2.

LITERATURE REVIEW

In today’s scenario most Researchers had carried out with research, including the secondary data
research in order to gather the related information. The similar studies that done previously by
other researchers had been review, by this it helps to provide more ideas and info to conduct the
study. The summary about previous research regarding the present topic will be discussed
comprehensively in this chapter. This literature review is to convey the knowledge and ideas
have been established on the organizational performance. In this study, case studies, academic
journals, books and magazines as well as other secondary data including online journals are the
references used as a source of information. In this chapter, the definitions and theories regarding
to the independent variables (business environment) as well as the dependent variables which is
organizational performance will be discuss. There is different opinion and statement from
different resources about effects of business environment on the organization performance. The
new framework in this research will play an important role in the studies. There are different
factors of business environment which is competition in similar businesses, government policies,
and environmental uncertainty, Technology, Infrastructural Facilities, Government policies,
Inflation, Raw materials (labor), Government politics, ability of the cooperative management,
cooperative capital, Organizational policies, Financial credits, Fraudulent practices,
organizational culture, liquidity risk and the size of the bank. The job performance can be
measured by job quality, behavior, profitability, employee satisfaction, customer satisfaction,
salary competitiveness, and employee turnover and job efficiency.

Business environment mainly lays between theory and practice the aria have participated
different experts and researchers to indent research related to general business management and
business strategic management in particular. A number of researchers have proposed various
models of business management. Strategic management model proposed by Wright, Kroll and
Parnell (1996) contains five basic framework, namely: (1) opportunities and external threats that
include macro environment and industry; (2) The internal environment that includes the
company's resources, the organization's mission and goals; (3) Formula strategies include
koporasi level, business unit level and functional level; (4) Implementation of the strategy which
includes organizational structure, leadership, authority, and organizational culture; and (5) that
includes the strategic control process and performance. Fundamental understanding into key
points in this model is the formulation of a strategy that is divided into phases of corporate,
business unit and functional levels. Furthermore, Wheelen and Hunger (2010) outlines the
strategy formulation directly in the elaboration of a more operational level, namely the mission,
goals, strategies, and policies. As for the implementation of the strategy outlined in the degree
program, budget, and procedures. In a pragmatic model of the strategic management of Wheelen
and Hunger looks easier to understand and easier to implement, although from the aspect of
leadership, structure, and culture look less highlighted in the model they put forward.

2.1. Business Environment

Relevance between theory and practice that occurs has prompted experts and researchers to
indent research related to general business management and strategic management in particular.
A number of researchers have proposed various models of strategic management. Strategic
management model proposed by Wright, Kroll and Parnell (1996) contains five basic framework,
namely: (1) opportunities and external threats that include macro environment and industry; (2)
The internal environment that includes the company's resources, the organization's mission and
goals; (3) Formula strategies include koporasi level, business unit level and functional level; (4)
Implementation of the strategy which includes organizational structure, leadership, authority, and
organizational culture; and (5) that includes the strategic control process and performance.
Fundamental understanding into key points in this model is the formulation of a strategy that is
divided into phases of corporate, business unit and functional levels. Furthermore, Wheelen and
Hunger (2010) outlines the strategy formulation directly in the elaboration of a more operational
level, namely the mission, goals, strategies, and policies. As for the implementation of the
strategy outlined in the degree program, budget, and procedures. In a pragmatic model of the
strategic management of Wheelen and Hunger looks easier to understand and easier to
implement, although from the aspect of leadership, structure, and culture look less highlighted in
the model they put forward
 2.1.1. External environment

In the development of business strategies External environment Strategic planning can be

divided into four stages of the process (Wheelen and Hunger, 2010) that is environmental
scanning, formulate strategy formulation, strategy implementation, and conduct evaluation and
control. Furthermore, the process of examining the environment, the external environment
analysis is intended to know the two variables, namely the opportunities and threats that are
beyond the organization and are likely not in the short-term control of the company. In general,
the analysis of the external environment will include the macro environment and the
environmental aspects of the industry. Macro environment includes aspects related to the
political, legal, economic, social and technology that may affect the business of the organization.
While the industry environment is an environment that is closer to the business activities of the
organization. Experts termed the management of the external environment as a place where the
bargaining power of buyers, bargaining power seller, the entry of potential new entrants, their
substitutes, and the intensity of competition in the industry company, which all of these are
beyond the control of the company (external factors). These factors cannot be controlled
companies without the right strategy and according to the situation of environmental change.
Management, with all their expertise, is required to develop a suitable strategy for the company
he leads. Rapid environmental change caused uncertainty of business environment (external),
and therefore contributes to the strategic plan that has been formulated (Handriani, 2011). The
external environment needs to be analyzed to determine the opportunities and threath who will
face the company. There are two perspectives (Clark et al., 1994; Tan &Litschert, 1994) to
conceptualize the external environment. First, perspective view of the external environment as a
vehicle for providing resources. The second perspective view of the external environment as a
source of information. The first perspective is based on the premise that the external environment
is a vehicle that provides the resources critical to the survival of the company (Tan &Litschert,
1994). This perspective also implies external potential to threaten the company's internal
resources. Strikes, deregulation, changes in legislation, for example, potentially damaging the
company's internal resources (Clark et al., 1994). The second perspective associate information
with environmental uncertainty. Environmental uncertainty refers to the external environment
conditions unpredictable changes, therefore these factors may affect the ability of members of
the organization in decision making.
 2.1.2. Internal environment

In the other perspective Internal environment (Marcus, 2005) is an environment that describes a
resource strengths and weaknesses of an organization that should be a concern and should be
analyzed to determine the extent to which companies can accommodate the opportunities and
threats originating from the external environment. Analysis of the internal environment of the
company, according to Pearce and Robinson (2013), include the resources, capabilities and
competencies possessed by the company. This approach is known as the Resource Base View
(RBV). In the RBV approach the resources owned by the company is much more important than
the structure of the organization to obtain and maintain a competitive advantage. Pearce
Robinson's (2013: 164), further, classify resources into three, namely (1) the assets are tangible
assets, such as production facilities, raw materials, financial resources, and facilities such as
computer technology. (2) intangible assets, such as reputation, moral company personnel,
technical knowledge, patents, trademarks, and accumulated experience of the company; and (3)
the capability of the organization, such as the ability and means to empower (combine) assets,
human resources, and production processes that convert inputs into outputs. Concepts and
methods of analysis of the internal environment in relation to the determination of the
organization's strategy, further can be mapped into: (1) Management Principles, (2) Seven S's,
(3) Value Chain, and (4) Resources, Capabilities, and Competencies. On the principles of
management analysis approach argued that the company should have personnel who are capable
of, especially dijajaran directors who can monitor, control, and provide input and advice to the
leaders’ summit. Leadership is needed to build the core values and corporate structure in order to
realize the strategy of the company through the division of labor based on specific tasks and
systematic. Furthermore, the internal analysis based strategy 7S framework stated that there are 7
basic things that can or should be done and controlled by management to realize the company
into excellence, namely: (1) Strategy, (2) Structure, (3) System, (4) Style , (5) Staffing, (6) Skills,
and (7) Shared Values. In the value chain analysis approach, which is also known as the concept
of "the building blocks of competitive advantage" that was developed by Porter (1996) and
Wheelen& Hunger (2012), the internal environmental analysis conducted to analyze the
strengths and weaknesses of the company. Value chain applied to understand that the activities
of the organization is as an ongoing process in the value creation activities paid by the buyer of
something created by the company. The measured values of total income benefit, ie when the
value of a given company's products or services exceed all costs incurred in making the value of
the product or service. Creating value for buyers who are able to exceed the cost of production
(margin) is a key concept used in analyzing the competitive position of the company. Further
analysis based on the value chain can be grouped into five main activities and four support
activities. Five main activities are as follows: (1) Inbound Logostics, (2) Operations, (3)
Outbound Logistics, (4) Marketing and Sales, and (5) Service. While supporting activities are:
(1) Resource Procurement, (2) Technology Development, (3) Human Resources Management,
and (4) Firm Infrastructure. Concepts and methods of analysis of recent internal environment is
resource-based view which gives emphasis on resource aspects, capabilitas, and competencies.
This concept was developed from the "Theory of the Growth of the Firm" presented by Edith
Penrose (Edith Panrose, 1996). In more detail, this approach can be described as follows: •
Resources are the basic capabilities of a company in the financial, physical, and human capital. •
Capabilities are the company's ability to exploit resources owned in order to achieve the desired
planning. An organization can have many capabilities but little competencies. • Competencies is
the manager's ability to connect with key resources and capabilities combine, transform and
direct them to satisfy customers.

2.2. Organizational Performance

In today’s scenario an important role of organizational performance to support business

processes have received special attention management experts. Empirically, the researchers have
tested the use of a construct of performance for a variety of issues related to the survival of an
organization (Venkatraman & Ramanujam, 1986). Performance, according to Whitmore (1997),
is an achievement of the target in the form that must be known and communicated to all parties
within the organization, and are associated with vision assigned to an organization. Narrowly,
business performance reflects the achievement of the objectives ekenomi an organization that is
reflected in the financial indicators. A financial indicator-based performance measure is referred
to as an indicator of financial performance and it has become the main model in research in the
field of strategic (Hofer, 1983). Generally, financial indicators used for this approach is sales
growth, profitability (which is reflected by the return on investment, return on sale, and return on
equity), earnings per share, and so on. In addition, in an effort to better reflect current market
conditions, the researchers also used the areas of strategy-based performance measurement
market, such as market-to-book or stock-market returns and the like (Montgomery, Thomas,
&Kamath, 1984). Broader conceptualization of business performance is pengukuaran
performances that incorporate operational performance indicators (nonfinancial) in addition to
the measurement of financial performance. This is done because the financial measures are not
fully able to provide a real picture of the state of the company. Under this conceptual framework,
measurements such as market share, new product introduction, product quality, marketing
effectiveness, manufacturing value-added, and another measurement of the efficiency of the
technology included as indicators of organizational performance measurement. Besides the
performance measurement paradigm as described above, in the late 1980s emerged a new
paradigm known as the balanced scorecard. This idea evolved because companies have already
started to think to balance the performance of non-financial information with financial data.
Integration between the performance of non-financial and financial data will help the company to
determine the strategy for the challenges of the future. Balanced Scorecard arises from a simple
argument is that the financial model of the business alone is no longer sufficient as the primary
way to manage performance. The financial model is beneficial to provide details about what
happened yesterday, but only slightly helpful in managing the development of the business. This
is because the financial model displays the data obtained historically and illustrates the
company's past performance that is hard to describe the situation what will happen in the future.

Furthermore, the measurement of the performance of the balanced scorecard approach to

Performance evaluation is done by considering the company 4 (four) perspectives (Kaplan &
Norton, 1996), namely financial perspective, customer perspective, internal process perspective,
and learning and growth perspective. A more detailed description of each perspective is as
follows:

2.2.1. Financial Perspective

Financial perspective into focus the objectives and measures. Each measure must be part of a
causal relationship, which in turn will be able to improve financial performance. Mulyadi and
Setiawan (2001: 347) explains that the financial performance measures indicate whether the
strategies, goals, strategic initiatives and implementation is able to contribute in generating
profits for the company. Financial measure commonly manifested in profitability, growth and
shareholder value. Financial perspective can be measured through appropriate financial ratios
financial statement profitability ratio, which is a tool to analyze or measure the level of business
efficiency and profitability achieved by the companies concerned.

2.2.2. Customer Perspective

In the perspective of the company's customers identify market segments and customers where
they will compete. A market segment that will be the source of a major component of financial
goals, or it could be said that the market or sales are the backbone of the company's
sustainability. Customer satisfaction in enjoying the products or services of the company is an
important variable to assess the success of a company, because without the presence of the
consumer can be sure that the existence of the company will not last long. Customer perspective
enables companies to identify and measure the proportion of the value to be given by the
company to customers and target markets. Mulyadi (2001: 238) states that the measure can be
used to measure the success of achieving the strategic target customers are: (1) market share, (2)
customer acquisition, (3) customer loyalty, (4) customer satisfaction, and (5) profitability
customer. Market share reflects the proportion of businesses owned by the company in a market
segment. Customer acquisition reflects the company's ability to attract or win new customers or
business. Customer loyalty reflects the company's ability to sustain or maintain relationships
with existing customers. Customer satisfaction reflects the company's ability to satisfy its
customers based on certain criteria (such as quality, time, price). Customer profitability reflects
the ability of the service

2.2.3. Internal Business Perspective

This perspective refers to the work done in the organization. In this perspective the
organization's performance is measured by how the organization is run and whether the
organization can operate production or services effectively and efficiently according implied or
organizations that claim to be customers. Kaplan and Norton (2000: 83) explain that in
perspective, there are three main components; Explanations of each of these components are as
follows:
 The process of innovation.

In the process of innovation, business unit examines emerging customer needs or are still hidden,
and then create a product or service that will meet those needs. Innovation process is divided into
two parts: identifying market needs and create products or services to meet the needs of the
market.

The process of operation

Process operating companies show activities undertaken by the company begins from the receipt
of a customer order and ending with the delivery of products or services to customers. This
process focuses on the delivery of products and services to existing customers in an efficient,
consistent and timely. Customers appreciate the grace period (lead time) are reliable as measured
by their timely delivery. A company must always measure cycle time and set goals for
employees to reduce the overall production process cycle time.

The process of service

This process is a service to the customer after the sale of products or services are performed.
After-sales service activities include warranty and repair, and replacement of defective products
that are returned and processing customer payments.

2.2.4. Learning and Growth Perspective

In this perspective measure matters relating to human resources. There are three dimensions that
must be considered in this perspective are: (1) the ability of Employees Measurements were
performed on three main points namely measurement of employee satisfaction, measurement of
employee turnover in the company, and the measurement of employee productivity. (2)
Information System Capabilities Measurement of the company can be done by measuring the
percentage of availability of the information required by the employees of the customer, the
percentage of availability of information on the cost of production and others. (3) Motivation,
Granting Privileges and Restrictions Authority Employees Measurements can be done through
several dimensions, namely: (a) Measurement of the advice given to the company and
implemented, (b) Measurement on improving and improving employee performance, and (c)
Measurement of the limitations of the individual within the organization. To determine the
objectives and measures related to the ability of the employees there are three things that will be
considered in this study are:

(1) Productivity of employees is a measure of the results, the overall impact of efforts to increase
employee morale and expertise, innovation, and customer satisfaction? The goal is to compare
the output generated by the number of employees who were deployed to produce the output.
There are many ways to measure labor productivity and one of the simplest measures of
productivity is per capita income.

(2) Percentage Skilled Employee Training Coaching and development of human resources is a
priority concern. This is done in an effort to increase competence in managing the management,
so that employees can continue to grow and skilled in their respective work units.

(3) Employee satisfaction Overall job satisfaction is now considered very important by most
companies and this is a precondition to improve productivity, quality responsiveness, and
customer service. To achieve employee satisfaction, then the manager can conduct surveys on a
regular basis.

2.2.5. Social Perspective

Especially for Microfinance Institutions (MFIs) there is a social aspect that should be added for
performance assessment such institution. This addition is based on the argument that in order to
measure the performance of an MFI, we not only consider the aspect of financial sustainability
(balanced scorecard) of the organization, but also must consider aspects of improving the living
standards of clients (social perspective) as a measure of the success of an MFI's principal,
including Cooperative Financial Services in it. This is in line with research that has been done
Matul & Simonyan (2007) on Microfinance Institutions MDF-Kamurj in Armenia and Pawlak &
Egusquiza (2007) on the NGO Manuela Ramos-CrediMUJER in Peru.

Effects of Business Environment on Organizational Performance

The business environment and its application to work environment is an outcome of his work as
director of the institute of social research, university of Michigan, USA. In his book “New
Pattern of Management” about high producing supervisors who achieve the highest level of
productivity at the lowest production costs with the highest level of employee motivation. In his
research work, he indicates that high producing managers tend to build their successful
achievement around their interlocking work groups employees whose level of co-operation is
sustained through range of business incentive that extend motives and involves the ego and
creativity motives. The research noted that the high producing manager utilized the tool of the
classical management work-study while recognizing the aspirations of the employees by
encouraging participative approaches. In this case the researches that was conducted before is
focused on internal environment than external business environment.

2.3. Theoretical Framework

In this section a theoretical framework for business environment is developed based on the
objective of the study and previous literature review on this area. A model developed based on
previous theory that estimates the effects of business environment on the organizations’
performance. Business environment and organizational performance are main constructs
included in the proposed research model. Their relationship is illustrated in figure 1 below.

Many theoretical frameworks have sought to explain business environment impact on the
organizations’ performance. An early example is Temtime & Pansiri (2014), in a small business
research entitled critical success / failure factors in developing economies: some evidence from
Botswana, conducting research on banking industry in the republic of Botswana. They used a
questionnaire as a tool for collecting research data, and analyze the data with statistical
techniques aided descriptive and inferential statistics. Their results showed that the development
of human resources, organizational development, the background manager, managerial
leadership and competitive strategy is an important component that affects the performance of
the organization. The main criticism we can give to this research is the research question still
contain fundamental flaws in the design aspects of research, conceptualization and
operationalization of the factors that become a critical aspect of the success and failure of banks.
Thus, further, we need a re-Explored on their research to include external factors,such as the role
of government, competition, and the above listed factors. Furthermore, research conducted by
Munizu (2010) with the title of the influence of external factors and internal to the performance
of insurance Co. in South Sulawesi, which is held in the city of Makassar and ParePare, and
involved 300 respondents. Next, Mappingau & Maupa (2012), in a study entitled entrepreneurial
intention and small business growth: an empirical study of small food processing enterprises in
South Sulawesi, Indonesia, conducting research on the development bank on the region of South
Sulawesi. They used a stratified random sampling and questionnaire as techniques and tools to
collect research data, and analyze the data with path-aided engineering analysis. The results of
their research to document empirically that both internal factors (availability of start-up capital,
the desire for self, family support, a model of entrepreneurship, personal skills, and work
experience) and external factors (availability of assistance and support from the government, the
availability of processing technology, availability of skilled labor, and branching areas)
simultaneously and positively affect the growth of the bank businesses. Criticism that can be
raised above their research is the conceptualization of organizational growth has not been
formulated clearly, so that the further research of this variable should be developed in a more
measured, such as organizational performance variables. Furthermore, Herman (2011), in a study
entitled influence business location, business character of the business strategy and business
performance of banking industry in North Sulawesi, carry out research on the 6 districts / cities
in North Sulawesi. He used questionnaires in research involving 200 respondents, and then
analyzes the data using descriptive analysis and structural equation modeling (Structural
Equation Modeling-SEM). Research results conclude that government regulation, competition
and business location significantly influence business strategy. Being the bank business
performance is significantly affected by government regulation, competition, business
characteristics through business strategy. Criticism which can be raised against this study is the
researchers did not include the uncertainty of the environment variable in examining the
relationship between business strategy and organizational performance, so that in future studies
mentioned variables should be considered as one dimension of business strategy variables. Of a
partial picture of the influence between each variable that consists of the external environment,
internal environment, and cooperative performance, it can be arranged as represented research
paradigm shown in the figure below.

The previous researches by researcher found many forces are used as a factor of environment. In
conducting this research standing from the research objectives, on the previous chapter the
researcher listed different internal and external business factors related to organizational
performance, So as to come up with a good finding here is the basic objectives that the
researcher wants to attain and used for the development of research framework:
General Objective
The general objective of this study is to examine the impact environmental challenges on the
performance of business organization, the case of bank of Abyssinia.
Specific Objectives
Specifically, the study was intended to achieve the following objectives:
To identify key issues involved in environmental factors towards business survival and
growth;
To examine relationship between environmental factors and organizational performance
and growth;
To determine the extent to which environmental factors affect business survival and
growth;
To identify strategies that the organization can adopt in the wake of turbulent business
environmental factors and;
To assess challenges confronting business survival and growth in the business
environment of bank of Abyssinia.

For this study Competition, Technology, Infrastructural Facilities, Capital, Government policies,
Inflation, Raw materials (labor), Organizational policies, Government politics, Electricity,
Financial credits, Fraudulent practices) are the parameter of organizational job performance.

This research attempts to explain and predict the effects of external and internal business

environment for the performance of organization effectiveness with holding the gap in which
the study focused on the area of banking industry by adding environmental factors that were not
used by previous researchers and it also focused in the continent Africa, developing country
Ethiopia. The relationship between the factors, some of the business environment factors has not
yet been clarified, so it is not obvious which one is dominant in actual economy. There is also a
need for a better understanding of the business factors which have brought about a paradigm
effect in the performance of the organization, particularly in developing countries like Ethiopia.
The Scopes of most of the existing studies are limited to either a single category of business with
limited determinants or cover limited geographical regions, particularly developed countries.
Moreover, there are no or very few studies on organizational performance. As the Ethiopian
banking industry market is experiencing a significant growth, a comprehensive study on
understanding the business factors and organizational performance for the field becomes
important. In this case the researches that were conducted before have focused on internal
environment than external business environment.

The external environment affecting the cooperative financial services is the level of competition
in similar businesses, government policies, and environmental uncertainty, Technology,
Infrastructural Facilities, Government policies, Inflation, Raw materials (labor), Government
politics, while the internal environment affecting the financial services cooperative strategy is the
ability of the cooperative management, cooperative capital, Organizational policies, Financial
credits, Fraudulent practices, organizational culture, liquidity risk and the size of the bank. Both
aspects of this environment must be addressed by the cooperative financial services in its
business strategy. If it is run, then the cooperative financial services will obtain high
performance.

Independent Independent
Variables Dependent variable Variables
EXTERNAL BUSINESS INTERNAL BUSINESS
ENVIRONMENT ENVIRONMENT
A. Competition A. Capital
B. Technology B. Organisational policies
C. Infrastructural Facilities C. Financial credits
D. Government policies ORGANIZATIONAL D. Fraudulent practices
E. Inflation PERFORMANCE E Organizational Culture/values
F. Skilled labor 1. Job Quality F. Liquidity risk
G. Government politics 2. Effectiveness G. Bank size
H. Customer 3. Behaviour
4. Attitude
5. Job Efficiency
6. Profitablity
7. Employee turnover rate
8. Employee satisfaction
9. Salary compitativeness
10. Customer satisfaction

Figure 2.1.: A schematic diagram of the Theoretical Framework

 2.4. Conceptual framework

Here is a conceptual framework that represents the relationship between the independent variable
of “Business environment factors” and the dependent variable of “organizational performance”
with a proposed change on the performance of the organization. The success is expected from the
relationship among the internal and external environmental factors of the business. It expected to
have a two side success both financial and non financial success. Through the study findings

Figure 2.2.: A schematic diagram of the conceptual Framework

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