1.1 Background of the Study
1.1.1 Competitive Strategies and Organizational Performance
To achieve sustained competitive advantage, firms can choose and implement a generic strategy (Porter, 2004). Parthasarthy (2007) describes strategy as a set of decisions and actions that managers make and take to attain superior company performance relative to rivals. Beard and Dess (1981) find both corporate-level strategy and business-level strategies are significant in explaining variation in firm profitability. The business strategy choices are found to be significant in explaining firm profitability (Beard and Dess, 2001) and its long-term performance.
There are various strategic alternatives for businesses to follow to reach their primary goals. Considering the sustainability of business in a competitive environment and to have an efficient role in markets, proper strategies should be selected for a successful business operation. The basic targets of competitive strategies are to comply with the market rules of competition and convert these rules into an advantage for the business. While developing their competitive strategies, businesses create a general formula about how to compete, what the targets should be and which policies should be implemented to reach these targets (Akbolat, Işık 2012).
Similarly, businesses should also provide developments and innovations in process and management issues to gain a sustainable competitive advantage. In this sense, business managers should tend towards strategic management accounting including the use of management accounting systems to provide information support in strategic decision making and control activities (Cinquini, Tenucci 2010). A business tendency towards strategic management activities and the use of competitive strategies and methods indicate a kind of investment in the long-term performance of the business.
The service sector is expanding at an increasing rate and is becoming intensely competitive. As such, every organization needs to adopt strategies which will enable it to have a competitive edge over the other players in the market. As competition intensifies, many businesses continue to seek profitable ways in which to differentiate themselves from competitors (Porter, 1980). Strategies concern the purpose and objectives of the organization. They are the things that organizations do, the paths they follow and the decisions they take in order to reach certain points or level of success. Influences such as economic restructuring, intensified competition, government regulations, and technological advances have resulted in heightened environmental turbulence and uncertainty for small business firms (Covin & Slevin, 2004).
Strategies are employed by firms within a particular industry. The strategies adopted are expected to relate to performance of the companies. Long term strategy should derive from a firm’s attempt to seek a competitive advantage based on one of three generic strategies Low cost leadership depends on some fairly unique capabilities of a firm to achieve and sustain their low-cost position within the industry of operation. Striving to create a market unique product for varied customer groups through differentiation is another key competitive strategy, which aids performance. Competitive strategies dependent on differentiation are designed to appeal to customers with special sensitivity for a particular product attribute. Such customers will be willing to pay a premium hence improve the firm performance. Competitive strategy consists of all those moves and approaches that a firm has and is taking to attract buyers, withstand competitive pressure and improve its market position (Grant, 2002).
Two main typologies of competitive strategy are cost leadership and differentiation. The cost leadership strategy is an integrated set of actions taken to produce goods or services with unique features that are acceptable to customers at the lowest cost relative to that competitor or reduce cost structure in order to achieve superior profitability (Porter, 2004) (Allen and Helms 2006) find that cost leadership strategy has only one significant tactic-minimizing distribution costs that affect organizational performance.
(Dess and Davis 2004) find that the overall low cost cluster has the higher average return on assets. Differentiation strategy is an integrated set of actions taken to produce goods or services (at acceptable cost) that customers perceive as being different in ways that are important to them. A profit impact of marketing strategy (PIMS) study by (Phillips, Chang, and Buzzell 2003) finds a significant and positive relationship between differentiation and market share. Firms choose from among two business-level strategies to establish and defend their desired strategic positioning against rivals. However, (Porter 2008) and the PIMS study by (Phillips, Chang, and Hill 2003) suggest that differentiation can be a way of achieving a low-cost position and there often is no unique low-cost position, a firm may have to base its sustainable competitive advantage on the simultaneous and continuous pursuit of both low cost and differentiation.
(Porter 2005) suggest that the combination of cost and differentiation strategies will result in poor performance and unlikely to generate a sustainable competitive advantage except in the most exceptional circumstances that such a combination results in a sustainable competitive advantage. However, some other studies have found that some firms have successfully employed combination strategies (Parthasarthy and Sethi, 2003).
Competitive strategy aims to establish a profitable and sustainable position against the forces that determine industry competition. Firms pursue competitive strategies when they seek to improve or maintain their performance through independent actions in a specific market or industry. By using an effective competitive strategy, an organization finds its industry niche and learns about its customers. A firm in a very attractive industry may still not earn attractive profits if it has chosen a poor competitive position. Conversely, a firm in an excellent competitive position may be in such a poor industry that it is not very profitable, and further efforts to enhance its position will be of little benefit. Both industry attractiveness and competitive position can be shaped by a firm, and this is what makes the choice of competitive strategy both challenging and exciting. While industry attractiveness is partly a reflection of factors over which a firm has little influence, competitive strategy has considerable power to make an industry more or less attractive (Slater & Olson, 2001). At the same time, a firm can clearly improve or erode its position within an industry through its choice of strategy. Competitive strategy, then, not only responds to the environment but also attempts to shape that environment in a firm’s favor.
Recent local studies done in the area of competitive strategy include: ( Obado 2005) did competitive strategies employed by the sugar manufacturing firms in Kenya and found out that the sugar manufacturing firms have formalized vision and mission statements. They employ competitive strategies of cost leadership, differentiation and focus to different degrees. Cost leadership strategy is the most widely practiced amongst the firms while differentiation strategy mainly revolves around customers’ service, distribution networks, and branding. (Amir 2007) did competitive strategies adopted by petroleum retail stations in Kenya a case of Mombasa city and the findings showed that all stations are applying some strategies for competition but most of them combine both the cost leadership and differentiation strategies at the same time, most of which are the multinationals due to their favorable financial capabilities. A few local companies and the independent owners mainly focus on price strategy and sell at lower prices.
(Kamau 2009) researched on competitive strategies employed by Zain and established that the company uses low cost strategy and differentiation strategies which enables the company to minimize costs, outsource services, adopt strategies to increase market share, quality offerings, efficient delivery system, ensuring market penetration and development and ensuring the company sources for resources in order to compete effectively with other companies.
In the past decade, numerous studies have found significant association between competitive strategy and organizational performance (Allen and Helms, 2006; Ortega, 2009). Selecting appropriate competitive strategy which is supported by organization and management system is important because it is the way firms use to achieve a competitive advantage (Hoque, 2004). It also impacts the competitive strengths and organisational performance (Anderson et al, 2008). Many studies also have found the relationship between competitive strategy and performance measurement. The management system plays a key role in developing a strategic plan, evaluating the achievement of organizational objectives and compensating managers (Ittner and Larcker, 2006). It also helps managers in tracking whether they are moving in the direction they want. However, it still remains a critical and much debated issue among academics and practitioners of what are the most appropriate performance measures to align to competitive strategy. Managers are still struggling with the issue of performance measurement, and are overwhelmed with performance data. Hence, this study aims to investigate the relationship between competitive strategy, performance measurement, and organisational performance.
It has been argued that achieving a position of competitive advantage is a necessary precursor to a firm’s significant performance. Attaining a position of competitive advantage and enhancing a firm’s performance relative to its competitors are two of the main objectives that the relationship between competitive advantage and performance business organizations should strive to achieve. In order to attain a competitive advantage that cannot only match that of their business rivals’ but also surpass industrial performance averages, business organizations must first comprehend the relationship between the internal strengths and weaknesses of their organization, as well as the potential effects on their firm’s competitive advantage and performance.
(Gathoga 2011) focused on competitive strategies by commercial banks in Kenya. The study revealed that banks in Kenya use various means in order to remain competitive. He also concluded that expansion into other areas by opening new branches has also been used as a strategy.
1.1.2 Kenya Airways
According to( RoK 2012) Kenya Airways which was wholly owned by the Government of Kenya until April 1995, and it was privatized in 1996, becoming the first African flag carrier in successfully doing so (RoK, 2012). Kenya Airways is currently a public-private partnership. The largest shareholder is the Government of Kenya (29.8%), followed by KLM, which has a 26.73% stake in the company (RoK, 2012). The rest of the shares are held by private owners; shares are traded in the Nairobi Stock Exchange, the Dar-es Salaam Stock Exchange, and the Uganda Securities Exchange (RoK, 2012).
1.2 Statement of the Problem
Kenya Airways has suffered a net loss of Sh4.8 billion for the half-year period as by (Wahome, 2012). Financial statistics for the remainder of the financial year show that the airline will post an even lower profit, below 25% of the pre-tax profit it made in the forgoing year. Turnover is down from Sh54B to Sh49B, Net profit for the full year Sh1.7B which represents a drop of net profit by 46.7% (Wahome, 2012). An important consistent trend about commercial aviation is that it is a fiercely competitive and highly volatile industry, in which fortunes shift continuously (Helfat & Lieberman, 2002).
An important consistent trend about commercial aviation is that it is a fiercely competitive and highly volatile industry, in which fortunes shift continuously (Helfat & Lieberman, 2002). As the drive towards a free, converging and global market gathers momentum, competition within the airline industry is expected to intensify (Jenner, 2009). Increasingly open skies are likely to impact on yields, and extraordinary profits will increasingly be an exception (Data Monitor, 2009). To this end the Kenya Airways continues to focus on profitable expansion of its network through a combination of direct access and alliances with other carriers. According to (RoK 2012), in the next 10 to 20 years, Kenya Airways aims to grow into a decidedly dominant carrier in Africa with notable presence in Asia, Europe and the Americas, while operating a modern fleet of 30 to 40 aircraft. Kenya Airways intends to forge strong partnerships and be a respected member of the global airline community (RoK, 2012). Lack of effective competitive strategies by the Kenya airways in the past few years has led to dwindling market share, lost of customers and its negative impact on their performance. Recently, the airlines are experiencing recession in growth and in an attempt to differentiate them and capture wide market share, the companies have put several measures in place (Jenner, 2009). Among the measures is the modification of the operational strategy. Strategies are meant to bring satisfaction to customers so that the airlines in return will reap high performance. The extent to which these strategies put the airlines ahead of competitors warrants an extensive study. This led to a question: what are the competitive strategies affecting performance of Kenya Airways?
1.4 Research Objectives
1.4.1 General Objective
The general objective of the study was to find out competitive strategies affecting organization performance in Kenya Airways.
1.4.2 Specific Objectives
Specific objectives guiding the study included:
- To establish the influence of cost leadership on organization performance of Kenya Airways.
- To determine the influence of differentiation on performance of Kenya Airways.
- To assess the extent to which market focus influences performance of Kenya Airways.
- To establish the extent to which strategic alliances influence performance of Kenya Airways.
1.5 Research Questions
- What is the influence of cost leadership on the performance of Kenya Airways?
- What is the influence of differentiation on performance of Kenya Airways?
- How effective is the market focus on performance of Kenya Airways.
- How effective are strategic alliances on performance of Kenya Airways.
1.6 Significance of the Study
This study is of importance to the management of the transport industry since competitive strategies employed in an organization goes a long way in developing a larger and stable market base, this study endeavors to deliver that.
It is of specific significance to the transport industry as this of help them to formulate the most effective competitive strategies in order for the firm to cope up and meet the ever-changing and fast-paced trends and demands of the business environment.
The study also facilitates policy formulation and implementation for all organizations working towards world-class services.
The study would be significant not only to Kenya Airways but also other organizations as it would enlighten them which competitive strategies to use and the effects they may experience as a result of the strategies.
The results of this study would also be valuable to researchers and scholars, as it would form a basis for further research. The study would be a source of reference material for future researchers on other related topics; it will also help other academicians who undertake the same topic in their studies.
1.7 Scope of the Study
The study basically seeks to determine competitive strategies affecting organization performance in Kenya Airways, Mombasa County. The study will be conducted in Mombasa County since it has well established airways services in the country. The study will be conducted in the six months from October 2014 to month of April 2015.
1.8 Limitations of the Study
It was anticipated that various challenges are likely to be faced when undertaking the study. These include inaccessibility of data, lack of up to date data, unwillingness by some respondents to answer questions, unanticipated occurrences, among others. These limitations were overcame through searching for relevant up to date data, developing good rapport with the respondents for them to respond to the questions better and looking for data from all possible sources.
1.9 Delimitations of the Study
To overcome the above challenges, the researcher assured the respondents that information given was for academic purposes and was handled with utmost confidence. Furthermore, the researcher ensured to secure all the necessary documents that served as proof that the study is purely for academic purposes and no austere motives whatsoever.
1.9.1 Assumptions of the Study
The study was based on the following assumptions: That all the respondents would co-operate and give reliable and credible information and that respondents would answer questionnaires as per the time frame set.
1.10 Operational Definition of Terms
Competitive strategy: This is more skill-based and involving strategic thinking, innovation, execution, critical thinking, positioning and the art of warfare.
Cost Leadership: This involves company offering low-cost products offers in an industry.
Differentiation is usually arises from one or more activities in the value chain that create a unique value important to buyers.
Market focus: This is narrow segment and within that segment attempts to achieve either a cost advantage or differentiation.
Strategy: This is the direction and scope of an organization over long term, which achieves advantage for the organization through its configuration of resources within a changing environment and to fulfill stakeholder expectations.
Strategic Alliances are partnerships that exist for a defined period during which partners contribute their skills and expertise to cooperative project.
CHAPTER TWO – LITERATURE REVIEW
The main purpose of this literature review is to identify and examine what has been done by other scholars and researchers in relation to competitive strategies affecting organizational performance in Kenya airways. The main sections of this chapter are review of theoretical literature, theoretical framework, review of empirical literature, conclusion and summary of gaps, conceptual framework and operationalization of variables
2.2 Review of Theoretical Literature
2.2.1 Theory of competitive strategy
According to (Porter 1998) competitive strategy is the search for a favorable competitive position in an industry, the fundamental arena in which competition occurs. The sustainability of this positional advantage requires that the business sets up barriers that make imitation difficult, because these barriers to imitation are continually eroding, the firm must continue to invest to sustain or improve the advantage. A firm’s choice of competitive strategy will be dictated by its ability to create and sustain competitive advantage. Competitive advantage is the condition which enables a company to operate in a more efficient or otherwise higher quality manner than the companies it competes with, and which results in benefits accruing to that company (Bryson 1995). Basically, strategy is about two things: deciding where you want your business to go, and deciding how to get there. A clear definition is based on competitive advantage, the object of most corporate strategy:
Competitive advantage grows out of value a firm is able to create for its buyers that exceeds the firm’s cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower prices than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. There are two basic types of competitive advantage: cost leadership and differentiation (Porter, 1985)]. A firm’s relative position within an industry is given by its choice of competitive advantage (cost leadership vs. differentiation) and its choice of competitive scope. Competitive scope distinguishes between firms targeting broad industry segments and firms focusing on a narrow segment. Generic strategies are useful because they characterize strategic positions at the simplest and broadest level. Porter maintains that achieving competitive advantage requires a firm to make a choice about the type and scope of its competitive advantage. There are different risks inherent in each generic strategy, but being “all things to all people” is a sure recipe for mediocrity – getting “stuck in the middle”.
In this study, the theory of competitive strategy is applied in the sense that the scope distinguishes between firms targeting broad industry segments and firms focusing on a narrow segment. Competitive strategies are useful because they characterize strategic positions at the simplest and broadest level. Porter maintains that achieving competitive advantage requires a firm to make a choice about the type and scope of its competitive advantage.
2.2.2 Resource-Based View (RBV)
The resource-based view of the firm (RBV) draws attention to the firm’s internal environment as a driver for competitive advantage and emphasizes the resources that firms have developed to compete in the environment. During the early strategy development phase of Hoskisson’s account of the development of strategic thinking (Hoskisson et al. 1999), the focus was on the internal factors of the firm. Researchers such as (Ansoff 1965) and (Chandler 1962) made important contributions towards developing the Resource-Based View of strategy (Hoskisson et al. 1999). From the 1980s onwards, according to (Furrer et al. 2008), the focus of inquiry changed from the structure of the industry, e.g., Structure-Conduct-Performance (SCP) paradigm and the five forces model) to the firm’s internal structure, with resources and capabilities (the key elements of the Resource-Based View (RBV). Since then, the resource-based view of strategy (RBV) has emerged as a popular theory of competitive advantage (Furrer et al. 2008; Hoskisson et al. 1999). The origins of the RBV go back to (Penrose 1959), who suggested that the resources possessed, deployed and used by the organization are really more important than industry structure. The term ‘resource-based view’ was coined much later by (Wernerfelt 1984), who viewed the firm as a bundle of assets or resources which are tied semi-permanently to the firm (Wernerfelt 1984). (Prahalad and Hamel 1990) established the notion of core competencies, which focus attention on a critical category of resource – a firm’s capabilities. (Barney 1991) also argued that the resources of a firm are its primary source of competitive advantage. According to (Ramos-Rodríguez and Ruíz-Navarro’s 2004) bibliometric study of the Strategic Management Journal over the years 1980–2000, the most prominent contribution to the discipline of strategic management was the Resource-Based View of strategy. In addition, the papers written by (Wernerfelt 1984) and (Barney 1991) are the two most influential articles in strategic management research (Ramos-Rodríguez & Ruíz-Navarro 2004).
Early researchers simply classified firms’ resources into three categories: physical, monetary, and human (Ansoff, 1965). These evolved into more detailed descriptions of organizational resources (skills and knowledge) and technology (technical know-how) (Hofer & Schendel 1978). (Amit and Shoemaker 1993) proposed an alternative taxonomy involving physical, human and technological resources and capabilities. (Lee et al. 2001) argued for a distinction between individual-level and firm-level resources. (Miller and Shamsie 1996) classified resources into two categories: property-based and knowledge-based. (Barney 1991) suggested that other than the general resources of a firm, there are additional resources, such as physical capital resources, human capital resource and organizational capital resources. Later, (Barney and Wright 1998) add human resource management-related resources to this list of additional resources of a firm. These resources can be tangible or intangible (Ray et al. 2004). (Wernerfelt 1984) also discussed that resources might be tied semi-permanently to the firm. (Barney 1991) drew attention to ‘all assets, capabilities, organizational processes, firm attributes, information, knowledge, controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness’. Ultimately, firms that are able to leverage resources to implement a ‘value creating strategy not simultaneously being implemented by any current or potential competitor’ (Barney 1991) can achieve competitive advantage.
Researchers subscribing to the RBV argue that only strategically important and useful resources and competencies should be viewed as sources of competitive advantage (Barney 1991). They have used terms like core competencies (Barney 1991; Prahalad & Hamel 1994), distinctive competencies (Papp & Luftman 1995) and strategic assets (Amit & Shoemaker 1993; Markides & Williamson 1994) to indicate the strategically important resources and competencies, which provide a firm with a potential competitive edge. Strategic assets are, ‘the set of difficult to trade and imitate, scarce, appropriable and specialized resources and capabilities that bestow the firm’s competitive advantage’ (Amit & Shoemaker 1993). (Powell 2001) suggested that business strategy can be viewed as a tool to manipulate such resources to create competitive advantage. Core competencies are distinctive, rare, valuable firm-level resources that competitors are unable to imitate, substitute or reproduce (Barney 1991; Prahalad & Hamel 1994). Distinctive competencies refer to all the things that make the business a success in the marketplace (Papp & Luftman 1995) (Wang 2004) outline an approach to firm-level analysis that requires stocktaking of a firm’s internal assets and capabilities. The assets in question could be physical assets, knowledge assets (intellectual capital) as well as human resources, which in turn determine the capabilities of a firm. (Maier and Remus 2002, pg. 110) use the term ‘resource strategy’ and define three steps in a firm’s resource strategy – competence creation, competence realization and competence transaction. Competence creation defines and analyses the markets, product and service. Competence realization involves the execution of services, procurement, and production. Competence transaction involves market logistics, order fulfillment and maintenance (Maier & Remus 2002).
Some researchers (Del Canto & Gonzalez 1999; Lockett & Thompson 2001; Ray et al. 2004) distinguished between tangible and intangible resources and conclude that intangible resources are often the most important ones from a strategic point of view. They argue that intangible resources are more likely to be a source of sustained competitive advantage rather than tangible ones. Other researchers (Barney & Wright 1998; Prahalad& Hamel 1990) treated human resources as the most valuable type of resource. (Prahalad and Hamel 1990) argued that these should not be ‘locked’ inside a business unit but should be available for reuse by other parts of firm wherever a potential use yielding higher returns can be identified. (Ray, Barney and Muhanna 2004) understood the difficulties for a firm to change its resources. They suggest that redesigning a firm’s processes, activities and routines can enable efficient and effective usage of resources and capabilities that can achieve sustainable competitive advantage.
It has been argued that the RBV ignores the nature of market demand and only focuses on internal resources (Hooley et al. 1996). Some authors (Andrew 1971; Chandler 1962, among others) argued that external and internal elements cannot be separated.( Maier and Remus 2002) defined the concept of ‘fit’ as a balancing act between the external-oriented MBV and the internal-oriented RBV. (Amit and Schoemnaker 1993) point out the important link between the firm’s internal resources and its external market conditions. (Dyer and Singh 1998) as well as (Wang 2004) suggested that the link between the individual firm and the network of relationship in which the firm is embedded is important for competitive advantage. (Wang 2004) suggested that an inter-organizational level view is useful to analyze business relationships, since neither the RBV nor the MBV address this specific aspect. (Dyer and Singh 1998) pointed out, in relation to the RBV and MBV, that, ‘the fact that there are clear contradictions between these views suggests that existing theories of advantage are not adequate to explain inter-organizational competitive advantage’.
2.2.3 Neo-institutional theory
Neo-institutional theory explains heterogeneity and differentiation (Oliver, 1996). Through institutional embeddedness and interconnection, the creation of competitive advantages can be explained because institutional embeddedness has an impact on organizational behaviour, causing it to seek an economic and social fit. Differentiation supports and sustains competitive advantage, but conformity to institutional pressures provides legitimacy, resources, and competitive advantage. In contexts where institutional and competitive pressures exert strong influences, the strategic decisions of managers result both in conformity to institutional pressures, which leads to isomorphism and legitimacy, and in differentiation, which, following the resource-based view of the firm, can increase the possibility of creating a competitive advantage through heterogeneity in resources and capabilities. Although both alternatives have an effect on performance and the creation and maintenance of dominant market positions, little attention has been paid performance and competitive advantage.
Five forces of competition as fierce rivalry, threat to entry, threat to substitutes, power of suppliers and power of buyers (Porter, 2008). He upholds that understanding the forces that shape a sectors competition is the basis for developing a strategy. Generic strategies can be effectively correlated to organizational performance by using key strategic practices. Porter posits that if the forces are extreme, no organization earns striking returns on investment and if the forces are benign, most of the companies are profitable. The composition of the five forces varies by industry and that an organization needs a separate strategy for every distinct industry such as the hospitals. Generic strategies comprise of low cost, differentiation, focus and combination strategies. These are commonly conventional as a strategic typology for all organizations.
The theories are relevant to this study in the following ways. To obtain firm performance within the scope of sustainable competitive advantage, decisions on shaping firm’s competitive strategies are one of the main issues for managers under firms’ business level strategy. Because, the formulation and completion of competitive business strategies that will improve performance are one of the competent methods to achieve firm’s sustainable competitive advantage.
Therefore, the impact of competitive strategies on firm performance is a major issue of unease the policy makers and has been playing important role to refine firm performance for a long time. Competitive advantage is the result of a strategy helping a firm to maintain and sustain a favorable market position. This position is translated into higher profits compared to those obtained by competitors operating in the same industry.
The study will concentrate on Resource Based View (RBV). The RBV can be depicted as an “inside out” process of strategy formulation. A central thrust is the contribution of core competencies as strategic assets, which will be the continuing source of new products and services through whatever future developments may take place in the market, which by their nature, are not known (Connor, 2002). The emphasis of the RBV approach to strategic management decision-making is on the strategic capabilities as basis for superiority of the firm rather than attempting to constantly ensure a perfect environmental fit. Resources are the specific physical, human, and organizational assets that can be used to implement value-creating strategies. Capabilities present the capacity for a team of resources to perform a task or activity. In other words, capabilities present complex bundles of accumulated knowledge and skills that are exercised through organizational processes, which enable company to coordinate its activities and make use of its assets.
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