging behind the competitors. This garment industry eventually hashuge potential in developing products, as long as they can develop more innovative and varied
products, there is improvement in fashion strategy to increase consumer demand and retain both
domestic and foreign customer to keep on using the diversified product from the garment industry
in Indonesia. At last, it is important to cultivate on how to make the garment products become the'host' in exist own country.
CONCLUSION
The external environment affects the performed operating strategy. Furthermore, the operating
strategies also influence the performance of the garment industry in Indonesia. The most influential
factors of external environment on the operating strategy are supplier and consumer, whereas
technology has the lowest effect. The implemented operating strategy in the garment industry inIndonesia recently is the flexibility and quality strategy, aimed to create product flexibly inaccordance with the development of consumer taste and purchasing power. Moreover, it is also
intended to create competitive cloth products in an excellent quality as a result of this garment
industry. The performance of the garment industry is still limited to the capability to produce
targeted clothing product but has not reach the target of efficiency yet, hence it will make the priceof per unit product become more expensive and not meet the standard quality requirements.
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