Survival of local construction companies in Kenya through diversification: a case study of Nairobi County
In Kenya as in the world over, globalization has presented a major challenge to the survival of local construction companies. Foreign construction companies have been increasingly dominating the Kenyan construction scene over the last couple of years. Most of the construction contracts issued by the Kenyan government and the big private sector players in the country have been undertaken by foreign contractors who are favoured by job owners due to their relatively significant expertise and financial muscle. This stiff foreign competition translates into depressed sales for the local construction companies and their survival becomes a struggle. Several past studies have generated a lot of confusion on whether diversification increases an organization‟s chances of survival and growth in the face of increasing globalization and shrinking markets. Therefore this study sought to investigate whether corporate diversification had positive impact on the organizational survival and growth of local construction companies in Kenya. Reviewed literature provided input to the research methodology. The population for the study was all National Construction Authority registered and practicing construction companies based in Nairobi County, Kenya. The list had an updated number of 4,317 companies out of which the study randomly sampled and obtained 48 companies. Questionnaire was chosen as a data collection instrument. Out of the 48 respondents, 35 companies responded to the questionnaires which represented 72.9% which is statistically adequate to represent the entire population. The data obtained was analyzed through Microsoft Excel and Statistical Package for the Social Sciences (SPSS) computer programme and the results presented in terms of tables, figures, percentages and means. The study found that lack of access to credit/finance, globalization and cyclical demand are some of the most significant challenges to the survival of local contractors in Kenya. The findings suggest that most local contractors prefer a mixture of both internal (organic) and external growth strategies. The study found that local contractors diversify into construction related markets to increase efficiency of construction works, gain lower cost advantage and differentiate their services. It was also found that unrelated diversification is seen as a financial risk reduction method and has cash stabilisation advantages for local contractors as a result of increased flexibility. The study found that diversification increased sales volume, overall profitability and utilisation of resources. It was therefore concluded that diversification, if implemented correctly, can enhance survival and growth of Kenyan construction companies faced with shrinking markets due to globalization. The study recommends that local construction companies should endeavour to build core competencies in their area of specialization before gradually entering into new markets and should prioritize organizational knowledge in new markets and how to create synergy which is crucial to successful diversification. Protective laws like the recently gazetted National Construction Authority Regulations (2014) encouraged and strictly enforced to protect citizen construction companies from unfair foreign competition and to build their capacity. Empirical studies should be conducted on the subject of diversification strategies and financial performance in the construction industry using listed companies which would ensure the availability of financial data. Further study should also be directed to the difference in performance between related and unrelated diversified local construction companies as well as studying all factors that influence the survival of local construction companies, without narrowing only on diversification. The areas where local construction companies have diversified into as well as effects of company size on diversification strategies are recommended for further research.