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
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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.
Publisher
University of Nairobi