Download strategies employed by the national bank of kenya to gain

STRATEGIES EMPLOYED BY THE NATIONAL BANK OF KENYA
TO GAIN COMPETITIVE ADVANTAGE
BY
DIANA MWANGI
A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE
REQUIREMENT FOR THE AWARD OF THE DEGREE OF MASTER OF
BUSINESS ADMINISTRATION, SCHOOL OF BUSINESS, UNIVERSITY OF
NAIROBI
NOVEMBER 2013
Declaration
This research project is my original work and has not been submitted for examination in
any other University.
Signature: ........................................
Date: ............................................
DIANA MWANGI
D61/8796/06
This research project has been submitted for examination with my approval as a
University Supervisor.
Signature: ..........................................
Date: ............................................
PROF. EVANS AOSA
DEPARTMENT OF BUSINESS ADMINISTRATION
SCHOOL OF BUSINESS
UNIVERSITY OF NAIROBI
Acknowledgements
I wish to thank my supervisor Professor Aosa and the entire faculty for their support
during my studies.
Dedication
This project is dedicated to the following people:
My husband Sam, for his unfailing belief in my potential.
My parents Mr. and Mrs. Mwangi for being my number one cheerleaders.
My siblings Charles, Tom, Njau, and Turi, for tolerating me (not many people can!)
My wonderful nieces and nephews Carr, Papa ,Kali and Papa(junior) who over the years,
have continually put a smile in my heart.
TABLE OF CONTENTS
DECLARATION…………………………………………………………………...
ii
ACKNOWLEDGEMENTS………………………………………………………..
iii
DEDICATION……………………………………………………………………...
iv
ABBREVIATIONS AND ACRONYMS………………………………………….
viii
ABSTRACT………………………………………………………………………...
ix
CHAPTER ONE: INTRODUCTION……………………………………………..
1
1.1 Background of the Study…………………………………………………………
1
1.1.1 Concept of Strategy………………………………………………………..
2
1.1.2 Competitive Advantage……………………………………………………
3
1.1.3 The Banking Industry in Kenya……………………………………………
4
1.1.4 The National Bank of Kenya……………………………………………….
4
1.2 Research Problem………………………………………………………………..
5
1.3 Research Objectives……………………………………………………………..
8
1.4 Value of the Study……………………………………………………………….
8
CHAPTER TWO: LITERATURE REVIEW……………………………………
9
2.1 Introduction……………………………………………………………………...
9
2.2 Theoretical Foundation…………………………………………………………..
9
2.3 Strategy and Competitive Advantage……………………………………………
11
2.4 Sources of Competitive Advantage……………………………………………...
12
2.5 Strategies employed by firms to gain Competitive Advantage………………….
14
CHAPTER THREE: RESEARCH METHODOLOGY…………………………
20
3.1 introduction………………………………………………………………………
20
3.2 Research Design…………………………………………………………………
20
3.3 Data Collection…………………………………………………………………..
20
3.4 Data Analysis…………………………………………………………………….
21
CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSIONS…..
23
4.1 Introduction……………………………………………………………………...
23
4.2 Demographic Information………………………………………………………..
23
4.3 Strategies employed by NBK to gain Competitive Advantage………………….
25
4.4 Gaining and Maintaining Competitive Advantage……………………………...
28
4.5 Discussion………………………………………………………………………..
29
CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATION…………………………………………………………….. 32
5.1 Introduction ……………………………………………………………………...
32
5.2 Summary...………………………………….......................................................... 32
5.3 Conclusion………………………………………………………………………..
34
5.4 Recommendations………………………………………………………………..
35
5.5 Limitations of the Study………………………………………………………….
36
5.6 Suggestions for Further Research……………………………………………….
37
REFERENCES……………………………………………………………………...
38
APPENDICES………………………………………………………………………
43
Appendix 1: Letter to Respondents…………………………………………………..
43
Appendix 2: Interview Guide………………………………………………………...
44
ABBREVIATIONS AND ACRONYMS
ATM
Automated Teller Machine
CBK
Central Bank of Kenya
CEO
Chief Executive Officer
CMA
Capital Markets Authority
ICT
Information Communications Technology
IT
Information Technology
KCB
Kenya Commercial Bank
MFIs
Microfinance Institutions
NBK
National Bank of Kenya
NSE
Nairobi Stock Exchange
RBV
Resource Based View
R&D
Research and Design
SME
Small & Medium Enterprises
SPSS
Statistical Package for Social Sciences
Abstract
Firms the world over, have had to use one strategy or another, in order to gain and
maintain competitive advantage. This is as a result of the globalization trend that has
intensified the level of competition among different firms, causing them to strategize in
order to stay ahead of competition. The banking industry has witnessed intense
competition the world over and the Kenyan banking industry is not an exception. To
survive in this market, commercial banks have adopted different strategies to gain and
sustain competitive advantage derived from their capabilities. In a competitive banking
industry like the Kenyan situation, absence of well-defined competitive strategies can
lead to weak positions and result in performances that are below the industry average.
The purpose of this study was to examine the competitive strategies adopted by the
National Bank of Kenya to achieve competitive advantage in the market. The study
adopted case study design to carry out this research where an interview guide targeting 5
senior officers of the bank was employed to collect data. Both primary and secondary
data were sourced and used for analysis through Content Analysis method. The study
revealed that NBK has traditionally pursued low pricing strategy to capture the market
share and sustain competition. It also came to the fore that the bank is currently
undergoing a restructuring process and is embracing cost efficiency strategy to spur
growth and gain competitive edge in the competitive banking industry. The study
recommended that the bank should focus on improving its ICT infrastructure, streamline
credit management processes, expand the branch network and train staff to be more
customer-friendly to exceed customer expectations to gain and sustain competitive
advantage. The major limitation of the study was that the respondents were cautious
about revealing a lot of information on the strategies they use, given the sensitivity of
such information. Further research may be carried out to establish how the strategies
employed by the Bank can be used to compete with other banks within its strategic group.
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
Porter (1990) defines strategy as a position of superiority on the part of a company in
relation to competitors regarding the activities and functions performed, while Cobb
(2003) argues that competitive advantage relates to how effectively and efficiently a firm
meets the wants and needs of its customers in the marketplace, relative to other
organizations that offer similar products or services. Every organization has some form of
strategy whether explicit or implied and it is these differences in strategy that determine
whether an organization can gain competitive advantage or not.
The banking sector all over the world has greatly transformed in the past two decades and
in every place there are new markets and new regulatory systems which have altered the
financial sector, creating new business opportunities, new profit levels and even new
risks that did not exist before (Carvalho, 2000). These changes witnessed in the global
financial sector have been brought about by liberalization and deregulation of the banking
sector. Privatization of state owned banks in Kenya and other transformations have
increased efficiency, reduced intermediation costs and increased competition among
commercial banks (Ongore and Kusa, 2013).
The past two decades have seen a drastic change in the Kenyan banking sector where
many non-banking financial institutions such as microfinance institutions (MFIs),
building societies, and Sacco’s are converting into fully fledged banks (Kathuni and
Mugenda, 2012). This has led to a tremendous increase in the number of banks to the
current 43 thereby setting in increased competition and an increase in the number of
products and services targeting various market segments. Statistics however still point to
the fact that “despite the faster growth in the number of commercial banks only 20% of
the population operate bank accounts and about 80% of the Kenyan population still
remains unbanked” (Kathuni and Mugenda, 2012, 132).
1.1.1 Concept of Strategy
Strategy is believed to have emanated from the art of war and the pursuit of military
success in the ancient days. Andrews (1971) and Chaffee (1985) define strategy broadly
to include goals and means of achieving such goals, while Hoffer and Schendel (1978)
and Drucker (1954) view strategy as that which defines the business of an organization.
In their view strategy determines the long term objectives of an enterprise and the courses
of action adopted, and resources allocated to perform such goals. Thompsons et al (2007)
think that strategy is a long-term plan of action designed for the sole purpose of winning.
Porter (1996) views strategy as a process of creating a unique and valuable position for a
firm using a set of activities through well-defined objectives. Mintzberg (1990) argues
that the term strategy is used to mean a plan, a ploy, a pattern, or a perspective. Strategy
therefore entails building defenses against competitive forces in an industry as well as
finding a position in the industry where competitive forces are weakest (Strickland,
2003). It is a deliberate search of ways of doing things in order to develop competitive
advantage for the firm. The competitive advantage created by such strategies defines the
difference between a firm and its competitors (Kathuni and Mugenda, 2012).
1.1.2 Competitive Advantage
Competitive advantage is a position of superiority on the part of a company in relation to
its competitors in any of the functions performed by the company (Rumelt, 2003). It is an
advantage gained by offering consumers greater value through lowering prices or
providing greater benefits and high quality services that justifies higher prices.
Competition actually exerts pressure on a firm to be proactive and formulate winning
strategies to respond to the competitive business environment in order to gain competitive
advantage (Awuah, 2011).
Competitive advantage therefore enables an enterprise to create superior value for
customers and itself (Porter, 1996). However to do so, a firm must possess adequate
resources that will create value thus leading to a position of superiority over its
competitors. Competitive advantage can be acquired through a number of strategies as
employed by a firm, that is, low cost strategy, differentiation strategy as well as focus
strategy. Barney (2003) argues that a firm experiences competitive advantage when its
actions in an industry or market create economic value and when few competing firms
engage in similar actions. Barney therefore tries to tie competitive advantage to
performance of the firm by arguing that a company will only obtain above normal
performance when it generates greater than expected value from its resources thus
competitive advantage.
1.1.3 The Banking Industry in Kenya
The banking industry in Kenya comprises commercial banks, microfinance institutions,
foreign exchange bureaus and credit reference bureaus. There are 43 commercial banks
(13 foreign owned while 30 are locally owned), 1 mortgage finance company, 6 deposit
taking microfinance institutions, 118 forex bureaus and 2 credit reference bureaus. Ten of
the major banks are listed on the Nairobi Stock Exchange (CBK, 2012). Banks in Kenya
offer corporate and retail banking services with larger banks offering other services
including investment banking.
The banking sector is governed by the Companies Act, the Banking Act, the Central
Bank of Kenya Act and prudential guidelines issued by the Central Bank of Kenya. The
largest banks in Kenya in terms of asset size include Kenya Commercial Bank (KCB),
Barclays, Standard Chartered, Co-operative Bank, CFC- Stanbic, Equity, Commercial
Bank of Africa, Citibank, NIC bank, National Bank of Kenya (NBK), and Diamond Trust
Bank (CBK, 2012).
1.1.4 The National Bank of Kenya
This study focused on NBK which was started in June 1968 by the Government of
Kenya, with the aim of providing banking services to middle level civil servants. The
current shareholding structure of the bank consists of the National Social Security Fund
(48.06%), Government of Kenya (22.5%), and the 29.44% owned by the general public
through shares bought at the Nairobi Stock Exchange after the government sold off part
of its shareholding.
The bank is currently among the 10 banks listed at the Nairobi bourse (NBK, 2013). The
bank has 68 branch outlets spread in major towns throughout the country and is currently
undergoing a restructuring strategy which will see the bank create 6 different divisions to
transform the 44 year-old bank into a profitable and competitive banking entity
(Anyanzwa, 2013).
1.2 Research Problem
A firm can gain competitive advantage at the marketplace by leveraging on its
capabilities thus influencing a firm’s marketplace success (Porter, 1985). There are
underlying set of fundamental economic and technical characteristics which give rise to
competitive forces in every industry. This therefore means that a firm can improve or
erode its competitive position within the industry through its choice of strategy. A
strategist must at all times seek to position the firm to occupy the best place in the
industry to influence the operating environment in the firm’s favour (Cobb, 2003). In
order to gain competitive advantage, some organizations adopt technologies that are
unique or advanced; others strengthen their brand, while others invest in training their
staff to obtain special skills. As explained Porter (1996), strategy if well implemented can
lead to a firm’s improved operations and competitiveness. Survival and growth of a firm
is therefore dependent on strategy and the competitive advantage it derives from its
capabilities.
The Kenyan banking industry has witnessed tremendous growth over the last two
decades. Currently there are 43 banks, 13 foreign banks and 30 locally owned banks
(CBK, 2012). This unprecedented growth has been marked with jostling for position,
market share and profits. As pointed out by Kathuni and Mugenda (2012), the industry is
characterized by intense competition for customers and this has led to increased
innovation of products and services to gain and retain market share. The major tactics
used to gain market share and edge out competitors according to Ongore and Kusa (2013)
include mergers and acquisitions, product innovations, direct sales, use of technology,
focus on cost reduction, and offering one-stop-shop services (in the case of Equity and
Co-operative Bank which provide banking, stock broking , bank assurance , and mobile
money transfer services).
Banks indulge heavily in the use of strong and persuasive marketing of products and
services to promote their trade however, new products and services are easily replicated
among the rival banks with the only differentiation being services quality and bank
charges. Despite the general growth characterised in the industry, not all banks can be
said to have performed at levels that meet the industry and stakeholders’ expectations.
National Bank of Kenya (NBK) is among the top five banks in Kenya in terms of assets,
yet while the other four banks, that is, Barclays, Standard Chartered, Co-operative Bank,
and Equity have all registered double digit growth in profitability NBK is struggling with
negative growth. The bank’s profits for the year 2012 dropped by about 50% and this
was attributed to a decrease in interest income coupled with increased cost of capital. It
posted an after tax profit of Sh. 730 million as at 31.12.2012, down from Sh. 1.5 billion
the previous year.
Studies have been conducted about the use of strategy to gain competitive advantage in
virtually all the industries and in all these studies, it has been established that different
companies use different startegies to gain competitive advantage. Shin (2004) carried out
a study on the strategies used for competitive advantage in electronic commerce and
found out that majority of these companies use the marketing mix model as well as
Porter’s five forces model to gain competitive advantage. Jowi (2006) did a study on the
strategies adopted by Mumias Sugar Company to gain competitive advantage. He found
out that the main strategy used by the company was the differentiation strategy. Ogutu
and Samuel (2012) carried out a study on the strategies adopted by multinational
companies to cope with competition in Kenya.
Their conclusion was that the
multinational companies banked on better quality products, excellent customer service,
differentiation strategy, diversifiation as well as cost cutting measures to gain competitive
advantage. Abishua (2010) did a study on strategic responses used by equity bank to
compete in the kenyan banking industry and concluded that the bank relied on product
offering diversification, branch expansion and information technology strategies.
The aforementioned studies all prove that different companies pursue different strategies
to gain competitive advantage. What strategies have been adopted by NBK to gain
competitive advantage?
1.3
Research Objective
The objective of this study was to establish the strategies adopted by the National Bank
of Kenya to gain competitive advantage.
1.4
Value of the Study
There is very little information on the competitive strategies used by NBK to penetrate
the highly competitive banking industry. Research in this area may help to reveal
unknown information to help in better understanding the current strategies employed and
what the bank needs to do to strengthen its competitiveness. Other scholars may also use
this research as a source of reference material for other similar or related studies.
This study may also contribute widely to banking practice since other commercial banks
may also be enlightened on the best strategies to undertake in order to gain competitive
advantage in the industry. In addition, the banks may also get a better picture about the
benefits, costs, and risks involved in the use of various strategies. This information may
help them to discern the kind of functions they need to outsource to other better
specialized firms in order to increase their chances of success in the market.
The Central Bank of Kenya (CBK) may use information from this research to formulate
policies that govern the operations of Banks operating within the domestic environment.
In particular, CBK may formulate comprehensive prudential guidelines that address the
various challenges within the sector so as to facilitate faster growth of the industry in line
with international practices.
CHAPTER TWO: LITERATURE REVIEW
2.1
Introduction
This chapter summarized information from books, journals, magazines and other
publications carried out in the same or closely related fields of study. The chapter
covered theoretical and empirical review of literature.
2.2
Theoretical Foundation
Scholars have come up with different theories to explain the phenomena of using strategy
to gain competitive advantage. Some of these theories include the following:
2.2.1 Porters Generic Strategies
Porter (1980) argues that competitive advantage is the superior position a firm occupies
in a market, vis a vis its competitors. Porter further says that in order for a firm to occupy
this position of superiority, it must employ the use of what he calls the generic strategies
and these strategies are low cost strategy, differentiation strategy and focus strategy.
A firm may choose to use the cost strategy whereby it employs economies of scale to
become the lowest cost producer in the industry thus attracting mass sales due to its
attractive pricing. On the other hand, if a firm chooses the differentiation strategy, it will
then focus on producing a unique product and in this case, its target market is usually not
price sensitive. Finally, a firm may opt to use focus strategy whereby it chooses a niche
market and endeavors to serve it exclusively. A firm may therefore use any of the three
generic strategies to achieve competitive advantages in the market.
2.2.2 The Resource Based View Theory
The theory encourages organizations to identify and develop resources that give them an
edge over their competitors. The resources identified and developed can only achieve a
competitive advantage if they are valuable and non-imitable (Chaharbhaghi and Lynch,
1999). The theory postulates that a firm’s ability to enjoy a position of advantage solely
relies on the resources it possesses which may be human, financial, technological or
physical (David, 1997).
It is the efficient utilization of these resources that gives the firm the power to defeat its
competition and therefore theorists who support this view encourage the firm to keep
improving their resources in order to stay ahead of competition. Grant (2005) supports
this argument by adding that the resources and capabilities of a firm form the first basis
of the firm’s profitability, that is, before a firm looks at other avenues, it must first work
with the resources it owns.
2.2.3 Strategic Groups Theory
This theory talks about intra industry strategic groupings that shape the industry as a
whole, that is, in every industry, there is a cluster of competitors. In his study of the
appliances industry, Hunt (1972) discovered the existence of a cluster of firms who
competed differently from other clusters within the same industry. He therefore came up
with the term “strategic groups” to describe these groupings. Players within a cluster
group compete in a cutthroat manner leading to rapid innovations and improved customer
service in a bid to attract and retain customers.
These strategic groups are known to employ similar tactics in order to gain competitive
advantage. Porter (1980) shows the similarity between strategic groups and entry barriers
in an industry. He explains that it is difficult for a firm to move from one strategic group
to another since the members of one strategic group coalesce to keep out further
competition.
2.3 Strategy and Competitive Advantage
Johnson and Scholes (2008) define strategy as “the direction and scope of an organization
over the long-term: which achieves advantage for the organization through its
configuration of resources within a challenging environment, to meet the needs of
markets and to fulfill stakeholder expectations". A survey conducted on various chief
executive officers (CEOs) in America showed that they did not place profitability as their
top priority, but rather well-thought-out strategy as the most important factor for an
enterprise especially for its growth and survival in future (Hitt et al, 2003). Consequently,
Thompson et al (2004) recommends two distinct performance yardsticks that a firm may
use to measure its success, that is, financial performance and strategic performance.
Financial performance is concerned with factors such as sales revenue and profitability,
whereas strategic performance is considered in terms of competitiveness, technical
progress, and market position.
Ansoff (2003) points out that interest in strategy grew out of the realization that a firm
needs a well thought-out and defined course of action to chart its growth direction.
Research has shown that firms which practice strategic planning are largely successful
and perform better than those that do not. However, David (2003) argues that this does
not mean that all companies that engage in strategic planning are successful.
Competitive advantage is a position of superiority on the part of the company in relation
to its competition in any of the multitude of functions or activities performed by the
company. Superiority means that the firm performs a given function distinctly from the
way other firms perform the same function (Rumelt, 2003). Firms have different avenues
with which they may gain competitive advantage such as superiority in production
techniques, superiority in research and design (R&D), superiority in marketing activities
as well as in customer service. The superiority or the distinction offered by the firm’s
function must add value to both the firm and the customer and must also be perceived by
that customer as such (Ellram et al, 2007). Without this condition, no competitive
advantage accrues to the firm from that superiority or distinction.
2.4
Sources of Competitive Advantage
Scholars have come up with two different views to explain factors that influence a firm’s
performance in an industry. The industry structure view led by Porter (1980) suggests
that a firm’s performance is determined by the characteristics of the industry with which
it is operating in. Such characteristics include the bargaining power of suppliers, the
bargaining power of buyers, rivalry, entry barriers and substitution threats. The view
therefore focuses on the industry as the only relevant unit of analysis. The second view is
called the resource-based view (RBV) of the firm which suggests that a firm’s returns are
dependent on the firm’s heterogeneity rather than the industry structure (Barney, 2003:
Rumelt, 2003). Firms that are in a position to accumulate resources and capabilities
which are rare, valuable, non substitutable, and not easy to imitate will be able to achieve
competitive advantage over rival firms. Internal factors that may give a firm an edge
include the possession of superior resources, business location, as well as its mastery of
customer service. This view unlike the industry structure view focuses on the firm as the
primary unit of analysis.
Porter (1998) points out three generic competitive strategies which a firm may choose to
compete under and these include, cost leadership strategy, differentiation strategy and
focus strategy. Under cost leadership, a firm usually follows a strategy that targets
customers who are price sensitive and in this case, the firm may accomplish this through
mass production which in effects leads to economies of scale, whose benefits are then
passed on to the customer (Porter, 1998) The firm may also achieve low cost production
through the reduction of operating costs and other overhead costs resulting into a low unit
cost that attracts mass purchases. Cost leadership strategy must not, however, be pursued
at the expense of quality, since this may easily destroy a brand leading to the loss of
market.
Differentiation strategy is where the firm positions itself to provide a unique product or
service and even charges a premium for creating the uniqueness. The strategy is useful
where the target market has unique tastes and preferences and the firm has the ability to
fully meet their requirements (Porter, 1998). In doing so, the firm gains brand loyalty
which effectively locks out competition. Porter asserts that the firm can only gain this
attribute of being different if it is actually unique at doing something or just perceived as
such by customers. Focus strategy on the other hand encompasses both cost leadership
and differentiation strategy since it focuses on a niche market and dedicates itself to
serving it exclusively thus enjoying loyalty (Porter,1998)
2.5
Strategies employed by firms to gain Competitive Advantage
In today's fast-changing competitive environment, firms' competitive positions are
constantly challenged by the emergence of new technologies, products, markets and
competitors. As a result flexibility and adaptability are necessary concepts that a firm
needs to employ to sustain competitive advantage (Saloner et al., 2001). Though the
banking sector in Kenya is still young, the emerging global trends have not spared it and
as such these banks strive to compete amongst themselves as well as with foreign banks.
Players in any industry compete to grow their profits, customer base as well as product
offerings. As such, they are forced by the environment adopt different strategies to grow
and retain their market share. The common strategies adopted firms to gain competitive
advantage include the following:
2.5.1 Use of Technology
Innovation in technology is considered a key resource in the growth of companies and the
development of competitive advantage. Technology as such plays a fundamental role in
shaping the pattern of product innovation and also improves a firm’s ability to provide
superior customer service as compared to its competitors. According to Bankley et al
(2006), technology defines a better way of doing things and organizations that have
advanced technology continuously identify better processes and systems to ensure that
they gain market share and remain market leaders. Rapid advancement in information
and communication technology (ICT) has had profound impact on various sectors and
has been instrumental in developing key strategies including organization structures,
customer service, marketing, and operational strategies. Competitive advantages
significantly influence the firm’s market place success. By using technological
capabilities firms can increase customer value thus gaining competitive advantage
(Afuah, 2002).
Mahmood et al (2010) argue that technology only compliments the traditional ways of
competing however mere possession of such technology does not accrue benefits to a
firm. The firm’s success will therefore depend on how well it leverages technology and
uses it to complement its processes. Mahmood et al (2010) further observe that
information technology enables a company to acquire competitive intelligence and thus
get to know the plans and strategies of competitors. As a result, effective application of
technology enables a firm to acquire a competitive edge relative to its rivals at the
marketplace.
2.5.2 Branch Network Strategy
Awuah (2011) observes that traditionally firms have used their branch network to retain
their market share and since this network addresses the importance that customers place
on location, firms with extensive branch network suffer less switching costs as compared
to those with few outlets. This strategy ensures that customers have a greater access to a
firm’s services and products thereby creating competitive advantages for the firm.
Branches can also present physical entry barrier to rivals as they involve huge fixed costs
and many firms normally shy off at having to spend large portions of their capital on
branch expansion. Such fixed costs are usually passed on to the customers before the
new branch breaks even and this may prove to be costly for the customers. (Northcott,
2004). This strategy thereby keeps the number of competitors to a minimum thereby
presenting the firm with the opportunity to grow its products and services at its own pace.
2.5.3 Direct Sales Strategy
Direct selling involves the sales of consumer products or services through salespersons
on a person-to-person basis away from the fixed retail location (Brown, 2009). However,
Brown (2009) warns that the direct sales strategy, which is a direct assault on the
competitors’ position, is a hard way to sell, unless a firm has a clear superiority
advantage over its competitors. Armstrong and Porter (1996) describe the direct sales
strategy as a form of personal selling where the salesperson presents goods and services
before a potential buyer and persuades them to make a purchase.
Most customers find this strategy convenient since they do not have to move to a firm’s
physical location, yet they get to purchase products and services from the comfort of their
office or homes. A firm that has perfected this strategy is better able to push through
more sales volumes and gain a larger market share than those that prefer to wait for
customers to come to their premises.
2.5.4 Marketing Strategy
Firms continue to invest huge amounts of funds on their marketing activities every year,
and this is especially true for firms in the financial industry. Parasuraman (1985) points
out that organizations base their marketing strategies on the Seven Principles (7Ps) of
marketing: product, price, place, promotion, people, physical evidence and processes.
The applications of these strategies are guided by the prevailing operating environment
and the firm’s objectives and capabilities. These strategies help to position the firm well
in the industry as well as increase awareness about its existence, products and services
offered. Kotler (1996) also asserts that marketing the quality of a service offered by a
firm is central to its acceptability, success and growth. He adds that a firm needs to
understand customer expectations, segment its market appropriately, position the service
well within the industry and carry out effective customer relationship management to
ensure customer retention.
Fleisher and Soussan (2007) points out that as a marketing strategy, a firm needs to
gather information on the segments served by its competitors, the market share they
command, the customer base, growth rates, customer loyalty and promotional mix used.
Also of importance are the advertising agencies they use, their sales and distribution
channels, pricing formulas as well as discounts given to customers.
2.5.5 Customer Service Strategy
The delivery of a service involves service providers, equipment used to provide the
service, the physical facilities and finally, customers at the service delivery end (Rob,
2009). Though an innovative product concept may give a company an initial competitive
edge, superior customer service is vital to sustaining business success. When a business
delivers quality customer service, customers are more likely to perceive value in
transactions, spread favorable word-of-mouth to potential customers, respond positively
to employee cross-selling efforts and also engage in repeat purchases of its
services/products. A business that is truly dedicated to delivering excellent quality service
to its customers will have higher customer retention and more sales volumes even to
existing customers (Rob, 2009). The focus of any firm must be customer satisfaction
through integration of service quality throughout the entire system to create repeat
purchases and loyal customers.
Service delivery as a strategy is important in that it is used to communicate with
customers, manage problem resolution processes and handle other aspects of the
customer relationship necessary to deliver high quality service. Setting customer
expectations and proactively communicating with customers are key aspects of managing
these relationships. Knowing what your customers really need is the key to providing
high quality customer service. Being accessible, listening to concerns and resolving
problems are fundamental when building customer loyalty (Customer Expressions
Corporation, 2011). Companies that implement effective customer service strategies
realize financial benefits, either through increased profits or through reduced costs
associated with repeat purchases from loyal customers, customer referrals, employee
retention, improved information exchange and streamlined service delivery (Rinehart,
2001).
CHAPTER THREE: RESEARCH METHODOLOGY
3.1
Introduction
This chapter presents the various stages and phases that were followed in completing the
study. It will cover research design, target population, data collection tools and data
analysis techniques.
3.2
Research Design
Kothari (2004) defines a research design as a blueprint for collection, measurement and
analysis of data. A research design is therefore a framework for specifying relationships
among the study’s variables and outlines procedures for every research activity. This
study employed the case study method to establish strategies employed by National Bank
of Kenya to gain competitive advantage in the industry.
Mugenda (2008) explains that a case study attempts to thoroughly investigate the concept
at hand and in this case therefore, competitive strategies employed by NBK were
investigated. The case study method was selected because it enabled the researcher to
have an in-depth understanding of the phenomena at hand since it is useful in describing
the characteristics of a large population.
3.3
Data Collection
This study utilized both secondary and primary data sources whereby secondary sources
included previous materials documented in form of newspapers, books, journals,
magazines and research papers which were available in libraries and also online through
websites. The most common methods for collecting primary data include interviews,
observations and use of questionnaires. In this case, an interview guide was used since it
allowed for a more in depth interaction with the study respondents and it consisted of
questions covering issues on strategies employed by the Bank and the competitive
advantage gained from such strategies.
The interview guides were administered in person to five senior managers all based at the
National Bank of Kenya headquarters at Harambee Avenue in Nairobi. The interview
guide method was selected because it made it easier to analyze the information collected
and it allowed the researcher to corroborate the information with data collected from
secondary sources.
3.4
Data Analysis
After all the data had been collected from secondary and primary sources, it was then
processed and analyzed to help interpret the findings. Data processing involves data
editing, coding, classification and data entry (Manoj, 2006). Nearly 90% of the data
collected in this study was qualitative in nature and was therefore analyzed through the
content analysis method which according to Mugenda (1999) is the systemic qualitative
description of the composition of the objects or materials of the study. It involves
observation and detailed description of objects, items or things that comprise the study.
Content analysis technique was used since it is the best method for analyzing data in a
case study and would enable the researcher to achieve the objectives of the study. This
technique enriches the research content since it does not limit the responders from giving
diverse views that may bring out a different angle to the research.
CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION
4.1
Introduction
This chapter looks into the analysis, presentation and discussion of the data collected
from the field and thereafter presents the results and the findings of the study. The
findings focused essentially on the competitive strategies taken by the National Bank of
Kenya to address competition in the banking industry. Using an interview guide, 5 senior
officers from business banking (corporate and retail banking) department, customer
service department, operations department, Finance department, and ICT department
were interviewed for this study.
4.2
Demographic Information
The respondents were required to provide information on their job titles and thereafter,
the various positions held by the respondents at the bank were categorized into two major
categories (directors and heads of departments). Four out of the five respondents
indicated their designations were heads of department while one was a director. Further
enquiries showed that the bank traditionally had a thin structure with the Managing
Director at the very top while the departments were headed by a General Manager at the
back office.
The current structure after the recent restructuring in 2012 has a Managing Director at the
apex, while the Director of corporate and Institutional Banking, the chief Finance
Officer, the General Manager Human Resources, the General Manager Audit occupy the
second tier of leadership. The research further showed that the administered interview
guide had a ratio of 1:4 with regard to female and male distribution implying therefore
that those in managerial positions in the Bank were predominantly male.
The interviewer sought to know the number of years that each officer had worked with
National Bank of Kenya and the banking industry in general. Out of the five respondents,
only two (2) had worked with the bank for over 10 years while the rest had only been at
the bank for less than two years. Interestingly majority of the respondents had been
engaged with other banks for between 11-15 years but had only served NBK for an
average of 5 years. The distribution showed that a fairly large percentage of those holding
senior managerial position in National Bank of Kenya are fairly new to the Bank and are
therefore better placed to view the bank from a different perspective (and hence
transform it) than the ones who are entrenched in institutional memory.
The study found that while all the respondents were first degree holders, majority of them
were also master’s degree holders and were also in possession of certificates in banking.
The respondents were therefore highly qualified to perform their duties as senior
executives at the bank. This high academic qualifications also point to the high level of
reliability of the information the respondents gave to this researcher.
4.3
Strategies employed by NBK to gain Competitive Advantage.
This study sought to ascertain the capabilities and resources that are considered important
in helping the bank to achieve and retain competitive advantage. Respondents indicated
several capabilities that they considered would help to place the bank in a good
competitive position in the banking industry in future. The respondents were quick to
point out the bank does not currently enjoy any absolute competitive advantage in the
market but was working on it. Amongst the capabilities they were confident the bank is
busy accumulating that would distinguish it from competitors include improved
efficiency and technological innovation. This was followed by the promise of automation
of processes and provision of efficient and extensive service delivery channels. Customer
service and risk monitoring were also mentioned to be part of the strategy the Bank
intends to use, however they were not given a lot of significance. This shows that the
bank will mainly leverage on technology, cost efficiency and extensive banking outlets to
gain and retain competitive advantage.
The researcher in the quest to determine the most important factors that affect customer
acquisition and growth, sought to know how various variables such as customer service,
branch network, bank charges, access to loans, account relationship management and cost
of operations affect customer acquisition and growth. According to the respondents,
extensive branch network and cost of operations are the most important factors
contributing to customer acquisition and growth at the Bank. This was perhaps influenced
by the fact that the larger market segment is retail clients who rely on outreach and
pricing of services/products. The bank’s easy access to loans and customer service were
adjudged the third most important factors in customer acquisition and growth, while
customer relationship management as well as cost of operations was ranked as the least
important factors. This revelation shows that the bank leans heavily towards retail
customers and is yet to get a firm grasp on the corporate customer base like its peers in
the market.
The study also established that NBK, unlike its peers in the market, does not have a
department whose sole responsibility is corporate planning and strategy. All the
respondents indicated that as currently structured, NBK does not have a strategy and
planning department and this might be a pointer to the extent to which the management is
committed to strategic planning and management. This was also corroborated by the fact
that majority of the respondents did not know how often the bank reviewed its corporate
strategies. Opinion on how often the bank reviewed its strategic plan was not answered
satisfactorily giving the impression that the respondents despite being senior executives
at the Bank, were not sure of the answer.
This research further revealed that in general, NBK is currently implementing cost
efficiency strategy and focusing on restructuring of the bank through staff rationalization,
target marketing and expansion of its outreach to customers through branch and ATM
networks. The respondents also indicated that the bank was undergoing an elaborate
restructuring process to diversify its balance sheet as part of its competitive advantage.
The bank had previously concentrated its strategy on retail banking and offering low cost
services to its customers, mostly retail. The bank is also changing focus to target
marketing strategies, staff rationalization and cost efficiency as part of the new sources of
competitive advantage. It created corporate and Institutional Banking division in the past
one year to rival top banks like Kenya Commercial Bank, Co-operative Bank, Barclays
Bank, and Standard Chartered Bank. It is expected that this move will significantly
reduce the Bank’s overreliance on consumer products only.
According to the respondents, the bank has significantly strengthened its capacity for
treasury, risk and corporate banking and this has been witnessed through the high level
recruitment of new talents in treasury, market risk, operational risk, credit risk, and
corporate departments. The recruitment process has seen staff rationalization taking
effect whereby many staff members have been laid off in the past one year. The drive to
focus on credit strategies to ensure quality loan book and reduce portfolio risk and the
staff rationalization process is aimed at achieving cost efficiency which is very key to the
bank. In addition, the respondents explained that the bank has hired six executives to
head the retail banking, Islamic banking, institutional banking, finance and currency
trading departments in order to capture a larger market share.
When the respondents were asked to indicate whether or not NBK enjoys competitive
advantage in the Kenyan banking industry, they responded in the affirmative. The
respondents argued that the low pricing strategy employed by NBK is a main source of
competitive advantage to the Bank. They however added that the low cost strategy alone
is not sustainable as evidenced by the fact that the bank was ranked nearly at the bottom
of Tier II banks in the market despite its asset base pointing it to Tier I.
The respondents were asked about their opinion on what the bank should do to gain and
maintain competitive advantage in the market. They unanimously agreed that the bank
should leverage on technology to drive growth and position itself as a worthy competitor
in the market. According to the respondents, the bank is especially focusing on mobile
banking platform, the new core banking system (Bank Fusion Universal Banking BFUB), internet banking and ATM expansion to cut on costs and increase revenue
growth. The future plan for the bank is to invest in the expansion of branch network, with
specific plans to open about 30 new branches across the country. This will be
complimented with the automation process of all operational activities and fast tracking
of agency banking model to rival peer banks in the market.
The bank has also rebranded and changed its logo and colours from green to yellow to
give it new impetus in the market and new identity, with a new slogan “Bank on Better”
as the promise to its customers and all its stakeholders. The respondents further indicated
the bank is due to raise additional capital from shareholders through a rights issue by
mid-2014. This additional capital will go towards beefing up the capital base to support
its ambitious balance sheet growth to Ksh.31 billion from Ks.8 billion and revamp its
infrastructure. With this war chest, the respondents believed the bank is capable of
growing its deposit base and gain competitive edge in the market.
4.4
Discussion
The findings of this research can be compared with literature review on the same subject
as well as similar studies conducted on the employment of different strategies to gain
competitive advantage.
4.4.1 Comparison with theory
The literature review postulated that a well-thought-out strategy is more important for an
enterprise than profitability for its growth and survival (Hitt et al, 2003). It also argued
that competitive advantage is a position of superiority in the sense that a firm can perform
a given function differently distinct from the way competitors perform the same function
(Rumelt, 2003). This study found that the National Bank of Kenya does not currently
enjoy any superiority position in the banking industry in Kenya that may distinctively
place apart and make it standout from competition. It was noted that its capabilities have
not added significant value to the bank in terms of growth and profitability and even to its
customers. The bank must therefore strive to accumulate resources and capabilities that
are considered rare by customers and not easy to imitate and substitute by that of
competitors.
This study pointed out that the bank is currently implementing a cost efficiency strategy
through staff rationalization and reducing overhead costs. It is also implementing target
marketing strategy through focusing on corporate and institutional banking and Islamic
banking to complement its retail market target. Literature had argued that a firm can
strive to implement three generic strategies which include differentiation, cost leadership
and focus strategy. Porter (2000) explains that a firm can seek to achieve competitive
advantage in one or all of the three strategies. It can also seek to be a low cost service
provider by reducing overheads and staff costs. It may also choose differentiation
strategy by offering unique products in the market which allows it to charge premium
prices, or opt for focus strategy by defining its scope of operation or focus on technical
innovation. There is therefore a huge similarity in the drive of the bank to implement cost
leadership and focus strategy hinged on rationalization, cutting operational costs,
targeting different markets, and implementing internet, mobile phone banking, and
automation.
4.4.2 Comparison with other studies
Studies conducted on the use of strategy to gain competitive advantage have confirmed
that all firms operating in any industry follow some sort of strategy in order to gain
competitive advantage. This is evidenced in the results of the studies done on the
strategies adopted by Mumias Sugar Company (Jowi, 2006) as well as those of strategies
adopted by multinationals to cope with competition in Kenya (Ogutu and Samuel, 2012)
In his study of Equity Bank, Abishua (2010) discovered that the Bank used product
offering diversification, branch expansion and information technology strategies to gain
competitive advantage.This places Equity Bank in the same strategic group as NBK since
NBK is also pursuing similar strategies to gain competitive advantage. The only
difference between the results of the two studies is that while Equity Bank is aggressive
in implementing strategy, NBK is moving at a slower pace therefore Equity Bank gains
more advantage that NBK.
CHAPTER FIVE: SUMMARY, CONCLUSION AND
RECOMMENDATIONS
5.1
Introduction
Grant (2005) observes that competitive advantage is a sustained benefit of implementing
some unique value-creating strategy. This unique strategy is based on the combination of
internal organizational resources and capabilities that cannot be replicated easily by other
organizations. This study examined the competitive strategies adopted by the National
Bank of Kenya to gain competitive advantage in the Kenyan banking industry. The
specific objective of the study was to analyze the current competitive strategies being
pursued by NBK. This chapter summarizes the findings of the study, gives
recommendations, identifies areas for further study and offers conclusion to the research
study.
5.2 Summary of findings
The study established that the main sources of competitive edge over other banks is
driven from the low bank charges for the range of services offered to the public and
possibly the length of time that the bank has been in existence covering over 40 years,
which have not worked well for the bank. A bank can therefore improve or erode its
competitive position within the industry through the choice of strategy(s) that it makes.
The other future source of competitive advantage would be its ambitious restructuring
program that might endear it to customers and possibly translate into competitive edge
for the bank.
The bank has traditionally pursued pricing strategy (low bank charges) to achieve
competitive edge with very little success in terms of growth in customer base and
profitability. Currently the bank is restructuring and focusing on cost leadership strategy,
target marketing to rope in corporate clients and is planning to invest heavily on branch
expansion strategy to leverage on product outreach. The bank therefore does not enjoy
economies of scale from its branch network which stands at 68 compared to 175 for
Kenya Commercial Bank spread across the country. Staff rationalization and credit
management strategies are also being pursued currently in order to drive growth and
ensure cost efficiency.
NBK is making a deliberate decision to computerize and ensure all its outlets are
networked to improve on efficiency, customer information management and to provide
easy access to banking services. This is expected to take effect sometimes in June 2014
after the much anticipated shares drive to raise additional core capital for expansion and
infrastructure development. The study found out that the bank presently does not have a
superior ICT system to position it strategically in the market to survive and sustain the
requisite competitive edge within the intensely competitive industry.
It was established that easy access to credit is not one of the National Bank of Kenya’s
strongest points as the respondents placed it a distance fourth in the bank’s factors that
affect its customers’ growth and acquisition. In order to control costs and ensure
improved earnings from assets, a bank must focus on its credit management strategy as a
matter of priority. Credit management strategies are therefore established to be weak at
the banking institution.
The level of customer service was placed third among the six most important factors as
ranked by the respondents, indicating the low level of importance attached to the
customer service in National Bank of Kenya. It was thus established that customer
service strategies are yet to be well developed to help the bank gain competitive edge.
5.3
Conclusion
The study established that there is cut-throat competition in the banking industry for
customers and profitability. As a result, commercial banks increasingly innovate and
adopt various strategies to differentiate them from competition and place them at an
advantage relative to other players. Various strategies such as pricing, direct sales, staff
rationalization, cost leadership, target marketing, information technology and branch
network are therefore at play to ensure a competitive edge is gained and maintained as a
market leader.
The bank has only pursued pricing strategy religiously where it
concentrated on low bank charges as the strategy to differentiate it from competition.
The restructuring process at National Bank of Kenya seems to be geared towards the right
direction which should allow the bank to focus on long term plans to counter competition
in the competitive banking industry and help it achieve its goals and objectives. It should
serve as a key plank on which the bank should gain and sustain its competitive edge in
the market. The strategic decision to focus on branch network expansion and adopt
computerization of operations of the bank is also expected to achieve efficiency in
customer information management and provide customer easy access to banking services
at the customers’ own convenience. The general drive to implement cost efficiency
strategy will also help to differentiate the bank in the market. Generally, the study
concludes that bank presently does not have a unique competitive advantage in the
market and the processes being put in place in form of restructuring should be subjected
to scrutiny to establish whether they will yield significant advantage to the bank.
5.4
Specific recommendations for achieving competitive advantage.
In the view of the findings of this research study, it is recommended that the bank should
greatly invest on the improvement of customer service delivery and turn-around time to
provide feedback to customers to ensure efficient and convenient services are delivered.
The bank needs to aggressively train staff especially the frontline officers on the
importance of customer service and focus on exceeding customer expectations for the
restructuring process to translate into growth of customer base, profitability and balance
sheet growth.
The study also recommends that the bank should invest heavily in ICT infrastructure and
regularly review and update the infrastructure to ensure they are using the most efficient
technologies in the market to gain and sustain competitive edge. The new core banking
system is not sufficient on its own and should therefore be reinforced with networking in
all the branches with the aim of reducing transaction time.
The bank also needs to streamline its credit access processes by focusing on a prudent
credit management strategy. The process of loan application, processing and
disbursement should be made efficient to make the bank competitive. Credit risk
management should also be sound to ensure a quality loan book that guarantees good
income to the bank. The bank should do more in terms of improving its credit
management process through utilizing ICT to eliminate bureaucracy in the application,
approval, disbursement and monitoring processes.
Finally, this study recommends that the bank should focus on an outreach strategy
through branch expansion. The expansion strategy can be complemented with wide offsight ATM machines, internet banking and a mobile banking platform to reach more
customers to aid in customer and commission growth.
5.5
Limitations of the Study
The researcher faced limitations especially in getting the respondents to find time to sit
for an interview. Given the fact that bankers work from 8am to sometimes after 8pm,
most interviews were conducted after working hours since this is the only available time
the respondents could afford.
Further given the nature and sensitivity of banking practice, most respondents were
cautious about giving away too much information on their strategies. They were therefore
giving scanty responses in the guise of protecting the privacy of their business.
5.6 Suggestions for further research
This study was a case study of one particular banking institution (National Bank of
Kenya) in a market with more than 43 players. As a result, every aspect of competition
could not be exhaustively studied and subjected to a more analytical study to determine
the extent to which they can withstand competition and help gain competitive advantage
using qualitative methods.
This therefore makes it more appropriate to subject other variables such as profitability of
a company and market share to determine the effect of competition and advantage they
bring to a firm. A further research should thus be carried out on these variables.
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APPENDICES
Appendix 1: Letter to Respondents
Dear Respondent,
RE: Strategies Employed by the National Bank of Kenya to Gain Competitive
Advantage.
I am a student at the University of Nairobi pursuing a Masters of Business Degree in
Strategic Management. I am conducting a research on the strategies employed by the
National Bank of Kenya to gain competitive advantage. I kindly request you to spend a
few minutes of your time in answering the questions in appendix 2. The interview guide
covers a number of important areas on National Bank of Kenya and I assure you that any
information will be treated with utmost confidentiality for the sole purpose of this
research.
Thank you.
Yours sincerely,
Diana Mwangi (Researcher)
Appendix 2: Interview Guide
1. Name of interviewee?
2. What is your designation in the bank?
3. Please indicate the number of years you have worked for the bank.
4. What is your level of education?
5. Please indicate whether your bank has the following capabilities to the best of your
knowledge.
Yes No
NBK offices are networked countrywide
Networking has improved the efficiency of operational
processes
Networking has enhanced service delivery channels
The bank has efficient monitoring of risks
The bank offers a convenient and extensive banking
platform
The bank has witnessed improved access to customer
deposits over the years
6. Does NBK have a strategy and planning department? If the answer is yes, how many
strategic plans has NBK implemented in the last 10 years?
7. How often does NBK review its corporate strategies?
8. Which generic strategy is being implemented by NBK currently?
9. Does NBK enjoy competitive advantage in the banking industry in Kenya?
10. Explain to what extent NBK has employed the following sources of competitive
advantage,
i.
Pricing strategy
ii.
Direct sales strategy
iii.
Staff rationalization strategy
iv.
Credit management strategy
v.
Cost efficiency strategy
vi.
Target marketing strategy
11. How do the following factors affect customer acquisition and growth of the bank?
i.
Customer service
ii.
Branch network
iii.
Bank charges
iv.
Easy access to loans
v.
Account relationship management
vi.
Cost of operations
12. What in your opinion can the bank do to gain and maintain competitive advantage?