Business and Management Review Vol. 1(12) pp.

10 – 18 February, 2012 ISSN: 2047 - 0398

Available online at http://www.businessjournalz.org/bmr

Competitive Strategy Orientations of Small and Medium Business Owners and their
Performance Impacts: The Case of Paint Manufacturing Smes in South-Western Nigeria

ADE OYEDIJO, Ph.D.

Department of Business Administration and Management Technology
Lagos State University, Ojo, Lagos, Nigeria
E-mail: [email protected]

ABSTRACT

This paper outlines the results of a study of the competitive strategy orientations of 92 small and medium sized
paint manufacturing enterprises in Southwestern Nigeria. Three sets of paint manufacturing SMEs which had
substantially divergent competitive strategies, i.e. Differentiation (28) Low cost (33) and mixed strategies (31)
were identified and compared using data generated through a survey. The data analysis using correlation
matrix and simple linear regression reveals a highly significant impact of the three strategies on the
performance of the sampled firms. Results of the analysis revealed a significant difference between the
performance of companies that used differentiation and low cost as stand alone strategies and the performance
of firms that used the two strategies together. Those using mixed strategies performed better than those using
stand alone strategies on all the three performance parameters of total income/revenue growth, sales growth
and customer complaints. A possible explanation for this result is the flexibility which the combined use of the
two strategies introduces into the operation of the firms that adopted this dual approach.

Keywords:Differentiation strategy, Low-cost strategy, small and medium scale enterprises, organizational
performance

INTRODUCTION
The strategic management practices of small and medium-sized enterprises (SMEs) have received little specific
attention from researchers. As in many other areas of scholarly inquiry into business activity, empirical research
in strategic management has tended to focus upon larger concerns (e.g. Gup and Whitehead 2000; Lenz, 1990;
Leontiades and Tezzel, 1994; Hopkins and Hopkins, 1994, 1997; Miller and Cardinal, 2001; Haveman, 1993;
Harris and Ogbonna, 2001). In recent years while much attention has been given to small scale businesses by
Nigerian policy makers, politicians, practitioners and academics, little research has been done on strategic
management practices within the small business sector of the Nigerian economy. This is surprising in view of
the importance of small and medium scale business organizations as critical engines of employment and
economic growth (Brouthers, Anderson and Nicolaes, 1998). In the case of the Nigerian manufacturing sector,
over 90% of all businesses are SMEs according to generally accepted official definition (SMEDAN, 2009). The
under representation of SMEs in terms of strategic management research data seems inappropriate when the
scale of this sector is considered. This fact, together with the key role that manufacturing inevitably plays in
economic prosperity, strongly suggests the importance of increasing our understanding of the management of
strategy in manufacturing SMEs in Nigeria.

Given recent government policy regarding the identification and encouragement of high-growth SMEs in
Nigeria, an important gap in the extant literature is any reliable empirical evidence concerning possible linkages
between business performance and the strategies utilized by SMEs. The primary objective of this study
therefore, is to reveal the competitive, business level strategies that are being utilized by these firms and the
impacts of such strategies on the performance of the sampled enterprises.

Background – The Significance of SMEs

According to SMEDAN (2009), a business is defined as small in the manufacturing sector if it employs fewer
than 100 employees. While there is no official definition of what constitutes a medium-sized enterprise,
businesses with between 100 and 199 employees are generally considered medium-sized (Mc Mahon, 2001).
Thus SMEs in the manufacturing sector may be considered as organizations employing less than 200 workers.

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The strategic importance of SMEs in the economic development of any nation is well recognized. Kilby (1965)
observes that small and medium scale enterprises are the spring boards for inventions, adaptations and general
technological development. According to Ogundele (2007), SMEs represent 90% of the enterprises in African,
Caribbean and Pacific (ACP) countries. They also provide 70% of employment opportunities for the citizens
and promote the development of local technology. Kuratko and Hodgetts (2001) have observed that small
businesses employ 53% of the private workforce and account for 47% of sales and 51% of private sector gross
domestic product.

SMEs are generally regarded as important to world economies (Pirch 1989; Storey, 1994). In fact, it has been
argued that SMEs make up the largest business sector in every world economy (Culkin and Smith, 2000). For
many years now, governments in different parts of the world are increasingly promoting and supporting the
growth of SMEs as a part of their overall national development strategy (Abdullah, 2000; and bin Bakar, 2000).
Apart from the fact that they dominate in terms of absolute numbers, SMEs are very important because they are
the key drivers of employment and economic growth (Wang, Walker and Redmon, 2008). At a macro economic
level, SMEs are considered by governments as a keystone to regional economic and community regeneration
because such firms absorb back into the workforce the employees that are made redundant by the restructuring,
rationalization downsizing and outsourcing taking place in large firms (Storey, 1994; Frank and Landstorm,
1998). This provides income to regions thereby stimulating local economic activity and driving wealth and
further creation of employment (Walker and Webster, 2004). SMEs are also commonly noted for contributing to
economic growth through their innovative activities despite their generally limited capacity for research and
development (R&D) investment (Acs and Andretch, 1990). For example, Peacock (2004) reported that SMEs in
Australia contributed 54% of all significant technology innovations even though their share of R&D investments
represented just 20% of technical innovation expenditure. It has also been argued that SMEs contribute to the
development of the society through the redistribution of political power arising from the ownership of small and
medium scale businesses by more people in a country (Deaking, 1996; Storey 1994). In addition, SMEs offer
consumers a greater opportunity for choice by operating in fragmented or niche markets which larger firms
either cannot economically enter or are reluctant to enter because of ‘unattractive’ risk – return consideration
(Brouthers, et. al; 1998). Nigerian SMEs present a unique setting for the study of the practice of strategic
management. Unlike SMEs in Western and Asian economies, most SMEs in Nigeria generally lack access to
funds and structured government support despite the existence of some institutions established for this purpose.
Thus, most of them struggle for survival amid intense competition and rivalry with larger firms, and so may
seek to employ strategies that are designed to help them compete and navigate the difficult environment in
which they operate.

Literature Review and Theoretical Framework

A popular argument in the literature is that the pursuit of efficiency or cost leadership requires a particular kind
of organizational structure and culture that is very different from the one that would be appropriate for
innovation or differentiation (Porter, 1980; Bowman, 1990). According to this view, it is not feasible to pursue
both strategies simultaneously. It is argued that the skills and resources, the structure and systems and the
culture, style and overriding values of the organization needed to best deliver low cost products are quite unique
and distinct from those required by a firm to achieve superior profit performance and a sustainable competitive
advantage through a strategy of differentiation (Bowman, 1990). While cost strategy requires skills in
controlling the raw materials, power, components, labour, machinery or storage space, as well as a heavy
investment in training to help reduce the costs of scrap and reworking, product differentiation requires a clinical
skill that predisposes a firm to a deeper understanding of its customers’ requirements than could be done by its
competitors. A product differentiation strategy thus requires a high degree of competence in a wide area of
management and organization and a labour force that is highly trained, experienced, self-motivated and able to
work together as a team. People are the key resource in this organization and are thus expensive. While cost
leadership requires extensive effort to improve the efficiency of the firm, the quality of the products or services
carries a greater emphasis under a differentiation strategy.

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Contrary to the theoretical position of Porter (1980) and Bowman (1990), empirical studies have found that a
firm can use differentiation strategy and low cost strategy together and still perform very well (e.g.) Murray,
1988; Miller, 1992; Kotha and Swamidass, 2000). The conflicting positions between theory and the findings
from empirical tests of the theory suggest the need for a further investigation of the postulates and the existing
results in different organizational contexts. The small business sector provides an opportunity for this.

Hypotheses
Based on a review of theory and previous studies, it is postulated as follows:

1. Total income and sales growth in paint manufacturing SMEs that are pursuing product differentiation
or cost leadership strategies exclusively will be higher than in paint manufacturing SMEs that are
pursuing both strategies together.
2. Paint manufacturing SMEs that are using product differentiation or cost leadership strategies
exclusively will experience less customer complaints than paint manufacturing SMEs that are mixing
product differentiation with cost leadership strategies.

SAMPLE, DATA AND METHODOLOGY

The Sample and Data Collection
The population of the study was owner-managers of small and medium paint manufacturing firms and they were
located across Southwestern Nigeria. A data base on small and medium manufacturers held by the Nigerian
Association of Small and Medium Scale Industrialists (NASMSI) provided the sample frame from which the
final pool of southwestern owner managers of small and medium paint manufacturing firms was drawn. The
final pool of owner – managers to whom questionnaires were mailed was 128. It is acknowledged that due to
constraint of finance available to the author, the survey involved a one wave effort and resulted in the return of
92 usable questionnaires out of the 103 received. This gives an effective response rate of 89.3%.

The above hypothesized relationships were tested using data collected through self-administered, structured
questionnaires containing essentially close-ended questions. The questionnaires were administered on chief
executives and marketing directors, or in some cases other directors within the 92 randomly selected small and
medium scale paint manufacturing companies in southwestern Nigeria. In order to appreciate the study setting
and test the questionnaire prior to its use, a pilot study involving face-to-face interviews with five small business
owner – managers was undertaken. The questionnaire was then refined in the light of experience.

This research is concerned only with small and medium paint manufacturing businesses in southwestern
Nigeria. There are two reasons for this. First, over the last few years, the performance of the small and medium
scale manufacturing sector in Nigeria has been a major pre – occupation of policy – makers and government
departments dealing with industry and trade. The sector has been characterized as non – competitive by
international standards and it is considered to have failed in performing the traditional and modern social and
economic roles of the sector (Oshagbemi, 1998; Ogundele 2007). The second reason is that it is highly probable
that cross-industry differences in the nature of business activities could confound findings relating to SME
strategies and to SME growth and performance more generally. Such influences are, to a reasonable extent,
controlled for by examining a single industry.

Additional focus is provided to this research by considering only paint manufacturing SMEs that are legally
organized as proprietary companies. There are two main reasons for this further narrowing down of the unit of
analysis. First, as Freedman and Godwin (1994) indicate, a particular concern with legally organized proprietary
companies is not uncommon among SME researchers worldwide. As they observe, “it would appear that, in so
far as the issue is concerned, the limited liability company is of more interest to the small business research
community than are unincorporated firms.

Second, the primary concern in this research is with SME strategy, growth and performance, and it is more
likely that these will be evident in businesses that are legally organized as proprietary companies (Freedman and
Godwin 1994; Grey 1992; Hughes and Storey 1994). There are 128 paint manufacturing SMEs legally

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organized as proprietary companies in Southwestern Nigeria at the time of this study. The final data used in this
study covered 92 firms.

Table 1: Selected Demographic Characteristics of Respondents and Their Firms

Age of business Frequency Percent
0–5 16 17.39
6-10 49 53.26
Above 10 27 29.35
Total 92 100%
No of employees
Below 50 40 43.48
51-100 38 41.30
Above 100 14 15.22

Total 92 100%

Product diversity
Single – line product 79 85.87
Multi-line product 13 14.13

Total 92 100%
Gender of owner manager
Female 07 7.61
Male 85 92.39

Total 92 100%
Qualification held
Secondary school 16 17.39
Polytechnic Diploma 27 29.35
Four years degree/ HND 40 43.48
Masters degree 09 9.78

Total 92 100%

Source: Field Survey (2011).

Construct and Questionnaire Design

Two constructs were measured in this study. They are performance and competitive strategy orientation.
Performance was measured by sales growth over a period of three years, reported number of customer
complaints over a period of six months, total income/revenue growth over a period three years and growth in
customer base over a period of three years.

Following Boyd’s (1991) suggestion for replications of existing strategic management frameworks/constructs,
we adapted two of Porters (1980) generic strategies scales to measure product differentiation and low cost
strategies. Adaptation of existing strategic management constructs in different environments is not without

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precedent. Alpkan, et.al. (2005) for example adapted Ramanujan (1987) and Porter’s (1980) scales in their
empirical study of strategic planning trends in Turkish small firms. Suffice to state that in this study, it was
decided to reveal the competitive strategies of paint manufacturing SMEs in southwestern Nigeria and asses the
impacts of such strategies on their performance. The causal links between the key components in the construct
are also investigated.

The questionnaire was made up of four sections A, B, C and D. Section A contained six main questions that deal
with the demographic characteristics of the respondent owner – managers and their firms. Section B contained
questions that deal with the competitive strategy orientations of the firms. In this section, firms were asked to
describe or choose their methods of handling competition using a series of items that covered the differentiation
and low cost approaches. Section C contained questions that deal with the sales growth, total income/revenue
growth, incidence/frequency of customer complaints in the firms, and growth in customer base. These
parameters were used as measures of performance.

In order to assess the importance of differentiation and low cost strategies to small business owner – managers, a
factor analysis was employed to establish the key factors important in competitive strategy decision making.
The importance of the 10 variables/items highlighting the competitive strategy construct is presented in Table II
and it shows that all the 10 variables are statistically significant with all variables showing high mean values.

A visual assessment of the correlation matrix of the principal components of the factors indicated a considerable
degree of inter – item correlation (see table IV). In addition, from the correlation matrix, the Bartlett test of
Sphericity (p<0.00000) and the Kaiser – Meyer – Olkin (KMO) measure of sampling adequacy index (value of
0.730) confirm the appropriateness of the data for exploratory factor analysis (EFA). The exploratory factor
analysis with varimax rotation produced the two factors, i.e. differentiation strategy and low cost strategy, that
we used as our study constructs. Differentiation strategy and low cost strategy were used as dimensions of
generic competitive, business level strategies. The factor loading of the items shown in table IV confirmed the
adapted scales as displayed.

Table II: Factor Loading of Generic Strategies

Initial Eigen Value Extraction sums of square loadings Rotation sum of square loadings
Total % of Cumulative Total % of Cumulative % of Cumulative Total
variance % variance % variance %
1 6.247 62.076 62.076 4.851 58.759 58.759 2.423 49.625 49.625
2 1.229 8.509 70.585 0.906 10.641 69.400 2.216 19.775 69.400
3 0.719 7.177 77.762
4 0.613 6.291 84.056
5 0.561 5.861 89.917
6 0.503 4.192 94.109
7 0.471 3.927 98.036
8 0.389 1.240 99.276
9 0.368 0.658 99.342
10 0.328 0.066 100.000
Extraction method: Exploratory factor analysis
Total variance explained: 69.4%

The means, standard deviations and mean differences from the test values are shown in Table III. The
reliabilities and correlation coefficients for each variable are shown in Table IV. Each mean is significantly
higher than the mid value of the scale from 1 to 5 (3) as the test value of the one sample test. The Cronbach’s
alpha reliability scores of differentiation strategy, low cost strategy, sales growth, total income/revenue growth,
incidence/frequency of customer complaints, and growth in customer base are 0.91, 0.88, 0.93, 0.94, 0.89 and
0.92 respectively. All the scales are above the generally accepted reliability level of 0.07 (Nunnally, 1978).
Results of correlation analysis showed that the variables are positively and strongly correlated (P<0.01).

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Table III: Descriptive statistics of the variables showing means, standard deviations, mean differences
and one sample tests
Variables Test Mean Std deviation Mean difference T P value
value
Differentiation strategy 3 3.9107 0.9638 0.8977 10.441 0.000

Low cost strategy 3 4.1078 0.6817 0.9391 10.433 0.000

Sales growth 3 3.8912 1.0333 0.9029 11.317 0.000

Total income/revenue growth 3 3.8716 0.8135 0.9486 11.973 0.000

Incidence/frequency of customer 3 3.7156 1.0331 0.9299 11.316 0.000

complaints
Growth in customer base 3 3.9118 0.7136 0.9019 10.441 0.000

Note: Based on a scale of 1 (totally disagree/not important) to totally agree/very important).

Table IV: Reliabilities and correlations of the measures

Variables 1 2 3 4 5 6

Differentiation strategy 0.94 1

Low cost strategy 0.87 0.7161** 1

Mixed strategy 0.96 0.7314** 0.7112** 1

Sales growth 0.88 0.6382** 0.6711** 0.6831** 1

Total income/revenue growth 0.89 0.7153** 0.7132** 0.6441** 0.7131** 1

Incidence/frequency of 0.90 0.6780** 0.6781** 0.5432** 0.6720** 0.6223** 1

customer complaints

Growth in customer base 0.91 0.6721** 0.6381** 0.6721** 0.5311** 0.6722** 0.6451**

**P< 0.01 (one sample t – test)

The nature and direction of the relationships among the generic strategies (Differentiation, Low cost and Mixed)
and performance variables (sales growth, total income/revenue growth, incidence / frequency of customer
complaints, growth in customer base) are examined by multiple regression analysis. Performance variables were
regressed against Differentiation strategy, Low cost strategy and Mixed strategy using four models. Table V
presents the effect of the generic strategies on performance for the three samples. The finding shows that for the
three samples, sales growth, total income/revenue growth, incidence/frequency of customer complaints and
growth in customer base are significantly affected by Differentiation, Low cost and Mixed strategies. The result
also shows that there is a significant difference between the performance of companies that are using
Differentiation strategy or Low cost strategy alone and the performance of companies that are using the two
strategies together. Result of the analysis showed that the performance of firms that were using Differentiation
and Low cost as stand alone strategies was lower than the performance of the firms that used mixed strategies.

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Table V: Effect of Competitive Strategies on Firm Performance

(1) Constant Model 1 Model 2 Model 3 Model 4
Dependent variable: Dependent variable: Dependent variable: Dependent variable:
sales growth Income/revenue growth frequency of customer Growth in customer
complaint base
B t Sig. B t Sig. B t Sig. B t Sig.
Independent variables 7.145 71.189 0.000 6.318 63.419 0.000 5.641 48.960 0.000 5.869 49.636 0.000
Differentiation 0.516 4.318 0.000 0.473 4.486 0.000 0.512 4.557 0.000 0.533 4.363 0.000
strategy
Low cost strategy 0.436 4.137 0.001 0.512 4.335 0.002 0.514 4.471 0.000 0.516 4.318 0.002
Mixed srategy 0.841 7.436 0.000 0.833 6.317 0.000 0.861 7.426 0.000 0.813 7.633 0.000
P> 0.05

DISCUSSION OF RESULT
This study examined the choice of generic competitive, business level strategies by paint manufacturing SMEs
in southwestern Nigeria and their impacts on the sales growth, revenue growth, incidence of customer
complaints and growth in customer base. The study showed that Differentiation strategy, Low cost strategy and
Mixed strategy are highly adopted by the sampled paint manufacturing SMEs and that all of them affect each
other positively. The study showed that the generic strategies are highly positively correlated and are not
alternatives to each other contrary to the theory of Porter (1980) that organizations must have different sources
and skills to be able to implement these different strategic postures successfully.

The finding of this study supports and reinforces the conclusion reached by some previous researchers that
Differentiation strategy and Low cost strategy can be followed by a firm simultaneously and profitably provided
that the firm possesses an appropriate blend of organizational control procedures, incentive systems, leadership
styles as well as the structure, skill, shared perspective, culture, resources, climate and atmosphere required to
implement the strategies effectively (e.g. Murray 1988; Miller 1992; Gupta 1995; Kotha and Swamidass 2000).
The result is also consistent with empirical evidence which suggests that organizations simultaneously pursue a
mix of (perhaps contradictory) strategies (Bowman and Ambrosini, 1997; Whittington, Pettigrew, Peck, Fenton
and Conyon, 1999). A combination of the two strategic orientations into a dual strategy may enhance the
strategic agility of a firm and contribute to its performance more than if only one of the two strategies was used.

MANAGERIAL IMPLICATIONS
With reference to the managerial implications of the findings, it can be asserted that the evidence of reliability,
item correlation, tests of goodness of fit and conceptual coherence associated with the results of this study
suggest that the findings will be useful as an important insight for policy makers, practitioners and academic
researchers who are interested in strategic management in the small business sector. Specifically, the managerial
implications of this study point to the need for firms to explore a combination of the two strategies i.e.
Differentiation and Low cost, to achieve competitive advantage and improved performance.

IMPLICATIONS FOR THEORY

On the theoretical front, the findings from this study appear to contradict the theory of Porter (1980) that a firm
cannot successfully use Differentiation and Low Cost strategies simultaneously and profitably on the basis that
each strategic posture requires different organizational skills, practices and conditions. This study suggests the
need for further rigorous empirical test of the bases of Porter’s theory.

SUMMARY AND CONCLUSION

The results of this study show a high and positive correlation between Differentiation, Low Cost and Mixed
strategies. The result also reveals a highly significant impact of the three strategies on the performance of the
sampled firms. Since significant differences were found in the performance of firms that were using stand alone
strategies and those that were using mixed strategies with the later category doing better on all the performance

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measurement parameters used for the analysis, we may conclude that a mixed strategy is practically more useful
than a stand alone strategy. A possible explanation for this result is the strategic synergy which the integration
and combined use of Differentiation and Low Cost strategies introduces into the operations of the firms that
adopt this dual approach. Apart from pointing to the possibility of successfully combining Differentiation and
Low cost strategies to achieve competitive advantage and improved performance, the result of the study
contradicts the theory of Porter (1980) that the two popular generic strategies Differentiation and Low cost are
mutually exclusive.

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