Effects of Performance on Divestiture Strategy in the Kenyan Oil Industry

Abstract

In recent years a substantial wave of divestments has occurred in the Kenyan oil industry although this phenomenon has not been sufficiently investigated up to now. The purpose of this study was to extend the current understanding of business divestiture by investigating effects of performance on divestiture strategy and the relationship between divestiture strategy and firm performance. A descriptive census survey was carried out amongst twelve managers from the five major oil companies that have divested from the Kenyan market and the energy regulatory commission.

Findings from the study indicate that firm financial performance is the strongest predictor of divestiture because of dwindling return on investment, low profit margins and high working capital requirements due to upfront payment of duties and compliance to safety standards- Key factors affecting the oil industry and contributing to a great extent to the declining performance include; poor petroleum infrastructure at KPC that contributes to supply constraints and the inefficiencies of KPRL.

Lack of appreciation of safety standards, this is further aggrieved by the lack of enforcement of government policy on safety standards. Uneven competition due to lack of a level playing field by the stakeholders in the petroleum sector has significantly contributed to the decline in performance. However, the findings support the fact that divestiture is an instrument for improving firm performance but should be applied as a last resort.