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The financial industry has been growing at a rapid rate not only locally but also internationally. However the industry, especially retail banking has been facing many challenges which include internal and external environmental challenges and this has led to shrinking profit margins. These challenges calls for financial institutions to identify and adopt strategies which will give them better competitive advantage and the ability to cope with the constantly emerging environmental challenges in the industry if they are to remain in business.
As a result of these challenges, this study was carried out to identify environmental challenges faced by financial sector in Kenya and strategies that can be adopted to overcome these challenges. To achieve this, a case study of National Bank of Kenya was undertaken by interviewing senior and middle level staff to identify challenges and strategies adopted by the bank against internal and external environmental challenges.
Structured interview guide was used in collecting data from NBK staff in Nairobi head office and its branches within Nairobi city whereby a total of 12 respondents were interviewed which included 3 general managers, 4 divisional managers and 5 branch managers. Interview guide pretest was carried out a month before the actual data collection took place which also included a reconnaissance visit to selected NBK branches so as to familiarize and book an appointment. Data was analyzed using content analysis with numeric statistics analyzed using MS excel presented using graphs and tables.
Environmental challenges which include entry of new competitors, high cost of operations, unstable economic conditions, tight policies and regulations among other were identified. The strategies to overcome these challenges identified include new product development and branding strategies, adopting new marketing strategies, expansion, outsourcing, ICT infrastructure upgrade to list a few.
The study recommends the need for the financial industry to come together and address these issues together rather than individual bank handling these challenges. The study concluded by recommending further research on identification of effective strategies to be adopted by financial institutions.
TABLE OF CONTENTS
LIST OF TABLES
LIST OF FIGURES
LIST OF ABBREVIATIONS AND ACRONYMS
ATM Automatic Teller Machine
BFUB Bank Fusion Universal Banking System
CBK Central Bank of Kenya
DFI’s Development Financial Institution
GDP Gross Domestic Product
HRM Human Resource Management
ICT Information Communication Technology
IMF International Monetary Fund
NBFI’s Non-Banking Financial Institution
NBK National Bank of Kenya
PBT Profit before Tax
CHAPTER ONE: INTRODUCTION
1.1 Background of the Study
Organizations operate within an environment that influences its operation either positively or negatively depending on the nature of its business. As Porter (1996) explains, “many firms operate within an environment whereby they are expected to meet various stakeholders’ expectations hence the need to formulate strategies that would help them meet this need” (p. 61). On the other hand organization operates within an environment with high competition which influences the firm’s strategic process and hence determines the firm’s achievement and purpose (Sharma, 2008).
Therefore the survival and success of an organization can be achieved if the firm has the resource capacity to create and align its strategies to the environmental challenges. This is not only influenced by the internal environment but also the external environment. Kumar (2006) explains that rapid technological change, easier entry by foreign competitors and the accelerating breakdown of traditional industry boundaries subject firms to new unpredictable competitive forces. He further adds that contemporary firms operating in a dynamic market contexts, often deal with these contingencies by implementing strategies that permit quick reconfiguration and redeployment of assets to deal with these environmental changes
Environmental influence has not spared the financial sector either, both locally and internationally. This was observed by Kumar (2006) when he explains that “environmental influence has necessitated the need for financial institutions to redefine their modes of service delivery and goals so as to maintain and remain relevant in the ever changing and dynamic environment” (p. 104-105). These changes therefore pose a lot of challenges to financial institution since this change comes with a cost.
As a result of changes in the business environment, strategies adopted by the firms whether locally or internationally need to have a quick response to the frequent changes that are normally experienced in the market. These responses has been referred by Chandler (1962) as adaptive strategies which mean it considers all the factors prevailing in the market at that particular time and its application brings forth a positive impact in the day to day running of business making the firm a profitable entity.
1.2 Strategic management
The term strategy is defined as the direction and scope of an organization over the long term which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder’s expectations. (Johson, & Scholes , 2006)
Managers do not make strategic decision in a competitive vacuum. Their company is competing against other companies for customers. The competition is a rough and tumble process in which only the most efficient companies win out (Charles & Hill , 2008).
One of the key challenges manager face is to simultaneously generate high profitability and increase the profits of the company. The two authors further explain that to maximize shareholder value, managers must formulate and implement strategies that enable their company to outperform rivals-that give it a competitive advantage
1.2.1 Strategic Responses
According to Porter, (1996), strategic response refers to the process of creating a unique and valuable position with means of a set of activities in a way that creates synergistic pursuit of the objectives of a firm.
Firm’s strategic responses refer to the processes employed by the executives of the firm in order to deal effectively with everything that affects the growth and profitability of the firm so that it can position itself optimally in its competitive environment by maximizing the anticipation of the environmental challenges (Olwany, 2011)
Johnson and Scholes (2002) distinguish strategic response into three categories: internal development strategies, acquisition strategy and joint development strategies. Internal development strategy according to them refers to the point where an organization develops through its own management new markets and new product. On the other hand acquisition strategy involves mergers between two or more companies and involves full ownership between two or more companies and involves full ownership of another company. Thirdly is the joint development strategy which implies that a firm can only achieve its objectives by co-operating with other companies (Johnson & Scholes, 2002). Therefore strategic response enables organizations to deal with increased turbulence and dynamism of the environment.
1.2.2 The Financial Sector in Kenya
Kenya’s financial sector can be described as being relatively diversified in terms of the number of financial institutions. The financial system had 51 commercial banks, 23 Non-Banking Financial Institutions (NBFIs), 5 building societies, 39 insurance companies, 3 reinsurance companies, 10 Development Financial Institutions (DFIs), a Capital Market, 13 Forex bureau, and 2,670 savings and credit cooperative societies (Ngugi & Kabubo, 1998).
Kenya’s economic performance weakened over the last decade because of the failure to sustain prudent macroeconomic policies, the slow pace of structural reform, and the persistence of governance problems. The often lax fiscal policy led to a rapid buildup of short-term government debt which, in combination with declines in the saving rate, translated into lending rates in excess of twenty percent in real terms. This, together with other high costs of doing business in Kenya – because of corruption, a deteriorating infrastructure, and an inefficient Parastatal sector (e.g., utilities, and transportation services) depressed investment and its effectiveness, and as a consequence economic growth, (International Monetary Fund, 2000)
The IMF (2000) report further explains that “since early 1998 Kenya’s economic performance was mixed. It has achieved fiscal adjustment against the difficult backdrop of worsening terms of trade, a dearth of external financing, and adverse weather conditions. At the same time, the rescue of a major bank in late 1998 strained fiscal policy and temporarily weakened monetary policy. In this context, investor confidence has remained weak, and growth has continued to decline”, the report concludes.
Kenya’s banking industry registered a 16.9 percent growth in pre-tax profits, from 34.9 billion in June 2010 to 40.8 billion as at end of June 2011, according to information published in Central Bank of Kenya (CBK) website. This rate of growth has also led to increase in mode of service deliver from hall banking to street banking
Price Waterhouse Coopers (2012) publication explains some of the main challenges facing the financial sector today which include; new regulations imposed on financial institution by the Central Bank, for instance, the Finance Act 2008, which took effect on 1 January 2009 requires banks and mortgage firms to build a minimum core capital of KShs 1 billion by December 2012. This requirement was hoped to help transform small banks into more stable organizations.
Ngugi and Kabubo, (1998) further explain more challenges facing growth of Kenya’s financial sector which include unpredictable inflation rates. They explain that inflation remained subdued in 1998 and in the first half of 1999, but it increased in the third quarter of 1999 mainly owing to increases in fuel and food prices as well as the lagged effects of the depreciation of the shilling. Real GDP growth slowed from 2.3 percent in 1997 to 1.8 percent in 1998, and it was expected to slow further in 1999, and unemployment continued to increase.
Financial Institutions play a very significant role in the Kenyan economy. Banks, for example usually meet the needs of high end investors by making available high amounts of capital for big projects in the industrial, infrastructure and service sectors of the economy. At the same time, the medium and small ventures must also have credit available to them for new investment and expansion of the existing units.
1.2.3 National Bank Kenya
National Bank Of Kenya Limited was incorporated on 19th June 1968 .The main objective of its establishment was to help Kenyans to get access to credit and control their economy after independence (National Bank of Kenya, 2012)
National bank in the past has been operating below its capacity due to increased bad debts in loan portfolio amounting to 36 billion which was politically motivated that pushed the bank into massive losses in the late 1990s and early 2000. However this situation has changed since recently the bank posted a profit before tax (PBT) of Sh2.6 billion in the year 2011 compared to Sh2.1 billion in 2009, according to its audited financial statements. (NBK, 2012)
The financial changes outline by different authors above, explains some of the challenges that the financial sector is facing and in particular National Bank of Kenya. In this era of rapid technological development and changes in market environment, NBK, has to put its strategic responses right to enable it compete both locally and internationally
1.3 Research Problem
As Kenya’s general economic condition deteriorated in the early 1980s, the financial sector performance also went down. Despite having a diversified financial system, financial savings remained at a low level. The share of domestic savings held as financial assets with the financial sector averaged 30% in 1984-1987, similar to the levels in the 1970s. Monetization of transactions fell from 34% to 30% and 29% in 1978-1980, 1980- 1984 and although NBFIs were mushrooming in the 1980s, the financial system continued to be dominated by the commercial banks with about 70% of the total loans and advances in 1988. In 1986, the sector faced a crisis with most of the institutions experiencing undercapitalization problems. The situation was attributed to the various constraints facing the sector and resulted in the mounting of a financial sector reform (Ngugi & Kabubo, 1998)
The above findings clearly show that financial sector has been experiencing various challenges which include both external and internal shocks. These challenges as outline by Ngugi and Kabubo, (1998) include central bank regulatory differences across financial institutions, especially between commercial banks and NBFIs, and among the financial instruments inadequate regulatory and legal frameworks for the financial system, together with weakness in prudential supervision weak monetary policy control by the central bank segmentation of the financial sector by activities. In the event that financial institutions fail to develop quick response mechanism against these challenges, this often results to these institutions registering losses, and losing its customer base to their competitors. It is this strategic decision that will determine whether the institution shall remain profitable in the current and ever changing market environment.
Franklin et al (2010) addresses some of the gaps in literature on the challenges facing financial sector. They point out that the poor state of African financial development raise a number of important questions on what went wrong with the financial reforms in Africa and on what could be improved. Is African financial development slow in itself, or is it merely a reflection of broader economic and policy failures? Are the levels of financial development achieved outside of Africa, in both developed and developing countries, achievable for most African countries? What factors have inhibited African financial development to this point? If those factors were corrected and financial development did take hold, would the finance-growth nexus hold in Africa as seen in other places? Understanding these issues is of crucial importance since, as well documented in the ample empirical evidence; there is a convincing linkage between financial development and economic development. They conclude by pointing out that there is virtually no rigorous academic research that addresses these questions. This research therefore seeks to find answers and document challenges faced by financial sector thus help in filling the knowledge gap in literature as pointed out above.
The research question guiding the research is what environmental challenges do financial sector in Kenya face and what strategic responses has been put in place against these challenges by financial institution in Kenya and in particular NBK.
1.4 Research Objective
The objective of the study is to identify environmental challenges facing financial sector and in particular National Bank of Kenya and the strategic responses adapted by the bank to overcome these challenges.
1.5 Value of the study
The results of this study has value in the academic field in that it will help in filling existing gaps in literature as relating environmental challenges experienced by organizations and in particular financial institutions. This is fundamental in academic field as it becomes a valuable repository of knowledge to academic scholars which include students, lecturers and researchers who will be able to refer to the document in the future while carrying out related studies.
The study will be of importance in policy making not only to the bank and other financial institutions but also government financial regulatory organ in developing and enacting policies which ensure sustainable operation of financial institutions in the country. External and internal environment has a great influence on operations by financial institutions, hence the results of the study will act as a guide to all stakeholders in the financial sector in developing operational policies which will ensure that any strategic responses adopted is effective in realizing objectives of financial institutions.
Furthermore, the study will be of great value in management practice in that the study will identify environmental challenges faced by financial institution in the current times and through its findings, the study will be able to recommend strategic responses that can be adopted by these institutions. In addition, having knowledge of these environmental challenges, management will be able to set their priorities and goals in line with the challenges they expect of face hence giving them better competitive advantage in the ever changing market environment.
CHAPTER 2: LITERATURE REVIEW
In this chapter, previous studies related to the topic were reviewed. This chapter begins with literature on concepts of strategy, Organization and the environment, internal and external environmental challenges and lastly strategic responses to these challenges.
2.2 The Concept of Strategy
Johnson and Scholes (2002) define strategy as the direction and scope of an organization over the long term which achieves the advantage for the organization through its configuration of resources within a challenging environment to meet the needs of markets and full fill stakeholder’s expectations. The concept of strategy explains where the institution is aiming to achieve in the long term and organize which activities and resources that will have to be committed to achieve the intended goals.
Mintzberg (1994) defines strategy as a plan, a pattern, perspective and position. As a plan because strategy defines the means through which an organization moves from one state to another that is from bad to good state. Strategy is also defines as a pattern since it is concerned with repetitive actions over a period of time. Further, he defines strategy as a perspective since it provides a clear vision and a sense of direction of where the organization is heading to. Finally he defines Strategy as a position which means that organizations are willing to offer particular products and services to new markets other than the existing markets. This therefore implies that they are able to position themselves better in new markets by offering new products or services.
Chandler (1962) defines strategy as the determination of the basic long term goals and objectives of an organization and adoption of courses of action and the allocation of resources necessary for achieving these goals. He therefore considered strategy as a means of establishing the purpose of an organization by specifying its long term goals and objectives, action plans and resources allocation pattern or to achieve the set goals.
Porter (1987) views strategy as what makes the corporate whole add up to more than same of its business units .He further classifies strategy in two levels that is corporate level strategy and business level strategy .Corporate level strategy defines what kind of business the organization is in and also the managers should manage their various business units .On the other hand business level strategy explains how to create competitive advantage in each of the business unit in which the organization compete.
Thompson and Strickland (2007) argues that the concept of strategy defines the various approaches that top corporate managers use as to be able to able to achieve a better performance of the set of business in which the organization has diversified to. Therefore he emphasize on the role of key business units managers to influence the strategic decision of the business units that they head to achieve cross business synergies and turn them into a gain of competitive advantage to the organization.
Ansoff and Mcdonnel (1990) define strategic management as a process through which a firm manages its relationship with the environment in which it operates. It involves aspects of strategic planning and management of change. He argues that strategic management has the ultimate objective of developing corporate values and managerial capabilities and through it, the will focus the decision of the entire organization in one direction .Porter (1980) outlined very clearly that the concept of strategic management provides the central purpose and direction that has enabled management of organization to adopt the changing environment.
2.2.1 Strategic responses to challenges of competition.
Competition in the recent past has become one of the major challenge and factor that has contributed to the diverse strategic behavior among organizations in general. Organizations in Kenya are characterized by an aggressive competitive environment with a lot of competitors which calls from them to re adjust and adjust their strategies often so that they can become strategically fit.
This is more common so for example in the banking industry in Kenya which is characterized by intensive competition and show aggressiveness for customer satisfaction and customer loyalty. This has posed a lot of challenges to banks in Kenya hence there is need for banks to respond to these challenges which forces them to review their strategies so as to become strategically fit. This is because of the fact that whenever there is rise in competition it has a negative influence on prices of a firm’s product ,its productivity and finally the wages due to employees will diminish leading to restructuring and downsizing of the organization as a result of the intensive competition.
Porter (1987) has outlined the various challenges and forces that firms face from gaining competitive advantage, they include: buyer and sellers bargaining power, threats of new substitute products and rivalry among products as out lined in his five forces model. He further defines the various strategies and strategic responses that can be used by firms to curb with the various challenges within the environment in relation to competition. They include: cost efficiency strategy, product differentiation strategy, focus strategy, avoidance strategy and low cost strategy.
Cost efficiency strategy, one of Porter’s generic strategies is cost leadership .This strategy mainly focuses on how firms can gain competitive advantage by having the lowest cost in the whole entire industry (Porter 1987).He argues that in order to achieve low cost advantage, a firm must have a low cost leadership strategy, low cost manufacturing and more so a work force that is willing and committed to the low cost strategy. This helps to achieve cost efficiency strategy that will outperform competitors in the same markets. In relation to the banking industry this can only be achieved when banks put the cost of their services as low as possible so as to gain customer loyalty and customer satisfaction.
Product differentiation strategies refer to those strategies that strive to create unique products that cannot be easily matched or duplicated by other competitors. This can only be achieved if firm’s have a resource-based view strategy (Porter 1985).This implies that the firms should have the resource capability to carry out product differentiation .This can only be achieved through innovation and faster speed of services offered to customers.
Pierce and Robinson (2007) argue that the differentiation strategies are aimed at achieving customer satisfaction and loyalty by stressing on attributes of a product that will allow firms to charge a premium price for their products.
Thirdly avoidance strategies focused on environmental change that aims to raise market entry cost. Muendo (2011) outlines that the challenges of competition within the environment that a firm is operating on may take the form of increased prices, buildup of capacity which may require companies to fore-go short term profitability in the hope that they will maintain a long term presence in the market.
Focus strategies refers to the type of strategic response whereby a firm targets a specific segment of the market (Thomas & Strickland, 2007) .They outline that a firm or organization can choose to focus on a selected customer groups and specific products that meets the criteria and the need of the selected customer groups. This would go a long way to ensure customer loyalty hence boost the profitability of the firms .Focus strategy depends upon an industry segment that should be large enough to have good growth potential that is of importance to the major competitors.
2.3 Organization and the Environment
The environment refers to the pattern of all the external and internal condition that influences or affects the life and development of an entity or a business organization. According to Johnson and Scholes (2007) they explain that the organizational environment encapsulates many different influences and hence there is difficulty in making sense of this diversity. They further argues that the environment is defined by it complexity which arises because of many of the separate issues in the business environment that are interconnected.
Porter (1985) observes that the global uncertainty in environmental changes increased dramatically in the 1970’s due to fluctuating raw material, prices, swings in financial and currency markets, electronic revolution among others. Therefore by accepting this diversity and complexity of the environment, the organizational environment is defined in different layers.
The first general environmental layer is the macro environment layer which consist of the environmental factors that impact to a greater or lesser extent on almost all organizations, Scholes (2007). The macro-environment is defined by the PESTEL framework which can be used to identify how future trends in the political, economic, social and technological and legal environment might impinge on the organization. This would help identify the key drivers of change which differs from one organization to another.
Organization in the world today operate within an environment that is very dynamic and uncertain and this therefore calls for the need by the management to strategically position themselves in order to adopt to the various changes and dynamism of the environment
Kirapash (2010) explains that organization needs to look out for opportunities to exploit their strategic abilities and seek improvements in their business units building an awareness and understanding of current strategies and success. Porter (1985) defines the organizational environment into two categories: the external environment which is constituted by the forces that are outside the organizations control. These forces are non-specific but would otherwise affect the firms’ activities and strategies. On the other hand, the internal environment; which consist of all the forces within the organization, and are within the organization control.
2.4 Internal Environment.
A firm internal environment refers to those aspects of the environment that are within the capability of the organizations. Pierce and Robinson (2007) has defined a firms internal environment as those elements within the organization that include the current employees ,the management and the corporate culture which defines the organization behavior .An organizations internal environment is defined by the firms mission statement which clearly describes the purpose for existence and generally explains the overall purpose which includes the attributes that would distinguish the organization from other organizations. Therefore we shall discuss the attributes that constitute the firms internal environment which includes the firms structure, Organizations culture, company policies and firms internal resources.
A firm’s internal environment also includes the corporate structure of the organization which comprises of the hierarchical arrangements that will define the various tasks and people that are responsible for the activities going on within the organization. A firm structure helps to determine the flow of information between the management and the entire staff and therefore have an influence on the strategic decision making process of the firms
Secondly the organizational culture refers to various values that the organization stands for the culture of the organization defines what the core business of the firm are .Just as each person has a distinct personality, so does each organization. The culture of the organization distinguishes it from others and shapes the actions and behavior of the people working in the organization (Johnson & Scholes, 2007).
Thirdly a company policy refers to those guidelines that usually determine how certain situations within an organization are addresses .Thomas and Strickland (2007) argue that firms establish policies that provide guidance for managers who make decisions concerning the circumstances that occur frequently within the organization They further outline that company policies serve as an indication of a firms personality and should be aligned to its mission statement.
Finally firm’s resources include the people, facilities, information machinery and equipment, and infrastructure. The most important and critical resources are the people that work within the organization and managers need to be professional in manage resources that are available to them .This implies that mangers needs to manage both human and non-human resources so that they can create value and be of great impact to the organizations environment.
2.5 External Environment
The success of firms in acquiring the needed resources and profitability, improving the quality of goods and services is all based on the impact the external environment has in the firm as a whole. It is in this regard that the firms choice of business strategies is moderated by the environment and that organizations that intend to meet or face the challenges of a rapidly changing environment require management decision that are founded on well-conceived strategies (Ward & Lewandaska, 2008)
Pierce and Robinson (2003) argue that organizations are not closed systems since they do not operate in a vacuum. They are instead open systems since they are likely affected by the environment in their operation. A firm’s business environment can be broadly categorized into two categories: micro-environment and macro environment. The micro environment involves those stakeholders in whom the organization with on a regular basis such as suppliers, distributors, employees and customers (Muendo, 2011).He argues that these groups are stakeholders who have direct interest influence on a manager’s decision making.
On the other hand a firm’s macro-environment refers to all the factors that are outside the organization also known as the external environment. It includes all the relevant factors and influences outside the organizations boundaries. Therefore a firm’s external environment is infinite and consists of all the elements outside the boundaries of the firm. The firm’s environment provides all the required inputs for the firm from which the firm produces the outputs which is finally delivered to the environ
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