COMPETITIVE STRATEGIES AND PERFORMANCE OF MICRO AND SMALL

ENTERPRISES IN NAIROBI COUNTY, KENYA

SHEM NYAKUNDI ISABOKE

D53/OL/CTY/32651/2015

A RESEARCH PROJECT SUBMITTED TO THE SCHOOL OF BUSINESS IN

PARTIAL FULFILMENT OF THE REQUIREMENT FOR THE AWARD OF

DEGREE IN MASTER OF BUSINESS ADMINISTRATION (STRATEGIC

MANAGEMENT) OF KENYATTA UNIVERSITY

JULY, 2018

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 DECLARATION

This project is my own original work and has not been presented for the award of any degree

in any University.

Signed: ___________________________ ____________________

SHEM NYAKUNDI ISABOKE DATE

D53/OL/CTY/32651/2015

This research project has been submitted for the course examination with my approval as the

University supervisor.

Signed: __________________________ Date_________________

Dr. Reuben Njuguna

Department of Business Administration

Kenyatta University

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 DEDICATION

This project is dedicated to my family for their support, love and encouragement.

May God bless you all.

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 ACKNOWLEDGEMENT

I would like to thank the Almighty God for giving me the opportunity and strength to pursue

my education. It is through His abundant grace that has brought this research work this far.

This work would have not been possible without my supervisor Dr Reuben Njuguna who

guided me all along the process.

I would like to thank my family, for their support and wonderful ideas throughout this

process. I further wish to thank my brothers and sisters for their invaluable advice and

companion on how to tackle the life challenges they have always been a source of inspiration

from whom I get my intelligence. Lastly, I also appreciate my friends who share this journey

with me and encouraged me in the adventure of academics and have been my anchor.

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 TABLE OF CONTENT

DECLARATION ................................................................................................................ ii
DEDICATION ................................................................................................................... iii
ACKNOWLEDGEMENT................................................................................................. iv
TABLE OF CONTENT ......................................................................................................v
LIST OF TABLES .......................................................................................................... viii
LIST OF FIGURES........................................................................................................... ix
ABBREVIATIONS AND ACRONYMS.............................................................................x
OPERATIONAL DEFINATION TERMS ....................................................................... xi
ABSTRACT ...................................................................................................................... xii
CHAPTER ONE : INTRODUCTION ................................................................................1
1.1 Background of the Study ............................................. Error! Bookmark not defined.
1.1.1 Competitive strategies ...........................................................................................3
1.1.2 Small and Medium Enterprises in Kenya ...............................................................4
1.1.3 SMEs in Nairobi City County ...............................................................................7
1.2 Statement of the Problem .............................................................................................7
1.3 Objectives of the Study ................................................................................................9
1.3.1 General Objective .................................................................................................9
1.3.2 Specific Objectives ...............................................................................................9
1.4 Research Questions......................................................................................................9
1.5 Significance of the Study ........................................................................................... 10
1.6 Scope of the Study ..................................................................................................... 10
1.7 Limitation of the Study .............................................................................................. 10
1.8 Organization of the study ........................................................................................... 11
CHAPTER TWO : LITERATURE REVIEW ................................................................. 12
2.1 Introduction ............................................................................................................... 12
2.2 Theoretical Review .................................................................................................... 12
2.2.1 Porter Generic Strategies Model .......................................................................... 12
2.2.2 Resource-Based View Theory ............................................................................. 16
2.2.3 Resource Dependence Theory ............................................................................. 17
2.3 Empirical review ....................................................................................................... 19

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 2.3.1 Cost Leadership Strategy and organizational performance ................................... 20
2.3.2 Differentiation Strategy and performance ............................................................ 22
2.3.3 Focus strategy and organizational performance ................................................... 25
2.3.4 Combination Strategy and organizational performance ........................................ 27
2.5 Conceptual Framework .............................................................................................. 31
CHAPTER THREE : RESEARCH METHODOLOGY ................................................. 33
3.1 Introduction ............................................................................................................... 33
3.2 Research Design ........................................................................................................ 33
3.4 Sampling Procedure................................................................................................... 34
3.5 Data Collection Procedure ......................................................................................... 34
3.6 Validity and Reliability of the study........................................................................... 35
3.6.1 Reliability ........................................................................................................... 35
3.6.2 Validity ............................................................................................................... 35
3.7Data Analysis and Presentation .................................................................................. 35
3.8 Ethical Considerations ............................................................................................... 36
CHAPTER FOUR : DATA ANALYSIS AND PRESENTATION OF RESULTS ......... 38
4.1 Introduction ............................................................................................................... 38
4.1.1 Questionnaire Response Rate .............................................................................. 38
4.1.2 Validity and Reliability of Research Instruments ................................................. 39
4.2 Background Information ............................................................................................ 39
4.2.1 Enterprise Industry .............................................................................................. 40
4.2.2 Number of Employees ......................................................................................... 40
4.2.3 Ownership structure ............................................................................................ 41
4.2.4: Enterprise Category ........................................................................................... 42
4.3. Low cost leadership strategy ..................................................................................... 43
4.4 Differentiation Strategy ............................................................................................. 44
4.5 Focus strategy............................................................................................................ 46
4.6 Combination Strategy ................................................................................................ 47
4.7 Organization Performance ......................................................................................... 47
4.8 Regression Analysis .................................................................................................. 48

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CHAPTER FIVE : SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ..... 51
5.1 Introduction ............................................................................................................... 51
5.2 Summary of the Findings ........................................................................................... 51
5.2.1 Low cost leadership strategy and organizational performance ............................. 51
5.2.2 Differentiation strategy and Organizational performance ..................................... 51
5.2.3 Focus strategy and organizational performance ................................................... 52
5.2.4 Combination strategy and organizational performance ........................................ 52
5.3 Conclusions ............................................................................................................... 53
5.4 Recommendations ..................................................................................................... 53
5.5 Suggestions for Further Study .................................................................................... 54
REFERENCES .................................................................................................................. 55
APPENDIX I: QUESTIONNAIRE.................................................................................. 58
APPENDIX III: LIST OF SMES IN NAIROBI ............................................................... 62

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 LIST OF TABLES
Table 2:1 Research Gaps ..................................................................................................... 30

Table 3:1Target Population ................................................................................................. 34

Table 4:1Validity and Reliability of Research Instruments .................................................. 39

Table 4:2 Low cost leadership strategy application .............................................................. 43

Table 4:3 Extent of application differentiation strategy ........................................................ 45

Table 4:4 Extent of application of focus strategy among SMEs ........................................... 46

Table 4:5 Extent of adoption of Combination strategy by SMEs in Nairobi City County ..... 47

Table 4:6 Organizational Performance of SMEs in Nairobi City County .............................. 48

Table 4:7 Model Summary .................................................................................................. 49

Table 4:8 ANOVA .............................................................................................................. 49

Table 4:9 Regression Coefficients ....................................................................................... 50

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 LIST OF FIGURES

Figure 2:1 Conceptual Framework ....................................................................................... 32

Figure 4:1 Response rate ..................................................................................................... 38

Figure 4:2 Industry to which the enterprises belong to ......................................................... 40

Figure 4:3 Number of employees ......................................................................................... 41

Figure 4:4 SME ownership structure.................................................................................... 42

Figure 4:5 Category of SME ................................................................................................ 43

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 ABBREVIATIONS AND ACRONYMS

GDP Gross Domestic Product

GoK Government of Kenya

ILO International Labour Organization

IT Information Technology

MFI Microfinance Institution

PEST Political/Legal, Economic, Social and Technological

RBV Resource-Based View

RDT Resource Dependence Theory

SPSS Statistical Package For Social Science

SWOT Strength Weakness Opportunities Threat

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 OPERATIONAL DEFINATION TERMS

Cost Leadership Strategy a strategy allows the firm to be a low-cost producer and
thus making more profits than rivals due to low costs of
production and economies of scale
Competitive Strategy it is mainly concerned with how a firm can gain advantage over
others while carrying out its business
Differentiation Strategy Differentiation as the second generic strategy allows a
firm to offer unique products or services at a premium price
pegged on the value added
Performance refers to the process of measuring the efficiency, growth and
effectiveness for an enterpreise
Competitive strategies Involves the formulation and implementation of the major
goals and initiatives taken the proprietors of SMEs to ensure
they perform and grow.
Strategy a combinationof competitive moves and business practices
that managers useto ensure thatorganizational vision and
objectivesare achieved
Small and Medium Enterprises the segment of the labour market in developing
countries thatconsist of workers who are self employed
and has absorbed significant numbers of jobseekers
Generic Strategies Porter's generic strategiesdescribe how a company pursues
competitive advantage across its chosen market scope, there
are three/four generic strategies, either lower cost,
differentiated, or focus

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 ABSTRACT
Small and Medium Enterprises (SMEs) is an important sub sector for the Kenyan economy
like many other developing countries since it employs about 85% of the Kenyan workforce
(about 7.5million Kenyans of the current total employment). The current constitutional
framework and the new Micro and Small Enterprise Act 2012 provide a new window of
opportunity through which the evolution of SMEs can be realized through the devolution
framework, however, the impact of devolution on SMEs development depends on the
architecture of the regulatory and institutional framework inclined to support SMEs in an
economy. Lack of access to credit is a major constraint inhibiting the growth of SMEs sector.
The issues and problems limiting SMEs acquisition of financial services include lack of
tangible security coupled with inappropriate legal and regulatory framework that does not
recognize innovative strategies for lending to SMEs. The study sought to establish the
influence of competitive strategies on the organizational performance of SMEs in Nairobi
City County, Kenya. The specific objectives were to determine the effect of low cost
leadership strategy, differentiation strategy, focus strategy and combination strategies on
performance of SMEs in Nairobi City county.The study was anchored on the following three
theories which include Porter’s generic strategies model, resource-based view theory, and
resource dependence theory. Empirical literature reviewed scholarly studies on the porter’s
generic competitive strategies which included cost leadership strategy, differentiation
strategy,focus strategyand combination strategies and their influence on financial
performance of SMEs. The study used a descriptive research design. The population of study
were youth owned SMEes in the 17 sub-counties in Nairobi City County that are operational.
This consisted of 1115 respondents who were the proprietors of the enterprises. A Census
was carried out for all the SMEs since the population was small. The primary data was
collected by use of self-administered semi-structured questionnaire. Data analysis was done
by use of descriptive statistics such as frequencies, percentages, mean scores and standard
deviation with the aid of SPSS and presented through tables, charts, graphs, frequencies and
percentages. The study realized that the Michael Porter’s generic strategies of competitive
advantage used in the study which include low cost leadership strategy, differentiation
strategy, focus strategy and combination strategy significantly influenced the organizational
performance of SMEs in Nairobi City County, Kenya. The variables explained 85.11% of
the changes in organizational performance of the SMEs. A unit increase in low cost
leadership strategy adoption by SMEs led to a 0.655 increase in organizational performance
of the SMEs, a unit increase in differentiation strategy adoption led to a 0.876 increase in
performance of the enterprises, a unit increase in focus strategy transformed to a 0.945
increase in performance of the firms while a unit increase in application of combination
strategy by the SMEs led to a 0.860 increment in their overall performance. The study
recommended improved capacity buidlign among the SMEs and participation of stakehodlers
in the growth of the small enterprises.

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 CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The business world is encountering a radial pace of change, unexpected technologies change and
massive entries of new competitors. Firm’s major concern is on their survival and their
sustainability to remain competitive and profitable. For this reasons, firms needs to adapt to
radical changes within the environment that is both radical and chaotic in nature. The only
opportunity is for the organizations to have competitive advantage by continuously able to renew
its competitive advantage in the market (Kitua, 2014).

It is imperative for firms to continuously adopt their activities in order to ensure survival (Porter
1980), firms expose themselves to the external environment, which is very volatile leading to
new opportunities and challenges. To remain competitive firms needs to constantly review their
strategies and approaches to maintain a sustained efficacy and competitiveness in order to exploit
opportunities and threats in the market. In this regard, there is dare need for firms to be steadfast
and proactive in their business execution and implementation of a sustained strategy to remain
competitive. Success therefore calls for a proactive approach to business (Pearce & Robinson,
2007).Competition is critical to ensure a renewed business approaches and competitiveness.

The resource-based view theory emphasizes the firm’s practices and resources as the
fundamental determinants of performance (Ramos-Rodriguez & Ruiz-Navarro,2004).
Knowledge-based theory considers knowledge as the most strategically significant resource of a
firm as it is difficult to imitate and source of sustained competitive advantage and corporate
performance (Ludwig & Pemberton, 2011). Contingency theory argues that competitive
strategies used by firms and time to time contextual and not a ‘one-size-fits-all’ (Meil ich,
2003).Thus, there is no one or single best way or approach to manage organizations.

SME managers, like any other managers, can use the feedback on performance to make

adjustments to policies and other modes of organizational operations (Wadongo et. al., 2010).

Fwaya (2006) views performance as a formula for the assessment of the functioning of an

organization under certain parameters such as productivity, employee’ morale and effectiveness.
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Performance management and improvement is at the heart of strategic management because a lot

of strategic thinking is geared towards defining and measuring performance (Nzuve and Nyaega,

2012). Odhiambo (2009) identified three approaches to performance in an organization which

are the goal approach, which states that an organization pursues definite identifiable goals. This

approach describes performance in terms of the attainment of these goals. The second approach

is the systems resource approach which defines performance as a relationship between an

organization and its environment. This concept defines performance according to an

organization’s ability to secure the limited and valued resources in the environment. The third

approach is the process perspective which defines performance in terms of the behaviour of the

human resource of an organization (Waiganjo et. al., 2012).

According to World Bank, (2013), SMEs are the main source of employment in

developed and developing countries alike, comprising over 90% of African business operations

and contributing to over 50% of African employment and GDP. The promotion of SMEs and,

especially, of those in the informal sector is viewed as a viable approach to sustainable

development because it suits the resources in Africa. In Kenya these businesses play a central

role in the economy and are a major source of entrepreneurial skills, innovation and

employment. However, many SMEs still remain outside the formal banking sectors yet they play

a key role in the economy of many countries. They create employment, lead to increased

participation of indigenous people in the economy, use mainly local resources, promote the

creation and use of local technologies, and provide skills training at a low cost to society (ILO,

2009). This study therefore sought to establish the competitive strategies employed by

microfinance institutions in Nairobi City County and how they influenced their performance.

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1.1.1 Competitive Strategies
Competitive strategy has never been more important to the success of any organization in today’s

business environment. It does not matter what type of business one is in or whether you

are small, big or just starting out, a company cannot survive without an adequate and

focused strategy to beat the competition. Forming a successful business strategy involves

creating a first-rate competitive strategy. How to succeed in today’s rapidly changing

competitive environment is a key question for many firms. The business environment is rapidly

changing; i.e. markets, customer demands, technologies, global boundaries, products and

processes. Different meaningsof competitive strategy have been advanced by different

scholars. According to Johnson and Scholes (2005) competitive strategy is concerned

with the basis on which a business unit might achieve competitive advantage in its market.

They stated that an organization can achieve competitive advantage by providing its

customers with what they want or need, better or more effectively than competitors.

Porter (1980) defined competitive strategy as the search for a favourable competitive

position in an industry. It deals exclusively with management’s action plan for competing

successfully and providing superior value to customers. Competitive strategy is the core of any

firm’s success and therefore businesses must develop a plan that addresses ways to compete in

their respective markets (Ansoff, 1990).

However, some of these strategies are implicit, having evolved over time, rather than

explicitly formulated. A company’s competitive strategy consists of all the business

approaches and initiatives that a firm undertakes to attract customers and fulfill their

expectations to withstand competition opressures and to strengthen its market position. It deals

with management action plans for competing successfully and providing superior value to

customers. This enables it differentiate or put the company apart from its competitors

(Thompson and Strickland, 2003).

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Porter’s competitive strategies deal with the core issues that many organizations are

concerned with, namely efficiency (cost) and product/service quality. Generic strategies

were used initially in the early 1980s and seem to be even more popular today. They

outline the four strategic options open to organizations that wish to achieve a sustainable

competitive advantage. Porter (1980) said that no single competit ive strategy is

guaranteed to achieve success and even some companies that have successfully

implemented one of the Porter’s competitive strategies found out that they could not

sustain the strategy. A firm that engages in each generic strategy but fails to achieve any of them

is ‘stuck in the middle’. It possesses no competitive advantage. A firm that is stuck in the

middle will compete at a disadvantage because the cost leader, differentiator or focusers will be

in better positions to compete in any segment (Porter, 1980). With the changed competitive

conditions facing the firm and its chosen strategy, it is mandatory that firms explore the

necessary capabilities required to achieve competitive advantage.

1.1.2 Performance of SMEs in Kenya

Small and Medium Enterprises (SMEs) contribute greatly to the economies of

allcountries, regardless of their level of development. About 80% of the labour force in Japan

and 50% of workers in Germany are employed in the SME sector. With respect to developing

countries and according to the ILO/JASPA (1998), the sector made a significant

contribution to the gross domestic product of Uganda (20%), Kenya (19.5%) and Nigeria

(24.5%). The term SMEs covers a wide range of perceptions and measures, varying from

country to country and between the sources reporting SME statistics. Some of the

commonly used criterions are the number of employees, total net assets, sales and

investment level. However, the most common definitional basis used is employment, but, there

is a variation in defining the upper and lower size limit of an SME (Ayyagari, Beck

&Demirguc-Kunt, 2003).

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In kenya about 70% of the employment is absorbed into the SME sector. It is the main source of

employment among Kenyan youths who are deemed otherwise unemployed. The sector has

however faced a myriad of challenges ranging from limited fundig, exposure, unfavourable

regulations and competition from their established counterparts. (MSME, 2015).

An enterprise is considered to be any organized effort intended to return a profit

oreconomic outcome through the provision of services or products to an outside

group(Carland, Hoy, Boulton&Carland, 1983). The operation of an enterprise

traditionallyrequires the investment of capital and time in creating, expanding or

improving the operations of a business (Meredith, 2001). Small to medium enterprises are

considered those enterprises which have fewer than 250 employees. In distinguishing between

small and medium size enterprises, the small enterprise is defined as an enterprise which

has fewer than 50 employees. These businesses are often referred to as SMEs and are

associated with owner proprietors (Meredith 2001; Schaper&Volery 2004).

Mutula and Brakel (2006) argue that there is no universally accepted definition for small and

medium enterprises (SMEs), the description of Small and Medium Enterprises (SMEs)

varies from country to country. Most of the time the choice whether or not a company is

an SME is based on the number of employees, value of assets or value of sales. In

Kenya SMEs are described as any non-farm enterprise, formal or informal, with less than 50

employees, including sole proprietorships, part-time businesses, and home-based businesses

(GoK, 2012).

As alluded to earlier in this chapter, In Kenya, SMEs operate in all sectors of the

economy, including manufacturing, trade and service subsectors. Almost two-thirds of all SMEs

in Kenya are located in the rural areas with only one-third found in the urban

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areas. The sector is perceived as the engine of growth as it is key in the generation of

employment & income, provision of goods & services & as a driver of competition,

industrialization and innovation. It comprises of about 75 % of all businesses, employs

4.6 million people (30%) and accounts for 87% of all new jobs and contributes 18.4 % of the

GDP (GoK, 2009).

Despite the opportunities presented by globalization, the results have been unsatisfactory for

SMEs in terms of their growth. This is evidenced by baseline survey; undertaken by Central

Bureau of Statistics (2004) which indicated that there is high rate of failure

andstagnation among many SMEs. The survey reveals that only 38% of the SMEs are

expanding while 58% have stagnated and that more micro and small enterprises are most likely

to close in their first three years of operation. This is confirmed by the study conducted by the

Institute of Development Studies University of Nairobi on behalf of Ministry of Planning

(2008) which used a sample of businesses operating in Central Kenya. The study revealed

that 57% of small businesses are in stagnation with only 33% of them showing some level of

growth.

Although management and owners of SMEs develop new ideas and solutions, they rarely

utilize a formalized logistical strategy, along with overall business objectives which can

contribute to the success and the survival management of the enterprise. They therefore

face critical constraints that inhibit their growth, competitiveness and performance (GoK

2008).

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1.1.3 SMEs in Nairobi City County
The national baseline survey (National Baseline Survey, 1999) indicated that about 17% of the

total SMEs are located in Nairobi. According to the licensing record provided by Nairobi

county licensing office (2014) there were 825 SMEs based in Nairobi County

operating in service and manufacturing sectors. The contribution of SMEs to job creation in the

country is regarded as immense. Analysis by county shows that Nairobi County recorded

a 5.4 increase in job creation in 2011 in the SMEs sector (Republic of Kenya, 2012).

Like in any other part of the country SMEs in Nairobi have high mortality rates with most of

them not surviving to see beyond their third anniversaries (RoK, 2005).

Despite limited knowledge, skills and capital base, the SMEs have not come up with strategies to

ensure they remain aloft in the competitive business environment in the City. Those who have

come up with strategies in making them competitive have ended up not implementing them well

or lacking capacity to make them successful.

1.2 Statement of the Problem

According to Covin, (1991), there is a relationship between strategy and performance,

while Chell, Haworth and Brearley, (1991) acknowledged that strategies which result in high

performance are identified with activities that include emphasis on product quality, product and

service innovations that meet changing customer needs are associated with market share

increase arising from attracting new customers and retaining existing ones. Activities associated

with high performing strategies also include emphasis on use of technologies, discovery

of new markets, excellent customer service and support,extensive advertising, use of

external finance, emphasizing cost effectiveness and concern with employee productivity

(Vickery, Droge&Markeland, 1993).

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SMEs struggle to operate, manage and improve their businesses efficiently in order to

deliver quality products and services consistently and on time. This is because in most

enterprises the application of business strategies requires a host of expensive and time

consuming changes both in the organizational culture and structure hence many owner /

managers have had to overlook some necessary and critical business strategies. This has had a

devastating negative effect on their performance as it has resulted in poor service delivery,

increased internal inefficiencies and negative bottom line; and most importantly reduced

contribution to the gross domestic product (GDP), creation of job opportunities and also the

overall individual organization performance.

The concept of business growth is still a grey area as there is yet to be a conclusive approach and

definite indicators of business growth despite the fact that it is every entrepreneur’s wish to have

their businesses grow. Thus the subject of business growth is a fertile area for a study in the

Kenyan context (Kemei (2011). Reviews examining impacts of microfinance have concluded

that, rigorous quantitative evidence on the nature, magnitude and balance of microfinance impact

is still scarce and inconclusive. It is widely acknowledged that no well-known study robustly

shows any strong impacts of microfinance (Aghion and Morduch (2010).

Makena (2011) studied on the financial challenges faced by SMEs and found that inadequacies

in access to finance are key obstacles to SMEs growth. Kemei (2011) studied on the relationship

between competitive strategies and financial performance of SMEs. The findings were that

positive and significant relationships have been established between MFIs loans and SMEs

performance. Kimoro (2011) in a study on the impact of microfinance strategies onwomen

empowerment found that microfinance has led to expansion of freedom of choice of women. A

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survey of the financial constraints hindering growth of SMEs by Koech(2011) found that the

factors affecting growth were capital market, cost, capital access, collateral requirements, capital

management and cost of registration. Coopper(2012) studied on the impact of competitive

strategies on the growth of SMEs in Nairobi and found a strong positive impact. This study

therefore sought to establish the influence of competitive strategies on the performance of SMEs

in Kenya with a special focus on youth enterprises in Nairobi City County.

1.3 Objectives of the Study

1.3.1 General Objective

The general objective of the study was to determine the influence of competitive strategies on the

performance of SMEs in Kenya.

1.3.2 Specific Objectives

The study was guided by the following specific objectives:

(i) To find out the influence of cost leadership strategy on performance of SMEs in Nairobi

County.

(ii) To determine the role of differentiation strategy on performance of SMEs in Nairobi

County.

(iii) To establish the effect of focus strategy on performance of SMEs in Nairobi City County.

(iv) To assess the influence of combination strategies on performance of SMEs in Nairobi

City County.

1.4 Research Questions

The study sought to answer the following research questions;

(i) What is the influence of cost leadership strategy on the performance of SMEs in Nairobi

City County?

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(ii) How does differentiation strategy affect the performance of SMEs in Nairobi City

County?

(iii) What is the relationship between focus strategy and the performance of SMEs in Nairobi

City County?

(iv) How do combination strategies affect the performance of SMEs in Nairobi City County?

1.5 Significance of the Study

This study adds to the growing body of knowledge on strategic management in developing

countries by offering a perspective of the practice of strategic management in the financial

performance of SME sectorin Kenya. The results will be useful to the governments in

developing countries. The SMEs can gain from the study as the results show best practices in

strategic management as well as understand the factors that affect strategic management in the

performance of the SMEs.The major research findings of this study will provide the opportunity

for the individual small enterprise managements and assess their competitive strategies with

other players in the industry in the Country, which will help them to identify the shortcomings

and strengths of their competitive strategies. Researchers and academicians in the field of

strategic management will find this study a useful guide for carrying out further studies in the

area.

1.6 Scope of the Study

This study was done among SMEs in Nairobi City County, Kenya. The population consisted of

all employees and proprietors of SMEs in the County. The study sought to determine the role of

competitive strategies on organizational performance of SMEs in Nairobi City County.

1.7 Limitation of the Study

The respondents approached were reluctant in giving information fearing that the information

sought would be used to intimidate them or print a negative image about them or their

enterprises. Some even turned down the request to fill questionnaires. The researcher obtained an
10
introductory letter from the University and assured them that the information they gave was to be

treated confidentially and it was to be used purely for academic purposes.

The researcher also encountered problems in eliciting information from the respondents as the

information required was subject to areas of feelings, emotions, attitudes and perceptions, which

could not be accurately quantified and/or verified objectively.The researcher encouraged the

respondents to participate without holding back the information they had since the research

instruments did not bear their names.

1.8 Organization of the study

This research proposal comprises of three chapters. Chapter one involves background of the

study, statement of the problem, purpose of the study, objectives of the study, research questions,

and significance of the study, limitation of the study, assumptions of the study and organization

of the study.

Chapter two reviewed literature which includes theoretical review, empirical review, research

gaps and the conceptual framework. Chapter three dealt with research methodology which

explainws the research design, target population, sampling design, rationale for sample

selection, data collection instruments, questionnaires, validity of the research instrument,

reliability, data analysis and ethical considerations while chapter four had presentation of

findings and discussions. Chapter five entailed summary of findings, conclusions and

recommendations.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

This chapter presented the literature review on strategies management practices and

organizational perforamnce. It summarized the information from other scholars who have carried

out their research in the same field of study. The chapter presented the theoretical review,

empirical review,summary,the research gaps and the conceptual framework.

2.2 Theoretical Review

The study was anchored on three theories which include Porter’s generic strategies model,

resource-based view theory and resource dependence theory.

2.2.1 Porter Generic Strategies Model

This model was described by Michael Porter in 1980. Porter's generic strategies describe how a

company pursues competitive advantage across its chosen market scope. There are three/four

generic strategies, either lower cost, differentiated, or focus. A company chooses to pursue one

of two types of competitive advantage, either via lower costs than its competition or by

differentiating itself along dimensions valued by customers to command a higher price. A

company also chooses one of two types of scope, either focus (offering its products to selected

segments of the market) or industry-wide, offering its product across many market segments.

The generic strategy reflects the choices made regarding both the type of competitive advantage

and the scope.

Porter wrote in 1980 that strategy targets either cost leadership, differentiation, or focus. These

are known as Porter's three generic strategies and can be applied to any size or form of business

ranging from SMEs to multinationals. Porter claimed that a company must only choose one of

12
the three or risk that the business would waste precious resources. Porter's generic strategies

detail the interaction between cost minimization strategies, product differentiation strategies, and

market focus strategies of porters. Competition in an industry is influenced by various

forcesin the business operating environment. Porter attempted to summarise these

forcesasthe rivalry among existing firms, threat of new entrants, substitute products or

services, increased bargaining power of suppliers and bargaining power of buyers.A firm’s

products/services are affected by its suppliers, substitutes, buyers, potential entrants and

industry competitors. For suppliers and buyers, these have a bargaining power on a firm’s

products/services whereas the potential entrants and substitutes pose a threat to the firm’s

products and services.

He further came upgeneric competitive strategies to counter these competitive forces (Barney,

2007 & Porter, 1998).Porter’s generic strategies are useful in determining strategic positions at

the simple and broad level of organisation scope. The basis for Porter’s model was the

industry structure and positioning within the industry. These strategies were cost leadership and

differentiation, while the third strategy, focus was based on these two strategies. Focus is

the firm’s choice of competitive scope. This scope distinguishes between firms targeting

broad industry segmentsand firms focusing on narrow segments.

Cost leadership as a strategy allows the firm to be a low-cost producer and thus making more

profits than rivals due to low costs of production and economies of scale. This becomes an

advantage for the firm, especially those that are first-movers or those that have ease of access to

raw materials or factors of production. They usually focus on being the low cost producer in an

industry for a given level of quality, and then sell these products at either the average industry

price to earn profits higher than rivals or below the average prices in order to gain or increase

13
their market share. These firms take advantage of their low cost of production to be able to sell

at below-average prices (Barney, 2007; Porter, 1998). In case of price wars, such firms can

maintain profitability when the rivals continue to suffer losses.

Cost leadership as a strategy, is used by firms that target broad markets. Firms undertaking cost

leadership strategy acquire cost advantage by improving processes, increasing efficiency, and

gaining access to lower production costs or material costs either through vertical integration or

adopting optimal outsourcing (Porter, 1998, Johnson et al., 2005). Differentiation as the second

generic strategy allows a firm to offer unique products or services at a premium price pegged on

the value added. The value added is usually a perception of the products by the buyers. The

added value and utility of that product as perceived by that buyer enables the product to be

differentiated at a cost that covers the extra value or features in it.

Differentiation results from the way a firm‟s products or services and the related activities affect

the buyers‟ activities. This strategy is incorporated with the value chain framework to strengthen

its application in firms‟ activities. All activities in the value chain (actions or characteristics that

add value to a product or service) contribute to the buyer value. The cumulative costs in the

value chain determine the value cost that is usually a premium price charged for the product or

service (Porter, 1998). Firms that successfully implement the differentiation strategy gain by

increasing their internal strengths through highly skilled and creative product development teams

as well as having access to the leading scientific research due to innovation. They also gain in

improving their reputation for better quality and continued innovation. Differentiation strategy

enables firms to achieve higher profits due to the premium prices charged for added value

(Hax&Majluf, 1996; Porter, 1998).

14
The third generic strategy is focus which combines the above two generic strategies. This

strategy is based on serving a certain clientele to the exclusion of others in the market. These are

basically buyers with unusual needs as the target market and thus the firm offers to dedicate its

services or products to serve them. Application of these strategies varies in firms and it is greatly

affected by the industry characteristics (Porter, 1998). This strategy enables firms to concentrate

on a narrow market segment to either achieve the above two strategies of cost leadership and

differentiation. It is based on the assumption that the particular needs of the narrow group of

customers can be better met by focusing entirely on this group (Barney, 2007; Porter, 1998).

Firms that adopt this strategy gain a high degree of customer loyalty, which in turn discourages

competing firms from attempting to compete directly with them. This strategy may, however,

make firms to achieve low volumes of production and customer numbers. It is characterised by

lower bargaining power of suppliers though, and this means that the firm will tend to pass higher

costs to customers since there is no much choice of substitutes for the product or service. This

becomes disadvantageous to customers who have no choice but to buy at the price set by the firm

(Barney, 2007; Johnson et al., 2005).

In summary, Porter argues that firms are able to succeed in adopting multiple strategies by

creating separate business units for each of the above strategies since customers often seek multi-

dimensional attributes of a product to derive maximum utility. These can be a mix of quality,

convenience, price and style, among other features of a product or service (Barney, 2007; David

et al., 2001). The application of this theory by SMEs is likely to steer their competitiveness to

ensure they performance in whichever industry they are in.

15
2.2.2 Resource-Based View Theory
The resource-based view (RBV) of Wernerfelt (1984) suggests that competitiveness can be

achieved by innovatively delivering superior value to customers. The extant literature focuses on

the strategic identification and use of resources by a firm for developing a sustained competitive

advantage (Barney, 1991). International business theorists also explain the success and failures

of firms across boundaries by considering the competitiveness of their subsidiaries or local

alliances in emerging markets (Luo, 2003). Local knowledge provided by a subsidiary or local

alliance becomes an important resource for conceptualizing value as per the local requirements

(Gupta et al., 2011).

In strategic management research, RBV theory has emerged as one of the theoretical

perspectives used to explain persistency in inter-firm performance differences (Barney and

Griffin, 1992). According to RBV theory, firms have collections of unique resources and

capabilities that are valuable, rare, inimitable and non-substitutable and which are able to

provide them with a sustainable competitive advantage. Hence, resources are tangible and

intangible assets that are either owned or controlled by a firm, whereas capabilities refer to its

ability to exploit and combine resources through organizational routines in order to

achieve its objectives (Amabile et al, 1996). For this study, by applying RBV theory, it

is important to investigate how internal and external resources can be influenced by

competitive strategy and enable an organization’s capabilities to enhance innovation

performance (Galbreath 2005).

According to Nahapiet and Ghoshal (1998), the term "intellectual capital" refers to the

knowledge and knowing capability of a social collectivity, such as an organization,

intellectual community, or professional practice” , while social capital is defined as ”the sum of

the actual and potential resources embedded within, available through, and derived from
16
the network of relationships possessed by an individual or social unit”. Intellectual capital is

a valuable resource in the form of accumulated knowledge which is embedded within an

organisation, while social capital resides in the relationships firms have with their network

partners. Nahapiet and Ghoshal (1998) argued that innovation is the ultimate outcome of the

creation of new knowledge which results from the combination and interaction between

intellectual capital and social capital of firms. SMEs also are endowed with these two sets of

capital or resource that require effective and efficient management to ensure the enterprises

competitive favourably and perform.

2.2.3 Resource Dependence Theory

The resource dependence theory was postulated by Pfeffer and Salancik in 1978. Organizational

success in resource dependency theory (RDT) is defined as organizations maximizing their

power (Pfeffer 1981). Research on the bases of power within organizations began as early as

Weber (1947) and included much of the early work conducted by social exchange theorists and

political scientists. Generalization of power-based arguments from intra-organizational relations

to relations between organizations began as early as Selznick (1949). RDT characterizes the links

among organizations as a set of power relations based on exchange resources.

RDT proposes that actors lacking in essential resources will seek to establish relationships with

(i.e., be dependent upon) others in order to obtain needed resources. Also, organizations attempt

to alter their dependence relationships by minimizing their own dependence or by increasing the

dependence of other organizations on them. Within this perspective, organizations are viewed as

coalitions alerting their structure and patterns of behaviour to acquire and maintain needed

external resources. Acquiring the external resources needed by an organization comes by

decreasing the organization’s dependence on others and/or by increasing other’s dependency on

it, that is, modifying an organization’s power with other organizations (Jones, 2011).
17
Although RDT was originally formulated to discuss relationships between organizations, the

theory is applicable to relationships among units within organizations. RDT is consistent with

ecological and institutional theories of organizations where organizations are seen as persistent

structures of order under constant reinterpretation and negotiation, interacting with an

indeterminate environment of turbulence and a multitude of competing interests.

Weber (1947) indicates that resource dependence theory has implications regarding the optimal

divisional structure of organizations, recruitment of board members and employees, production

strategies, contract structure, external organizational links, and many other aspects of

organizational strategy.

The theory argues that organizations depend on resources, these resources ultimately originate

from an organization's environment, the environment, to a considerable extent, contains other

organizations, the resources one organization needs are thus often in the hand of other

organizations, resources are a basis of power, legally independent organizations can therefore

depend on each other and power and resource dependence are directly linked. Organizations

depend on multidimensional resources: labor, capital and raw material. Organizations may not be

able to come out with countervailing initiatives for all these multiple resources. Hence

organization should move through the principle of criticality and principle of scarcity. Critical

resources are those the organization must have to function. An organization may adopt various

countervailing strategies like associating with more suppliers, or integrate vertically or

horizontally (Michael, 2013).

Resource dependence concerns more than the external organizations that provide, distribute,

finance, and compete with a firm. Although executive decisions have more individual weight

than non-executive decisions, in aggregate the latter have greater organizational impact.
18
Managers throughout the organization understand their success is tied to customer demand.

Managers' careers thrive when customer demand expands. Thus customers are the ultimate

resource on which companies depend. Although this seems obvious in terms of revenue, it is

actually organizational incentives that make management see customers as a resource.

Resource dependence theory effects on nonprofit sector have been studied and debated in recent

times. Scholars have argued that Resource dependence theory is one of the main reasons

nonprofit organizations have become more commercialized in recent times. With less

government grants and resources being used for social services, contract competition between

private and nonprofit sector has increased and led to nonprofit organizations using marketization

techniques used mainly in the private sector to compete for resources to maintain their

organizations livelihood. Scholars have argued that the marketization of the nonprofit sector will

lead to a decrease of quality in services provided by nonprofit organizations (Jones, 2011).

Simlarly to SMEs their resources emanate from the international sources, owners or proprietors,

or externally who may include MFIs or donors. The stakeholders in either environments are key

in ensuring the enterprises succeed. The proper utilization of the resources by SME owners most

of whom are not informed and with limited management skills, tend to misuse them or not even

identify them this works against their competitiveness. Competitive strategies therefore are

meant to place the SMEs in a better position to remain aloft in the even growing and competitive

business environment (Kioko, 2012)..

2.3 Empirical review

Adelekeet al. (2008) defines strategic management practice as the process of examining both

present and future environments, formulating the organizations objectives, implementing and

controlling decisions focused on achieving these objectives in the present and future
19
environments. According to Thompson and Strickland (2003), strategic management practice is

the process whereby managers establish an organization's long-term direction, set specific

performance objectives, develop strategies to achieve these objectives in the light of all the

relevant internal and external circumstances, and undertake to execute the chosen action plans.

2.3.1 Cost Leadership Strategy and organizational performance

Cost leadership is a concept developed by Michael Porter, utilised in business strategy. It

describes a way to establish the competitive advantage. Cost leadership, in basic words, means

the lowest cost of operation in the industry (Wikipedia, 2016). It is a strategy used by businesses

to create a low cost of operation within their niche. The use of this strategy is primarily to gain

an advantage over competitors by reducing operation costs below that of others in the same

industry. Cost leadership is a business strategy that allows a company to become the lowest cost

producer within an industry. The use of this strategy is primarily to gain advantage over

competitors by reducing operation costs below that of others in the same industry.

Sources of cost advantage are varied and depend on the structure of the industry. They may

include the pursuit of economies of scale, proprietary technology, preferential access to raw

materials and other factors.

A firm pursuing a cost-leadership strategy attempts to gain a competitive advantage primarily by

reducing its economic costs below its competitors. If cost-leadership strategies can be

implemented by numerous firms in an industry, or if no firms face a cost disadvantage in

imitating a cost-leadership strategy, then being a cost leader does not generate a sustained

competitive advantage for a firm. The ability of a valuable cost-leadership competitive strategy

to generate a sustained competitive advantage depends on that strategy being rare and costly to

imitate (Robert, 2001). Beyond existing competitors, a cost-leadership strategy also creates

benefits relative to potential new entrants. Specifically, the presence of a cost leader in an
20
industry tends to discourage new firms from entering the business because a new firm would

struggle to attract customers by matching or even undercutting the cost leaders’ prices. Thus a

cost-leadership strategy helps create barriers to entry that protect the firm and its existing rivals

from new competition.

In many settings, cost leaders attract a large market share because a large portion of potential

customers find paying low prices for goods and services of acceptable quality to be very

appealing. The need for efficiency means that cost leaders’ profit margins are often slimmer than

the margins enjoyed by other firms. However, cost leaders’ ability to make a little bit of profit

from each of a large number of customers means that the total profits of cost leaders can be

substantial (Anderson, 2014).

In some settings, the need for high sales volume is a critical disadvantage of a cost-leadership

strategy. Highly fragmented markets and markets that involve a lot of brand loyalty may not

offer much of an opportunity to attract a large segment of customers. In both the soft-drink and

beer industries, for example, customers appear to be willing to pay a little extra to enjoy the

brand of their choice. Lower-end brands of soda and beer appeal to a minority of consumers, but

famous brands still dominate these markets. A related concern is that achieving a high sales

volume usually requires significant upfront investments in production and/or distribution

capacity. Not every firm is willing and able to make such investments (Michael, 2015).

Cost leaders tend to keep their costs low by minimizing advertising, market research, and

research and development, but this approach can prove to be expensive in the long run. A

relative lack of market research can lead cost leaders to be less skilled than other firms at

detecting important environmental changes and trends. Meanwhile, downplaying research and

21
development can slow cost leaders’ ability to respond to changes once they are detected. Lagging

rivals in terms of detecting and reacting to external shifts can prove to be a deadly combination

that leaves cost leaders out of touch with the market and out of answers (Hudson, 2016).

Cost leadership strategies are only viable for large firms with the opportunity to enjoy economies

of scale and large production volumes and big market share. Small businesses can be "cost

focused" not "cost leaders" if they enjoy any advantages conducive to low costs. For example, a

local restaurant in a low rent location can attract price-sensitive customers if it offers a limited

menu, rapid table turnover and employs staff on minimum wage. Innovation of products or

processes may also enable a startup or small company to offer a cheaper product or service

where incumbents' costs and prices have become too high. An example is the success of low-cost

budget airlines who, despite having fewer planes than the major airlines, were able to achieve

market share growth by offering cheap, no-frills services at prices much cheaper than those of

the larger incumbents. At the beginning low-cost budget airlines chose "cost focused" strategies

but later when the market grow, big airlines started to offer the same low-cost attributes, and so

cost focus became cost leadership. A cost leadership strategy may have the disadvantage of

lower customer loyalty, as price-sensitive customers will switch once a lower-priced substitute is

available. A reputation as a cost leader may also result in a reputation for low quality, which may

make it difficult for a firm to rebrand itself or its products if it chooses to shift to a differentiation

strategy in future(Gamble, 2010).

2.3.2 Differentiation Strategy and performance

In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that

are widely valued by buyers. It selects one or more attributes that many buyers in an industry

perceive as important, and uniquely positions it to meet those needs.It is an approach under

which a firm aims to develop and market unique products for different customer segments.
22
Usually employed where a firm has clear competitive advantages, and can sustain an expensive

advertising campaign. It is one of three generic marketing strategies that can be adopted by any

firm (Porter, 1980).

A differentiation strategy is appropriate where the target customer segment is not price-sensitive,

the market is competitive or saturated, customers have very specific needs which are possibly

under-served, and the firm has unique resources and capabilities which enable it to satisfy these

needs in ways that are difficult to copy. These could include patents or other Intellectual Property

(IP), unique technical expertise, talented personnel, or innovative processes. Successful

differentiation is displayed when a company accomplishes either a premium price for the product

or service, increased revenue per unit, or the consumers' loyalty to purchase the company's

product or service (brand loyalty). Differentiation drives profitability when the added price of the

product outweighs the added expense to acquire the product or service but is ineffective when its

uniqueness is easily replicated by its competitors. Successful brand management also results in

perceived uniqueness even when the physical product is the same as competitors (Hambuck,

1983).

Differentiation strategy is not suitable for small companies. It is more appropriate for big

companies. To apply differentiation with attributes throughout predominant intensity in any one

or several of the functional groups (finance, purchase, marketing, inventory etc..). This point is

critical. For example GE uses finance function to make a difference. You may do so in isolation

of other strategies or in conjunction with focus strategies (requires more initial investment). It

provides great advantage to use differentiation strategy (for big companies) in conjunction with

focus cost strategies or focus differentiation strategies.

23
A differentiation strategy calls for creating a product or service with sufficiently distinctive

attributes that it sets your business apart from the competition. If your differentiation strategy

works, you may be able to charge your customers a premium for your product or service.

However, such a strategy may backfire without sufficient market acceptance. You also face other

risks that can impact your bottom line.Every company would like to think that it stands apart

from the competition in the eyes of its customers. A company that employs a differentiation

strategy does so with the intention of creating a product or service that is valued and perceived

by its customers as unique and better than the competition. Companies that succeed in

implementing a differentiation strategy have one or a combination of the following attributes:

leading scientific research, highly skilled and creative product-development personnel, a strong

sales force and a strong reputation for quality and innovation (Kiechel, 2010).

One positive of a successful differentiation strategy is that the company may charge a premium

for its product or service. The company does so with confidence because of a highly developed

and strong corporate identity. The company can readily pass along higher supplier costs to its

customers because of the lack of substitute or alternative products on the market. Having a loyal

customer following helps stabilize the company's revenue and lessens the impact of market

downturns because of customer loyalty in good times and bad.A company that succeeds in

implementing a differentiation strategy must worry about competitors' copying its business

methods and stealing away its customers. In addition, implementing a differentiation strategy is

costly. It may take years before a company achieves a strong brand image that sets it apart.

During that time, the company faces the risk of changing consumer tastes or preferences. In such

a case, the company may not have sufficient customer demand to offset its higher costs, which

may lead to a loss (Gamble, 2010).

24
A differentiation strategy may not be ideal for every company. It is difficult to maintain

differentiation for an indefinite amount of time because of competition. Many companies attempt

to find the right balance by competing on such things as price, service and quality, or on any

combination of attributes that it believes are important to its customers to gain a competitive

advantage. For example, a company that differentiates itself based on price may sacrifice quality

to attract customers who are price sensitive. During market downturns, the company may enjoy

higher sales than one that competes based on differentiation quality.

2.3.3 Focus strategy and organizational performance

This is a marketing strategy in which a company concentrates its resources on entering or

expanding in a narrow market or industry segment. A focus strategy is usually employed where

the company knows its segment and has products to competitively satisfy its needs. Focus

strategy is one of three generic marketing strategies. See differentiation strategy and low cost

strategy for the other two. Focus or niche strategy involves segmenting markets and appealing to

only one or a few groups of customers or industry buyers. It is a marketing strategy in which a

company concentrates its resources on entering or expanding in a narrow market or industry

segment. Focus strategy identifies the market segments where the company can compete

effectively. The strategy matches market characteristics with the company's competitive

advantages to select markets where a focus of the company's resources is likely to lead to desired

sales volumes, revenues and profits. The premise is that the needs of the group can be better

serviced by focusing entirely on it and this enables the firm enjoy customer loyalty (Gamble,

2010).

Successful companies leverage competitive advantages in the marketplace to achieve high levels

of performance. They either attain overall market leadership by differentiating themselves from

competitors or dominate market segments where they focus their efforts. Focus strategy

identifies the market segments where the company can compete effectively. The strategy

25
matches market characteristics with the company's competitive advantages to select markets

where a focus of the company's resources is likely to lead to desired sales volumes, revenues and

profits. Low production cost is an effective competitive advantage, but it doesn't apply in all

markets. The key is to segment your market into sections that you can reach at low cost and that

are cost-sensitive. Once you have identified market segments in which consumers are looking for

the lowest prices, you can use focus strategy to concentrate the company's resources there.

Ideally, the cost of reaching those consumers is low, allowing you to maintain your price

advantage while focusing on increasing sales.

Some consumers prefer to pay more to get better quality. If you have a superior design, more

expertise or access to higher-quality materials, you may have a competitive advantage on product

quality. In this case, you have to identify market segments that will buy your higher-priced

products. Focus strategy lets you concentrate promotional resources on the sectors that match

your quality advantage. Since you are no longer competing on low price, you can cover the

higher costs involved in identifying and reaching these high-value segments. If your competitive

advantage includes selling a well-known brand, you have to use focus strategy to make sure you

are reaching the consumers who have a positive image of the brand, need the product and can

afford to buy it. Some brands, such as detergents, cut across many market segments while others,

such as sports-related brands, require more focus. Focus strategy for brands involves targeting

promotional activities to let those consumers who are interested in the brand know that it is

available from your company.

Companies can compete on service by emphasizing customer satisfaction. Focus strategy for

companies that develop a service competitive advantage relies less on market segmentation and

more on assigning resources to increase excellence in customer service. Customer service

26
focused on high levels of customer satisfaction implies hiring employees with good people skills,

training them in customer relations, training them on the products they are supporting and

monitoring for rapid response times. Because such customer service is expensive, companies

focused on customer service as a competitive advantage avoid the lowest-cost market segments

but can do well in high-value sectors (Panayides, 2003).

This dimension is not a separate strategy for big companies due to small market conditions. Big

companies which chose applying differentiation strategies may also choose to apply in

conjunction with focus strategies (either cost or differentiation). On the other hand, this is

definitely an appropriate strategy for small companies especially for those wanting to avoid

competition with big one.In adopting a narrow focus, the company ideally focuses on a few

target markets (also called a segmentation strategy or niche strategy). These should be distinct

groups with specialised needs. The choice of offering low prices or differentiated

products/services should depend on the needs of the selected segment and the resources and

capabilities of the firm. It is hoped that by focusing your marketing efforts on one or two narrow

market segments and tailoring your marketing mix to these specialized markets, you can better

meet the needs of that target market. The firm typically looks to gain a competitive advantage

through product innovation and/or brand marketing rather than efficiency. A focused strategy

should target market segments that are less vulnerable to substitutes or where a competition is

weakest to earn above-average return on investment (Payadise, 2003).

2.3.4 Combination Strategy and organizational performance

The Porter Generic Competitive Strategies (1980, 1985) of overall cost-leadership,

differentiation and focus on strategic management research cannot be overemphasized.

Low cost and differentiation strategy may be compatible approaches in dealing with

competitive forces (Allen & Helms, 2006; Miller, 1992; Spanos, et al., 2004), and postulated the
27
pursuit of what has been termed ‘hybrid’, ‘mixed’, ‘integrate’, or ‘combination’ strategies (Kim

et al., 2004; Spanos et al., 2004),These ‘hybrid’ strategies are the ones which combine low

costand differentiation elements (Gopalakrishna& Subramanian, 2001; Proff, 2000).

A combination competitive strategy involving high level of emphasis on both cost-leadership and

differentiation strategies simultaneously should be distinguished from “stuck-in-the-middle”

strategy where a firm fails to successfully pursue both cost-leadership and

differentiation strategies (Acquaah&Ardekani, 2006). A combination strategy has been

shown to be viable and profitable (Kim et al., 2004; Miller &Dess, 1993; Wrightet al., 1991).

Since cost-based and differentiation-based advantages are difficult to sustain, firms that

pursuea combination strategy may achieve higher performance than those firms that pursue a

singular strategy. Pursuit of a differentiation strategy for low-cost firms will help

minimize.

Implementation of combination strategy based on porter’s model: success built on lost

opportunity in industrial lubricants. PrakashR.Awadetheir vulnerability due to reliance on cost-

based advantages only (Yasai-Ardekani& Nystrom, 1996). A hybrid strategy seeks

simultaneously to achieve differentiation and low price relative to competitors. This success

strategy depends on the ability to deliver enhanced benefits to the customers with low price

while achieving sufficient margins for reinvestment to maintain and develop bases of

differentiation. This is, in fact, the strategy Tesco is trying to follow (Explorer, 2010).

A best cost provider strategy giving customer more value for the money by offering upscale

product attributes at a lower cost than rivals. Being the best cost producer of an upscale

product allows a company to under-price rivals whose products have similar upscale

attributes. This option is a hybrid strategy that blends elements of differentiation and low-cost in

28
a unique way (Thompson et. al, 2012). According to Ireland (2011), most consumers have high

expectations when purchasing a good or service. In general, it seems that most consumers

want to pay a low price for products with somewhat highly differentiated features. Because of

these customer expectations, a number of firms engage in primary and support activities

thatallow them to simultaneously pursue low cost and differentiation. Firm seeking of using this

use the integrated cost leadership/differentiation strategy (Ireland et.al, 2011).

This new, hybrid strategy, may become even more important-and more popular-as global

competition increases. Compared to companies relying on a single generic strategy,

companies that integrate the generic strategies may position themselves to improve their

ability to adapt quickly to environmental changes and learn new skills andtechnologies. This

would more effectively leverage core competencies across business units and product

lines and would also help produce products with differentiated features or characteristics

that customers’ value and provide these differentiated products at a low cost, compared to

competitors' products. This is because of the multiple, additive benefits of successfully

pursuing the cost leadership and differentiation strategies simultaneously.

Differentiation enables the company to charge premium prices and cost leadership enables

the company to charge the lowest competitive price. Thus, the company is able to achieve a

competitive advantage by delivering value to customers based on both product features

and low price (Learning. O, 2009). Acquaah&Ardekani (2006) justified that the implementation

of a combined competitive strategy is not only feasible, but will also generate superior

incremental performance over the implementation of single competitive strategies. The

implementation of a combined competitive strategy results in multiple sources of competitive

advantage for example, economies of scale and brand/customer loyalty, as compared to

29
advantages gained through pursuitof single competitive strategies. Moreover, the pursuit of a

combined competitive strategy, and each of the single competitive strategies will generate

superior incremental performance over the inability to successfully pursue any of the

singular competitive strategies.

Furthermore, firms that pursue a differentiation strategy may also be able to achieve a

low-cost position by emphasizing efficiency in their value creating activities, thereby

further strengthening their competitive position vis-a-vis their rivals. The success of

Japanese companies such as Toyota, Canon, and Honda has been attributed to the simultaneous

pursuit of cost leadership and differentiation strategies (Ishikura, 1983),

Successful organizations adopt a combination of competitive aspects to build a Hybrid Strategy.

2.4 Summary of Literature Review and Research Gaps

Table 2:1 Research Gaps

Author Year Topic Findings Research gap
Robert 2001 Cost leadership The strategy is The study only
strategy and rate and costly to pokes holes on the
performance of imitate and strategy but does
firms therefore not indicate the
challenging to influence it has on
generate and performance
sustain
competitive
advantage
Gamble et al 2010 Applications of Large firms can The study
et al et al cost leadership apply the cost suggests an
strategy leadership alternative
strategy but strategy but not
small firms need the effect of cost
to employ cost leadership
focused strategy strategy on
performance
Panayide 2003 Focus strategy For firms to The study did not
and market penetrate well in point out the
penetration the maket they influence of focus
focus less on strategy on

30
 market performance but
segmentation only when it can
and more on be used
customer service
Explorer 2010 Hybrid strategy Success depends The study is
and firm on ability to conditional but
competitiveness delivery does not indicate
enhanced the cause-effect
benefits to outcome
customers with
low price but
ensuring profits
are made

Source: Resaercher and Literature Reviewed

2.5 Conceptual Framework

A conceptual framework is a basic structure that consists of certain abstract blocks which

represent the observational, the experiential and the analytical/ synthetical aspects of a process or

system being conceived. It is a set of broad ideas and principles taken from relevant fields of

enquiry and used to structure a subsequent presentation. The interconnection of independent and

dependent variables completes the framework for certain expected outcomes. The independent

variables include; cost leadership strategy, differentiation strategy, focus strategy and

combination strategy while the dependent variable is performance of SMEs in Nairobi City

County.

31
Independent Variables Dependent Variables
Competitive strategies

Cost Leadership strategy

 Efficiency
 Cost of operation
reduction
 Cheaper commodities

Differentiation Strategy
 Unique product features
 Promotion
 Unique distribution Performance of SMEs
 Profitability
Focus Strategy  Growth in scale/size
 Market ninche target  Market share
 Market segmentation
 Geographic location

Combination strategy
 Qualtiy
 Style
 Pricing
 Convenience

Figure 2:1 Conceptual Framework

Source: Researcher, 2018

32
 CHAPTER THREE

RESEARCH METHODOLOGY

3.1 Introduction

This chapter presents the methodology tha were used to carry out the study. It further

describes the type and source of data, the target population and sampling methods and the

techniques that were used to select the sample size. It also describes how data was collected,

analyzed and presented.

3.2 Research Design

Kothari (2004) defines research design the framework that explains how the problem under

study will be investigated to solve it .A descriptive survey design was adopted in order to

provide an outcome that is clear as well as characteristics that are linked with it at a specific

point in time. The relevance of descriptive survey in this particular study is the essence that it

does not require several rounds of monitoring but rather focuses on one point in time. According

to Cooper &Schindler (2003), a descriptive study is concerned with finding out the what, where

and how of a phenomenon. This study was therefore able to generalize the findings to all the

enterprises.

3.3 Target Population

A population is defined as a complete set of individuals, cases or objects with some common

observable characteristics, (Mugenda & Mugenda, 2003). The population for this study were all

the proprietors of SMEs in Nairobi City County. The target population for the study was

therefore 115 respondents.

33
Table 3:1Target Population
Cluster Popuplation Percentage
Established SMEs 37 32.17%
Medium enterprises and 28 24.35%
growing
Small and young start-ups 50 43.48%
Total 115 100%
Source: Nairobi City County, 2018

3.4 Sample size and Sampling Design

Sampling techniques provide a range of methods that facilitate in reducing the amount of data

that needs to be collectded by considering only data from a sub-group rather than all possible

cases or elements. Since the population is small, the study adopted a census study to incorporate

the entire population in the sample. Therefore the sample was equally 115 respondents.

3.5 Data Collection Instruments and Procedure

According to Kothari (2004), data collection procedures are strategies employed in research to

ensure credible, valid and reliable data is obtained to inform the research findings. A semi-

structured questionnaire was used to collect primary data from the respondents. The study

administered the questionnaire individually to all respondents of the study. The study exercised

care and control to ensure all questionnaires issued to the respondents were received and

achieved this, the study maintained a register of questionnaires, which were sent, and those that

were received. The questionnaire was administered using a drop and pick later method.

34
3.6 Validity and Reliability of the study

3.6.1 Validity

Validity is a measure of the degree to which data obtained from the instrument accurately and

meaningfully represent the theoretical concept and in particular how the data represents the

variables. Where validity has been established, any inferences made from such data will be

accurate and meaningful (Mugenda&Mugenda, 2003). The validity of a study increases by using

various sources of evidence (Yin, 2003). The first phase of this research employed the

econometric technique to investigate the relationship between competitive strategies and

performance of SMEs. The data was collected from the proprietors’ of the SMEs. This issue

confirmed the validity of the data and relevant results.

3.6.2 Reliability

Cronbach’s Alpha was applied to measure the co-efficient of internal consistency and therefore

the reliability of the instrument. In order to check reliability of the results, the study used

Cronbach’s alpha methodology, which is based on internal consistency. Cronbach’s alpha

measures the average of measurable items and its correlation. SPSS software was used to verify

the reliability of collected data. Overall scales’ reliability of the present situation and the

desirable situation was tested by Cronbach's alpha, which was above the acceptable level of 0.70

(Hair et al., 1998). Alpha above the value of 0.7 is considered acceptable (George &Mallery,

2003). Construct validity technique was used to test the validity of the instrument.

3.7 Data Analysis and Presentation

Quantitative data collected was analyzed by the use of descriptive statistics using SPSS (Version

22) and presented through percentages, means, standard deviations and frequencies. The

information was displayed by use of bar charts, graphs and pie charts and in prose-form. This

was done by tallying up responses, computing the percentages of variations in response as well
35
as describing and interpreting the data in line with the study objectives and assumptions through

use of SPSS (Version 22) to communicate research findings. Content analysis was used to test

data that was qualitative in nature or aspect of the data collected from the open ended questions.

In addition, the study conducted a multiple regression analysis.The multiple regression equation

was;

Y = β0 + β1X1 + β2X2 + β3X3 + β4X4+ε

Where;

Y= Peformance of SMEs.

B0 - intercept coefficient

εi – error term (extraneous variables)

X1 –cost leadership strategy

X2– Differentiation strategy

X3–Focus strategy

X4 – Combination strategy

β1,β2, andβ3 =regression coefficients

However, qualitative data was anlayzed using a likert scale of 1 to 5 based on weights for the

degree of influence of independent variables on the dependent where 1 was for Not at all, 2 for

Low extent, 3 for moderate extent ,4 for greater extent and 5 very greater extent

3.8 Ethical Considerations

Informed consent was obtained from all those participating in the study. Those who were not

willing to participate in the study were under no obligation to do so. Respondents’ names were
36
not indicated anywhere in the data collection tools for confidentiality and information gathered

was only used for the purposes of this academic study. Research audhtority was sought from

NACOSTI and Kenyatta University Graduate school and permission granted. The refereed

materials and sources were cited accordingly.

37
 CHAPTER FOUR

DATA ANALYSIS AND PRESENTATION

4.1 Introduction

This chapter presents the analysis of the collected data, the results and the ensuing findings.

Frequency tables and pie charts are presented to illustrate the analysis and interpretation of the

data.

4.1.1 Questionnaire Response Rate

As mentioned earlier, out of the selected sample of 115 respondents, 15 (i.e. 13.043%) did not

respond, hence only 100(86.96%) questionnaires were used in the subsequent analysis. This

correlates with Mugenda and Mugenda (2003) recommendation that a response rate of 50% is

adequate for analysis and reporting; a rate of 60% is good and a response rate of 70% and over is

excellent. This clearly shows that the response rate in this study was excellent.

Figure 4:1 Response rate

Source: Field data, 2018

38
4.1.2 Validity and Reliability of Research Instruments

In order to determine the reliability of the research instruments, a pretesting was conducted by

the researcher. A Cronbach Alpha was used to determine reliability where a coefficient of 0.7 or

more indicated that the research instruments were reliable. The findings are indicated in table

Table 4.1 below;

Table 4:1Validity and Reliability of Research Instruments

Variables No. of Items Cronbach Alpha

Cost leadership strategy 6 0.756

Differentiation Strategy 5 0.809

Focus strategy 6 0.855

Combination strategies 6 0.911

Performance of SMEs 5 0.833

Source: Researcher, 2018

From Table 4.2 above, the Cronbach Alpha for performance is 0.833, cost leadership strategy is

0.756, differentiation strategy is 0.809, focus strategy is 0.855 while for combination strategy it

was 0.911. Since all the coefficients of Cronbach Alpha were above 0.7, this indicates that the

research instruments were reliable.

4.2 Background Information

The study sought to establish the background information on what the firms dealt in, number of

employees they had, type of ownership and category of enterprise from the respondents who

were proprietors of youth owned SMEs in Nairobi City County. The names of the firms were

randomly based on the 100 enterprises in the County.

39
4.2.1 Enterprise Industry
The study sought to establish the industry to which they belonged. The findings were as

presented in Figure 4.2 below;

Figure 4:2 Industry to which the enterprises belong to

Source: Researcher, 2018

It was realized that 25% of the sampled enterprises were in the retail chain industry, 21% dealt

with procurement, logistics and supply chain management, 18% were engaged in manufacturing,

11% in the building and construction industry, 18% in the ICT sector while 7% of them belonged

to other sector like cosmetics, service and Jua Kali. This indicates that most of the SMEs are in

the retail chain sector while the least were in the other sectors.

4.2.2 Number of Employees

The study further sought to establish the number of employees the SMEs had in Nairobi City

County. It was realized that 11% of the firms have between 0-20 employees, 18% had between

21-40 employees, 33% had between 41-60 employees while 38% had 61 and above employees.

40
Figure 4:3 Number of employees

Source: Researcher, 2018

From the figure, majority of the SMEs sampled have 61 and above employees. This indicates

that most SMEs in Nairobi City County have grown from small scale to middle and large scale.

4.2.3 Ownership structure

The study sought to determine the type of ownership structure among the SMEs in Nairobi City

County ranging from sole proprietorship, partnership, company or any other. The findings were

as illustrated below;

41
Figure 4:4 SME ownership structure

Source: Researcher, 2018

Figure 4.4 above indicates that 47% of the SMEs are private limited companies, 28% are sole

prietorship type of businesses either family or individual owned, 15% are partnerships while

10% are SACCOs, cooperative socieities, foregin owned or a joint venture. A majority of the

SMEs are formally registered as companies to enable them access formal businesses and

transactions. This has given them an edge on the competitive environment of business.

4.2.4: Enterprise Category

The study further sought to assess the category to which the Small and Medium Enterprises

belonged on a scale of either small and upcoming, medium or established and large. Most of the

enterprises in Nairobi City County are medium (53%) while a few are established (15%) or

smalland up coming (32%). This indicates that there is needs for proper competitive strategies to

aid in advancement of scale from small to medium and subsequently large.

42
Figure 4:5 Category of SME

Source: Researcher, 2018

4.3. Low cost leadership strategy

The study sought to determine the extent to which the following indicators of low cost

leadership strategy were adopted by the SMEs in Nairobi City County on a scale of 1-5 where

(5) Very large extent (4) large extent (3) moderate extent (2) less extent (1) not at all. The

findings from the sampled respondents were coded and their mean and standard deviation

calculated as tabulated below;

Table 4:2 Low cost leadership strategy application

Low cost leadership strategy Mean SDEV

Reduction of operational costs 3.55 0.688

Reduction of consumer prices 4.12 0.834

Offers and promotions 3.86 0.922

Improved deliveries and accessibility for customers 3.29 0.877
Reduced cost of transport 2.78 0.802
Source: Field data, 2018

43
From table 4.1 above, most of the SMEs in Nairobi City County have strived to reduce

operational costs aimed at reducing the price of their products as indicated by a mean of 3.55,

they have also employed reduced consumer prices to gain competitive advantage at a mean of

4.12. The enterprises significantly employ offers and promotions to gain market demand for

their products as indicated by a mean of 3.86. The SMEs have also improved deliveries and

accessibility of their goods and services to customers/and clients as indicated by a mean of 3.29

and standard deviation of 0.877. Additionally, the enterprises have also worked on reducing the

cost of transport on their goods and resources to cut on the price of their final products as

indicated by a mean of 2.78. This indicates that the SMEs have all embraced low cost leadership

strategy although on reduction of cost of transport of them have not significantly reduced it

which has made their cost reduction efforts in vain.

Due to increased competition in the SME industry, low cost leadership strategy has been a

challenge since it has led to low profits and unsustainability given the expensive business

environment. The respondents indicated that reducing the cost by either 1 shilling makes the

product look cheaper than those higher but this needs to be coupled with other strategies.

According to the study, the strategy can be more effect if combined with focus strategy. The

SMEs should therefore ensure they identify their market segment. This concurs with

Anderson(2014) whose study realized that large and established firms are the ones who can

apply the lost cost strategy but small and medium sized enterpreises will not get the strategy

effective and competitive in the market.

4.4 Differentiation Strategy

The respondents were requested to rate the extent to which the following indicators of

differentiation strategy have been adopted by their respective enterprises on a scale of 1-5

where (5) Very large extent (4) large extent (3) moderate extent (2) less extent (1) not at all.

The findings were as tabulated in table 4.2 below;

44
Table 4:3 Extent of application differentiation strategy

Differentiation Strategy Mean SDEV

3.58 0.833
Extended market coverage to new areas

Adoption of IT 4.11 0.721

Improved products / services to its customers 3.99 0.903

Ventured from traditional business to new / different 2.33 0.874

Tailored products to suit specific requirements of our clients 3.77 0.692

Introducing new product to the market 2.69 0.844

Reviewed product / service prices to match or be lower than competitors 2.09 0.958

Rebranded our services / products to create market recognition 3.51 0.755

Source: Field Data, 2018

From table 4.2, it is evident that the SMEs have significantly adopted the differentiation strategy
aimed at making them unique in the ever competitive business environment. Most of them have
adopted new information technology to give them an edge as indicated by a mean of 4.11 and a
standard deviation of 0.721 which indicates a significant deviation from the mean. The
enterprises have also extended to new market areas that have not been reached by rivals at a
mean of 3.58, improved their products/services to fit client/customer needs (3.99), rebranded the
prdoucts to improve market recognition and preference as indicated by a mean of 3.51, tailored
their products to suit specific requirements of their clients (3.77), introduced used and new
products into the market (2.69). However the enterprises have not done well in reviewing their
product/service prices to match or be lower than their competitors (2.09) nor ventured from
traditional businesses to new or different ones as indicated by alow mean of 2.33. This indicates
that the SMEs have strived to make their products unique and gain market share but have not
worked on their prices which is a significant determinant of market demand.
Given the free market economy, this strategy proves to be challenging since other players take
advantage of it and gain market demand. The SMEs strive to make their products unique, come
up with new products, adopt technology, venture into other markets not reached by others
entities but price has not been affected.There is need to coin this strategy with low cost
leadership strategy for the enterprises to perform as indicated by Gamble(2010) in his study on
SMEs in Pakistan.

45
4.5 Focus strategy
The study also requested respondents to rate the extent to which the following indicators of
differentiation strategy adopted by the Small and Medium Enterprises in Nairobi City County
on a scale of 1-5 where (5) Very large extent (4) large extent (3) moderate extent (2) less
extent (1) not at all. The findings were coded, cumulated and averages and standard deviations
calculated as indicated below to show the weight of each of the options taken by the
respondents.
Table 4:4 Extent of application of focus strategy among SMEs

Focus Strategy Mean SDEV

Remained in same business and advanced in customer service 4.55 0.847

Have come up with product/service range to cater for all client categories 4.18 0.907

Extended to locations where customers emanate from 3.97 0.709

Enhanced efficiency and effectiveness 4.11 0.881

Source: Field data, 2018

From the table above, it is clear that focus strategy is extensively applied by most SMEs in

Nairobi City County. The proprietors indicated that they remained in same business and

advanced in customer service at a high mean of 4.55, came up with product/service range to cater

for all client categories at a mean of 4.18, extended to locations where customers emanated from

at a mean of 3.97 and enhanced efficiency and effectiveness in their operations at a high mean of

4.11. This indicates that the firms focused on their market segments and worked on their

products and services to ensure they maximized the potential and demand of the market.

This strategy, according to the proprietors of the enterprises, proves to be effective since it

promotes progressive development and growth of an SME from small, to medium to large. They

have applied the strategy which has turned round their growth rate and general operational

performance. This is in tandem with a study by Ireland et al (2011) who also realized that the

strategy is effective for start-ups. However the strategy proves to be challenging if the market

needs change and trends against the firm area of specialization. This calls for diversification and

also a hybrid strategy either either differentiation or cost leadership.

46
4.6 Combination Strategy
The study sought to determine extent to which Porter’ generic strategy of combination has
been adopted by the selected Small and Medium Sized enterprises in Nairobi City County on a
scale of 1-5 where (5) Very large extent (4) large extent (3) moderate extent (2) less extent and
(1) not at all based on the indicators tabulated below. The findings were as indicated in table
4.4 below;
Table 4:5 Extent of adoption of Combination strategy by SMEs in Nairobi City County

Combination strategy Mean SDEV

Improved customer service 3.66 0.881

Reduced prices relatively below our competitors but remained 2.44 0.907

Diversification
solvent to other business to remain aloft 2.10 0.699

Stakeholder involvement 2.19 0.801

Source: Field data, 2018

Table 4.4, evidently indicates that the SMEs in Nairobi City County, sparingly apply the

combination strategy to gain competitive advantage.This theory calls for a hybrid of focus,

differentiation or cost leadership strategies. The SMEs were however found to have improved

customer service to gain customer loyalty given the competitive environment at a high meanof

3.66 but failed to reduce prices relatively to their competitors and remain solvent, diversify to

other businesses and remain profitable and also involve stakeholders in management, operations

and decision making as depicted by a low mean of 2.44, 2.10 and 2.19 respectively. The

challenge in implmementing this strategy is lack of balance on the two strategies merged given

the limited skills andknowledge among the proprietors and also lack of cooperation from

stakeholders and limited resources to help steer the implementation of the strategy as also

indicated by Kiechel (2010).

4.7 Organization Performance

The study sought to establish the degree of organisational performance as measured via

various indicators among the selected SMEs in Nairobi City County on a scale of 1-5where

47
(5) Very large extent (4) large extent (3) moderate extent (2) less extent and (1) not at all.

The findings were as tabulated below;

Table 4:6 Organizational Performance of SMEs in Nairobi City County

Performance Indicators Mean SDEV

Improved internal processes for increased efficiency 2.87 0.749
The employee turnover has reduced due to satisfaction 1.88 0.801
Customer loyalty has increased due to satisfaction 2.59 0.855
Brand recognition in the market has improved 3.25 0.799
Improvement of professionalism in customer service 2.77 0.688
Growth of employees/self in number and skills 3.44 0.913
Increased engagement with the public through open days 1.77 0.877
Source: Field Data, 2018

Table 4.5, indicates that the SMEs are generally not performing very well. They have however

improved internal processes for increased efficiency (2.87), customer loyalty improved due to

satisfaction (2.59), recognition of their brands significantly improved (3.25), their number of

employess or owners improved in number and skills (3.44) and also improved in terms of

handing customers with professionalism (2.77). The SMEs have also not done well in reducing

employee turn over (1.88) and public or stakeholder engagement (1.77). Low engagement with

the public has signifincatly contributed to poor performance since the enterprises are not in touch

the source of their market and human resource.

4.8 Regression Analysis

The researcher conducted multiple regression analysis to establish the influence of competitive

strategies on organizational performance of SMEs in Nairobi City County. The findings are

indicated in subsequent sections;

48
Table 4:7 Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate

1 0.899 0.851 0.811 0.595

Source: Field Data, 2018

The table above indicates the model summary. From the findings, R was 0.899, R square was

0.851 and adjusted R squared was 0.811. An R square of 0.851 implies that 85.1% of changes in

organizational performance of SMEs in Nairobi City County, Kenya is explained by the

independent variables of the study. There are however other factors that influence performance

of SMEs in Nairobi City County, Kenya that are not included in the model which account for

14.9%. An R of 0.899 on the other hand signifies strong positive correlation between the

variables of the study.

Table 4:8 ANOVA

Model SS df MS F Significance

Regression 638.04 6 560.4 676.015 0.0912

Residual 281.40 341 0.950

Total 919.44 347

Source: Field data, 2018
From the ANOVA table above, the value of F calculated is 676.015 while F critical is 489.465.

Since the value of F calculated is greater than F critical, the overall regression model was

significant and therefore a reliable indicator of the study findings. In terms of p values, the study

indicated 0.000 which is less than 0.05 and therefore statistically significant.

49
Table 4:9 Regression Coefficients

Model Unstandardized Standardized t Sig

coefficients Coefficients
B Std Beta
Error
Constant 7.49 0.674 8.012 0.000
Low cost leadership strategy 0.655 0.022 0.811 14.15 0.00
Differentiation strategy 0.876 0.033 0.120 11.04 0.000
Focus strategy 0.945 0.029 0.127 1.15 0.000
Combination strategy 0.860 0.031 0.384 4.42 0.000
Source: Field data, 2018

The resultant regression equation becomes;

Y = 7.49 + 0.655X1 + 0.876X2 + 0.945X3 + 0.860X4

Where Y is the organizational performance of SMEs in Nairobi City County, Kenya; β0, β1, β2,

β3 and β4 are the regression coefficients and X1, X2, X3 and X4 represent low cost leadership,

differentiation, focus and combination strategies respectively.

This implies that when all the variables of the study are held constant, performance of SMEs in

Kenya will be at the intercept which is 7.49. A unit improvement in low cost leadership strategy

while all other factors held constant results in 0.655 increase in performance of the SMEs, a unit

increase in differentiation strategy with other factors ceteris paribus leads to 0.876 increase in

performance of the SMEs. Similarly a unit increase in focus strategy while other factor ceteris

paribus, translates to a 0.945 increase in performance of SMEs in Kenya while a unit increase in

adoption of combination strategy with other factors held constant leads to a 0.860 improvement

in performance of SMEs in Kenya.

50
 CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction
This chapter presents a summary of the findings of the study, conclusion and suggests some

recommendations. At the end of this chapter suggestions for further study and research are

suggested. These are areas that in future can be explored to further the knowledge and research

on strategic managment practices.

5.2 Summary of the Findings

5.2.1 Low cost leadership strategy and organizational performance

The study revealed that the most of the SMEs in Nairobi City County have employed the low

cost leadership strategy to a significant level through reduction of operational costs aimed at

reducing the price of their products, reducing consumer prices to gain competitive advantage, use

of offers and promotions to gain market demand for their products, improved deliveries and

accessibility of their goods and services to customers/and clients and also worked on reducing

the cost of transport on their goods and resources to cut on the price of their final products. This

indicates that the SMEs have all embraced low cost leadership strategy although on reduction of

cost of transport of them have not significantly reduced it which has made their cost reduction

efforts in vain.

5.2.2 Differentiation strategy and Organizational performance

The study revealed that the SMEs have significantly adopted the differentiation strategy aimed at

making them unique in the ever competitive business environment. Most of them have adopted

new information technology to give them an edge. The enterprises have also extended to new

market areas that have not been reached by rivals, improved their products/services to fit

client/customer needs, rebranded the prdoucts to improve market recognition and preference as

indicated by a mean of 3.51, tailored their products to suit specific requirements of their clients,
51
introduced used and new products into the market. However the enterprises have not done well

in reviewing their product/service prices to match or be lower than their competitors nor

ventured from traditional businesses to new or different ones. This indicates that the SMEs have

strived to make their products unique and gain market share but have not worked on their prices

which is a significant determinant of market demand.

5.2.3 Focus strategy and organizational performance

The study realized that focus strategy is extensively applied by most SMEs in Nairobi City

County. The proprietors indicated that they remained in same business and advanced in customer

service at a high mean of 4.55, came up with product/service range to cater for all client

categories, extended to locations where customers emanated from and enhanced efficiency and

effectiveness in their operations. This indicates that the firms focused on their market segments

and worked on their products and services to ensure they maximized the potential and demand of

the market.

This strategy, according to the proprietors of the enterprises, proves to be effective since it

promotes progressive development and growth of an SME from small, to medium to large. They

have applied the strategy which has turned round their growth rate and general operational

performance. However the strategy proves to be challenging if the market needs change and

trends against the firm area of specialization. This calls for diversification and also a hybrid

strategy either either differentiation or cost leadership

5.2.4 Combination strategy and organizational performance

It was realized that the SMEs in Nairobi City County, sparingly apply the combination strategy

to gain competitive advantage. The SMEs were however found to have improved customer

service to gain customer loyalty given the competitive environment but failed to reduce prices

relatively to their competitors and remain solvent, diversify to other businesses and remain

profitable and also involve stakeholders in management, operations and decision making. The

52
challenge in implementing this strategy is lack of balance on the two strategies merged given the

limited skills andknowledge among the proprietors and also lackof cooperation from

stakeholders and limited resources to help steer the implementation of the strategy.

5.3 Conclusions
The study concluded that the Michael Porter’s generic strategies of competitive advantage used
in the study which include low cost leadership strategy, differentiation strategy, focus strategy
and combination strategy significantly influenced the organizational performance of SMEs in
Nairobi City County, Kenya. The variables explained 85.11% of the changes in organizational
performance of the SMEs. A unit increase in low cost leadership strategy adoption by SMEs led
to a 0.655 increase in organizational performance of the SMEs, a unit increase in differentiation
strategy adoption led to a 0.876 increase in performance of the enterprises, a unit increase in
focus strategy transformed to a 0.945 increase in performance of the firms while a unit increase
in application of combination strategy by the SMEs led to a 0.860 increment in their overall
performance.
The focus strategy was applied to a greater extent by the SMEs in gaining competitive advantage
followed by differentiation, combination and the least applied strategy was low cost leadership
strategy which proved to be challenging to the start-ups and medium SMEs due to limited
resources, vast market and free market economy system which could not favour them.
Combination strategy had more challenge in application since it involved the hybrid of
differentiation and focus strategy however the SMEs tried to focus on a given market, product,
location and gain market share. This led to vast development and advancement in category of the
enterprise from small to medium and ultimately large enterprises.
The SMEs were found to fast adopting changes in technology, customer preferences, government
policy and market trends to remain aloft in the ever growing and competitive market. The study
further realized that the strategies need to be intertwined for excellent results.

5.4 Recommendations
It was recommended that in order to for the SMEs to grow in scale and profitability and also

to compete favourably, they need to embrace Michael Porter’s generic strategies of competitive

advantage. However they need to be selecting and mix those that can work hand in hand. The

focus strategy should be applied by most firms but also diversification of products, market and

53
customers is key in risk management given the ever changing market niche and trend. The SMEs

further need adopt with the changes in government policy, technology, customer needs and

requirements, market trends and forces to amecably apply the strategies and compete fairly.

5.5 Suggestions for Further Study

The study recommends that further studies be done on the influence of combination strategies

on performance of SMEs in Kenya, the analysis of the effect of customer engagement on the

performance of SMEs in Kenya and a comparative study on the opportunities between SME

development and strategic management in Kenya

54
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Porter M.E., (1980). Competitive Strategy: Techniques for Analyzing Industries and
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Porter, M. E (1985).Competitive Advantage: Creating and Sustaining Superior Performance,
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Porter, Michael E. (1980). Competitive Strategy.Free Press. ISBN 0-684-84148-7.

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Pharmaceutical Industry in Nairobi. Unpublished MBA Project, University of Nairobi.

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Teece, D. J. Pisano, G. and Shuen, A. (1997). “Dynamic Capabilities and Strategic
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 APPENDIX I: QUESTIONNAIRE

I am an MBA student from Kenyatta University. As part of the requirements for the award of the

Masters degree, am carrying out a study on the competitive strategies and performance of SMEs

in Nairobi County, Kenya. I am therefore requesting that you assist in filing this questionnaire to

inform the findings. Thank you

The answers provided for this questionnaire will solely be used for academic purposes and they
will be treated with the highest level of confidentiality.

Section A: Organisation Bio-Data (Optional)

1. Name of the Firm ……………………………………………………….

2. What does your enterprise(s) deal with?

………………………………………………………………………………………………..

3. How many employees does your enterprise have?

4. What is the type of ownership does your enterprise have?

Sole Proprietorship

Partnership

Company

Other (specify)

5. Categorize your enterprise on the following scale

Small and upcoming

Medium

Established and large

Other (specify)

Section B: Low cost leadership strategy

58
6. The following are indicators of low cost leadership strategy, please indicate the extent to
which your enterprise adopts them. Please tick in consideration of the key provided below.

Key: (5) Very large extent (4) large extent (3) moderate extent (2) less extent (1) not at all
Low cost leadership strategy 5 4 3 2 1
Reduction of operational costs
Reduction of consumer prices
Offers and promotions
Improved deliveries and accessibility for customers
Reduced cost of transport

7. Does your SME face any challenges in implementing this strategy?

Yes ( ) No ( )
Please explain…………………………………………………………………………………
8. How can this strategy be more effective in making your SME profitable?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
Section C: Differentiation Strategy
9. The following are indicators of differentiation strategy, please indicate the extent to which
your enterprise adopts them. Please tick in consideration of the key provided below.

Key: (5) Very large extent (4) large extent (3) moderate extent (2) less extent (1) not at all

Differentiation Strategy 5 4 3 2 1

Extended market coverage to new areas

Adoption of IT

Improved products / services to its customers

Ventured from traditional business to new / different

Tailored products to suit specific requirements of our clients

Introducing new product to the market
Reviewed product / service prices to match or be lower than competitors
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Rebranded our services / products to create market recognition
10.. What challenges do you face in implementing this strategy?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
11. How can your enterprise make better use of this strategy?
…………………………………………………………………………………………………
…………………………………………………………………………………………………
…………………………………………………………………………………………………
Section D: Focus strategy
12. The following are indicators of differentiation strategy, please indicate the extent to which
your enterprise adopts them. Please tick in consideration of the key provided below.

Key: (5) Very large extent (4) large extent (3) moderate extent (2) less extent (1) not at all
Focus Strategy 5 4 3 2 1

Remained in same business and advanced in customer service

Have come up with product/service range to cater for all client categories
Extended to locations where customers emanate from
Enhanced efficiency and effectiveness
13. Is this strategy effectively applied in your enterprise?
Yes ( ) No ( )

14. What are some of the challenges faced in implementing this strategy?
………………………………………………………………………………………………….
………………………………………………………………………………………………….
………………………………………………………………………………………………….

Section E: Combination Strategy

15. The following are indicators of combination strategy, please indicate the extent to which
your enterprise adopts them. Please tick in consideration of the key provided below.

Key: (5) Very large extent (4) large extent (3) moderate extent (2) less extent (1) not at all

60
Combination strategy 5 4 3 2 1

Improved customer service

Reduced prices relatively below our competitors but remained solvent
Diversification to other business to remain aloft
Stakeholder involvement

16. What challenges do you face in implementing combination strategy?

………………………………………………………………………………………………….
………………………………………………………………………………………………….
………………………………………………………………………………………………….
17. Please highlight any other strategies that the firm has employed to remain competitive in the
market.
………………………………………………*……………………………………………………..
………………………………………………………………………………………………
Section F: Organization Performance
8. Organisation performance can be measured along various indicators; to what extend has
your Organisation achieved improvement along the terms;
Key: (5) Very large extent (4) large extent (3) moderate extent (2) less extent (1) not at all
Performance Indicators 5 4 3 2 1

Improved internal processes for increased efficiency

The employee turnover has reduced due to satisfaction
Customer loyalty has increased due to satisfaction
Brand recognition in the market has improved
Improvement of professionalism in customer service
Growth of employees/self in number and skills
Increased engagement with the public through open days

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APPENDIX III: LIST OF SMES IN NAIROBI

1. ATLAS PLUMBERS AND BUILDERS

2 TROPIKAL BRANDS AFRIKA

3 KEPPEL INVESTMENTS LTD
4 SHIAN TRAVEL
5 RUPRA CONSTRUCTION CO.
6 POWERPOINT SYSTEMS (E.A) LTD
7 CHEMICAL AND SCHOOL SUPPLIES
8 SATGURU TRAVEL AND TOURS
9 RADAR LTD
10 KENTONS LTD
11 AVTECH SYSTEMS LTD
12 SAI PHARMACEUTICALS LTD
13 KUNAL HARDWARE AND STEEL
14 CONINX INDUSTRIES LTD
15 R & R PLASTIC LTD
16 CAPITAL COLOURS C. D LTD
17 ASL CREDIT LTD
18 KANDIA FRESH PRODUCE SUPPLIERS LTD
19 FURNITURE ELEGANCE LTD
20 MURANGA FORWARDERS LTD
21 BBC AUTO SPARES LTD
22 DIGITAL DEN LTD
23 XRX TECHNOLOGIES LTD
24 NAIROBI GARMENTS ENTERPRISE LTD
25 CHARLESTON TRAVEL LTD
26 SPICE WORLD LTD
27 MASTER POWER SYSTEMS LTD

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28 SOFTWARE TECHNOLOGIES LTD
29 KENBRO INDUSTRIES LTD
30 SKYLARK CREATIVE PRODUCTS LTD
31 GANATRA PLANT & EQUIPMENT LTD
32 SECURITY WORLD TECHNOLOGY LTD
33 SPECIALIZED ALUMINIUM RENOVATORS LIMITED
34 WINES OF THE WORLD LTD
35 VIRGIN TOURS LTD
36 ARAMEX KENYA LTD
37 CANON ALUMINIUM FAB LTD
38 PANESAR'S KENYA LTD
39 TYRE MASTERS LTD
40 LANTECH AFRICA LTD
41 WARREN ENTERPRISE LTD
42 AFRICA TEA BROKERS LTD
43 MERIDIAN HOLDINGS LTD
44 DUNE PACKAGING LTD
45 THE PHOENIX LTD
46 FAIRVIEW HOTEL LTD
47 SPECICOM TECHNOLOGIES LTD
48 PUNSANI ELECTRICALS & INDUSTRIAL HARDWARE LTD
49 BISELEX (K) LTD
50 VICTORIA FURNITURES LTD
51 GINA DIN CORPORATE COMM
52 AMAR HARDWARE LTD
53 MELVIN MARSH INTERNATIONAL
54 LANOR INTERNATIONAL LTD
55 SYNERMED PHARMACEUTICALS (K) LTD
56 SAHAJANAND ENTERPRISES LTD
57 VEHICLE & EQUIPMENT LEASING LTD
58 SILVERBIRD TRAVELPLUS

63
59 WAUMINI INSURANCE BROKERS LTD
60 KENAPEN INDUSTRIES LTD
61 HARDWARE AND WELDING SUPPLIES
62 ISOLUTIONS ASSOCIATES
63 MOMBASA CANVAS LTD
64 EAST AFRICA CANVAS CO
65 TOTAL SOLUTIONS LTD
66 PRINT FAST (K) LTD
67 OPTIWARE COMMUNICATIONS LTD
68 DEEPA INDUSTRIES LTD
69 ENDEAVOUR AFRICA LTD
70 TRAVEL SHOPPE CO LTD
71 KEMA (E.A) LTD
72 AMAR DISTRIBUTORS LTD
73 PWANI CELLULAR SERVICES
74 SHEFFIELD STEEL SYTEMS LTD
75 GENERAL ALUMINIUM
76 CREATIVE EDGE LTD
77 BROLLO KENYA LTD
78 TRIDENT PLUMBERS LIMITED
79 PHYSICAL THERAPY SERVICES LTD
80 PRAFUL CHANDRA & BROTHERS LTD
81 DHARAMSHI LAKHAMSHI & CO / DALCO KENYA
82 MADHUPAPER KENYA LTD
83 UNION LOGISTICS LTD
84 OIL SEALS AND BEARING CENTRE LTD
85 SKYLARK CONSTRUCTION LTD
86 BIODEAL LABORATORIES LTD
87 WARREN CONCRETE LTD
88 RONGAI WORKSHOP & TRANSPORT
89 COMPLAST INDUSTRIES LTD

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90 KINPASH ENTERPRISES LTD
91 SIGHT AND SOUND COMPUTERS LTD
92 DE RUITER EAST AFRICA LTD
93 ACE AUTOCENTRE LTD
94 KENYA SUITCASE MFG LTD
95 HEBATULLAH BROTHERS LTD
96 MARKET POWER INT. LTD
97 NIVAS LTD
98 SIGMA SUPPLIERS LTD
99 IMPALA GLASS INDUSTRIES LTD

100 EGGEN JOINEX LTD `

101 MAACO ENTERPRISE LIMITED

102 ADVERTISING LIMITED

103 3M OVERSEAS EDUCATION ADVISORY CENTRE

104 A AND J INVESTMENTS CO. LIMITED

105 AADA CONSTRUCTION CO. LTD

106 AAJAB CLEANERS LIMITED

107 AARAFA COMMUNICATION SOLUTIONS LIMITED

108 AARI LIMITED

109 DON RIBIRIE LIMITED

110 DONATAN PREMIER CONTRACTORS(K) LTD

111 DONCHE ENTERPRISES

112 DONDAN HOLDINGS LIMITED

113 DONDER COMPANY LTD

114 DONEKS AGENCIES

115 DONKIN ENTERPRISES

65