CHAPTER ONE: INTRODUCTION
Background information of the Study
In current rapidly changing and dynamic globalized environment, development of an organizational and performance is associated with knowledge and experience (Covey, 2004). In the view of (Jones, et al., 2000), to achieve and maintain strong organizational productivity and performance becomes the main challenge that face management in many organizations today. According to (Amidu and Wilson, 2014) competition is the main influencer for performance in many industries. Performance enhances efficiency through allocation of resources in the production sectors.
The allocation of funds and finance access is affected by the banking sector competition. Despite this, the service and manufacturing industries face some challenges in their development when levels of competition become high. In addition, financial instability comes in and economic growth levels goes down. However, competition is the catalyst towards innovation and creativeness enhancement. On the process, the major products prices get lowered and products and services produced become of high standards. Competition allows customers to make the choices since there are variety of products and services.
The 2008 Great Recession and the ongoing debt crisis in Europe have led to high strains in financial markets (Chan-Lau, Liu, &Schmittmann, 2012). Despite a huge support central bank programs in developed countries financial institution is even now experiencing challenges related to environment. The banks have bigger funding spreads as well as droping prices of equity. In consideration of this economic recession and global financial crisis, leaders of financial institutions are under increasing pressure to improve customer satisfaction and sustaining lower costs and improve market leadership (Momeni, Kheiry&Dashtipour, 2013).
In response to the financial crunch United States banks have benefited due to stable revenues that are significantly beyond pre-crisis levels. Moreover, the US economy has steadily been growing relatively in the last five years (Schildbach, 2013).
The International Finance Institute of states that global economy is in a period of adjustment which lead to differentiated performance results (IIF, 2014). The US and the UK banking industry has witnessed a varying growth, while in Japan the banking sector growth is sluggish. In China,assets, liabilities as well as net profit growth has led to decline in the banking sector while fear of credit risk increased steadily. Moreover, in the view of the adverse external environment in European countries, revenues of Europe financial institutions have also decreased (Schildbach, 2013).
According to Beck & Cull (2014), financial development in African countries lags behind as compared to other countries. In 2011for instance, credit to the private sector in Africa was noted as average of 77% of total GDP compared to more than 132% for the other growing markets in Pacific and Eastern Asia (Amidu& Wilson, 2014). Before the financial crisis of 2008, liquid liability average for banks in Sub-Saharan Africa ranged above 30%, as compared to 4% in other growing nations (Allen, Carletti, Cull, Qian &Senbet, 2009). According to Honohan and Beck (2007), most of the countries in Africa involved in less agricultural activities don’t develop financially. This is because in Africa, there is high population and agriculture is the key backbone for their livelihoods since most of the food is staple and are meant for subsistence use.
According to Beck and Cull (2014), the financial sectors have been somehow restructured within the nations in Africa for the past decades. The key focus has been trying to do away with the foreign investments entry barriers. Credits controls and requirements for reserve reductions has been a major goal. In addition, reduction of interest rates has been part of reforms together with coming up with security markets, tightening already established regulations and decreased state ownership. These mentioned reforms have enabled establishment of capital markets in many African countries. Nationalization and improvement of banks especially those collapsing have been done. As seen from the scratch of overview, these developments have been of much importance especially on the rebuilding of banks that have been gone down in the past few decades (Amidu, 2013).
The Kenyan banking industry is composed of the Central Bank of Kenya, as state bank, all commercial Banks, non-banking financial bodies as well as foreign exchange bureaus (CBK, 2013). A report from the CBK data as at 31st December 2013 indicates that commercials banks have been forty three in Kenya, finance company for mortgage been one, six institutions for microfinance, foreign banks have been represented by five offices, one hundred and eleven foreign exchange bureaus and credit reference bureaus are two. Out of these, most of the mentioned financial institutions are owned locally and their size is small and medium. Most of the banks that are dominant in Kenya are owned by foreigners. Nairobi Stock Exchange has listed six banks that are considered to be major.
The Supervision bank 2013 annual report of CBK shows that Kenyan banking industry increased performance with the marginal growth of the economy. Banking sector recorded close to 16% from 2.30 trillion Ksh as growth in entire assets as at 2012 to Ksh. 2.70 trillion in 2013. The total customer deposits grew by more than 13% from Ksh. 1.70 trillion in 2012 to more than Ksh. 1.90 trillion in 2013. There was an increase in profit for the sector by 17% from Ksh. 108 billion in 2012 to Ksh. 129 billion in 2013. The growth has mainly been achieved following financial institutions mobilization of deposits as well as bringing more clients through strategies like new branches openings. Diversification of income sources has been made through diversification of banking modes that has been made in many if the financial institution. Some additions strategies for growth include cost effective delivery adoption and interest expenses reduction. Banking sector has been facing competition of late due to new entrants and high level of innovation being used (CBK, 2013).
Industry-Related Factors
In the view of (Ansoff and McDonell, 1990), organizations are always dependent to their operating environment. Organizations obtains inputs for manufacturing from the environment and transforms them into finished goods before giving them back to the environment. It is observed than environmental change would lead to shaping of challenges and opportunities faced by firms in the industry. In the view of (Grant, 2000), success of the organization occurs when the match is created between the environment and strategy as well as between its internal capability and the strategy of the individual firm. Research indicate that there is n outcome of strategy gap in a case where the environment does not match the strategy of the organization. Most of the strategies are deemed very effective and competitive, usually correlate with internal capability and environment.
Most organizations are sailing in stiff competition with each other because they are selling similar products and services in the same market. The competition becomes even stiffer if the business model is almost rigid. As such, players in the market have little chance to diversify and play differently. The competitiveness of the organization high relies on the industries nature in which the firm is linked to in terms of market. According to Porter (2008), firm success is high based on how competitive the market is because it results to innovativeness and diversifications.
Therefore, when a firm has a competitive strategy, there is a lot of importance and benefits attached to it and all forces are seen as positive. Porter (1998) argues that there is a strong industry structure that shapes various strategies and this helps the organizations to position themselves. Knowing the contribution of Porter’s five competitive forces while formulating an appropriate competitive strategy and overall performance is important to every manager of an organization. In the view of (Machuki, 2005) organizations, whether for profit or non-profit, private or public have seen it necessary to engage in strategic management process so as to achieve their corporate long term goals. He further observed that environments in which organizations operate have become increasingly uncertain as well as more interconnected.
Porter argues that the new entrants in the market comes in with willingness to own a good market share and increases their outputs as well as raising their capacity. As such, reduction of prices may be witnessed as well as increase of costs which lead to reduction of profitability. Porter proposes six major sources of barriers related to entry which are: product differentiation, capital requirement, and costs linked to switching. Others are channels distribution access and policies from the government. Peng (2009) noted that new entrants are motivated to the new industry by lucrative above-average returns earned by some incumbents. Further, Porter argues that major incumbents’ primary weapons are barriers to entry, which are industry structures increasing the costs of entry.
Clients are able to select other various types of products when there is product substitution. Through this, some products are affected since the demand goes down following many alternatives in the market. According to Johnson and Scholes (2002), the product that offers high value for the client get the high market share and this increases the demand since most of the customers shift towards there. Porter (1998) argues that when substitutes are available in the market, there is availability of price ceiling which controls how sellers and suppliers attach prices to various products. The industry profit rises as a result of provision of prices that are attractive. Some of determinants for substitute’s competitive pressures as suggested by Thompson and Strickland (2002) include availability of attractive prices, perception of buyers on substitutes in terms of satisfying levels and performance and lastly, the ability of shifting to substitute by the buyers.
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