Diversification Strategy and Performance of Mobile Telephony Firms in Kenya

Abstract

The competitive strategy of the firm in the business environment characterized by uncertainties in the market is an important management decision. Diversification strategy as one of the competitive strategies of the firm allows a business unit operating in more than one sector to gain an advantage due to their activities among themselves and thus creating an undesirable situation of mitigating or hindering competition for the businesses operating in the same industry. This strategy allows a firm to expand or enter new markets which are different from the firm’s existing product lines or markets and in the process attain above-average returns by taking advantage of the incoming opportunities. Diversification is considered as a growth strategy whose rationale is to explore new business areas that promise greater profitability and therefore a firm needs to enter/expand in new markets or product lines which are related or/and unrelated to its existing businesses. The objective of the study was to determine diversification strategy and its effects on performance of mobile telephony firms in Kenya. The study adopted a descriptive cross sectional research design. The population of the study consisted of Mobile Service Providers operating in Kenya. According to CCK (2011-2012), there are currently four firms offering mobile services in the country namely: Safaricom, Airtel, Orange and Yu. The study used primary data which was collected using a selfadministered questionnaire. The data was analyzed using descriptive statistics. The findings of the study was that the influence of diversification strategies on firm performance was on total cost reduction, sales growth, return on investment, market share growth, financial liquidity and reduction of response time for product design change or volume change. The study found out that by pursuing related diversification, the companies were able to use the existing products which are complementary to each other to boost their sales growth and reduce cost, use the companies’ well-known brand value to contribute positively to market share and return on investment, apply resource enhancement and utilization collectively by all the strategic units to increase returns, share management skills among the different products to enhance the firms’ customer base and to gain competitive advantage through the transfer of brand name as well as their marketing capabilities. Unrelated diversification strategy influences the performance of the companies as it helped the managers to create economic value in different product lines and markets, result in expansion of product lines and activities to different sectors where profitability is higher, realize cost savings through performing some activities centrally and reduce risk for the firms’ products and services that have been threatened by the environmental uncertainty or that are in decline phase of their life cycle. Unrelated diversification was also found to have an effect on the firm’s performance as it enables the firm’s to have a higher level of absorptive capacity that allows it to more fully capture the benefits of simultaneous exploitation and exploration besides leading to benefits from organizational slack. It also results in co-insurance effect that has a positive influence on the company debt capacity due to the reduction in the volatility of firm revenues and profits and as well as enabling the executives to select from any of the strategic business units whose information is set to be available to them without any transaction cost.