Competitive Strategies and Performance of Commercial Banks in Kenya

Abstract

The primary objective of profit-making organizations is to maximize the performance of the organization overtime. Superior performance can be achieved in a competitive industry through the pursuit of a generic strategy, i.e. the developments of an overall cost leadership, differentiation or focus approach to industry competition. Also, following the recent global credit crunch, profitability of commercial banks is considered very crucial, thus the present study’s objective is to examine the relationship between competitive strategies and profitability of commercial banks in Kenya. The study used the survey method to assist in achieving the objective of the study. The population of the study consisted of all the 44 commercial banks operating in Kenya as at 31st December 2009. Primary data was gathered using questionnaires administered to corporate strategy managers and operations managers of the various banks. Out of the 44 banks targeted, 38 responded by returning filled questionnaires. This formed an 86% response rate thus considered suitable for analysis. To achieve the study objective, respondents were issued with a number of competitive strategies and were required to score on a 5-point likert scale the extent to which the strategies were adopted by their respective banks. The study scope allowed for only three strategies that formed the conceptual framework of the study and the data to be tested. Secondary data, in the form of the various performance measures (i.e. Profitability ratios, capital and risk weighted assets ratios and market share ratios) for the period 2005 to 2009 was collected from the financial statements of banking institutions operating in Kenya as well as from the Central Bank of Kenya’s website. The study used descriptive and inferential statistics to vi arrive at a more in-depth profile in establishing the link between competitive strategies adopted and firm performance indicators. The study was able to establish that despite the challenges in implementation, competitive strategies are very important for banks to remain competitive in the market. In the banking industry, understanding the market structure is a key determinant for the successful implementation of the competitive strategies. Banks following a cost leadership strategy realize statistically significant superior performance compared to those that pursue broad differentiation and focus strategy which report above average returns. The differentiation strategy may be difficult to implant in a service industry since services are easily copied and fruitful options may be limited due to the simplicity and imitability of financial services, unless the target market is highly sophisticated and knowledgeable. The researcher highly recommends that commercial banks consider shifting more of their focus to the cost leadership strategy in order to realize superior performance.