assessment of performance measure men 1

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ASSESSMENT OF PERFORMANCEMEASUREMENTIN BUSINESS STRATEGY

IMPLEMENTATIONAMONG COMPANIES IN KADUNA TOWNByAdekola AliA DISSERTATION SUBMITTED TO THE ST CLEMENTSUNIVERSITY,

TURKS & CAICOS ISLANDS, BRITISH WEST INDIES IN PARTIALFULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF

THE

DEGREE OF DOCTOR OF PHILOSOPHY2

ABSTRACTThis research work entitled Assessment of PerformanceMeasurement inBusiness Strategy Implementation Among Companies inKaduna Town;reports the impact of effectiveness, efficiency, client and employeesatisfaction,research and development, and a firms corporate social responsibilityon a firms

performance. The relationship of these variables to the success ofbusiness strategies isalso reported in this work. The research looked at problems that areusually faced inthe various approaches used in assessing a firms performance. It alsocarried out acomparative analysis of both quantitative and qualitative performanceof firms. Samplesfrom 15 private limited liability companies and 15 public limited liabilitycompanies wereselected using the random sampling technique for analysis. The

Regression and Chi-Square techniques were used to verify that there is no significantrelationship betweenfinancial ratios and business strategy. The techniques were also usedto prove thatthere is no significant relationship between a firms productioneffectiveness and itsbusiness strategy amongst other hypotheses. The research workhowever revealed thatmost staff members at the lower level of the firms are not involved inthe development

of various strategies, thus making it difficult for them to theimplementation. The


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2.33 Strategy implementation and control 124

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2.34 Strategy implementation framework 127

2.35 Strategic control and evaluation 129

2.36 Contemporary approach to strategic control 131

2.37 Key strategic management variables 1432.38 Corporate governance failures 144

2.39 Importance of corporate governance 145

2.40 Corporate social responsibility 146

2.41 Leadership 149

2.42 Financial variables 150Chapter Three 155

3.0 Methodology 155

3.1 Canonical correlation techniques 155

3.2 Multivariate discriminant analysis (MDA) 156

3.3 The probit technique 157

3.4 The logit technique 1573.5 Linear programming (LP) technique 158

3.6 Regression techniques 160

3.7 Justification of regression techniques 167

3.8 Chi square technique: 167

3.9 Chi square basic assumptions 167

3.10 Computing Chi Square 168

3.11 Interpreting the Chi Square value 169

3.12 Test of hypotheses 169

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3.13 Instrument used 170

3.14 Research population and sample size 171

3.15 Justification of the sample selection

172

Chapter Four 174

4.0 Data presentation and analysis 174

4.1 Introduction 174

4.1.1 Trends analysis of selected companies financial performance 175

4.2 Implications of performance measurement and business strategy 204

4.3 Regression analysis 205

4.4 Analysis of our least square model 209

4.5 Test of hypotheses 209

Chapter Five 221

5.0 Discussion of results 2215.1 Link between performance and strategy 221

5.2 Analysis of primary data responses 221

5.3 The problem of strategy in selected companies 230

5.4 Implications of strategy to business development 232

Chapter Six 234

6.0 Summary of findings, conclusions and recommendations 234

6.1 Summary of findings and conclusions 234

6.2 Recommendations 237

References 239

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CHAPTER 1


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1.1 BACKGROUND TO THE PROBLEM8

Measuring performance has been part and parcel of anysuccessfulbusiness entity. It is strategic because the long run survivalof anyorganization depends on its performance. Managements useperformance measurement to evaluate the overall health oforganization.However, in measuring performance, there is no doubt thatcompaniesstill face the following problems of; what variables to beconsidered?What methodology to be used to evaluate the stability of

thesevariables? How to generate values for these variables? andmany more.Many performance rating agencies in attempts to provideanswers tothe above problems have adopted various approaches andstrategies.Business Week (2002), in measuring performance of 500Best

Companies globally considered variables like total return(1yr), totalreturn (3yrs), sales growth (1yr), sales growth (3yrs), netmargin andreturn on equity.Fortune Magazine (2000) in its attempt to measureperformance of 50Best Companies Globally considered variables likeinnovativeness,quality of management, employee talent, financial

soundness, use ofcorporate assets, long-term investment value and quality ofproduct(s).Nigerian stock Exchange (2003), in an attempt to measureperformanceof Best 20 Quoted Companies in Nigeria focused attentionon thefinancial ratios/performance of performance.9

Notwithstanding all these attempts, there is still need toinvestigate


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firms performance vis--vis business strategy for betterunderstandingof the relationship.1.2 STATEMENT OF THE PROBLEM

There is no doubt that there is a link between firmperformance andbusiness strategy. But the problem of identifying the rightvariables toestablish this relationship still exists. Previous attempts tomeasure firmperformance have ignored the extent of the impact of someveryimportant variables like production effectiveness, efficiency,client and

employee satisfaction, research and development andcorporate socialresponsibility.

The problems associated with the approaches used bypreviousresearchers are that they ignored distortions andmanipulations that gowith the companies financial statements. These distortionsand

manipulations are clearly manifested in the financial scandalof Enron,WorldCom and Parmalat.Lawrence and Glueck (1987) observed that distortion couldaffect thefinancial variables performance. They also noted that morerecently theearning per share has come under unfavorable scrutinybecause earningcan be manipulated (by cutting out research and

development, sellingoff assets and liquidating inventory). Unfortunately, thesemanipulationsthat have long-term impact on firms and their strategies areignored.10

Today, companies like Sears, Rockbuck, Dow Channel andDaytonHudson have adopted performance measurement of their

business unit


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based on total operation and awarding incentive pay basedonperformance of competitors. Recently, more and morecorporate

boardrooms are looking for other measures to reflect growthinshareholders expectations and encourage strategic decisioninstead ofshort term planning.

The need for the search for more variables especiallyqualitativevariables that impact on business strategy and performancehasinformed this study. The study therefore used some selected

companiesin KADUNA, Nigeria for this investigation. Also, theassessment of thesevariables in measuring performance will assist businessstrategist inmaking sure that safe and sound strategy is based onadequateunderstanding of these variables.1.3 OBJECTIVES OF THE STUDY

The objectives of this study will include:1. To elucidate greater understanding on the measurementof firmsperformance in business strategy implementation control2. To identify the key performance indicators and assesstheirsuitability in business strategy planning and implementation3. To evaluate the relative impact of each of these indicatorsidentified on the long run strategy of companies.4. To carry out a comparative analysis of both quantitative

andqualitative performance.11

5. To ascertain the extent of the relationship betweenperformanceindicators and business strategy.1.4 RESEARCH QUESTIONS1. Are there relationships between firms performance andbusiness

strategy?2. Do financial ratios have any impact on business strategy?


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3. Are there any problems in measuring firm performance?4. Why do some firms consider only quantitative variables inmeasuringperformance?

5. Why do some firms consider only qualitative variables inmeasuringperformance?6. Will combining both quantitative variables and qualitativevariablesproduce better result in measuring performance?1.5 RESEARCH HYPOTHESES

The following hypotheses will guide this study.1. Ho: There is no significant relationship between financialratios and

business strategy.H1: There is significant relationship between financial ratiosandbusiness strategy.2. H0: There is no significant relationship between firmproductioneffectiveness and business strategy.H1: There is significant relationship between firm productioneffectiveness and business strategy.

123. H0: There is no significant relationship betweenclient/employeesatisfactions and business and business strategy.H1: There is no significant relationship betweenClient/employeesatisfactions and business strategy.4. H0: There is no significant relationship between researchandbusiness strategy.

H1: There is significant relationship between research andbusinessstrategy.5. H0: There is no significant relationship between corporatesocialresponsibility and business strategy.H1: There is significant relationship between corporate socialresponsibility and business strategy.1.6 SIGNIFICANCE OF THE STUDY

As at now, there is no known study of firm performance vis--vis


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business strategy in Kaduna. This study attempted toprovide moreinformation in this area.1. It will elicit better understanding of performance

measurement inbusiness strategy implementation control2. It will serve as a guide to business strategy planning3. It will draw the attention of managements to the need toconsidersome qualitative variable in measuring firm performance4. It will also serve as a reference material to business policymakersand future researchers in this area.13

1.7 LIMITATION OF THE STUDYThe major limitations of the study are fund, data and time.Because ofthese limitations the study was not able to cover all thefirms inKADUNA and its environs. Despite these limitations, due carewas takennot to sacrifice quality and in-depth of this study on the altarof time,

data and money.1.8 DELIMITATION OF STUDYThis study as we have shown has attempted to measure firmperformance vis-a -vis business strategy in selected firms inKADUNA.1.9 DEFINITION OF TERMSCompetitive advantage: The ability of an organization toadd valuefor it customers than its rivals, and thus attain a position ofrelative

advantage.Core competency: Distinctive skill, normally related to aproduct,service or technology, which can be used to createadvantage.Corporate strategy: The overall strategy for a diversifiedor multiproductservice organization.Effectiveness: The ability of an organization to meet the

demands and


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expectation of its various stakeholders, those individuals orgroups withinfluence over the business.14

Efficiency: The sound management of resources tomaximize the returnsfrom them.Visionary strategies: Strategies created by strong,visionary strategist.E-V-R confluence:The effective matching of anorganizations resources(R) with the demands of its environment (E). A successfuland sustainedmatch has to be managed and frequently requires change;

successfullyachieving this depends on the organization culture and value(V)Financial control: the term used to describe the form ofcontrol normallyfound in a holding company structure.Focus strategy: Concentration of one or a limited numberof marketsegments or niches.

Functional Strategies: The strategies for the variousfunction carried outby an organization, including marketing production, financialmanagementinformation management, research and development,human resourcemanagement.Stakeholder: Any individual or group capable of affectingthe actions andperformance of an organization.

Strategy: The means by which organization achieve theirobjectives andpurpose. There can be strategy for each product and/orservice and for theorganization as a whole.15

Strategic business unit: A discrete grouping within anorganization withdelegated responsibility for strategically managing aproduct, a service, ora particular group of products or services.


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Strategic capability: process skills used to add value andcreatecompetitive advantage.Strategic change: Charges which take place over time in

the strategiesand objectives of the organization. Change can be gradual,emergent andevolutionary or discontinuous, dramatic and revolutionary.Strategic control: A style of corporate control whereby theorganizationattempts to enjoy the benefits of delegation anddecentralization with aportfolio of activities which, while diverse, is interdependentand capable of

yielding synergies from co-operation.Strategic Issues: current and forth coming developmentsinside andoutside the organization which will impact upon the ability oftheorganization to pursue its mission and achieve its objectivesStrategic Leader: Generic term used to describe thosemanagers whoare responsible for changes in the cooperate strategy

Strategic Life Cycle: The notion that strategies have finitelives, aftersome period of time they will need improvement, change orreplacement.Strategic Management: The process by which anorganizationestablishes its objectives, formulates actions (Strategies)designed to meet16

these objectives in the desired time scale implements the

action andassesses progress and results.Strategic Planning: The systematic and formal creation ofstrategiescapable of making a very significant contribution in large,multi activityorganizations.Stretching Resources: The creative use of resources, toadd value for

customers, through innovation and improved productivity.


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SWOT Analysis: An analysis of an organizations strengthsand weaknessas along side the opportunities and threats present in theexternal

environment.Synergy: The term used for the added value of additionalbenefits whichideally accrue from the linkage or fusion of two businesses,or fromincreased co-operation between either different parts of thesameorganization or between a company and its suppliers,distributors andcustomers. Internal co-operation may represent linkages

between eitherdifferent division or functions.Tactics: This is the strategy that determines what majorplans are to beundertaken and allocates resources to them.17

CHAPTER TWOLITERATURE REVIEW2.0 DEFINING MANAGEMENT AND STRATEGIC

MANAGEMENTManagement according to Koontz Harold and ODonnell Cyril(1972)stated that since people began forming groups toaccomplish goals, theycould not achieve as individuals, managing has beenessential to insurethe coordination of individual efforts. Management haveassumedgreater importance as societies and organized groups have

increasinglyrely on group effort to achieve results and as manyorganized groupshas risen in importance. Stoner et al (1995) definedmanagement as theprocess of planning, organizing, leading and controlling thework oforganization members and of using all availableorganizational resources

to reach stated organizational goals. From their definition, itcan be seen


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that in defining management emphasis is laid on planning,organizing,leading and controlling of a companys work force.Sisk Henry (1973) in his view stated that the study or

definition ofmanagement as a process should be based on three parts:first, thecoordination of resources; second, the performance ofmanagerialfunctions as a means of achieving coordination and third,establishingthe purpose of the management process. They clarified thisprocess as:1. Definition of management as coordination. The question

thereforebecomes: how does the manager of an enterprise coordinatethe18

resources of the organization; namely men, material, moneyetc. Inbusiness enterprise most organized groups, a primerequirement ismoney. There is seldom an organization without some

measure ofcapital, a requisite for fraternal, social and religious groupsas well as forbusiness organizations. Material includes the physicalproperties of abusiness such as production equipment. The people who aremembersof the organization are the third element. These threeelements form aconvenient mnemonic device, the three ms of management,

money,materials and men. Although, an over simplification, thisdevice is anaid in remembering the coordinative aspect of management.2. The coordination of the resources of an organization isachieved bymeans of the management functions of planning, organizing,directingand controlling.

3. A definition of management as the coordination ofresources through


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the utilization of the functions of the management process isnotcomplete. Management is a process; it is directed towardthe

attainment of stated goals or objectives. Without anobjective, there isno goal to reach or no path to follow. The concept of goal asanobjective provides the purposive characteristics ofmanagement.Based on the above explanation, Sisk (1973) therefore,definedmanagement as the coordination of all resources throughthe process of

planning, organizing, directing and controlling in order toattain statedobjectives.19

2.1 STRATEGIC MANAGEMENT DEFINEDChandler (1962) made a comprehensive analysis ofinterrelationshipamong environment, strategy, and organizational structure.He analyzed

the history of organizational change in 79 manufacturingfirms in theUS. While doing so, Chandler defined strategy as: Thedetermination ofthe basic long-term goals and objectives of an enterpriseand theadoption of the courses of action and the allocation ofresourcesnecessary for carrying out these goals. Chandler refers tothree

aspects: Determination of basic long term goals and objectives, Adoption of course of action to achieve these objectives,and Allocation of resources necessary for adopting the courseofaction.Andrews (1965) defines strategy as: The pattern ofobjective, purpose,

goals and the major policies and plans for achieving thesegoals stated


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in such a way so as to define what business the company isin or is tobe and the kind of company it is or is to be: This definitionrefers to the

business definition, which is a way of stating the currentand desiredfuture position of company, and the objectives, purpose,goals, majorpolicies and plans required to take the company from whereit is towhere it wants to be.Ansoff (1965) explains the concept of strategic managementas: thecommon thread among organizations activities and product-

market that20

defines the essential nature of business that theorganization was orplanned to be in future.Ansoff (1965) stressed the commonality of approach thatexists indiverse organizational activities including the products andmarkets that

defines the current and planned nature of business.Glueck (1980), defined strategy precisely as: A unified,comprehensiveand integrated plan designed to assure that the basicobjective of theenterprise are achieved. The three adjectives that Glueckused todefine a plan made the definition quite adequate. Unifiedmeans thatthe plan joins all the parts of an enterprise together;

comprehensivemeans it covers all the major aspects of the enterprise, andintegratedmeans that all parts of the plan are compatible with eachother.Mintzberg (1987) defines strategy as a pattern in a streamof decisionand actions Mintzberg distinguishes between intendedstrategies and

emergent strategies. An intended strategy refers to theplans that


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managers develop, while emergent strategies are theactions thatactually take place over a period of time. In this manner, anorganization may start with a deliberate design of strategy

and end upwith another form of strategy that is actually realized.Porter (1980) made invaluable contribution to thedevelopment of theconcept of strategy. His ideas on competitive advantages,the five-forcemodel, generic strategies, and value chain are quite popular.He opines21

that the core of general management is strategy, which he

elaboratesas: developing and communicating the companys uniqueposition,making trade-offs, and forging fit among activities.2.2 STRATEGIC MAMANGEMENT SCHOOLS

The subject of strategic management is in the modest of anevolutionary process. In the course of its development,several strandsof thinking are emerging which gradually lead to

convergence of views.Selznick (1975), Andrew (1965) and Kazmi (2002) explainthese schoolsof thoughts as follow:1. THE DESIGN SCHOOL: This school which perceivesstrategyformation as a process of conceptions developed mainly inthe late1950s and 60s. Under this school, strategy is seen assomething

unique, which is in the form of a planned perspective. TheChiefExecutive Officer as the main architect guides the process ofstrategy formation. The process of strategy formation issimpleand informal and based on judgment and thinking.2. THE PLANNING SCHOOL: This school which developedin the1960s sees strategy formation as a formal process. Under

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school, strategy is seen as a plan divided into sub-strategiesandprogrammes. The planners play the lead role in strategyformation. The process of strategy formation is formal and

deliberated. Another major contributor to this school isAnsoft(1965).22

3. THE POSITIONING SCHOOL: This school perceivesstrategyformation as an analytical process, and developed mainly inthe1970s and 80s. Under this school, strategy is seen as a setof

planned genuine positions chosen by a firm on the basis ofananalysis of the competition and the industry in which theyoperate.

The analysts play the lead role in strategy formation. Theprocessof strategy formation is analytical, systematic anddeliberate. Themajor contributors to the positioning school are Hatten

(1970s),and Porter (1980s).4. THE ENTREPRENEURIAL SCHOOL: This school seesstrategyformation as a visionary process developed mainly in the1950s.Under this school, strategy is seen as the outcome of apersonaland unique perspective often aimed at the creation of aniche. The

lead role in strategy formation is played by theentrepreneur/leader. The process of strategy formation isintuitive,visionary and largely deliberate. The major contributors tothisschool are Schumpeter (1950s), Cole (1959) and severalothers,most of whom are economists.5. THE COGNITIVE SCHOOL: Cognitive school which

perceives


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strategy formation as a mental process, developed mainly inthe1940s and 50s. Under this school, strategy is seen as anindividual

concept that is the outcome of a mental perspective. Theprocessof strategy formation is mental and emergent. The major23

contributors to the cognitive school are Simon (1947 and1957)and Tharda and Simon (1958).6. THE LEARNING SCHOOL:This school perceives strategyformation as an emergent process has had a legacy from the1950s through the 1970s. Under this school, strategy is seen

as apattern that is unique. The learner within the organizationwhoever that it might be plays the lead role. The process ofstrategy formation is emergent, informal and messy. Theleadcontributors to the school are Lindblom (1959, 1960), CyertandMarch (1963).7. THE POWER SCHOOL: Power school of thought which

seesstrategy formation as a negotiation process, developedmainlyduring the 1970s and 80s. Under this school, strategy isseen as apolitical and cooperative process or pattern. The lead role instrategy formation is played by any person in power (at themicrolevel) and the whole organization (at the macro level). Theprocess of strategy formation is messy, consisting of conflict,

aggression and cooperation. At the micro level, the processofstrategy formation is emergent while at the macro level, it isdeliberate. Major contributors to the school are Allison(1971) andAshley (1984)8. THE CULTURAL SCHOOL: Cultural school, whichdeveloped inthe 1960s, sees strategy formation as a collective process24


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developed mainly in the 1960s. Under this school, strategy isseenas a unique and collective perspective. The lead role instrategy

formation is played by the collectivity displayed within theorganization. The process of strategy formation is ideologicalconstrained, collective and deliberate. The majorcontributors tothe cultural school are Rhenman and Norman (late 1960s).9. THE ENVIRONMENT SCHOOL: This school perceivesstrategyformation as a reactive process, developed mainly in thelate1960s and 70s. Under this school, strategies occupy a

specificposition or niche in relation to the environment as an entity.

Thelead is passive and imposed and hence, emergent.

The major contributors to the school are Hannan andFreeman(1977) and contingency theorists like Pugh et al (late1970s).10. THE CONFIGURATION SCHOOL: This school of thought

whichperceives strategy formation as a transformation processdeveloped during the 1960s and 1970s. Under this school,strategy is viewed in relation to a specific context and thuscouldbe in a form that corresponds to any process visualizedunder anyof the other nine schools. The process of strategy formationisintegrative, episodic and sequential. In addition, the process

couldincorporate the elements pointed out under the other nineschoolsof thought. The major contributors to the configurationschool areChandler (1962), Mintzberg and Miller (late 1970).25

2.3 STRATEGY MANAGEMENT DYNAMICS:Chandan (2002) stated that there are three types of

circumstances inwhich the strategic tensions are to be made. These are:


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a. Strategy under certaintyb. Strategy under riskc. Strategy under uncertaintya. STRATEGY UNDER CERTAINTY:This is the simplest

form ofdecision-making. The condition of certainty exists whenthere is nodoubt about the factual basis of a particular decision, and itsoutcome can be predicted accurately. There is just one stateofnature for each alternative course of action and there iscompleteand accurate knowledge about the outcome of eachstrategic

alternative.b. STRATEGIC DECISION UNDER RISK: A condition of riskexistswhen a strategic decision must be made on the basis ofincompletebut reliable information. Here, there is no longer just oneoutcomefor each strategy but a number of possible outcomes wherethe

probability of each outcome is known, calculated or assignedand anexpected value for each alternative or strategy is obtained.

Thestrategy that yields the best expected value is selected as adecision.

The decision problem is put in the form of a matrix. A matrixissimply a two-dimensional arrays of figures arranged in rowsand

columns. The rows represent the variable to the decisionmaker (onerow for each strategy) and the columns represent the statesof26

nature (one column for each state of nature). The matrixcould be inform of a pay-off matrix or in the form of an opportunity costmatrix.

In the case of the pay-off of each row and column representsthe


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pay-off or profit for a given strategy and its correspondingstate ofnature. Each state of nature is assigned a probability, whichidentifies

the odds that such a state of nature would prevail. Typically,in manyorganizational problems, the probabilities of various statesof natureare known by virtue of determining how frequently theyoccurred inthe past.c. STRATEGIC DECISION MAKING UNDER UNCERTAINTY

The conditions of uncertainty make the decision makingprocess

much more complicated. The decision maker or strategisthas no ideaor knowledge about the probabilities of various states ofnature andhence the expected values of various alternatives cannot becalculated. Such problems arise wherever there is no basisin the pastexperience for estimating such probabilities. For example, inthe case

of marketing a new product, it is difficult to make judgmentsas tohow much this product will sell in different geographicalareas orabout probabilities of these predetermined quantities inthese areasin order to make profit.In such situations, there is no single best criterion forselecting astrategy. However, there are a number of criteria, each

justified byrationale and is a function primarily of the organizationstrategist. Theselection of a strategy would depend upon the criteria to beused. Thesecriteria are:27

a. PESSIMISM CRITERION:This criterion according toChandan

(2002) was suggested by Abraham Wald, it is also known asWald


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Criterion or maximize the minimum pay-off. This is aconservativeapproach to an intrinsically difficult situation, and thestrategist assumes

that whatever alternative is chosen, the worst will happen.For eachpay-off of each course of action, under each state of nature(theprobabilities of states of nature are not known), thestrategist picks theworst pay-off, so that there will be a value of the worst pay-off for eachcourse of action and the decision maker will pick the highestvalue

among these.b. CRITERION OF OPTIMISM: This criterion is based uponmaximaxprinciple, which maximizes the maximum pay-off for eachstrategicalternative. The strategist assumes that for each course ofaction, thebest state of nature will prevail, giving him the best of eachstrategy so

that he can choose the best of these best.However, a rational strategist cannot always be totallyoptimist under allsituations. To overcome this difficulty, Hurwiez ( ) introducedthe idea ofdegree of optimism or coefficient of optimism, the value ofwhich isdetermined by the attitude of the strategist. He called thiscoefficient anAlpha (&), and it is measured on 0 to 1 scale. Its value is 1

for acomplete optimist and 0 for a complete pessimist. For astrategist who isneither a pessimist nor a optimist, the value of & will bebetween 0 and1, depending upon the degree of optimism.28

c. CRITERION OF REGRET: This is also known as savagecriterion

and it minimizes the maximum regret of not making theright strategy


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and uses the opportunity cost matrix to make the decision.For eachcourse of action, there are costs involved in choosing theopportunity of

having a different course of action after states of naturehave beenknown. These costs are really regrets of not choosing thebest course ofaction. Out of the maximum regret for each course of action,we choosethe minimum regret and the corresponding course of action.d. LAPLACE STRATEGY: The Laplace strategy assumes thatallstates of nature are equally likely to occur. This means that

thestrategist does not have anyone outcome that is more likelyto occurthan others. Hence, both are the case of pay-off matrix aswell asopportunity cost matrix, all states of nature have the sameprobability ofoccurrence.e. DECISION UNDER CONFLICT: These decisions under

conflictforms basis of games theory. The games with completeconflict ofinterest are known as zero sum games, in which the gain ofthe decisionmaker equals the loss of the opponent for example, if theMarketingManager of a company wants to increase the market shareof hisproduct, it will be at the expense of the market share of his

competitors.2.4 COMPETITIVE STRATEGIESCompetitive strategy is the means by which organizationsseek toachieve and sustain competitive advantage.Porter (1980) in analyzing competitive strategy introducedthree broadframeworks. These are competitive strategy in fragmentedindustries,

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competitive strategy in emerging industries and competitivestrategy indeclining industries.Competitive strategy in fragmented industries:

According toPorter, this is a situation where no firm in this industry has asignificantmarket share and can strongly influence the marketoutcome. Usuallyfragmented industries are populated by a large number ofsmallmedium sized companies many of whom are privately owned. InKaduna, we have a lot fragmented firms. Thus, in our study,gathering

data from these firms proved very difficult. However, there isno singlepraise quantitative definition of fragmented industries, andsuch adefinition is probably unnecessary for purposed of discussingthestrategic issues in this important environment. The essentialnotion thatmakes these industries a unique environment in which to

compete is theabsence of market leaders with the power to shape industryevent.Porter (1980) went further to say that fragmented industriesare foundin many areas of any economy, whether in United States orsome othercountries, and they are common in areas such as thefollowing. Services Retailing Distribution Agricultural products Creative businessesSome fragmented industries, such as bread making inKaduna andtelevision program syndication, are characterized byproducts or services30

that are differentiated, whereas others, such as oil tankershipping,


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electronic component distribution, fabricated aluminumproducts,involve essentially indifference products. Fragmentedindustries also

vary greatly in their technological sophistication, rangingfrom hightechnology business to garbage collection and higherretailing.Porter (1980) explained the followings as the reasons forindustryfragmentation:(i) Nearly all fragmented industries have low overall entrybarrier.(ii) Most fragmented industries are characterized by the

absence ofsignificant economies of scale or learning curves in anymajor aspect of thebusiness, be it manufacturing, marketing, distribution, orresearch. Manyfragmented industries have manufacturing processescharacterized by few.If any economies of scale or experience cost declines,because the process

is a simple fabrication or assembly operation, straightforward warehousingoperation, and an inherently high labour content.iii. High haulage costs: This is another reason why industriesarefragmented. High transportation costs limit the size of anefficient plant orproduction location despite the presence of economic ofscale.

Transportation costs balanced against economies of scale,

determine theradius a plant can economically service. Transportation costsare high insome companies like iron and steel. They are effectivelyhigh in manyservice industries because the service is produced at thecustomerspremises or the customer must come to where the service isproduced.

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Iv. Diseconomies of scale: In a situation where frequent newproductintroductions and style changes are essential to competition,allowing only

short lead times, a large firm may be less efficient than asmaller onewhich seems to be true in womens wear in which style playsa major rolein competition.v. Exit barriers: Fragmented industries exist where there areexit barriers.Many firms, especially marginal firms, will tend to stay in theindustry andthereby hold back consolidation. Aside from economic exit

barriers,managerial exit barriers appear to be common infragmented industries.

There may be competitors with goals that are notnecessarily profitoriented. Certain businesses may have a romantic appealthat attractscompetitors who wants to be in the industry despite low oreven nonexistent

profitability. These factors seem to be common in suchindustriesas farming and dress making in Kaduna.Diverse market needs: In some industries, buyers tastes arefragmented,with different buyers each desiring special varieties of aproduct and willingto pay a premium for it, rather than accept a morestandardized version.

Thus the demand for any particular product variety is small,

and adequatevolume is not present to support productions distributions,marketingstrategies, that would yield advantages to a large firm.Sometimesfragmented buyers taste stem from regional and localdifferences in marketneeds. Every local fire department wants its own customizedfire, engine

with many expensive bells etc.32


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High product differentiation: If product differentiation is veryhigh andbased on image, it can place limits on a firms size andprovide and

umbrella that allows inefficient firm to survive, large sizemay beinconsistent with an image of exclusivity or with the buyersdesire to havebrand of all his or her own. Closely related to this situation isone in whichkey suppliers to the industry value exclusivity or a particularimage in thechannel for their products or services.Local laws: Local laws and tax system in Kaduna have forced

some firms tocomply with standards that are unique to the local politicalscene, leadingto major source of fragmentation in some industry, evenwhere the otherconditions do not hold. Local legislations have probably beena contributingfactor to fragmentation in industries.2.5 WAYS TO OVERCOME FRAGMENTATION

Overcoming fragmentation is predicted on changes thatunlock, thefundamental economic factors leading to the fragmentedstructures.

These approaches include:1. Creating Economies of Scale:Economies of scale are a means of overcoming industriesfragmentation.

Technological changes leads to economics of scale, thusresulting to

industry consolidation. Economies of scale created in onepart of thebusiness can sometimes outweigh diseconomies in another.Innovationthat creates economies of scale in marketing can also leadto industryconsolidation.33

A Split of Factor: Sometimes, the causes of industry

fragmentation are


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centered in one or two areas, such as diseconomies of scaleinproduction or fragmented buyer taste. One strategy forovercoming

fragmentation is to somehow separate those aspects fromthe rest ofthe business. According to Porter (1980) when the causes offragmentation center on the production or service deliveryprocess,overcoming fragmentation requires decoupling productionfrom the restof the business. If buyer segments are numerous or whereproductsdifferentiation leads to preferences for exclusivity, it may be

possiblethrough the use of multiple, scrupulously disassociatedbrand names,styles, and packaging to overcome the constraints placed onmarketshare. However, the basic approach to overcomingfragmentationrecognizes that the root cause of the fragmentation cannotbe solved.

Rather, the strategy is to neutralize the parts of the businesssubject tofragmentation to allow advantages to share in other aspectsto comeinto play. Early Recognition of Industry Trend: Early recognition ofindustrytrend can be used to solve the problem of fragmentation.Somethingindustries consolidate naturally as they mature, particularly

if theprimary source of fragmentation was the newness of theindustry oroutside industry trends. Industry trends can lead toconsolidation byaltering the causes of fragmentation.34

In some industry, the threat of substitute products triggeredconsolidation by shifting buyers needs, and thereby

stimulating changes


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in services that are increasingly subject to economies ofscale. In otherindustries, changes in buyers taste, changes in thestructure of

distributions channels, and innumerable industry trends mayoperate,directly or indirectly, on the causes of fragmentation.Government or regulatory changes: This can forceconsolidation byraising standards in the products manufacturing processbeyond thereach of small firms through the creation of economies ofscale.Recognizing the ultimate effects of such trends, and

positioning thecompany to take advantage of them, can be an importantway ofovercoming fragmentation.Porter (1980) further stated that industry can be fragmentednot onlybecause of fundamental economic reasons, but becausethey are stuckin a fragmented state. According to Porter industries become

stuck dueto the following reasons:Existing Firms Lack Resources: Sometimes the stepsrequired toovercome fragmentation are evident, but existing firms lacktheresources to make the necessary strategic investments. Forexample,there may be potential economies of scale in production, butfirms lack

the capital or expertise to construct large-scale facilities orto makerequired investments in vertical integration. Firm may alsolack theresources or skills to develop in house distribution channels,in house35

service organization, specialized logistical facilities, orconsumer brand

franchise that would promote industry consolidation.


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Existing Firms Are Far Sighted: Even though firms have theresources topromote industry consolidation, they may be emotionallytied to

traditional industry practices that support the fragmentedstructure orunable to perceive opportunities for change. This factpossibly combinedwith the lack of resources, may partly explain the historicalfragmentation in many countries, and industries. In manycountries/industries producers had long been productionsoriented andhad made apparently little effort to develop nationaldistributions or

consumer brand recognition.Lack of Attention by Outside Firms: this could lead toindustryfragmentation. If outsiders do not perceive the opportunityto infuseresources and a fresh fund into the industry to promoteconsolidation, itcan lead to fragmentation. Some industries that escapeattention tend

to be those of the beaten track or those lacking glamour.They may alsobe too new or too small to be of interest to major establishedfirms,which have the resources to overcome fragmentation. If afirm can spotan industry in which the fragmented structure does notreflect theunderlying economics of competition, it can provide a mostsignificant

strategic opportunity. A company can enter such an industrycheaplybecause of its initial structureGovernment Policy: In Nigeria, government policy ofincreasingshareholders fund has lead to forced consolidation ofNigeria banking36

industry. This forced government policy has resulted to

reduction inindustry fragmentation


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2.6 STRATEGY FORMULATION IN FRAGMENTEDINDUSTRIESPorter (1980) proposed five steps in formulating strategy infragmented

industries. He stated that:Step one is to conduct a full industry and competitoranalysis to identifythe source of the competitive forces in the industry, thestructure withinthe industry, and the positions of the significant competitors.Step two is to identify the causes of fragmentation in theindustry. It isessential that the list of causes be complete and that theirrelationship

to the economic of the industry be established.Step three is to examine the causes of industryfragmentation one byone in the context of the industry and competitor analysis instep one.Can any of these sources of fragmentation be overcomethroughinnovation or strategic change? Will any of the sources offragmentation

be altered directly or indirectly by industry trends?Step four depends on a positive answer to one f theprecedingquestions. If fragmentation can be overcome, the firm mustassessattractive returns. To answer this question the firm mustpredict thenew structural equilibrium in the industry once consolidationoccurs andmust then reapply structural analysis. If the consolidated

industry doespromise attractive returns, the final question is, What is thebest,37

defendable position for the firm to adopt to take advantageof industryconsolidation?Step five. This involves the selection of the best alternativefor coping

with the fragmented structure. This step will involve aconsideration of


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the broad alternatives as well as others that may beappropriate to theparticular industry, in light of the particular resources andskills of the

firm. Besides providing a series of analytical processes to gothroughperiodically, these steps also direct attention to the keypieces of data inanalyzing fragmented industries and in competing in them.

The causesof fragmentation, predictions about the effects of innovationon thesecauses, and identification of industry trends that might alterthe causes

of fragmentation become essential requirements forenvironmentalscanning and technological forecasting.2.7 COMPETITIVE STRATEGY IN DECLININGINDUSTRIESPorter (1980) stated that for purposes of strategic analysis,decliningindustries are treated as industries that have experienced anabsolute

decline in unit sales over a sustained period. Decline cannotbe ascribedto the business cycle or to other short-term discontinuities,such asstrikes or material shortages, but represents a true situationin whichend-game strategies must be developed. There have alwaysbeenindustries in decline, but the prevalence of this difficultstructural

environment has probably increased with slower worldeconomicgrowth, product substitution resulting from rapid costinflation, andcontinued technological changes. The decline phase in thebusiness lifecyclemodel is characterized by shrinking margins, pruningproduct lines,38

falling R & D and advertising, and a dividing number ofcompetitors.


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The accepted strategic prescription for decline is a harveststrategy,that is, eliminating investment and generating maximumcash flow from

the business, followed by eventual divestment.In-depth study of a wide spectrum of declining industries,suggests thatthe nature of competition during decline as well as thestrategicalternatives available to firms for coping with decline are agreat dealmore complex. Industries differ markedly in the decline,someindustries age gracefully, whereas others are characterized

by betterwarfare, prolonged excess capacity, and heavy operatingcosts.Successful strategies vary just as widely some firms havereaped highreturns from strategies actually involving heavyreinvestment in adeclining industry that make subsequently borne by theircompetitors by

existing before the decline was generally recognized, andnot harvestingat all.Determinants of Industry DeclinePorter (1980) explains various causes of industry decline.

They include:a. Technological substitution: One source of decline issubstituteproducts created through technological innovation or madeprominent

by shifts in relative costs. This source can be threatening toindustryprofits because profits, and also leads to fall in sales volume.

Thisnegative effect on profits can be mitigated if there arepockets ofdemand in the industry that are resistant to the substituteand havefavourable characteristics.

39


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b. Demographics: Another source of decline is shrinkage inthe size ofthe customer group that purchases the product. In industrialbusiness,

demographics cause decline by reducing demand indownstreamindustries. The competitive pressure of a substitute productdoes notaccompany demography as a source of decline. That is ifcapacity canleave the industry affected by demographics in an orderlyway, survivingfirms may have profits prospects comparable to those beforedestabilizing competition in decline.

c. Shifts in Needs: Demand can fall because of sociologicalor otherreasons which change buyer needs. Like demographics,shifts in needsdo not necessarily lead to increased pressure of substitutesforremaining sales. However, shifts in needs can also besubject to greatuncertainties, which have led many firms to continue to

forecast aresurgence of demand. This situation is very threatening toprofitabilityin decline. The cause of decline gives clues about theprobable degreeof uncertainty firms perceive about future demand as well assomeindications about the profitability of serving the remainingsegments e.g.Industries like the textile in Nigeria.

Exit BarriersCrucial to competition in declining industries is the mannerin whichcapacity leaves the market. When there exist barriers inexit, the lesshospitable the industry will be to the firms that remainduring decline.40

Causes of exit barriers

If the assets of a business, either fixed or working capital orboth, are


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lightly specialized to the particular business, company orlocation inwhich they are being used, this creates exit barriers bydiminishing the

liquidation value of the firms investment in the business.For example,Nigeria textile industry due to high level of competition fromcheaptextile materials from China cannot change businessbecause of largequantity of fixed assets, thus making it very difficult to besold.Secondly, the number, of buyers wishing to use the assets inthe same

business is usually few, because the same reasons thatmake the firmwant to sell its assets in a declining market will probablydiscouragepotential buyers.Also, if the liquidation value of the assets of a business islow, it iseconomically optimal for the firm to remain in the businesseven if the

expected discounted future cash flows are low. If the assetsaredurable, the book value may greatly exceed the liquidationvalue. Thusit is possible for firms like the textile industry in Nigeria toearn a bookloss but it will be economically appropriate to remain in thebusinessbecause the discounted cash flows exceeded theopportunity cost of

capital on the investment that could be realized if thebusiness weredivested.Fixed cost of exitOften substantial fixed costs of exiting elevate exit barriersby reducingthe effective liquidation value of a business. A firm oftenmust face the41

substantial costs of labour settlements; this factor has ahuge impact on


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Nigeria government efforts to privatize some of the ailingindustries.Similarly, Nigerian Labour congress (NLC), the umbrellaorganization for

Nigerian workers often hit against laying-off of staff withoutadequatecompensation. Management may need to be resettledand/or retrained.Breaking long-term contracts to purchase inputs or sellproducts mayinvolve substantial cancellation penalties, if they can beabrogated at all.In many cases the firm must pay the cost of having anotherfirm fulfill

such contracts.There are often also hidden costs of exit. Once the decisionto divestbecomes known; employee productivity declines andfinancial resultsloose deteriorate. Customers quickly pull out their business,andsuppliers lose interest in meeting promises.Porter (1980) continued by saying that sometimes exit can

allow thefirm to avoid fixed investments it would otherwise have hadto make forexample, requirements to invest in order to comply withenvironmentalregulation may be avoided, as may other requirement toreinvest capital

just to stay in the industry. Requirements to make suchinvestmentpromote exit, unless making them yields an equivalent or

greaterincrease in the discounted liquidation value of the firm,because theyraise investment in the business without raising profits.42

Strategic Exit BarriersPorter (1980) stated that even if a diversified firm faces noexit barriersfrom economic consideration relating solely to the particular

business, it


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may still face barriers because the business is important tothe companyfrom an overall strategic point of view. He thus explainedthis situation

as:a. Interrelatedness: The business may be part of a totalstrategyinvolving a group of businesses, and leaving it woulddiminish theimpact of the strategy. The business may be central to thecorporationsidentity.Exiting may hurt the companys relationships with keydistribution

channels or may lower overall clout in purchasing. Forexample inNigeria, if Nigerian Brewery should stop producing starlarger beer, forpoor performance of the product in the market, it is going toaffect theoverall image of the company. Exit may render sharedfacilities or otherassets idle, depending on whether or not they have

alternative uses byfirm or can be rented in the open market. A firm terminatinga solesupply relationship with a customer may not only fore closesales ofother products to that customer but also hurt its chances inotherbusinesses on which it relied to supply key raw materials.b. Access to financial markets: Exiting may reduce theconfidence of the

capital markets in the firm or worsen the firms ability toattractacquisition candidates (or buyers). If the diverted business islarge43

relative to the total, its divestment may strongly reduce thefinancialcredibility of the firm. Even though a write-off is justifiedeconomically

from the point of view of the business itself, it maynegatively affect


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earnings growth or otherwise act to raise the cost of capital.Smalllosses over a period of years through operating the businessmay be

preferable to a single large loss from this standpoint. Thesize of writeoffswill obviously depend on how depreciated the assets in thebusinessare relative to their liquidation value, as well as the ability ofthe firm todivest the business incrementally as opposed to having tomake a onceand for all decision.

The more related a business is to others in the company,

particularly interms of sharing assets or having a buyer-seller relationship,the moredifficult it can be to develop clear information about the trueperformance of the business. Businesses performing poorlyconsequently fail even to consider economically justified exitdecisions.2.8 STRATEGIC OPTIONS IN DECLINING INDUSTRYPorter (1980) strategy during decline usually revolves

arounddisinvestments or harvest, however, there is but a range ofstrategicalternatives although not all are necessarily feasible in anyparticularindustry. The range of strategies can be convenientlyexpressed interms of four basic approaches to competing in decline,which the firmcan pursue individually. These alternative declining

strategies are.44

1. Leadership: The leadership strategy is directed at takingadvantage of a declining industry whose structure is suchthat theremaining firms are above average profitability andleadership isfeasible vis a vis competitors. The firm aims at beingfirms

remaining in the industry. Once this position is attained thefirm


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switches to a holding position or controlled harvest strategy,dependingon the subsequent pattern of industry sales. The premiseunderlying this

strategy is that by achieving leadership the firm is in asuperior positionto hold position or harvest than it would be otherwise.

Tactical steps that can contribute to executing theleadership strategyare the following:a. Investing in aggressive competitive actions in pricing,marketing orother areas designed to build market share and ensure rapidretirement

of capacity from the purchasing market share by acquiringcompetitorsor competitors product lines at prices above theiropportunities for sale;this has the effect of reducing competitors exit.b. Purchasing and retiring competitors capacity, which againlowers exitbarriers for competitors and insures that their capacity is notsold within

the industry; a leading firm in the mechanical sensorindustry repeatedlyoffers to buy the assets of its weakest competitors for thisreason.2. Niche: The reason of this strategy is to identify a segment(ordemand pocket) of the declining industry that will not onlymaintainstable demand or decay slowly but also has structuralcharacteristics

allowing high returns. The firm then invests in building itsposition in45

this segment. It may find it desirable to take some of theactions listedunder the leadership strategy in order to reducecompetitors exitbarriers or reduce uncertainty concerning this segment.Ultimately the

firm may either switch to a harvest or divest strategy.


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3. Harvest: In the harvest strategy, the firm seeks tooptimize cash flowfrom the business. It does this by eliminating or severelycurtailing new

investment, cutting maintenance of facilities, and takingadvantage ofwhatever residual strengths the business has in order toraise prices orreap benefits of past goodwill in continued sales, eventhoughadvertising and research have been curtailed. Othercommon harvesttactics include the following:* Reducing the number of models.

* shrinking the number of channels employed;* Eliminating small customers;* Eroding service in terms of delivery time (inventory), speedofrepair, or sale assistance.

The harvest strategy presupposes some genuine paststrengths onwhich the firm can live, as well as an industry environmentin the

decline phase that does not degenerate into bitter warfare.Withoutsome strengths, the firms price increases, reduction inquality, cessationof advertising, or other tactics, will be met with severelyreduced sales.If the industry structure leads to great volatility during thedeclinephase, competitors will seize on the firms lack ofinvestment to grab

market share or bid down prices, thereby eliminating theadvantages tothe firm of lowering expenses through harvesting. Also,some46

businesses are hard to harvest because there are fewoptions forincremental expense reduction; an extreme example is onein which the

plant will quickly fail to operate if not maintained.


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4. Quick divestment: This strategy rests on the premise thatthe firmcan maximize its net investment recovery from the businessby selling it

early in decline, rather than by harvesting and selling it lateror byfollowing one of the other strategies. Selling the businessearly usuallymaximizes the value the firm can realize from the sale of thebusiness,because the earlier the business is sold, the greater is theuncertaintyabout whether demand will indeed subsequently decline andthe more

likely other markets for the assets, like foreign countries, arenotglutted.In some situations it may be desirable to divest the businessbeforedecline, or in the maturity phase. Once decline is clear,buyers for theassets inside and outside the industry will be in a strongerbargaining

position. On the other hand, selling early also entails the riskthat thefirms forecast of the future will prove incorrect.Divesting quickly may force the firm to confront exit barrierslike imageand interrelationships, although being early usuallymitigates thesefactors to some extent. The firm can use a private labelstrategy or sellproduct lines to competitors to help ease some of these

problems.47

2.9 COMPETITION IN GLOBAL

assessment of performance measure men 1

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