THE IMPACT OF NEW ENTRANTS IN THE CEMENT INDUSTRY IN NAIROBI
BY
KIARIE JANET WANJA
UNITED STATES INTERNATIONAL UNIVERSITY
SUMMER 2012 THE IMPACT OF NEW ENTRANTS IN THE CEMENT INDUSTRY IN NAIROBI
United :t~'-^:~
KIARIE JANET WANJA
A Project Report Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirement for the Degree of Masters of Business Administration.
UNITED STATES INTERNATIONAL UNIVERSITY
SUMMER 2012
600000064507 STUDENT'S DECLARATION
1, the undersigned, declare that this is my original work and has not been submitted to any other college, institution or university other than the United States International University in Nairobi for academic credit.
Signed: '%i^=^^^ Date: a^kl^OlA
Kiarie Janet Wanja (ID: 615067)
This project has been presented for examination with my approval as the appointed supervisor.
Signed: ^yr^^ Date: ^3- fH^^ ^
^pf. Fred Newa.
Signed: Date:
Dean, Chandaria School of Business
Signed: Date: f ^ ~ -^^1 / ^
Deputy Vice Chancellor, Academic Affairs
iii COPYRIGHT
All rights reserved. No part of this report may be photocopied, recorded, or otherwise reproduced, stored in a retrieval system or transmitted in any form or by any electronic or mechanical means without prior written permission from the author.
By Kiarie Janet Wanja, 2012
iv ABSTRACT
The study examines the impact of new entrants in the cement industry in Kenya. This study is guided by the following three research questions: (i) what is the impact of the new entrants on pricing of cement products? (ii) What is the impact of the new entrants on the market share of cement products? and (iii) What are the strategic responses by the existing cement companies on the new entrants?
The study is modeled on descriptive design. The population of interest is the managers of Bamburi Cement Company, East African Portland Cement Company and Athi River Mining Limited The three companies have been selected for this study because statistics clearly indicate that they are they command a larger market share in the cement industry. Stratified random sampling was adopted to select a total of fourty two managers as the sample size. In terms of data, the research relied mainly on primary data collected using structured questionnaire. This questionnaire contained both open and close ended questions. Data was first coded, formatted and transformed in a mode that could be picked accordingly using SPSS. Thereafter, the data was analyzed in terms of descriptive statistics mainly frequency tables, charts and graphs.
The findings indicate that majority of the respondents were male between the ages of 36 to 45 years and that Mombasa Cement as well as Simba Cement were viewed as major rivals among the new entrants. The category of buyers with the highest turnover was the large sized orders, and the results illustrated that there were over five suppliers for raw materials and that there was no substitute for cement. However other results indicated that iron sheet, wood and mud as substitutes for cement. In addition to that pricing, demand and supply were among the major factors contributing to rivalry within the cement industry while the increase in demand for cement was the major reason for the increase in new entrants.
On the basis of the study various recommendation were made, First it was recommended that future researchers could carry out the impact of new entrants in the cement industry in Kenya as the study only covered the impact of new entrants in Nairobi. Further research should also be carried out on the demand for cement being considered to be price inelastic due to lack of apparent substitutes despite iron sheet, wood and mud which are
V not viewed as substitutes for cement and do not directly impact the price of cement but are still used in the construction of houses as they are affordable as compared to cement as well as the use of entry and exit barriers so as to curb new entrants.
vi
f ACKNOWLEDGEMENT
My sincere appreciation goes out to those who not only contributed to the completion of this study but also the entire degree program. It could have been impossible to complete this study without contribution of key people. I am very grateful to the Almighty God for giving me this opportunity and for his constant guidance. I sincerely thank my supervisor Dr. Fred Newa for his insightful guidance, readiness to assist and constructive criticisms which yielded to the successful completion of the study.
Finally to my parents Mr. and Mrs. Kiarie for their support, patience and understanding during the weekends and those long study hours. 1 am grateful to my brothers especially John Mburu, my fiance Bernard Maingi and my sisters whose love and support was invaluable.
vii
( DEDICATION
To my family, fiance and friends: for their inspiration, support, encouragement and understanding in my academic journey.
VIU TABLE OF CONTENTS
STUDENT'S DECLARATION HI
COPYRIGHT nil
ABSTRACT V
ACKNOWLEDGEMENT VII
CHAPTER ONE 1
LO INTRODUCTION 1
1.1 BACKGROUND OF THE STUDY 1 1.2 PROBLEM STATEMENT 5 1.3 PURPOSE 9 1.4 RESEARCH QUESTIONS 9 1.5 SIGNIFICANCE 9 1.6 SCOPE OF THE STUDY 10 L7 TERMINOLOGIES 10 1.8 CHAPTER SUMMARY 12
CHAPTER TWO 13
2.0 LITERATURE REVIEW 13 2.1 INTRODUCTION 13 2.2 IMPACT OF NEW ENTRANTS ON PRICING 13 2.3 IMPACT OF NEW ENTRANTS ON MARKET SHARE 19 2.4 STRATEGIC RESPONSES BY EXISTING COMPANIES TO NEW ENTRANTS 26 2.5 CHAPTER SUMMARY 36
CHAPTER THREE 37
3.0 METHODOLOGY 37 3.1 INTRODUCTION 37 3.2 RESEARCH DESIGN 37 3.3 POPULATION AND SAMPLING 38 3.4 DATA COLLECTION 41 3.5 RESEARCH PROCEDURE 42 3.6 DATA ANALYSIS METHODS 42 3.7 CHAPTER SUMMARY 43
CHAPTER FOUR 44
4.0 RESULTS AND FINDINGS 44 4.1 INTRODUCTION 44 4.2 BACKGROUND INFORMATION 44 4.3 IMPACT OF NEW ENTRANTS ON PRICING 51 4.4 IMPACT OF NEW ENTRANTS ON MARKET SHARE 52 4.5 STRATEGIC RESPONSES BY ESTABLISHED PLAYERS TO NEW ENTRANTS 53
4.6 CHAPTER SUMMARY 56
CHAPTER FIVE 57
5.0 DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS 57 5.1 INTRODUCTION 57 5.2 SUMMARY 57 5.3 DISCUSSION 59 5.5 RECOMMENDATION 67
ix
( REFERENCES 69
APPENDICES 76
APPENDIX I: COVER LETTER 76
APPENDIX II: QUESTIONNAIRE 77
X LIST OF TABLES
Table 3.1 Population Distribution 44
Table 3.2 Sample Determination 46
Table 3.3 Stratification of Sample Size 47
Table 4.1 Age of Respondents 51
Table 4.2 Category of Buyers with the Highest Turn Over 54
Table 4.3 Factors Contributing to Rivalry 55
Table 4.4 Factors Contributing to Increase of New Entrants 56
Table 4.5 Impact of New Entrants on Pricing 57
Table 4.6 Impact of New Entrants on Market Share 58
Table 4.7 Strategic Responses by Established Players to New Entrants 59
xi LIST OF FIGURES
Figure 4.1 Gender of Respondents 51
Figure 4.2 Rival Firms 52
Figure 4.3 Different Categories of Buyers 53
Figure 4.4 Substitutes for Cement 59
xii CHAPTER ONE
1.0 INTRODUCTION
1.1 Background of the Study Economies have been liberalized leading to new markets and new entrants. Competition has set in with firms aiming to increase, gain, or maintain their market share. The first changing global business environment has led to more competition, increased choice for customers, lower prices, lower margins, replacement of tangible assets with information dramatically changing global structures, from independence to independence to interdependence, boundaries collapsing and market economies expanding (World economic outlook, 2000). According to Folkes and Patrick (2003), it is only those players who have the ability to anticipate market trends and provide quick responses that will survive.
The increasingly competitive envirormient has called on firms to rethink their marketing strategies (Pearce and Robinson, 2005). The days when firms could simply wait for clients to beat a path to their door are long gone. Organizations must realize that their services and products, regardless of how good they are, simply do not sell themselves (Kotler 2000). Companies need to adapt and re-think strategies to respond to these environmental forces and chart the way for future growth and development. This is of particular importance especially in the face of intense competition currently facing them. In the recent past, most companies have used strategies so as to counter the various threats and cash on opportunities presented by the competitive business environmental factors. The sector where cement industries fall is a very competitive one due to the threat of new entrants that have recently become rampant in this industry. This calls for the differentiation of offers and better services than those of competitors (Davidson, 2002).
On the other hand consumers are faced with a variety of choices on where to buy goods as well as services (Kotler, 2006). They are constantly being bombarded by discounts and other offers and have access to an ever widening range of competitive alternatives in nearly all shopping categories. Moreover, they have a growing number of shopping options including internet and even more recently, mobile shopping. As a resuh of the foregoing developments in the market, consumers are seeking the best offers and are highly skeptical about those who
1 do not provide clear value for money. In fact, they have become very choosy in terms of what they purchase, where they purchase and how they make their purchases (Davidson, 2002). Kotler (2006) echoes the same sentiment by his observation that consumers have become more educated and informed more than ever before and they have the tools to verify companies' claims and seek out superior alternatives. Companies face intense competition from domestic and foreign brands which is resulting in rising promotion costs and shrinking profit margins (Davidson, 2002).
In simpler terms, consumers have become more and are becoming even more sophisticated. They demand more value for their money and are more convenience oriented. With this change in both customer characteristics and behavior, organizations have to refocus their strategies not only on customer acquisition but also retention. They also have to shift their focus from purely satisfying consumers to creating loyalty and trust through mutually beneficial long term relationship (Mburu, 2001). They have an even more challenging task of exceeding customer expectations. Due to the new developments in the market, it was therefore important to conduct a research to determine the impact of the new entrants in the Kenyan cement industry (Mburu, 2001).
If an industry earns a return on capital in excess of its cost of capital, that industry acts as a magnet to firms outside the industry. Unless the entry of new firms is barred, the rate of profit will fall toward its competitive level. The US bagel industry, for example, faced a flood of new entrants in 1996, which caused a sharp diminution of profit prospects. The threat of entry rather than actual entry may be sufficient to ensure that established firms constrain their prices to the competitive level. An industry where no barriers to entry or exit exist is contestable: prices and profits (Narayanan and Fahey, 2001).
Contestability depends on the absence of sunk costs. Sunk costs exist where entry requires investment in industry-specific assets whose value cannot be recovered on exit. An absence of sunk costs makes an industry vulnerable to "hit-and-run" entry whenever established firms raise their prices above the- competitive level. In most industries, however, new entrants cannot enter on equal terms with those of established firms. The size of the advantage of established over entrant firms (in terms of unit costs) measures the height of barriers to entry.
2 which determines the extent to which the industry can, in the long run, enjoy profit above the competitive level. The principal sources of barriers to entry are capital requirements, economies of scale, cost advantages, product differentiation, access to channels of distribution, governmental and legal barriers, and retaliation (Porter, 2008).
According to The European Cement Association, Brussels (2002), Cement has played a key role as a construction material throughout the history of civilization. In Europe the use of cement and concrete in large civic works can be traced from antiquity through modem times. Portland cement was patented in 1824 and by the end of the 19th century concrete, based on Portland cement, had become a highly appreciated construction material throughout Europe. Cement manufacturing is a major mineral commodity industry. In 1995 the world production of cement was 1,420 million tormes. Total cement production in the European Union amounted to 172 million tonnes in 1995 and consumption was 168 million tormes. Imports amounted to 23 million tonnes and exports to 27 million tonnes. These figures include trade between EU countries. Since 1990 cement consumption in the European Union has fallen by around 13% and production has fallen by 11%. In 1973 the cement industry in the European Union produced 27% of the cement produced in the world. In 1995 the percentage was 12%) (European Cement Association, Brussels, 2002).
Today four West European groups of companies (Holderbank, Lafarge, Heidelberger and Italcementi) rank among the top five world cement producers with Cemex (Mexico). They, like many other key players, have also branched out into several building materials subsectors such as aggregates, concrete products, plasterboard, etc. Cement is a binder in the form of a powder which hardens when mixed with water. Cement is used to produce concrete which is an artificial stone made from cement, aggregates, sand and water. Concrete is an essential material for the construction of roads, bridges, harbours, residential houses, schools, hospitals, etc. The use of cement has contributed to the welfare of society and its rising economic standards for generations. The draft European standard for common cements lists 27 different Portland cement types in 5 groups as follows: Portland cement 43%, Portland- composite Cement 44^0, Blast furnace cement 7%, Pozzolanic cement 5% and Other Cements 1% (World Cement Directory, 2002).
3 Cement companies have seen an increased growth and development within the past decade as well the entrance of new companies into the Kenyan market which has been occasioned by an increase in the construction sector. Porter's competitive forces that shape the global cement industry documents that in this industry, rivalry is moderate, the effect of substitutes is weak, buyer power is minimal, supplier power is high, and entry/exit barriers are both high. In essence, the vertical supply chain has pricing power over final consumers, whereas the horizontal dimension of competition is lacking due to lack of the possibility of differentiated advantages in production. Inelastic demand neutralizes the consumer power associated with product standardization, whereas proximity of raw materials to production sites generates regional cement clusters (Selim and Salem, 2010).
Rohit Singh & Ongolo (2010) noted that in 2008, at the time of the study team's visit to the country, Kenya had three cement manufacturers, and the dominant cement player had an estimated market share of around 65%.By2010a new firm had entered the market, and the market share of the largest firm had decreased to around 50%. Although in 2008 Kenya had three cement manufacturers, it was also the case that the largest firm had ownership stakes in both the others. This could potentially mean that they had some degree of influence over the other firms (such as through joint Directorship), or knowledge about their competitive strategies, which could potentially result in reduced competition between the three firms. It was also suggested that there was a degree of price leadership, with the other firms following the largest firm (Rohit Singh & Ongolo, 2010).
Belda (2006) mentions that Athi River Mining (Kenya) Limited was established in 1974 as a mineral extraction and processing company and is now a public company quoted on the Nairobi Stock Exchange and ARM is in the business of manufacture of cement, quick and hydrated lime, sodium silicate, industrial minerals, special cements and building products and fertilizers with two plants in Kenya one in Kaloleni manufacturing lime and cement and Athi River plant manufacturing industrial minerals, silicate, special cements and fertilizers. The Athi River Mining Company is still a cement producer and has increased its production over the years in regard? to the growing market (Rohit Singh & Ongolo, 2010). Belda (2006) states that East African Portland Cement company was established in 1933 with a small cement mill with an initial production capacity of 60,000 tons of cement per annum, over the
4 years the production was increased to 600,000 tonnes and Portland Cement is sold under the brand name Blue Triangle Cement. Yager (2008) argues that Kenya has three cement producers with a combined capacity of 3.1 million metric tons per year and that the National cement production increased 3.13 million metric tons in 2008 from a revised 2.55 metric tons in 2007, the increased output was attributed to recent capacity expansions and increased utilization of existing capacity the Central Bank of Kenya. In deed the three cement companies that is Athi River Mining, East African Portland Cement Company limited and Bamburi Cement are very popular in the Kenyan market and their market share was predictable a few years ago before new entrance of new cement companies as will be discussed in this paper.
1.2 Problem Statement Kenya had three cement manufacturers and the dominant cement player had an estimated market share of around 65% in 2008. By 2010 a new firm had entered the market, and the market share of the largest firm had decreased to around 50% (Ellis, et al, 2010). Although in 2008 Kenya had three cement manufacturers, it was also the case that the largest firm had ownership stakes in both the others. This could potentially mean that they had some degree of influence over the other firms (such as through joint Directorship), or knowledge about their competitive strategies, which could potentially result in reduced competition between the three firms. It was also suggested that there was a degree of price leadership, with the other firms following the largest firm (Ellis, et al, 2010).
Ellis et al (2010) in a different study titled assessing the economic impact of competition in various sectors in Kenya with regards to the cement industry, found that Kenya suffers from a relatively high degree of concentration in its cement and beer industries, and a number of competition problems and anti-competitive practices have been identified in both. The report revealed that Kenya has three cement manufacturers, but the dominant firm has ownership stakes in both the others, giving it some degree of influence over the other firms (e.g. with joint Directorship), which could potentially result in reduced competition between the three firms. Anecdotal evidence suggests that this happened after a price war which started soon after a new entrant came into the market in the mid 1990s. It was reported by market participants that the price of a 50kg bag of cement fell from KSh450 to KSh250 at that time.
5 and that exclusive distribution arrangements with the incumbents prevented the new entrants' product being stocked by dealers (Ellis et al, 2010).
Selim and Salim (2010) in a report titled Competitive and Institutional Dimension, concluded that it is fundamental for governments and cement firms alike to recognize the importance of finding a coordinated international approach that can direct the global cement industry towards both economic efficiency and environmental compliance. Policy makers need to realize that there are three specific forces, with corresponding effects, that actually govern this interesting but peculiar market. He identified the critical forces that govern international cement markets as well as their effects as follows: (i) Absolute Cost advantage which he argues prevents new firms from entering because incumbent multinationals control such an advantage, (ii) Substitutability which keeps the power of the buyer (consumer) weak relative to cement firms reinforcing the above advantage and lastly (3) Industry Concentration which curbs rivalry providing a haven to back handed collusion in the local governance structure of the industry and creates competition compliance concerns.
In other theories, the prices of a monopolist or dominant firm fall temporarily because of strategic entry deterrence, limit pricing, or predation. In these models, deterrence typically is successful: there is no entry. Klemperer's paper (1989) is an appealing exception. In Klemperer's theory of price warfare, low prices are triggered by actual entry in markets where customers of new entrants incur switching or set-up costs. To attract customers who will incur these set-up costs, entrants in Klemperer's model offer temporary discounts from prevailing price levels. In reaction, and to stem the loss of customers to entrants, the incumbent also offers temporary discounts. The result is a price war. Once entrants have established a clientele, the price war stops and all firms raise their prices.
A price war breaks out when entrants arrive during the price war, the entrants' price is below the incumbent's price. It is even below the entrants' costs. The low price increases sales of the good so that new dealers are drawn into the market to distribute entrants' output. Further, depending upon the distribution of dealer set-up costs, the price war may induce some (but not all) of the incumbent's dealers to switch to an entrant. Once entry is complete and all the
6 dealers have attached themselves to a supplier, the price war ends and the price of the good increases (Klemperer's paper, 1989).
Another study by Ehrenberg and Goodhardt (2000), examined the impact of a new packaged goods brand on key market and brand performance measures. Using twenty weeks worth of panel data, they evaluated the impact of a new brand launch on a beverages market, looking at how it performed in terms of gaining buyers and the rate at which they purchased. They also examined how the competitor parameters of the market were affected by the new entrant. Their findings suggested that new brands look just like established brands within the short term. They also show that normal patterns of double jeopardy, where bigger brands not only have more customers but these customers also purchase slightly more often, are largely unaffected in a launch for both the new brand and existing brands. Finally, it appears that there are no obvious effects on the normal patterns of competition, as expressed by the parameters of the Dirichlet model of repeat-purchase.
Virian (2002) examined three models that describe a causal link between competition, entry and cost reduction. The first model was a simple model of managerial incentive: managers maximize a weighted sum of their utility, which is positively related to costs, and firm profits, which is negatively related to costs. They saw that in the framework there was no reason to encourage entry. We next examined a model where a potential entrant possessed a lower cost technology than incumbents. The issue here was whether the reduction in costs was sufficient to outweigh the tendency towards excessive entry. They showed that a single entrant whose costs were lower than the incumbents was like reducing all incumbents' costs. Finally they looked at a model where incumbent firms could quickly imitate the technological advances of a low-cost entrant. It is only this case that yields a clear argument for subsidizing entry.
Indeed, it is this case where the divergence between the private and social interests in the largest: If cost-reducing technologies can be quickly copied, potential entrants may well be discouraged from entry, and a case for public policy to encourage entry may be warranted. This scenario is not implausible. It could well be that cost-reducing innovations are often mundane and seldom appropriable. Furthermore there is some evidence that entry and exit
•1 li. oiC'ilV
7 decisions in industries are better described by evolutionary models than optimizing models (Virian, 2002).
While evidence suggests companies often find it difficult to identify new competitors, this is not the case in the mobile phone industry. Because the mobile phone operators must compete for spectrum licenses, they can easily identify their competitors in the individual markets. The threat of new entrants bringing additional production capacity should be downplayed in this industry, because technology can be assumed to be similar and thus new entrants do not necessarily bring additional production capacity, nor does their entry hold consumer cost down. The fixed-line operators do however present a risk to mobile phone operators, because they will certainly provide extra production capacity and lower the consumer costs as a result of this competition (Byles, 2006).
The Kenya's cement industry faces stiff competition due to the threat posed by new entrants into the market. The last few decades has seen so many players join the cement industry. For example in Kenya we have Bamburi cement. East African Portland Cement Company, Mombasa Cement, Savannah Cement and National Cement company among others. Every player must therefore strive to cut its share from the industry's market share. The only player that survives in such a competitive environment is that player who has a competitive edge over others. Currently there are many players in the market which has resulted to reductions of market shares of companies as well as profits (McCarthy et al, 1996). There is pressure on every market players to ensure that they get their product mix right or risk losing market share (Soderbom, 2001). Futrell (1995) argues that it becomes imperative that a company focus on how best to reach its customers effectively than its competitors.
Despite these studies, there are still some unanswered questions and contradictory findings. Most of the studies were also conducted in different settings and therefore there is need to conduct a study in the Kenyan context. Again the studies which are similar to this study were conducted more than ten years ago and therefore the findings caimot be generalized to this study because so much has changed during the five years and there is need to unearth the current situation as far as new entrants is concerned in the current cement industry.
8 Liberalization and globalization of market economies has opened up the market for every player. Every player is therefore free to join any industry without much hindrance. The cement industry has not been spared from this new development in the market. This can be demonstrated by the number of new players in the cement industry globally and more particularly in Kenya. It is however not known the impact that the new entrants have had in this industry in terms of pricing and market share as well as the strategic responses by the established cement companies in fighting off new entrants. All of these issues represent opportunities for further research in order to generate a clearer understanding of the strategic responses adopted by players in the cement industry.
The study therefore intends to fill the knowledge gap by determining the impact of new entrants on the cement industry in Nairobi.
L3 Purpose The general objective of the study was to investigate the impact of new entrants in the cement industry in Nairobi.
L4 Research Questions This study was guided by the following research questions to aid in gathering the information regarding the research. 1.4.1 What is the impact of new entrants on pricing of cement products?
1.4.2 What is the impact of new entrants on the market share of cement products?
1.4.3 What are the strategic responses by the existing cement companies on the new entrants?
1.5 Significance
The findings and recommendations from this study stand to benefit many.
1.5.1 Importance to Businesses and Individuals
The study findings will help them understand the relationship between the property market, the importance of mortgage financing and the increases in demand for cement thus providing new avenues for their investments and financing decisions.
9 1.5.2 Importance to Cement Companies The findings can help cement companies to better capitalize on the demand capacity, in strategizing for future growth, acknowledging and embracing environment changes.
1.5.3 Importance to the Government
The government can utilize this study in putting forth ways of managing infiation, exchange rates which are important in developing the economy. In addition to that the goverrmient can seek ways of providing legislation and regulations to help grow this sector as well as to provide governance framework to protect stakeholders from malpractices.
1.5.4 Academicians and Researchers
The research findings present many topics of interest for researchers. This research was not exhaustive thus leaves some areas that require further research with this paper as a foundation.
1.5.5 Importance to Potential Entrants This study will enable potential entrants in the cement industry understand and also appreciate the market penetration strategies that they may adopt in order to have a competitive advantage in the market. The findings from this study also equip the potential entrants with timely and actionable response strategies to beat completion as well as to survive in the market.
1.6 Scope of the Study The study was carried out in Kenya and was aimed at investigating the industry forces and strategic choices adopted by cement companies. The research targeted employees and managers of Bamburi Cement Company, East African Portland Cement Company and Athi River Mining limited the reason being that they are the giants in this industry. Questionnaires were designed for the management.
1.7 Terminologies 1.7.1 Financial Institutions Jorion (2009) mentions that financial institutions are fundamentally different from other firms and include commercial bank, securities houses and insurance companies
10 1.7.2 Turbulent Business Environment King (2009) describes turbulent business environment as the extent of frequent and unpredictable environmental changes that can dramatically affect organizations in the running of their business such as growth of competition, change in economic system, globalization and e-business.
1.7.3 New entrants Narayanan and Fahey (2001) A new entrant is therefore the possibility of a new player joining the market and competing for market share against other competitors.
1.7.4 Strategy Pearce and Robinson (2007) define strategy as the determination of basic long-term goals and objectives, the adoption of action to achieve them and the allocation of resources as being as central to the concept of strategy.
1.7.5 Price Kotler and Keller (2006) define price as a value that will purchase a definite quantity, weight, or other measure of a good or service.
1.7.6 Markets share The percentage of an industry or market's total sales that is earned by a particular company over a specified time period. Market share is calculated by taking the company's sales over the period and dividing it by the total sales of the industry over the same period. This metric is used to give a general idea of the size of a company to its market and its competitors (Kotler, 2006).
1.7.7 Industry structure Pierce and Robinson (2007) define industry structure as the formalized arrangement of interaction between and responsibility for the tasks, people and resources in an organization.
1.7.8 Cement A powdery substance made by calcining lime and clay, mixed with water to form mortar or mixed with sand, gravel, and water to make concrete(Marriam Webster)
1.7.9 Industry According to Hitt and Hoskissons (2009) an industry is a group of firms producing products that are close substitutes and in the course of competition these firms often influence one another forming strategies which are often based on industry characteristics.
11 1.7.10 Strategic responses Pearce and Robinson (2007) define it as the set of actions that result in the formulation and implementation of plans designed to achieve a firm's objectives.
1.8 Chapter Summary This chapter serves as an introduction to the research proposal. The section is comprised of the background information, problem statement and research questions. The Chapter also highlights the opportunities and threats in the cement industry and addresses the different cement companies in Kenya as well as in the demand for cement in the East African region and the flow of cement into Kenya from other international sources. In addition to that it focuses on the impact of the increase in demand for construction products in Kenya and the financial institutions as a lender resort.
The next chapter will present the literature review followed by chapter three which will comprise the research design methodology applied in this particular study while chapter four will report on the results and findings. Consequently chapter five will only focus on the discussion, conclusion and recommendations which will be based on the findings.
12 CHAPTER TWO 2.0 LITERATURE REVIEW
2.1 Introduction
The cement companies in Kenya have experienced an increased growth and development within the past decade as a result of the increase in the construction sector. Subsequently the increased demand for cement brings about different changes in the industry such as the threat of new entrants which in turn influences its pricing, market share as well as response strategies to counter the threat of new entrants.
This chapter presents a review of the literature on the strategies for countering the threats of new entrants as in previous studies. The chapter is structured on the basis of the research questions: (i) what is the impact of the new entrants on pricing of cement products? (ii) What is the impact of the new entrants on the market share of cement products? And (iii) What are the strategic responses by the existing cement companies on the new entrants?
2.2 Impact of New Entrants on Pricing Landphair and Larsen (2006) define price as an evaluation of the percentage of the overall development, cost of the production, manufacturing and production time. The cost of production, raw materials, warehousing, advertising, distribution among other variables greatly determines ultimate price of a product. Kotler (2007) also defines price as a measure of the value exchanged by the buyer for the value offered by the seller. In broad terms price can therefore be defined as the sum of all values that consumers exchange for the benefits of having or using the product or service. A product's price influences the amounts paid for the factors of production, labour, land, capital and entrepreneurship price thus is a basic regulator of the economic system because it influences the allocation of the factors of production. We can therefore say that the employment of any or all factors of production - land, labour and capital is dependent upon the price received by each.
Selim & Salem (2010) stipulate that the demand for cement is considered to be price inelastic due to lack of apparent substitutes. This can be seen with varying degrees across the world today. As the economies of different countries are in recession and the construction business has been negatively impacted, cement prices persistently increased in real terms. In the UAE,
13 for example, the price of cement has increased even though the real estate market is in turmoil. In Egypt, even though there has been a reduction in steel prices in 2008-2009, cement prices soared. In North America and Europe the prices are fluctuating but they are clearly on the rise (Portland Cement Association, 2009). This can be attributed to the fact that even when private enterprise is not using cement, the governmental demand on it is high as it needs it for infrastructure build-up.
Kenya has three cement manufacturers, but the dominant firm has ownership stakes in both the others, giving it some degree of influence over the other firms (e.g. with joint Directorship), which could potentially result in reduced competition between the three firms. Anecdotal evidence suggests that this happened after a price war which started soon after a new (third) entrant came into the market in the mid 1990s. It was reported by market participants that the price of a 50kg bag of cement fell from KSh450 to KSh250 at that time, and that exclusive distribution arrangements with the incumbents prevented the new entrants' product being stocked by dealers (Ellis et al, 2010).
2.2.1 Price Discrimination
A company can employ various pricing strategies in when faced with completion in the market. One of the pricing strategies that can be adopted is price discrimination. Kotler and Keller (2007) define price discrimination as when an organization sells its products at two or more prices, even though the differences in prices are not based on differences in costs. Price Discrimination can take several forms: customer — segment pricing (different customers pay different prices for the same product/service), product — form Pricing (Different versions of the product are priced differently but not according to differences in their costs), Location Pricing (a company charge different prices for different locations, even if the price for offering each location is the same), time pricing (an organization vary it prices by the season, the month, the day and even the hour examples, where time pricing is commonly practices include telephone services, transportation services, hotel services and supermarkets). Image pricing (this happens when a company price the same product at two different prices based on image differences), and Channel Pricing (Companies charges different prices depending on the channel carrying the product) (Kotler and Keller, 2007).
14 According to Kotler and Keller (2007),for price discrimination to be an effective strategy, certain conditions must be satisfied: i) the market must be segmentable and the segments must show different degrees of demand, ii) the costs of segmenting and watching the market should, not exceed the extra revenue obtained from the price difference, iii) the price discrimination must be legal, iv) price discrimination should also reflect differences in customers perceived value, v)the practice must not lead to customer resentment, vi) the competitor must not be able to undersell the company in the higher price segment vii) members in the lower-price segment must not be able to resell the product to the higher price segment.
According to Sabha (2011), in a report presented to The Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, it was stated that prices of cement in neighbouring countries such as China and Pakistan have been much lower than that of India. During its study visits, the Committee found that in Andhra Pradesh, the price of cement was Rs.l20 per bag; in Tamil Nadu, it was Rs.150 per bag while in Kerala, it was Rs.l90 per bag, excluding various types of taxes and levies. When the Committee sought to know the price variation and the volatility of prices, the representatives of Cement Manufacturers' Association explained that since March, 1989, 'cement' has been a de-controlled commodity and, therefore, it has been subject to forces of open market, i.e., 'demand and supply'. It was also stated that variations in prices are a result of dynamics of market forces. Besides, prices of different brands also vary in market, depending upon their brand image and consumer preferences (Sabha, 2011). This demonstrates price discrimination in the cement industry where each player can charge different prices to different customers in different markets depending on the market forces in the marketing environment.
2.2.2 Price skimming Another common pricing strategy employed by managers in new and growing markets is price skimming which refers to setting prices high at introduction and dropping them over time. As product life cycles become shorter and the number of new products and services increase every year, managerial use of price skimming appears to be increasing (Gebhardt, 2006). Likewise, as prices drop at ever increasing rates for a range of products and services, consumer awareness of price skimming also appears to be increasing. The managerial
15 attractiveness of price skimming is straightforward: by sequentially lowering price over time, capturing incremental customers with every price drop, price skimming allows a firm to charge each customer their reservation price (e.g., Besanko and Winston 2000). A central assumption of price skimming is because each consumer pays a price at or below his or her reservation price, each consumer is satisfied with his or her purchase.
Months after the Simba Cement's plant in Athi River started operation, the four existing players were aware that the business environment would remain the same, but may not have anticipated that they would contend with much thinner margins. This was especially after Tororo-based investors had set up a 700,000 metric 16one-a year capacity cement plant, also in Athi River, and making their intentions known from the start that theirs would be the cheapest brand. The Ugandan-owned Mombasa Cement, trading as the Nyumba brand together with Devki Group's Simba Cement, are still the cheapest brands retailing at up to Sh40 discount per 50-kilogramme bag compared to the dearest trade names. Mr Raval Narendra, the chairman of Devki group of companies, says that profit margins from the industry have been severely eroded owing to the weakening shilling, but the higher costs are yet to be passed on to the consumers. "Competition in the cement business is very tight compelling us to maintain the older prices but this is not sustainable for the industry," said Mr Narendra.He added that his company was keenly watching the market to see how the other players respond to the heightened input costs before it reviews its pricing (Economic Missions, 2007).
On the other hand, Lafarge-owned Bamburi Cement and State-controlled East African Portland Cement are both selling their regular brands at Sh730 for a 50-kilogramme bag, but dealers say the prices have previously been as high as Sh750. Athi River Mining's Rhino cement retails at Sh700, while dealers sell the Simba and Nyumba brands at between Sh685 and Sh700, revealing of the undercutting in the market. Although a vibrant real estate market has seen a steady growth in demand for cement over the past five years, the manufacturers have consistently ensured excess supply with fresh fears that the inefficient players may be pushed out of the market. Rivalry among industry players out to protect their market share, has made it untenable for them to raise prices to reflect the higher input costs as each wait for competition to take the first step (Economic Missions 2007).
16 2.2.3 Forward and Backward Integration The ability of a company to carry out forward and backward integration can also be employed by a company to decrease cost of production due to carrying out suppliers' tasks and increased products due to manufacturing and production products. A decrease in cost of production has a direct correlation with decrease in prices. A company may adopt this strategy in order to be able to recover production costs and hence be in a position to offer competitive prices in the market. However forward or backward integration can be very costly causing profits to reduce especially if a company requires capital intensive machinery, technology or is limited by government regulations. Ahlstrom and Burton (2009) further demonstrate that the capability of an industry to vertically integrate is determined by its ability to carry out a backward integration by owning its supply and reducing costs associated with suppliers.
According to Emeka (2010), The Nigerian Federal Government stated year that it will implement a mandatory backward integration policy in order to achieve self sufficiency in cement production. The Minister of Commerce and Industry, Senator Jubril Martins - Kuye, stated this during a meeting with a delegation of Cement New Entrants in Abuja, on Thursday. He noted that unregulated importation of 50kg cement into the country had stifled local cement producing companies resulting in loss of jobs and under -utilization of the country's natural resources. He said that the issue of cement is of priority to the government. He stated that they had been asked to take a second look and make sure that while they were doing that they should be watching the price so that Nigerians who want to build houses have cement at affordable price."Cement production is one of the areas which Nigeria has comparative advantage. We have huge deposits of limestone across the country. There is no reason why Nigeria should not supply cement to countries within Africa. This is why government is encouraging local manufacturers of cement to utilize limestone across the country" (Emeka, 2010).
Speaking earlier, the Chairman, Forum of New Entrants to cement industry in Nigeria, Mr. David Iweta, noted that the current gap that existed between demand and supply in the cement sub-sector was as a result of the current monopolistic market, adding that over 65 per cent of annual cement import was done by a single company. Also, the Federal Government
17 should invite all stakeholders in the cement industry together with the ministry officials for brainstorming to draw up a balanced cement policy for the country that will accommodate all interest groups in the industry (Emeka, 2010).
2.2.4 Branding cum Psychological Pricing
A company may also resort to creating a powerful image that sinks in the minds of the customers in order to have a competitive advantage over its competitors. The brand image standing in the market will automatically affect its pricing strategies. The pricing strategy usually adopted after creating a powerful brand in the market is what may be referred to as psychological pricing strategy. This is a pricing approach that considers the psychology of prices and not simply the economics price say something about the product. For example, many consumers use price to judge quality especially in situations when they cannot judge quality by: examining the product, by referring on past experience with a product and also when they lack information and skill or to judge quality.
Kotler (2000) refers to a brand as an offering that is a product or service from a source that is known. Most organizations aim at creating strong brands for their products as consumers purchase products or services of due to the brand name. A product associated with a poor brand name is usually associated with low sales, low quality or even counterfeit products. Consequently a product associated with a strong brand name and image is often cost a higher price as compared to other products. Ahlstrom and Burton (2009) denote that the impact of goods produced in an industry to the buyer is determined by the quality of the products thus high quality products ensure that the industry has power.
Emergence of new players in the cement industry has actually forced players in the cement industry to adopt strategies to either rebrand their products or rather improve their corporate image of their companies. Most companies in the sector have as a result resorted to social responsibility in order to cut a competitive edged in the market and beat other competitors in the market. In Kenya for instance, Bamburi Cement attaches particular importance to preserving the environment and involving local communities in its projects. As part of this commitment, a project was launched in 2005 linking Lafarge's Kenyan subsidiary and schools located in arid and semi-arid areas in the fight against deforestation and providing
18 these schools with drinking water and firewood. Every morning, students from Kenyan schools in rural areas collect firewood and a few litres of drinking water to prepare their midday meal, which consumes a great deal of time and energy. Furthermore, almost 200 million trees are chopped down each year in Kenya for commercial or domestic use (Economic missions, 2007).
Bamburi Cement wanted to help combat these two problems, so it launched the 'Green Schools' program, which involves planting trees and building tanks for drinking water at schools. Bamburi Cement builds concrete water tanks with a capacity of 6,000-10,000 litres using sand provided by the local community; these tanks make it possible to collect the rainwater that runs off the classroom roofs. Then up to 5,000 young trees are provided and planted near each school. The teachers and head teachers of the schools concerned attend seminars to give them all the information necessary for the success of the project, of which they then become "guardians". Initially, Bamburi Cement entered into pilot partnerships with 35 schools to test the feasibility of the project. In 2005, schoolchildren involved in the project planted over 30,000 trees of 18 different species; today, 96 schools in four Kenyan provinces are participating in the 'Green Schools' project, and over 250,000 trees have been planted. In this way, the project provides a reliable supply of drinking water and firewood whilst at the same time involving a number of partners such as local authorities, teachers, children and their parents, who, once they are part of the project, will in due course be able to repeat it (Economic missions, 2007).
2.3 Impact of New Entrants on Market Share
Guiltian (2002) acknowledges that price is one of the subset of strategic variables that firms use so as to acquire and retain consumers based on a competitive perspective. Moreover price is a critical factor in organization as it determines the market share, consumer loyalty and the ability to retain and attract new consumers.
While previous research on the relationship between market share (MS) and business profitability (BP) has found a positive relationship, its nature (i.e. direct versus spurious), its context-specificity, and the validity of MS as a predictor of BP have not been adequately addressed. Kohli and Venkatraman (2005) conducted an empirical assessment on major
• -c S'"'/;"''~":rri'-on::'University r^'i. .,.3 - Licrary 19 assertions and contradictions in regard to market share profitability relationship. Their major findings were that (1) the association between MS and BP is context-specific; (2) both direct and spurious relationships exist, and their relative strengths vary across environments; and (3) the validity of MS as a predictor of BP is context-specific.
According to initiation of Coverage Equity Research (ICER) of 2011, Bamburi's operating costs/20one have increased by 16% over 2005-2009 (from KES4,796 or $64 to KES8,604 or $111) due to rising energy costs as well as the increased use of imported clinker at its kiln could not support its volume growth. In 2010, the operating costs/20one20 declined. Bamburi historically had a lower operating costs/20one compared with EAPC and ARM but ARM now has become more efficient. Bamburi's better historical profitability was due to its larger scale, in our view, and it should retain this scale advantage in the future. It is believed that Bamburi's market share in local production to be more resilient than in domestic sales, thanks to stronger growth in exports. We estimate its market share in local production at 51% in 2010, down from a peak of 70% in 2008, and we see it declining to 41% in 2013, which implies that Bamburi will remain the largest cement producer in Kenya (and in the region) - almost twice as big as the second and third-largest players EAPC ((ICER, 2011).
2.3.1 Market Penetration New entrants can have an impact on the market share of a company in an industry through market penetration which occurs when a company enters/penetrates a market with current products. The best way to achieve market penetration is by gaining competitors' customers (part of their market share). Other ways include attracting non-users of your product or convincing current clients to use more of your product/service, with advertising or other promotions. Dalrymple and Parsons (2005) say that "promotion of more frequent and varied usage among current users" (market penetration) involves finding and promoting new uses among existing customers, which seems like it would be finding new target markets for the product. Lamb, Hair and McDaniel's (2003) definition of market development. For example, the makers of Silly Putty have found a new target market in adults who use the product as a stress reducer, so in this case the new use implies a new target market (Emeka, 2010).
20 Despite the fact that the European Union was consolidating into a single market, Vodafone did not have high market shares in EU countries, suffering the effects of Orange, an innovative new entrant quickly gaining market share. Vodafone was growing quickly however, allowing their strengths in technology and acquisitions and mergers to maintain its nearly 65 percent growth (Byles, 2006).
Market penetration (existing markets, existing products): Market penetration occurs when a company enters/penetrates a market with current products. The best way to achieve this is by gaining competitors' customers (part of their market share). Other ways include attracting non-users of your product or convincing current clients to use more of your product/service, with advertising or other promotions. Market penetration is the least risky way for a company to grow (Emeka, 2010).
Lafarge-owned Bamburi Cement and State-controlled East African Portland Cement are both selling their regular brands at Sh730 for a 50-kilogramme bag, but dealers say the prices have previously been as high as Sh750. Athi River Mining's Rhino cement retails at Sh700, while dealers sell the Simba and Nyumba brands at between Sh685 and Sh700, revealing of the undercutting in the market. Although a vibrant real estate market has seen a steady growth in demand for cement over the past five years, the manufacturers have consistently ensured excess supply with fresh fears that the inefficient players may be pushed out of the market. Rivalry among industry players out to protect their market share, has made it untenable for them to raise prices to reflect the higher input costs as each wait for competition to take the first step (Economic missions, 2007). However, the entry of new players into the cement sector is eating into the profitability and market share of the established players, cutting their profit outlook. The profitability outlook for Bamburi is not attractive, in our view, as it is expected that the earnings will be declining due to lower prices in Kenya this was mentioned by analysts from Renaissance Capital, noting that Bamburi's potential for special dividends as the company is cash-rich might make it attractive to hold onto the shares. Bamburi's profit for the financial year ended December 2010 declined by 24.6 per cent to $58.8 million compared with the previous year as Kenya's largest cement maker by market share saw its turnover decline due to new entrants engaging it in a pricing war (Sabha, 2010).
21 2.3.2 Market Development Another approach is through Market development where an established product in the marketplace is targeted to a different customer segment, as a strategy to earn more revenue for the firm. This may involve moving into another region or expanding into another country. It can also be implored by connecting through an alliance. Aaker (2004) says that selling to nonusers is an example of market development but Guiltinan and Gordon (2002) say that selling to nonusers is market penetration. Lewison (2006) says that serving new groups of customers (new market segments) is market development, giving the example of a fashion designer who develops a less-expensive line of clothing for the mass market, which surely is a strategy to "identify unmet consumer needs and develop new products to meet those needs," this being his definition of product development.
Therefore this explains the strategic move by Bamburi Cement to construct two additional cement plants, one in Kenya and one in Uganda at an estimated cost of Kes. 10.8 billion for the Kenya plant and Kes. 5.4 billion for the one in Uganda three years ago. The new plants started operating in 2008. The new plant in Kenya has a capacity of 2.6 million 22ones while that in Uganda will be 640,000 tonnes. The two additional factories have doubled the company's output. Bamburi Cement, which is one of sub-Saharan Africa's largest cement producers, started production in 1954, with an annual capacity of 140,000 tonnes. In 1999, Bamburi acquired a significant stake in Hima Cement Ltd which has improved Bamburi's market presence in Uganda, and is also providing market leverage in the Great Lakes region (Sabha, 2011).
It therefore goes without saying that the strategic move by Bamburi cement companies as well as other players in the industry either to take their investments and engagement a notch higher by venturing into regional markets as well as entering into mergers could be as a result of enhancing their market leverage as a result of the new entrants into the market. This is the only surest way of ensuring that they maintain their market leadership by continuing to command a larger share of the market.
22 2.3.3 Product Development
New entrants into an industry may also force existing companies into product diversification which may in turn affect a company's market share. This involves entering product-market different from those in which a firm is currently engaged. It can also be implemented by acquisition or a new business venture. Booth (2000) gives the example of developing an entirely new product based on new technology as one showing "diversification" (product diversification). Urban and Star (2001) state that it is to enter new markets with new products (product diversification) as undertaking major product design and implementation programs, something that virtually everyone else calls product development. The dominant cement companies can focus on diversification so as to ensure that they remain relevant, meet their objective and fight off competition. For instance, ARM is also involved in manufacturer of fertilizer from bentonite clay which is a form of waste in gypsum mining and the use of other components (Maingi, 2005).
Blue Triangle Cement is widely used for all cementing, mortar and concrete building applications. The company also produces custom-made cement products for the construction trade. Blue Triangle Cement CEM I 42.5R, commonly known as Ordinary Portland Cement (OPC) is available in 50-kg bags and 40-tonne tankers (bulk). OPC is generally used in the following applications: pre-cast concrete items, such as paving blocks, tiles, building blocks, pre-stressed concrete components, runways, concrete roads, bridges, general civil engineering construction work, asbestos products, such as sheets and pipes and non-structural works, such as plastering, flooring, etc. Blue Triangle Cement CEM IV/A 32.5 N, commonly known as Portland Pozzolanic Cement (PPC) is available in 50kg bags, 25kg bags and 40- torme tankers. PPC is ideally suited for the following construction applications: hydraulic structures, mass concreting works, marine structures and masonry mortars and plastering in classified conditions (Maingi, 2005).
We can therefore assume that Blue Triangle Cement Company has therefore diversified its products in the face of new entrants into the industry in order to remain competitive and relevant in the industry. A decade ago before the threat of new entrants into the cement industry emerged, cement companies were only selling cement to its customers. Things have
23 changed a lot given the turbulent nature of the market which is characterized by a sophisticated group of customers who are knowledgeable and who also have a variety of outlets to choose from. It is important to note that it is this assumption that this paper or study intends to confirm in order to get rid of any doubts by the researcher as well as other scholars.
A firm with a market for its current products may also embark on a strategy of developing other products catering to the same market as a result of new entrants. This move may also translate into reduction or increased market share. Frequently, when a firm creates new products, it can gain new customers for these products. Aaker (2000) says that developing new products for existing markets such as Arm & Hammer introducing a new laundry detergent is product development even though laundry must be a new market since it is a new market segment, his definition of market development. Aaker further notes that developing new generation technologies is product development.
The word "cement" traces to the Romans, who used the term opus caementicium to describe masonry resembling modem concrete that was made from crushed rock with burnt lime as binder. The volcanic ash and pulverized brick additives that were added to the burnt lime to obtain a hydraulic binder were later referred to as cementum, cimentum, cament and cement (Sabha, 2011). Cement used in construction is characterized as hydraulic or non-hydraulic. Hydraulic cements (e.g., Portland cement) harden because of hydration, chemical reactions that occur independently of the mixture's water content; they can harden even underwater or when constantly exposed to wet weather (Emeka, 2007).The chemical reaction that results when the anhydrous cement powder is mixed with water produces hydrates that are not water-soluble. Non-hydraulic cements (e.g., lime and gypsum plaster) must be kept dry in order to retain their strength. The most important use of cement is the production of mortar and concrete—the bonding of natural or artificial aggregates to form a strong building material that is durable in the face of normal environmental effects. Concrete should not be confused with cement, because the term cement refers to the material used to bind the aggregate materials of concrete. Concrete is a combination of a cement and aggregate (Economic missions, 2007).
24 2.3.4 Marketing Strategies
New entrants into an industry may force companies to adopt various marketing strategies such as heavy advertising, personal selling as well engaging in promotional activities such as road shows. This may in turn have an impact on the company's market share depending on the how appealing the marketing strategies are to the audience. Kotler and Armstrong (2000) define marketing as a social and managerial process. It is the process by which individual and groups obtain what they need through creating and exchanging products and value with others. Basically, it is all about satisfying customer needs and wants. Kotler (2007) observes that marketing helps to define the business mission, as well as analyzing the environment, competitive, and business situations. It, therefore, plays a major role in the organization's strategic planning process.
According to Thompson and Strickland (2003), environmental scanning enables managers to identify potential developments that could have an important impact on industry conditions leading to the emergence of opportunities and threats. This will help the managers to develop appropriate strategies given the industry competitive situation. The strategic marketing responses are based on the marketing mix elements of products, price, distribution and promotion.
Bamburi, ARM and EAPC have resulted to advertisement through the use of different forms of media such as billboards, television as well as radio presentations. Subsequentiy this goes to show that the existing players are keen on maintaining their market share as well as fighting off competition. Organizations have the people and the systems to distribute "information-based" products that are linked to their core activities, such as travel services, house sales and conveyance (Economic Mission). Rosenbloom (2005) suggests that product service strategies or any good service strategies require channel member support if they are to work well.
New entrants may also lead to companies segmenting their markets in order to serve the markets better depending on the availability of resources as well as the market potential of the product. Thompson and Strickland (2003) also notes that huge relational databases are being built that will capture data on customers from their day-to-day transactions through the
25 bank's Information Technology (IT) systems. This provides organizations' marketers with information to improve techniques to identify customer segments and predict customer needs. Adrian et al.(2008) notes that the segmentation approach suggests that the vendor must implement a separate marketing strategy for each segment selected as a target market including products or services that deliver benefits uniquely sought by members of each segment.
A Cement company may obtain its segmentation strategy as follows: understanding needs and preferences of consumers- Having housing, infrastructure, and commercial construction, as demand drivers, the company analyze the needs and preferences of consumers in these sectors, grouping customers based on their needs and preferences -Customers with similar needs and preferences can be included in one segment, targeting the segment that the company can best meet the needs and preferences of - The Company should target the customers, of which it can meet the needs and preferences, i.e. customer needs higher- strength or low price, branding the commodity- Though being a commodity product, branding is important for a cement company. The company needs to position its brand among Architects and Builders rather than household individuals, provide required product to meet targeted customers' needs and preferences - delivering up to the expectations of the targeted segment (Sabha, 2011).
2.4 Strategic Responses by Existing Companies to New Entrants Strategy is a game plan that creates a match between firms' capabilities and the environment. A strategy is an action that a firm takes in order to achieve a set of goals aimed at responding to changes in the environment. All organizations are faced with the challenge of managing strategy. Strategic issues by nature are future oriented and require large amounts of the firms' resources. Meeting Stakeholders expectations requires a firm to balance the expectations of the owners, customers, employees and the public at large (Johnson and Scholes, 2002).
Porter (2008) on the other hand argues that strategy is basically about competition and the means by which an organization tries to gain a competitive advantage. Strategy can be seen either as the building of defenses against competitive forces or finding of a position in an industry where competitive forces are weakest (Pearce and Robinson, 2007).Strategy
26 provides management with a future oriented framework for understanding of how external forces impact on organizations performance.
Change is inevitable, as organizations do not exist in a vacuum. If the envirormient of the organization changes drastically, this will create pressure for change within the organization. For survival, the organization has to adapt its internal operations to reflect the external realities (Ansoff, 2000). Companies that do not keep up with accelerating pace of industry changes will be irrelevant.
A host of external factors influence a firms' choice of direction and action ultimately. These factors, which constitute the external environment, can be divided into three interrelated subcategories, factors in the remote environment, industry environment and operating environment. The remote environment comprises factors that originate beyond and usually irrespective of any single firms operating situation and include economic, political, social and technological. The remote environment presents firms with opportunities, threats and constraints but rarely does a single firm exert any meaningful reciprocal influence (Pearce and Robinson, 2002). He further adds that the industry environment is shaped by five forces which include; the threat of new entrants, the bargaining power of customers, the bargaining power of suppliers, the threat of substitute products or services and the jockeying among current contestants, while the operating environment comprises factors in the competitive situation that affect a firm's success in acquiring needed resources or in profitably marketing its goods and services.
Organizations that do not respond to the changing environment demand or do not adapt to keep pace with the change; and even in some situations fail to anticipate such change, are likely to suffer and become irrelevant. Porter (2008) noted that environmental turbulence calls for continuous change to keep pace with the first change. Strategy implementation and execution consists of seeing what it will take to make the strategy work and to reach the targeted performance on schedule. In the last two decades organizations have gone through reengineering, re-strategizing, mergers, downsizing, rightsizing, quality efforts and cultural renewal projects all to accommodate strategic change in one way or another (Kotler, 2007).
27 According to (Byles, 2006), competitors in the future would certainly lower their cost base, focus on increased differentiation, and some will support concepts relating to convergence while others will ignore it. Competitors will continue to expand internationally through the use of acquisitions, mergers, and strategic alliances that will offer customers an expanded network territory.
2.4.1 Defensive Strategies Due to competitive nature of business, the position of market leader is not permanent since rival firms will always strive to attain this position and therefore challenge or dislodge the market leaders. Market leaders can also become susceptible to being challenged by other competing firms due to failure to undertake continuous product development, basking in too much success and therefore being unable to notice the onslaught of competitors, or, in their quest to maintain their position, over-invest and therefore reduce the profits of the firm hence making the firm unable to compete and maintain the position of market leader (Phillip and Keller, 2007).
Market leaders can therefore pursue several marketing strategies depending on the nature of threat to their position. This can be carried out through strategies aimed at expanding total market demand, increasing market share or by defending existing market share as outlined below:
2.4.1.1 Defending Market Share Usually, due to their large size, market leaders represent a convenient target and are often vulnerable to attack. Whether the attack is successful or not is often determined largely by the Market Leader's ability to recognize its vulnerability and position itself in such a way that the challenger's chances of success are minimized (Wilson and Gillan, 2000).
As a market leader continues to expand demand for its products, another important strategy it must pursue is to defend the market that it has already secured. This happens when the market leader's territorial dominance is challenged. To defend its market share, a market leader engages in continuous product and process innovation (Wilson and Gillan, 2000). This can be achieved through new product development, distribution effectiveness and cost
28 cutting. Safaricom Limited for instance lias pursued product innovation strategy by continuously offering different tariffs that target different users in order to maintain its position as the most profitable mobile telephony company in Kenya. Market share can also be defended by employing an effective distribution mechanism. East African Breweries and Coca cola have pursued this strategy by ensuring that their products are available locally and internationally. East African Breweries has enhanced this through outsourcing distribution from a network of independent distributors in order to reach the East African Market (EABL, 2006) .
Market leaders may also defend their market share by being proactive and responsive to new customer needs by finding the need and fulfilling it (Phillip and Keller, 2007). When Akamba Bus Company realized that some customers on its routes preferred a little luxury and were therefore opting for ''shuttle" services provided by smaller vans, they introduced "executive" services like "Akamba Royal" and "Akamba Executive" which are more spacious, air conditioned, punctual and offer snacks to their customers.
2.4.1.2 Position Defense Position defense is a strategy that aims at creating deterrence against attack or reducing the effects of any encroachment by rival firms or redirecting such attacks to areas where they would not significantly hurt the market leader (Kotler, 2005). Realizing that the main use of their product is quenching thirst, the proliferation of companies such as Crown Foods which bottles Keringet mineral water and Excel Food Company which manufactures quencher ]\xicQ sounded an alarm to Coca cola. In response. Coca cola introduced Dasani water and Sunfil Juice. This has had the effect of reducing the impact on Coca-Cola products by the action of its rivals.
2.4.1.3 Flank Defense Flank defense is a strategy used by a market leader to protect areas surrounding its territory of dominance to ensure that rivals will not be tempted to encroach on its market. This strategy can be implemented through product line extension into areas that are currently not served by the market leader but which provide a potential imoad by a competitor (Kotler, 2007) . As cheap local brews were gaining currency in Kenya especially among low income
29 market segments, East African Breweries limited moved in through product line extension and introduced Senator Keg Lager which is lowly priced and distributed widely in areas that were not traditionally East African Breweries' market. The company states that Senator Keg Lager is a barley beer in a keg format that is accessible and affordable. Senator Keg retails at Ksh.20 for 300ml, Ksh. 30 for 500ml and Kshs. 66 for 1 litre unit. The brand has shown strong performance and is indeed providing affordable and high quality alternative to illicit brews.
2.4.L4 Pre-emptive Defense When market leaders are privy to the moves or intended action by competitors, the market leader can pre-empt such action by either moving into action ahead of the competitor or by sustained price attacks (Kotler, 2007). Nakumatt Holdings, a leading supermarket retailer with 17 branches all over Kenya, pursued this strategy by opening outlets in major towns to pre-empt expansion moves by Uchumi Supermarket.
Mobile network operator Airtel limited, has also pursued a pre-emptive defense strategy by progressively reducing its calling charges to an extent that its main competitor has had to appeal to The Communications Commission of Kenya claiming unfair trade practices. Another pre-emptive defense strategy that a market leader may employ is intermittent or guerilla attack to potential rivals. The market leader attacks on an ad-hoc basis with the aim of keeping competitors off-balance and not being sure who will be attacked next, hence, competitors are not able to organize any meaningful challenge. Since market leaders tend to have an edge over resources, they can also entice rivals into costly competition by not responding to any attacks initially, then attack later by reducing price of its products (Kotler, 2007).
2.4.1.5 Counter Offensive Defense Countering attacks from rivals may become necessary when a market leader is faced with a competitor's price cuts, increased promotion, product improvement or territorial invasion (Kotler, 2007). Mumias Sugar Company has branded its product and increased promotion to counter competition from Sony Sugar Company which has also branded its product. Another strategy is to find a segment in the competitor's attack where gains would be highest if a
30 counter-offense is launched. Barclays Bank has employed this strategy by enabling its new customers open accounts free of charge thus attracting low income earners who had drifted away to upcoming banks like Equity Bank.
2.4.1.6 Mobile Defense The rationale of mobile defense strategy is to cover new territories that might in the future serve as focal points both for offensive and defensive attacks to competitors (Kotler, 2007). One will achieve a degree of strategic depth which will enable the firm not just fight off an attacker but to retaliate effectively. This can be done through production of generic products where need is identified. The international publisher McGraw-Hill has used this strategy to publish low priced books in developing countries such as India as it maintains its high segment international market by publishing high priced books for the American, United Kingdom and European markets. Mobile defense can also be achieved through diversification of products (McGraw-Hill, 2004). For instance. Coca cola has diversified into bottled water and juices. In mobile defense, caution is given to market leaders not to concentrate on diversification to the detriment of the market being defended. To this extent, Coca cola may have extended its product lines by introducing a variety of sodas and diversified into other products such as water and juice, but has not forgotten continuous promotion of its main brand. Coke.
2.4.1.7 Contraction Defense There are times when sustained attacks and continuous defense of a market becomes costly to the market leader. In such a case, a market leader may opt for strategic withdrawal from the market or what is referred to as planned contraction (Kotler, 2007). The market leader can therefore cede areas of weakness and concentrate on defending areas of strength. Due to poor economic performance and proliferation of micro-finance institutions which diverted potential savers in the 1990s, Kenyan leading banks. Standard Chartered and Barclays, closed and merged many branches and concentrated on serving corporate and high value customers. Similarly, till recently, Shell-Bp had withdrawn from the western region of Kenya due to competition from illegal oil products that were meant for export but had found their way into the market.
31 2.4.1.8 Expanding Market Share Besides working to increase market demand and defending its territory, a market leader may also pursue a strategy of expanding its market share. Research on Profit Impact of Market Share (PIMS) has proven that the size of a firm's market share has a positive correlation with profitability. A market leader can expand market share through product development, improving product quality, product line extension to gain from economies of scale and by price reductions to enhance affordability. For instance, through product line extension. Coca Cola has been able to increase its market share by marketing multiple brands of soda.
On improving product quality, dairy firms like Brookside and Delamere, in Kenya, continue to make deliberate effort to improve the initial sour milk, into flavoured extensions such as Strawberry, Vanilla and Banana yoghurt.
2.4.1.9 Advertising Heavy advertising is another strategy that a market leader can employ to expand market share. Advertising permits the seller to repeat a message many times. It also allows the buyer to receive and compare the messages of various competitors. Customers might believe that a heavily advertised brand must offer "good value" (Kotler, 2007). Coca Cola Company employs this strategy in advertising the strongest brand. Coke. The market leader can also expand market share by employing the strategy of improved distribution. Distribution channels enable a firm to display, sell or deliver the physical product or services to the buyer or user. With efficient distribution channels in place, the market leader commands a competitive advantage over competitors. Supaloaf manufacturers have devised efficient distribution of the bread throughout the country by outsourcing small scale and large scale distributors such as wholesalers and retailers.
2.4.1.10 Mergers Mergers and takeovers are other strategies that a market leader can use to increase market share. Group 4 Securicor was formed from the merger between Securicor PLC and Group 4 Falck security business which was completed in July 2004. On the other hand. East African Breweries took over the Castle brand from South African Breweries. By so doing, they were able to increase their customer base.
32 2.4.2 Innovation In a given industry five forces framework by porter help identify the sources of competition in an industry. Competition has intensified over the last decades in virtually all parts of the world. This increase in competition has played a major role in unleashing innovation and driving progress worldwide (Porter, 2008). No company and industry can afford to ignore the need to compete and each therefore must try to understand and master competition.
To begin analyzing different frameworks that we can use to assess solutions for the growing environmental impact of the cement industry and the market regulations needed, a better understanding about the forces that critically affect the industry must be distilled.
According Porter (2008), rivalry within the cement industry is moderate. The structure of the market tends to be oligopolistic in different regions around the world. In other words only a few firms control the market in many different countries. This is due to the high fixed cost which creates a highly concentrated firm environment with limited rivalry. On the other hand, cement products are not differentiated. This means that competition between existing firms can get intense. When consumers do not bare a cost by switching from one firm to another (Low switching costs) and when the product lacks differentiation, this creates a haven for competition and intense rivalry. The combination of the above factors results in moderate rivalry within the global cement industry (Porter, 2008).
Ansoff and McDonnell (2000) on the other hand observed that strategic responses involve changes in the firm's strategic behaviors to assure success in transforming future environment. Pearce and Robinson (2007) defined strategic responses as the set of decisions and actions that result in the formalization and implementation of plans designed to achieve a firm's objectives. Therefore it is a reaction to what is happening in the economic environment of organizations. Porter (2008), views operational responses as part of a planning process that coordinates operational goals with those of the larger organization. Hence operational issues are mostiy concerned with certain broad policies and policies for utilizing the resources of a firm to best support its long term competitive strategy.
According to Ansoff (2000), firms must adapt new strategies to new environmental condition. The change in competition will require strategies, which in turn call for reformed
33 organizational capabilities. Increased competition threatens the attractiveness of an industry by reducing profitability of players. Competition exerts pressure on firms to be proactive and to formulate successful response strategies to changes in the competitive envirormient.
2.4.2.1 Differentiation Differentiation is used as a response technique to increased competition by many firms. To differentiate is to make one unique and distinctive (Barman, 2002). Differentiation involves differentiating of the product or service offering of the firm and creating something that is perceived industry wise as being unique. According to Pearce and Robinson (2007) strategies dependent on differentiation are designed to appeal to customers with a special sensitivity for a particular product attribute. They argue that it provides insulation against competitive rivalry because of brand loyalty by customers and resulting lower sensitivity to price. The differentiation strategy adopted may be broad or narrow. The current realization is that broad differentiation affords a firm a broad market share upon which long-term profitability base can be developed (Barman, 2002).
2.4.2.2 Focus strategy The focus strategy aims at narrow market segments, product category of certain buyers. The strategy is about identification of a particular customer segment, geographical market and coming up with products suitable for that segment, once the segment has been identified. Porter (2008) argues that this strategy rests on the premise that the firm is thus able to serve its narrow strategic target more effective or efficient than competitors who are competing more broadly. According to Chekwony (2001) the focus strategy therefore helps firms to direct their strategic plans to align themselves to the environment.
2.4.2.3 Cost Leadership Cost leadership as yet another generic strategy, requires aggressive construction of efficient scale facilities, vigorous pursuit of cost reduction from experience tight cost and overhead control, avoidance of marginal customer accounts, and cost minimization in areas like research and development, service, sales force, and advertising Leseketeti (2006). The firm strives to become the most efficient producer in the market, and has the ability to change the
34 lowest price. Mugambi (2003) argues that cost leadership can be achieved by a firm adapting functional policies and resorting to aggressive construction of efficient scale facilities. The quality assurance process may also be elaborate to reduce costs of customers' delays and cost of errors. Therefore the dominant cement companies can focus on cost reduction so as to charge affordable prices and maintain a competitive advantage.
2.4.2.4 Operational strategies Operational responses may also be adopted as a response strategy to counter new entrants usually concerned with setting broad policies and plans for using the resources of the firm to support its long-term competitive strategy. It is very comprehensive and integrate the cooperate strategy. The strategy here are those that focus on giving high service quality (Chase et al; 2000), low production costs (Dooner, 2001), having flexible facilities and process (Garvin, 2004), ability to deliver with speed (Dooner, 200) and innovativeness (Unilever, 2001).
Quinn (2000) identifies strategy as a plan that puts together an organization's major goals, policies and action sequences. A well-formulated strategy enables an organization to allocate its resources in a unique way on the basis of its relative internal competencies and limitations, expected changes in the environment, and contingent actions by competitors.
Wilson and Rosenfeld (2000) defined organization structure as the established pattern of relationships between component parts of an organization outlining communication, control and authority patterns. Thus, structure distinguishes the parts of the organization and delineates the relationship between them. One of the major activities of restructuring is business process reengineering. Hammer (2006), notes that companies can dramatically improve their efficiency and quality by focusing on customers and the processes that create value for them. Processes have come to be more important than their products and are in fact defining the marketplaces in which the companies compete. Outsourcing, for instance, would enable an organization to concentrate on its core businesses, while benefiting from the cost efficiencies of those companies that specialize on the outsourced activity. Firms can design their strategies based on their processes, for instance, through intensification where processes
35 are mapped and improved to enhance customer service, or through extension where strong processes enable entry to new markets.
It is important to note that while the threat of new entrants is weak, Vodafone must continue to reduce costs below that of its competitors. By maintaining high levels of efficiency, Vodafone can help make the entrance into the mobile telephony industry unattractive to its potential competitors (Byles, 2006).
2.5 Chapter Summary This chapter has presented literature review describing the recent studies that have been undertaken in this area of this research. The next chapter will present the research methodology to be employed in carrying out the research while chapter four will report on the result and finding. The last chapter five will only focus on discussion, conclusion and recommendation which will be based on the findings.
36 CHAPTER THREE
3.0 METHODOLOGY
3.1 Introduction This chapter provides a detailed discussion of the research methodology that was used in this study. Consequently it explains the research design and how it was relevant to the study. In addition to that the chapter also discusses the population of the study, sample and sampling techniques, data collection methods as well as data analysis methods applied in the study. In essence the chapter provides a brief summary of some of the key discussions in the study.
3.2 Research Design A research design constitutes the blueprint for the collection, measurement and analysis of data, and aids the researcher in the allocation of his limited resources (Olive and Abel, 2000). The case study approach was used where the focus was established cement companies in Kenya. A research design has more to do with the research method than the general plan, and is concerned with issues such as whether a survey or experimental study should be conducted, and what survey or experiment design to use. Any research conducted without a research design is likely to be more expensive (due to midstream attrition) than research properly conducted using a clear research design. Thus, a research design ensures that the research will be relevant to the problem, and will use economical procedures (Olive and Abel, 2000).
The research design used in this study was a survey research design. Czaja and Blair (2005) point out that a survey is based on the need to collect information usually with the use of a questionnaire from a sample of respondents from a well defined population. Subsequently survey design procedures require inputs from the people who will use the survey data and from those who will conduct the survey. The data users should identify the variables to be measured, the estimates required, the reliability and validity needed to ensure the usefulness of the estimates and any resource limitations that may exist pertaining to the conduct of the survey.
37 3.3 Population and Sampling 3.3.1 Population Mann and Lacke (2010) suggests that populations consists of all elements that is individuals, items, objects whose classification are being studied and that the population that is being studied is also referred to as the target population.
The population of interest in this study consisted of managers in cement manufacturing companies and more particularly Bamburi cement Company located in Athi River, East African Portland Cement Company also located in Athi River and AthiRiver Mining Limited located at Athiriver and Chiromo. The reason for selecting Nairobi for our study was due to the fact that traveling to Mombasa or Kaloleni would have been costly and time consuming. Another researcher conducting research in the same area could focus on Mombasa and Kaloleni as well other parts in order to verify the findings of this study.
Table 3.1: Population Distribution
Position Bamburi Portland ARM Total
Senior Managers 31 23 25 79
Middle Managers 53 57 61 171
Other Employees 895 1451 2194 4540
Total 979 1531 2280 4790
3.3.2 Sampling Design 3.3.2.1 Sampling Frame
According to (Emory, 2005), sampling frame is a master list of some interest. It is the list of elements from which the sample is drawn, and is a complete and correct list of population members only. For example, all cement companies in Kenya may be found in the Nation Business Directory. Many established companies in Kenya are listed in the Nairobi Stock Exchange. The list of companies also acts as a sampling frame for many populations. The sampling frame should therefore address or set of rules that clearly spell out the population. In developing a sampling frame, one may require several sources, as none of the sources is
38 exhaustive enough to represent the entire population, unless registration is mandatory (Emory, 2005). According to the list obtained from the Nairobi Stock Exchange data base as at December 2011, there were three cement companies listed in the exchange.
The sampling frame for employees was derived from the list of management employees in the companies. According to the list obtained from the Kenya Manufacturers Association data base as at December 2011, there are a total of 4790 employees in the three listed cement companies in Athi River and Chiromo. This was confirmed with the respective HR officials in the companies. A sample of informed respondents was selected from the three companies believed to be the major players in the cement industry using stratified random sampling technique.
3.3.2.2 Sampling Technique
Stratification can occur after selection of individuals for instance if one wanted to stratify a sample of individuals in a town by age, one could easily get figures of the age distribution, but if there is no general population list showing the age distribution, prior stratification would not be possible. In this study at the analysis stage it is important to have a correct proportional representation. Random stratified sampling is more precise and more convenient than simple random sampling.
3.3.2.3 Sample Size
A determinant of power is sample size. As sample size increases, the distribution of means become narrower and the variance decreases, thereby reducing the overlap between the two distributions and increasing power (Aron and Aron 2002).
The focus of the study was on informed representatives of the companies who responded to the questionnaires. Forty two (42) management staff members from selected departments were interviewed from the three companies. These departments were: Marketing, Operations, HR and Finance. Due to their experience and the understanding of the business strategy the identified managers were in a position to provide a fair opinion of the company response to the competitive threats of new entrants.
This involved visiting their offices with separate appointments in order to carry out this research on time. To identify the respondent the survey used stratified sampling to ensure the
39 managers of operations, marketing, finance and liuman resources are covered in each company. These were deemed to be adequate representatives of the companies and could help answer the research questions reliably as they covered both inbound and outbound activities. The lists of number of managers in the companies under study were used for sampling.
The aim of the stratification was to cover both inbound (operations) and outbound activities (marketing and sales) as described by Michael Porters value chain activities (Porter, 1985).
The number of eligible employees was as follows:
Table 3.2: Sample Determination
Position Bambur Portlan ARM Total Sample Percent d
Senior Managers 31 23 25 79 25 32%
Middle Managers 53 57 61 171 17 10%
Other Employees 895 1451 2194 4540
Total 979 1531 2280 4790 42
The samples were distributed randomly across the 3 stratum identified. According to Chava and Nachimias (2003), a representative sample should have at least 30 Units. Further, as Kothari (2003) observed, in a homogeneous population the number of members in the sample size may not affect the results of the research if the sample is drawn in a proper manner. According to Mugenda and Mugenda (2001), a sample of 10 percent of the accessible population is enough where time and resources are restrictive.
These were subdivided into three categories based on the employees' position in each company as shown below. For the middle managers, we used a sample of 10% and for the middle managers; we used a sample of 32% of the accessible population. The study targeted more senior managers given their bigger role in decision making in as they were in a better position to provide the right information needed for the study. According to Mugenda and
40 Mugenda (2001), a sample of 10 percent of the accessible population is enough where time and resources are restrictive. The resulting total sample of 42 managers was broken dovm for each cement company under study and is presented in the following tables.
Table 3.3: Stratification of Sample Size
Company Position Number Sample Percent Of Employees Bamburi CementSenio r 32% Company LimiteManagerd s 31 10 (Athi River) Middle 10% Managers 53 5 Senior East African Managers 23 7 32% Portland CementMiddl e Managers 57 6 10% Senior Athi River MininManagerg s 25 8 32% Limited Middle Managers 61 6 10%
250 42
3.4 Data Collection Primary data was used in the study. Gillespie, Jeannet & Hennessy (2010) mention that primary data is collected for a specific research purpose and is obtained by direct observation or by direct contact with the source of information. A semi-structured questionnaire was used to collect data by the researcher. Arthur (2006) refers to a questionnaire as a set of questions that is either open or closed whereas close-ended questions as those that may be answered with a single word for example yes or no. Robert (2000) notes that open ended questions are very versatile and play an important role in research and an easy to answer open-ended question is asked as the initial questions so as to gain a rapport. The questionnaire comprised of closed and open ended questions so as to cater for questions that required explanation and those which required anticipated answers. Closed ended questions usually limit the response to predetermined categories and thus quick and easy to answer making them easy to get data from as well as allowing data analysis to be easy and convenient to the researcher. On the other hand open ended questions require the respondent to answer in their own words and
41 thus the respondent give their opinions and ensure collection of detailed information relevant for discussion of findings. Data was collected by use of questionnaires comprising open and close ended questions which were dropped to firms in the sector and then collected later after a week. The questionnaires were divided into four sections which contained a General information section, the three research questions which were; what is the impact of new entrants on pricing of cement products? What is the impact of new entrants on the market share of cement products and what are the strategic responses by the existing cement companies on the new entrants. The questionnaire was addressed to the employees from the selected companies. The respondents to be interviewed comprised of managers in strategic departments namely Operations, Marketing, Finance and Human Resources.
3.5 Research Procedure The survey instrument developed must be preceded by certain prerequisites so as to ensiu-e that efficiency and effectiveness is adhered to. The data collection instrument in this study was a questionnaire comprising of open and closed ended questions developed by the researcher guided by the research questions. The use of a pilot test is critical as it verifies that the questionnaire is relevant and its main aim is to act as a tryout so as to provide a survey form that is usable and one that will provide the researcher with the specific information required. Hence it is critical for all quesfionnaires to be pilot tested before being put into practice. In addition to that it is important to ensure that clarity is used in the questionnaires so as to avoid misinterpretations. However the pilot test quickly reveals whether the respondents understand the language, directions and instructions provided and if the respondents are able to answer the questions without difficulty. For this reason a pilot test of three respondents was conducted initially to test the data collection instrument. The pilot test provided insights on emerging issues and as such some questionnaire items had to be rephrased, revised and improved accordingly. As a result this ensured that the respondents understood the questions in the instrument without interpretations. The instruments were administered by the researcher to the respondents using hand delivery (drop and pick) and where the respondents were not easily accessible the questionnaires were emailed.
3.6 Data Analysis Methods The questionnaires from the survey were first edited to clear any inconsistencies and standardize the data collected. The data from questioimaires was then be coded and then entered in a Statistical Package for Social Sciences (SPSS) database for processing. The data analysis of this study was conducted through the use of descriptive statistics. According to Cooper and Scindler (2002) descriptive statistics involves the process of transforming a mass of raw data into summarized figures such as frequencies, mean scores, standard deviations and percentages. Open ended questions were analyzed using content analysis and reported as narratives. The measures utilized mainly looked into the frequency of the respondents. In addition to that the results of the study were presented in the form of statistical tables and figures as the main mode of presentation with a short narrative thereafter. The analysis focused on answering the research questions.
3.7 Chapter Summary This chapter explains the research design and methodology applied in the study and the target population selected. A survey of cement companies listed in the NSE was carried out to meet the study objectives. Primary data was collected with the help of structured questionnaires targeting management staff in strategic departments. The next chapter will report on the result and findings. The last chapter which is chapter five will focus on the discussions, conclusion and recommendation which will be based on the findings.
43 CHAPTER FOUR
4.0 RESULTS AND FINDINGS
4.1 Introduction This chapter addresses the results on the analysis of the impact on new entrants in the cement industry in Nairobi. The findings are based on the responses from the questionnaires filled and information gathered from the research questions. The response rate was 98% out of a sample size of 42 managers only 41 responded to the questionnaires. The first research question was to determine the impact of new entrants on the price of cement. The second research question was to determine the impact of new entrants on the market share and the third research question focused on the strategic responses by established players to the new entrants. The findings in this chapter are presented in form of charts, tables and narratives. Part one presents general information about respondents. In part two, the three research questions are analysed and the findings presented.
4.2 Background Information The general information for the study comprised of the respondents' names, gender, age, rival firms, the different categories of buyers, categories of buyers with the highest turnover, the number of suppliers of raw materials, various substitutes for cement, factors contributing to rivalry and factors contributing to the increase in the number of new entrants.
4.2.1 Gender of Respondents The study set to examine the gender of the respondents involved in the study. The findings are summarized in figure 4.1.
44 Gender of Respondents Gender of Resporvlent • Female • male i
Figure 4.1: Gender of Respondents
As indicated in figure4.1 , 78.05 percent of the respondents were male as compared to 21.95 percent females.Thus, the fmdings indicate that majority of respondents were male.
4.2.2 Age of Respondents The study ser to examine the age of the target respondent involved in the study. The findings are summarized in table 4.1.
Table 4.1: Age of Respondents
Valid Cumulative Age Frequency Percent Percent Percent
31-35 years 17 41.5 41.5 41.5
36-45 years 24 58.5 58.5 100.0
Total 41 100.0 100.0
As indicated in table 4.1 majority of the respondents were aged between 36 to 45 years with 58.5 percent and 41.5 percent aged 31 to 35 years Thus the findings indicate that most of the respondents are above 35 years of age.
45 4J.3 Rival Firms The study set to find out the firms that the respondents view as rivals involved in the study. The findings are summarized in figure 4.2.
Rivals Firms • Bamburi Cement Ltd H Mombasa Cement (-1 Athi River Mining ^Ltd • East African "FtortlandLtd 1—1 Savannah '-'Cement n Simba Cement • other
17.07%
Figure 4.2: Rival Firms
As indicated in figure 4.2. Bamburi was viewed as the major rival with 26.83 percent while Athi River Mining Company Limited, East African Portland Cement Company, Mombasa Cement and Simba Cement each had 17.07 percent followed by Savannah Cement with 4.68 percent. Therefore, among the new entrants Simba Cement and Mombasa Cement were viewed as major rivalseac h with a 17.07 percent while Savatmah Cement was viewed as the least rival with 4.68 percent.
46 4.2.4 Different Categories of Buyers The study set to examine the different categories of buyers for cement from the respondents involved in the study. The findings are summarized in figure 4.3.
30-
•s
O o
Very Smalt Sized Small Sized Orders Mddte Sized Orders Large Sized Orders Very Large Sized Orders Orders
Different Categories of Buyers
Figure 4.3: Different Categories of Buyers
As illustrated in figure 4.3. majority of the respondents that is 30 of them indicated large sized orders as part of the different categories of buyers while 5 of the respondents mentioned that middle sized orders was also part of the different categories of buyers and another 5 also mentioned very large sized orders The small sized orders was only mentioned by 1 respondent as forming part of the different categories of buyers for cement. Therefore, the findings indicated that large sized orders form the majority of the different categories of buyers while small sized orders is the least category of buyers.
4.2.5 Category of Buyers with the Highest Turn Over The study set to find out the category of buyers for cement with the highest turnover from the respondents involved in the study. The fmdings are summarized in table 4.2.
47 Table 4.2: Category of Buyers with the Highest Turn Over
Category of Buyers with the Valid Cumulative Highest Turn Over FrequencyPercen t Percent Percent
Middle Sized Orders1 8 43.9 43.9 43.9
Large Sized Orders 21 51.2 51.2 95.1
Very Large Sized 2 4.9 4.9 100.0 Orders
Total 41 100.0 100.0
As indicated in table 4.2 the category of buyers with the highest turnover was the large sized orders with 51.2 percent followed by middle sized orders with 43.9 percent and very large sized orders with 2 percent. As a result the fmdings indicate the category of buyers with the highest turnover is the large sized orders.
4.2.6 Suppliers of Raw Material The study set to find out the number of suppliers of raw materials to the respondents involved in the study. The number of suppliers of raw materials was found to be 5 and over with 100 percent. As a result the fmdings indicate the number of suppliers of raw materials is 5 and over.
48 4.2,7 Substitutes for Cement The study set to examine the various substitutes for cement that are there from the respondents involved in the study. The fmdings are summarized in figure 4.4.
Substitute
Figure 4,4: Substitutes for Cement
As indicated in figure 4.4 majority of the respondents that is 65.85 percent indicated that cement does not have a substimte while 19.51 mentioned that Iron Sheet was a substitute for cement as compared to 9.76 percent who indicated that wood was another substitute and 4.88 percent mentioned mud as a substitute. Therefore, the findings indicate that majority of the respondent hold the view that cement does not have a substitute while the other respondents view iron sheet, wood and mud as substitutes for cement.
49 4.2.8 Factors contributing to Rivalry
The study set to find out the various factors contributing to rivalry within the cement industry from the respondents involved in the study. The findings are summarized in table 4.3.
Table 4.3: Factors Contributing to Rivalry
Valid Cumulative Factors Contributing to Rivalry FrequencyPercen t Percent Percent
Other 2 4.9 4.9 4.9
Pricing 19 46.3 46.3 51.2
Availability of Raw 4 9.8 9.8 61.0 Materials
Advertising 4 9.8 9.8 70.7
Demand Vs Supply 10 24.4 24.4 95.1
CSR Activities 2 4.9 4.9 100.0
Total 41 100.0 100.0
As illustrated in table 4.3 majority of the respondents indicated that pricing was a major factor contributing towards rivalry with 46.3 percent followed by demand versus supply with 24.4 percent while availability of raw materials and advertising followed with 4 percent each compared Corporate Social Responsibility activities which followed as well as other factors with 2 percent each. Therefore, the findings indicate that the major factor contributing to rivalry within the cement industry is pricing.
4.2.9 Factors Contributing to New Entrants The study set to find out the various factors contributing new entrants in the cement industry from the respondents involved in the study. The findings are summarized in table 4.4.
50 Table 4.4: Factors Contributing to Increase of New Entrants
Factors Contributing to Increase Valid Cumulative of New Entrants FrequencyPercen t Percent Percent
Valid Availability of Loca7 l 17.1 17.9 17.9 Raw Material
Availability of Capitai l 7.3 7.7 25.6
Increase of Demand fo20r 48.8 51.3 76.9 Cement
Backward and Forward2 4.9 5.1 82.1 Integration
Fewer Govt. 7 17.1 17.9 100.0 Regulations
Total 39 95.1 100.0
Missing System 2 4.9
Total 41 100.0 •
As illustrated in table 4.4 majority of the respondents indicated that the increase of demand for cement was a major factor contributing towards new entrants with 48.8 percent followed by fewer government regulations and availability of local; material with 17.1 percent each as compared to the availability of capital which followed next with 7.3 percent while backward and forward integration was the least with 4.9 percent. Therefore, the fmdings indicate that the major factor contributing to new entrants with the cement industry is the increase in demand for cement.
4.3 Impact of New Entrants on Pricing The study aimed to determine the impact of new entrants on the pricing of cement from the respondents involved in the study. The respondents were asked to indicate to what extent they agreed or disagreed on the a number of statements that the impact of new entrants has
51 greatly influenced the pricing of cement on a scale of 1 to 5 where 5 is strongly agree, 4 is Agree, 3 is Neutral, 2 is Disagree and 1 Strongly disagree. The hypothesis below was formulated.
Hypothesis 1 HQ: The new entrants have no impact on the pricing of cement.
Hi: The new entrants have an impact on the pricing of cement.
To test the hypotheses, a t-test was performed. The fmdings are summarized in table 4.5 below.
Table 4.5: Impact of New Entrants on Pricing
One-Sample Test
Test Value = 0
95% Confidence Interval of the Difference Sig. (2- Mean t df tailed) Difference Lower Upper
IMPPRICE 80.818 40 .000 3.56098 3.4719 3.6500
There was found to be an impact of new entrants on the pricing of cement because there was a 95% confidence interval of the difference, the t=80.81 and P=0.00 (two-tailed). The null hypothesis was therefore rejected and the alternate hypothesis accepted.
Hi: The new entrants have an impact on the price of cement.
4.4 Impact of New Entrants on Market Share
The study aimed to determine the impact of new entrants on the market share of cement from the respondents involved in the study. The respondents were asked to indicate to what extent they agreed or disagreed on the a number of statements that the impact of new entrants has greatly influenced the market share of cement on a scale of 1 to 5 where 5 is strongly agree, 4 is Agree, 3 is Neutral, 2 is Disagree and 1 Strongly disagree. The hypothesis below was formulated.
52 Hypothesis 2 HQ: The new entrants have no impact on the market share of cement.
Hi: The new entrants have an impact on the market share of cement.
To test the hypotheses, a t-test was performed. The fmdings are summarized in table 4.6 below.
Table 4.6: Impact of New Entrants on Market Share
One-Sample Test
Test Value = 0
95% Confidence Interval of the Difference Sig. (2- Mean t df tailed) Difference Lower Upper
IMPMKTSHARE 37.172 40 .000 3.78455 3.5788 3.9903
There was found to be an impact of new entrants on the market share of cement because there was a 95% confidence interval of the difference, the t=37.17 and P=0.00 (two-tailed). The null hypothesis was therefore rejected and the alternate hypothesis accepted.
Hi: The new entrants have an impact on the market share of cement.
4.5 Strategic Responses by Established Players to New Entrants
The study aimed to examine the strategic responses by established players to new entrants. The respondents were asked to indicate to what extent they agreed or disagreed on the a number of statements that the impact of new entrants has greatly influenced the pricing of cement on a scale of 1 to 5 where 5 is strongly agree, 4 is Agree, 3 is Neutral, 2 is Disagree and 1 Strongly disagree. The findings are summarized in table 4.7.
53 Table 4.7: Strategic Responses by Established Players to New Entrants
Std. Coefficient Rank of Statements Mean Deviation of Variation CV Seeking additional distributio3.9n 0 .800 channels for cement so as to fight off new entrants 0.205039059 6 Penetrating into new areas so 3.7as8 to .759 create awareness and attract new customers as a way of fighting off competition 0.200685609 4 Developing/improving their product3.88 s .748 targeting existing customers so as to maintain and attract customers. 0.192923952 3 Customizing products so as to 3.66 .530 maintain and attract customers 0.144760338 1 Focusing on producing a variet3.4y o9f 1.143 products for different customer 0.327669206 17 Pursuing business opportunitie3.9s 3 .905 related to the current ones due to increased competition 0.230534374 9 Pursuing business opportunitie3.5s 4 1.002 unrelated to the current ones due to increased competition 0.283447437 11 Carrying out constant research3.7 so8 as .852 to understand customer needs and preference. 0.225322061 8 Carrying out constant research3.3 so2 as .986 to understand how to cut costs due to increased competition 0.297212577 12 Building the company's image 3.88 .600 through increased advertising spending 0.154664561 2 Sub-dividing markets into smalle3.78r 1.129 manageable units so as to fight off competition 0.298752174 14 Creating barriers to entry int3.9o 8 1.235 established market segments 0.310559152 16 Getting into exclusive distributio3.10 n .768 agreements with dealers so as to stop them from stocking competitors products 0.248025247 10 Targeting non users/potential 3.2user0 s of.95 4 cement so as to fight off new entrants 0.298721125 13 Carrying out uncoordinated attack2.88s on1.45 2 new entrants in the market 0.504682185 20
54 Enticing new entrants into costl3.2y7 1.184 competition 0.362186407 19 Carrying out heavy promotion fo3.4r 4 1.141 existing products so as to fight off new entrants 0.33185124 18 Expanding corporate social 3.61 .737 responsibility programs so as to fight off new entrants 0.204306717 5 Increased involvement with the3.7 3 .837 industry experts/ heavy users so as to fight off new entrants 0.224398227 7 Increasing workers pay and comfort3.63 s 1.113 in order to retain talent and fight off competition 0.306142541 15
The study aimed to determine the strategic responses used by established players which include the three cement companies under study on the new entrants. The findings in Table 4.8.established that creating barriers to entry into established market segments was highest in the list of established players to curb new entrants (mean 3.98) which was followed by pursuing business opportunities related to the current ones due to increased competition (mean 3.93), seeking additional distribution channels for cement so as to fight new entrants came in next (mean 3.90). Then there was building the company's image through increased advertising spending (mean 3.88), developing/improving their products targeting existing customers so as to maintain and attract customers (mean 3.88), penetrating into new areas so as to create awareness and attract new customers as a way of fighting off competition (mean 3.78), carrying out constant research so as to understand customer needs and preference (mean 3.78) and sub-dividing markets into smaller manageable units so as to fight off competition (mean 3.78). Then there was increased involvement with the industry experts/ heavy users so as to fight off new entrants (mean 3.73) followed by customizing products so as to maintain and attract customers (mean 3.66), increasing workers pay and comforts in order to retain talent and fight off competition (3.63) expanding corporate social responsibility programs so as to fight off new entrants (mean 3.61), pursuing business opportunities unrelated to the current ones due to increased competition (mean 3.54), focusing on producing a variety of products for different customer (mean 3.49) and carrying out heavy promotion for existing products so as to fight off new entrants (mean 3.44) and carrying out constant research so as to understand how to cut costs due to increased
55 competition (mean 3.32) followed by enticing new entrants into costly competition (mean 3.27). Targeting non users/potential users of cement so as to fight off new entrants (mean 3.20), getting into exclusive distribution agreements with dealers so as to stop them from stocking competitors products (3.10) and the least was carrying out uncoordinated attacks on new entrants in the market (mean 2.88). The strategic responses to new entrants also involved quality improvement, corporate social responsibility, intense advertising and after sale services.
4.6 Chapter Summary This chapter presented findings of the survey by way of tables and figures. It was sub-divided into 4 sections namely background information of the respondents followed by analyses on the impact of new entrants on pricing of cement, impact of new entrants on market share and strategic responses by established players to new entrants. In the next chapter a summary of the findings, discussions, conclusions and recommendations are presented.
56 CHAPTER FIVE
5.0 DISCUSSIONS, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction In this chapter, the researcher provides a discussion on the findings of the research as compared to the findings in the literature review, the summary of the study and recommendations for further improvement on other ways in which established players have responded to new entrants and some of the approaches used by new entrants that are different from what the established companies have always used.
5.2 Summary The purpose of this study was to establish the impact of new entrants to the cement industry in Nairobi. This included the impact of new entrants on the pricing of cement, market share and the strategic responses by established companies to new entrants.
In order to achieve the above, descriptive research design was adopted. The target population in the study was managers of Bamburi Cement Company Limited, East African Portland Cement and AthiRiver Mining Limited. Stratified random sampling was adopted to select a total of sample size of fourty two managers. In terms of data, the research relied mainly on primary data collected using structured questionnaire. This questionnaire contained both open and close ended questions. Data was first coded, formatted and transformed in a mode that could be picked accordingly using SPSS. Thereafter, the data was analyzed in terms of descriptive statistics mainly in terms of frequency tables, charts and graphs.
The study revealed that the majority of the respondents were male while the women formed the minority. In addition to that majority of the respondents were found to be between the ages of 36 to 45 years with while the minority were between the ages of 31 to 35 years.
In terms of rival firms Bamburi was viewed as the major rival among the established players while among the new entrants Simba Cement and Mombasa Cement were viewed as major rivals while Savannah Cement was viewed as the least.
57 The large sized orders formed the largest category of buyers which was followed by the middle and very large sized orders while the small sized orders formed the least category of buyers. Subsequently large sized orders formed the category of buyers with the highest turnover.
The study revealed that there were over five suppliers for raw materials and that there was no substitute for cement based on response from the majority of the respondents. However other respondents indicated that iron sheet, wood and mud as substitutes for cement based.
The study further showed that pricing was a major factor contributing towards rivalry followed by demand versus supply while availability of raw materials and advertising followed as compared to Corporate Social Responsibility activities which came in next. On the other hand the increase in demand for cement was a major factor contributing towards new entrants followed by fewer goverrmient regulations and availability of local raw material as compared to the availability of capital which followed in next before backward and forward integration.
On the impact of new entrants on the pricing of cement a t test of hypothesis was carried out, the study revealed that there was found to be an impact of the new entrants on the pricing of cement as a result the null hypothesis was rejected and the alternate hypothesis accepted as the new entrants have an impact on the pricing of cement. In addition to that on the on the impact of new entrants on the market share of cement a t test of hypothesis was carried out, the study revealed that there was found to be an impact of the new entrants on the market share of cement as a result the null hypothesis was rejected and the alternate hypothesis accepted as the new entrants have an impact on the market share of cement.
The strategic responses to new entrants by established players based on a number of statements where by the respondents were to agree to a list of statements on a scale of 1 to 5 where. The study revealed that creating barriers to entry into established market segments, seeking distribution channels for cement so as to fight off competition, carrying out constant research so as to understand customer needs and preference, carrying out heavy promotion for existing products so as to fight off new entrants and targeting non users/potential users of
58 cement so as to fight off new entrants were among some of the major strategies However, carrying out uncoordinated attacks on new entrants in the market was not a popular strategy.
5.3 Discussion 5.3.1 The impact of New Entrants on Pricing of Cement Guiltian (2002) acknowledges that price is one of the subset of strategic variables that firms use so as to acquire and retain consumers based on a competitive perspective. Moreover price is a critical factor in organization as it determines the market share, consumer loyalty and the ability to retain and attract new consumers. The study findings revealed that the new entrants have an impact on the pricing of cement based on a t test of hypothesis. A price war breaks out when entrants arrive. During the price war, the entrants' price is below the incumbent's price. It is even below the entrants' costs. The low price increases sales of the good so that new dealers are drawn into the market to distribute entrants' output. Further, depending upon the distribution of dealer set-up costs, the price war may induce some (but not all) of the incumbent's dealers to switch to an entrant. Once entry is complete and all the dealers have attached themselves to a supplier, the price war ends and the price of the good increases (Klemperer's paper, 1989). This is supported by the findings that the new entrants have an impact on the pricing of cement. However in most instances the new entrants raise their prices after they have penetrated the market and acquired loyal consumers as the low prices are often aimed at attracting consumers who are price sensitive.
The finding is supported by Landphair and Larsen (2006) define price as an evaluation of the percentage of the overall development, cost of the production, manufacturing and production time. The cost of production, raw materials, warehousing, advertising, distribution among other variables greatly determines ultimate price of a product. In this case the new entrants are among the other variables that greatly determine the price of a product especially due to competition.
However we have to acknowledge that as per the findings indicated above the established players are perceived to have strong brand names, knowledge of the market, experience in the industry and as such they set the price for cement while the new entrants follow mostly by ensuring that they have a lower price as compared to the established players. This is supported by Kotler (2007) defines price as a measure of the value exchanged by the buyer for the value offered by the seller. In broad terms price can therefore be defined as the sum of all values that consumers exchange for the benefits of having or using the product or service.
Second, there are some consumers who prefer to purchase cement from the established players due to the good brand image and previous experience with established players. This is supported by Kotler (2000) refers to a brand as an offering that is a product or service from a source that is known. Most organizations aim at creating strong brands for their products as consumers purchase products or services due to the brand name. Bamburi Cement Limited was rated as the major rival among the established players while Mombasa Cement and Simba Cement were listed as the two major rivals among the new entrants. Consequently a product associated with a strong brand name and image such as Bamburi Cement often cost a higher price as compared to other products. A product associated with a low price is usually associated with poor brand name, low sales, low quality or even counterfeit products. Kotler and Keller (2007) define price discrimination as when an organization sells its products at two or more prices, even though the differences in prices are not based on differences in costs. Therefore, this supports the low prices charged by new entrants so as to penetrate a new market or the different prices charged by new entrants so as to attract new consumers.
Daly and Farley (2010) regard substitutes as goods that are similar and are often used for the same purpose and as such consumers are willing to use one good in place of another due to the similarity in function. However, the study revealed that there was no substitute for cement according to a majority of the respondents results while iron sheet, wood and mud were perceived as substitutes for cement as per a minority of the respondents as they are used in the construction of houses though they are not as effective as cement. Selim & Salem (2010) stipulate that the demand for cement is considered to be price inelastic due to lack of apparent substitutes. The study may have revealed that iron sheet, wood and mud are viewed as substitutes for cement however they do not directly impact the price of cement. An industry is only threatened if another industry produces a similar product (such as aluminum cans vs. plastic bottles), or if consumers of that product can decrease the ratio of their use of that product and use another product that is in minimal partial substitution. Both of these choices are virtually non-existent to cement consumers, hence the threat of substitutes is very
60 low (United States Geological Survey, 2008). It is important to note that cement does not have a clear substitute as wood, sheet or mud may be used in its place. In addition to that the increase in demand for cement, the availability of local raw materials, backward and forward integration, fewer government regulations and availability of capital will continue to attract new entrants into the cement industry.
Fourthly, the study revealed that there were over five suppliers for raw materials. The bargaining power of suppliers is a factor that greatly determines the price of a product due to a high or low bargaining power. Ahlstrom and Burton (2009) argue that the factors that make suppliers powerful include the demand for supplier's products. The factors affecting the bargaining power of suppliers include the availability of substitutes of the products, switching cost, ability to carry out forward and backward integration. The suppliers usually include those of transportation and suppliers of the raw materials. This is another factor that may influence the pricing of cement as well new formation of new entrants due to forward and backward integration.
Finally, the study revealed that the large sized orders formed the largest category of buyers which was followed by the middle and very large sized orders while the small sized orders formed the least category of buyers. Bargaining power of the buyer on the other hand refers to the effect customers can exert on a particular industry. Pure buyer power exists when only one buyer exists in the market (monopoly). In this case power is entirely in the hands of the buyer. In the cement industry, facts suggest that this effect is minimal (Porter, 2008). However as per the study there were different categories of buyers therefore the impact on pricing is not as much as it would be if there was only one buyer.
The study revealed that new entrants have an impact on pricing of cement nevertheless there are other factors that should be taken into consideration such as the bargaining power of suppliers, bargaining power of buyers, the availability of substitutes, entry and exit barriers, branding and advertising.
5.3.2 The Impact of New Entrants on Market Share New entrants can have an impact on the market share of a company in an industry through market penetration which occurs when a company enters/penetrates a market with current
61 products. The best way to achieve market penetration is by gaining competitors' customers (part of their market share). Other ways include attracting non-users of your product or convincing current clients to use more of your product/service, with advertising or other promotions (Dalrymple et al, 2005).
The study revealed that the new entrants have an impact on the market share of cement based on the t test of hypothesis. In terms of rival firms bamburi was viewed as the major rival among the established players while Mombasa Cement and Simba Cement were viewed as the major rivals among the new entrants followed by Savannah Cement were which was viewed as the least rival This indicates that the entry of new players into the cement sector is eating into the profitability and market share of the established players, cutting their profit outlook. According Porter (2008), rivalry within the cement industry is moderate. The structure of the market tends to be oligopolistic in different regions around the world. In other words only a few firms control the market in many different countries. This is due to the high fixed which create a highly concentrated firm environment with limited rivalry. On the other hand, cement products are not differentiated. This means that competition between existing firms can get intense. When consumers do not bare a cost by switching from one firm to another (Low switching costs) and when the product lacks differentiation, this creates a haven for competition and intense rivalry. The combination of the above factors results in moderate rivalry within the global cement industry (Porter, 2008).
Secondly, the study revealed that majority of the respondents indicated that large sized orders formed the large part of the different categories of buyers while other respondents mentioned that middle sized orders and very large sized orders also formed part of the different categories of buyers with small sized orders as the least category. Therefore, the market share was scattered between various categories of buyers. Dalrymple and Parsons (2005) say that "promotion of more frequent and varied usage among current users" (market penetration) involves finding and promoting new uses among existing customers, which seems like it would be finding new target markets for the product. The different category of buyers provide a wide range of consumers for the new entrants. However Adrian et al.(2008) notes that the segmentation approach suggests that the vendor must implement a separate
62 marketing strategy for each segment selected as a target market including products or services that deliver benefits uniquely sought by members of each segment.
Another approach is through Market development where an established product in the marketplace is targeted to a different customer segment, as a strategy to earn more revenue for the firm. This may involve moving into another region or expanding into another country. It can also be implored by connecting through an alliance. Aaker (2004) says that selling to nonusers is an example of market development but Guiltinan and Gordon (2002) say that selling to nonusers is market penetration. Lewison (2006) says that serving new groups of customers (new market segments) is market development, giving the example of a fashion designer who develops a less-expensive line of clothing for the mass market, which surely is a strategy to "identify unmet consumer needs and develop new products to meet those needs," this being his definition of product development.
Thirdly, the study revealed that majority of the respondents indicated that pricing was a major factor contributing towards rivalry followed by demand versus supply while availability of raw materials and advertising followed Corporate Social Responsibility activities was the least factor. This is supported by According to Thompson and Strickland (2003), environmental scanning enables managers to identify potential developments that could have an important impact on industry conditions leading to the emergence of opportunities and threats. Nevertheless, the forces of demand versus supply and availability of raw materials provide an indicator of the environmental forces as compared to advertising and corporate social responsibility which aim to create a strong brand image and name for the various companies.
Fourthly, the study revealed that the increase in demand for cement was a major factor contributing towards new entrants followed by fewer government regulations and availability of local material each as compared to the availability of capital which followed next while backward and forward integration was the least factor. This is supported by a government creating barriers by limiting the number of licenses it sells for production. Cement is energy intensive as well as highly polluting; therefore entry to such a market has to be highly regulated in the eyes of many governments. In addition to that assets needed to produce cement cannot be easily utilized for another industry (that is the cement industry is highly
63 asset specific). This means that if a firm decides to enter into the market it must reaUze that a cease in its production will be very costly. Finally, economies of scale can prevent entry. For cement firms, neutralizing the high fixed costs requires a minimum efficient scale of production that creates a strong barrier to entry. Overall, the cement industry has high barriers to entry and high barriers to exit (Selim and Salem, 2010).
5.3.3 Strategic Responses by Established Players on New Entrants The study aimed to determine the strategic responses used by established players which include the three cement companies under study on the new entrants. The study revealed that creating barriers to entry into established market segments was highest in the list of established players to curb new entrants. Strategy can be seen either as the building of defenses against competitive forces or finding a position in an industry where competitive forces are weakest (Pearce and Robinson, 2007). This is supported by the above statement whereby the established players curb new entrants from entering their market segments. This explains why seeking additional distribution channels for cement so as to fight new entrants came in next after curbing new entrants so as to ensure that the consumer do not lack cement from the established players.
Change is inevitable, as organizations do not exist in a vacuum. If the environment of the organization changes drastically, this will create pressure for change within the organization. For survival, the organization has to adapt its internal operations to reflect the external realities (Ansoff, 2000). This supports the following statement that building the company's image through increased advertising spending, penetrating into new areas so as to create awareness, attracting new customers as a way of fighting off competition and carrying out constant research so as to understand customer needs and preference were considered as critical strategic responses to new entrants among the established players.
The study revealed that the established players were focusing on quality improvement as a way of curbing new entrants. Ahlstrom and Burton (2009) denote that the impact of goods produced in an industry to the buyer is determined by the quality of the products thus high quality products ensure that the industry has power. This enhances the established players
64 customizing products so as to maintain and attract customers and focusing on producing a variety of products for different customer as well as constant research on quality improvement as strategic responses to new entrants.
Kotler and Armstrong (2000) define marketing as a social and managerial process. It is the process by which individual and groups obtain what they need through creating and exchanging products and value with others. Basically, it is all about satisfying customer needs and wants. This supports increasing workers pay and comforts in order to retain talent and fight off competition, expanding corporate social responsibility programs so as to fight off new entrants and carrying out heavy promotion for existing products so as to fight off new entrants. However, the organization has to first identify the specific needs and wants of the target market and employees then tailor itself to the satisfy them if not it risks losing out.
The study revealed that most of the established players were focusing on creating barriers to entry and exit, quality improvement and intense advertising as the major strategic responses to new entrants.
5.4 Conclusion The main purpose of the study was to investigate the impact of new entrants in the cement industry in Nairobi from three selected companies that is East African Portland Cement Company Limited, AthiRiver Mining Limited and Bamburi Cement Limited. The following sections present the major conclusions drawn from the research findings.
5.4.1The Impact of New Entrants on Pricing The study established that the new entrants have an impact on pricing of cement established by a t-test of hypothesis. The new entrants focus on penetrating the market on lower prices as compared to the established players aimed at attracting and retaining consumers who are price sensitive. More often than not consumers prefer to purchase products that are within their reach and that are of a high quality but at an affordable price. Therefore, the established players in turn focus on intense advertising, corporate social responsibility, maintaining a reputable and strong brand name and image which is aimed at retaining consumers and enhancing customer loyalty despite lower prices offered by new entrants. Nevertheless we
65 have to acknowledge the established players are perceived as to have strong brand names, brand images, knowledge of the market, experience of the industry and as such they set the price for cement while the new entrants follow mostly by ensuring that they have a lower price as compared to the established players. The established players also focus on other ways of maintaining customer loyalty other than price as they are the price setters such as quality assurance and improvement as they more knowledgeable of the industry.
5.4.2 The Impact of New Entrants on Market Share The study established that the new entrants have an impact on market share of cement established by a t- test of hypothesis. The new entrants also tend to focus on the different categories of buyers they include the small sized orders, large sized orders, middle sized orders, very large sized orders and even small sized orders. The different categories of buyers provide a wide market segment within the cement industry for not only the new entrants but also the established players. The major rivals among the new entrants include Simba Cement and Mombasa Cement followed by Savannah Cement. This is an indicator that the new entrants are eating into the market share of the established players thereby reducing their profit outlook. Therefore the information provided on the different categories of buyers should be used to penetrate new markets by new entrants while established players should create barriers to entry as well as other ways of dealing with the different market segments such as customization of products.
The established players should focus on product differentiation, quality improvement and market development as well as constant research on cost of production so as to offer affordable prices so as to fight off new entrants and maintain market share. The use of intense advertising and corporate social responsibility are some of the ways that consumer loyalty can be maintained by the established players and fight off new entrants in the study.
5.4.3 Strategic Responses by Established Players on New Entrants The study also revealed that pricing was a major factor contributing towards rivalry as well as demand versus supply and availability of raw material. Therefore, pricing will remain as a major factor contributing towards rivalry with the cement industry while advertising and
66 corporate social responsibility activities so as to build the company image, quality improvement, customization of products, constant research on cost reduction and on the consumers needs and preference will remain as a major task to both established players and new entrants so as to survive and remain relevant.
The study revealed that creating barriers to entry into established market segments was highest in the list of established players to curb new entrants. The strategic responses also involved constant research on cost reduction, delivery of products at affordable prices, after sale services, motivation of employees and intense advertising on the established brand names and images.
Therefore, the established players should also focus on carrying out uncoordinated attacks on new entrants in the market, product diversification and constant research on market segmentation so as to have various products for the different target markets and to fight off new entrants by having competitive prices for different market segments.
5.5 Recommendation 5.5.1Recommendations for Improvement 5.5.1.llmpact of New Entrants on Pricing of Cement The strategy that appeared to work best for new entrants was lower prices for cement so as to penetrate new entrants. The new entrants also follow the price set by the established players in the industry. However there are other factors that the new entrants should consider such as intense advertising and constant research on quality improvement. On the other hand the new entrants should also focus on research so as to reduce cost of production, customization and quality improvement in order to ensure that they do not offer product at low prices which result to loss making despite attracting new consumers then increasing the price only to lose consumers. Furthermore, it is stipulated that the demand for cement is considered to be price inelastic due to lack of apparent substitutes. However, iron sheet, wood and mud are not viewed as substitutes for cement and they do not directly impact the price of cement but they are still used in the construction of houses as they are affordable as compared to cement. Therefore in terms of pricing of cement iron sheet, mud and wood should be considered while pricing cement.
67 5.5.1.2 Impact of New Entrants on Market Share The result of new entrants offering lower prices as compared to the established players more often than not affects the market share of the established companies in the cement industry. The study revealed that Bamburi Cement Limited was viewed as the major rival among the established players and a price setter while Simba Cement and Mombasa Cement are viewed as the major rivals among the new entrants. The different category of buyers can be segmented with different prices and the products customized so as to fit the needs and preference for each category. The use of branding, intense advertising, product diversification, constant research, product development, corporate social responsibility, delivery of products, and increase in distribution channels as well as quality improvement and after sales services are some of the factors that can be used to fight for the market share.
5.5.1.3 Strategic Responses by Established Players on New Entrants Change is inevitable, the cement industry should constantly analyze its internal and external environment so as to ensure that it survives. This not only applies to the established players but also on the new entrants. The established players should also focus on consumer complaints, compliments and feedback on various aspects so as to ensure that the organization remains proactive to not only new entrants but to the needs of the consumers. The use of constant research so as to remain informed on the internal and external environmental forces is the best strategy as it ensures that an organization survives change.
5.5.2 Recommendations for Further Studies The study suggested that future researchers could carry out the impact of new entrants in the cement industry in Kenya as the study only covered the impact of new entrants in Nairobi. Further research should also be carried out on the demand for cement being considered to be price inelastic due to lack of apparent substitutes despite iron sheet, wood and mud which are not viewed as substitutes for cement and do not directly impact the price of cement but are still used in the construction of houses as they are affordable as compared to cement as well as the use of entry and exit barriers so as to curb new entrants.
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75 APPENDICES
APPENDIX I: COVER LETTER
KIARIE JANET WANJA UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA (USIU-A) P.O. BOX 14634, 00800. NAIROBI
Dear Respondent,
I am carrying out research on the impact of new entrants in the cement industry in Nairobi. This is in partial fulfillment of the requirement for the Degree of Masters of Business Administration.
This study focuses on manufacturers of cement such as East African Portland Cement, Bamburi Cement Company and Athi-River Mining Company among other selected cement companies from which you have been selected as one of the lucky respondents. The resuh of this study will provide the management with the necessary information for strategizing for future growth acknowledging and embracing environment changes.
This is an academic research and confidentiality is strictly emphasized, your name will not appear anywhere in the report. Kindly spare some time to complete the questionnaire attached.
Thank you in advance,
Yours sincerely,
Kiarie Janet Wanja.
76 APPENDIX II: QUESTIONNAIRE
PART I: GENERAL INFORMATION Kindly answer all the questions either by ticking in the boxes or writing in the spaces provided.
PART I:
1) Name of Respondent (Optional)
2) Please indicate your gender: Female • Male •
3) Please tick your age
Age 20-25 years • 26-30 years • 31-35 years • 36-45 years • 46 years and overD 3) Please indicate the name of your company?
4) Please indicate below the rival firms in the cement industry?
5) Please select one or more of the different categories of buyers that you have in your organization as indicated below? 1. Very small sized orders • 2. Small sized orders • 3. Middle sized orders • 4. Large sized orders • 5. Very Large sized orders •
77 6) Of the different categories of buyers indicated above which category contributes highest to the turnover of your organization?
7) How many suppliers of raw materials do you have in your organization? 1. 1 • 2. 2D 3. 3 • 4. 4n 5. Over 5 •
8) Please indicate the various substitutes for cement that are there in your industry?
9) What are some of the factors that are contributing to rivalry within your industry?
10) What other factors are contributing to the increase in the number of new entrants in the cement industry?
PART II:
Section B: Strategic Responses to competition
Please tick as many as applicable to you
Kindly indicate to what extent you agree or disagree with how the following factors influenced your company's response to new entrants in a scale of 1-5. Where: 5 = Strongly agree, 4 = Agree, 3 = Neutral, 2 = Disagree = Strongly disagree.
78 THE IMPACT OF NEW ENTRANTS ON THE PRICE OF CEMENT- To what extent do you agree with the following statements that the impact of new entrants has greatly influenced the pricing of cement.
11 .Different customer are offered different price5 s4 fo3r th2 e same type of product
12. More often than not companies temporarily lowe5 4r thei3 2r prices so as to attract customers.
13 Sometimes companies set a relatively high pric5 4e fo3 r a2 product at first, then lower the price over time so as to attract and maintain a certain type of customer
14. Sometimes customers are easily influence5 d4 3toward 2 s purchasing the same product from a different company when competing companies offer the same price for the same product.
15.At times unprecedented low prices for cemen5 t 4lea 3d t2o price wars among cement manufactures.
16 It is common for cement to be sold at differen5 4 3t price2 s in different locations
17 Companies associated with high quality 5 product4 3 s 2 and reputation can not lower their prices irrespective of competition from rival companies.
18.More often than not different customer pay differen5 4 3 t 2price s for the same product
19 At times companies maintain high prices as a5n indicatio4 3 2 n of high quality even if rival firms are offering lower prices.
20.Sometimes companies set a relatively low pric5 e 4fo r3 a 2produc t at first, then increases the price over time so as to maintain and attract a certain type of customers
21 .Sometimes companies set a relatively high pric5 e4 fo3r a2 product at first, then lower the price over time so as to attract a certain type of customer
22. Cement companies that are able to produce whil5 4e maintainin3 2 g low production cost due to efficient scale facilities often charge low prices.
79 23. For price discrimination to be an effective5 strateg4 3 y2 the1 market should be segmented with different degrees of demand.
24. Cement manufacturers argue that price hikes5 ar4e ofte3 2n du1 e to the increase in the price of transportation and raw materials.
25.It is common for cement manufacturers to hav5 e a4n easie3 2 r 1tim e setting prices while consumers generally act as price takers
26 The ability of a company to carry out forwar5d an4 d 3backwar 2 1 d integration can result to a decrease in cost of production.
27. A product with a low price is usually associate5 4 d 3wit 2h lo1 w sales, low quality or even counterfeit products thus cement manufacturers have to maintain a higher price as compared to the new entrants
28. A product associated with a strong brand nam5 e 4an d3 imag2 e 1 often cost a higher price as compared to other products.
THE IMPACT OF NEW ENTRANTS ON MARKET SHARE- To what extent do you agree with the following statements that your company has responded in the following ways to new entrants so as to maintain market share.
29. Loyalty to buyers to the current competitor5s brough4 3 t 2 about by existing customer retention programs make it difficult for new entrants to succeed with the cement industry.
30.More often than not new entrants have a hard5 tim4 e 3 gettin2 g market acceptance
31 .New entrants have higher acceptance in area5s wher4 e3 2 established players have low presence or no presence
32. Fewer government regulations make it easier5 fo4r a3 ne2w firm in the industry to succeed.
33. New production methods can make substitute 5 product4 3 s 2t o succeed better compared to existing products.
34.Indirect substitute products can pose as an 5 unsuspectin4 3 2 g competing product that can succeed over the existing product
35.A product associated with a poor brand name 5 is 4usuall 3 2y associated with low sales, low quality or even counterfeit products thus new entrants cannot offer cement at very low prices as compared to existing competitors
80 36.A product associated with a strong brand nam5e an4 d 3imag 2 e 1 often cost a higher price as compared to other products and as such customers are often willing to pay a higher price
37.Established players with high market share los5 t4 mor3 e 2t o 1th e new entrants than those with lower market shares
38.Established players with low market share los5 t 4mor 3e t2o th1 e new entrants than those with higher market shares
39. New entrants are attracting customers throug5 h 4th e3 us2e o1f advertisements so as to create awareness forcing existing companies to focus on constant advertising
40. The existing manufacturers of cement are focusin5 4 g3 on2 regula1 r advertising via different forms of media so as to retain and attract more customers due to competition
STRATEGIC RESPONSES BY ESTABLISHED PLAYERS TO NEW ENTRANTS-To what extent do you agree with the following statements that your company has responded in the following ways to the new entrants
Use a scale of 1 to 5 where 5 is to a great extent and 1 is to a small extent
41.Seeking additional distribution channels for5 cemen4 3t s2o as to fight off new entrants
42.Penetrating into new areas so as to create awarenes5 4 3 s 2an d attract new customers as a way of fighting off competition
43. Developing/improving their products targetin5 g 4existin 3 2 g customers so as to maintain and attract customers.
Customizing products so as to maintain and attrac5 t4 customers3 2 .
44.Focusing on producing a variety of products 5 for4 differen3 2 t customer
45.Pursuing business opportunities related to th5 e 4curren 3 2t ones due to increased competition
46.Pursuing business opportunities unrelated t5o th4 e 3curren 2 t ones due to increased competition
47. Carrying out constant research so as to understan5 4 3d custome2 r needs and preference.
81 48.Carrying out constant research so as to understan5 4 d3 ho2 w to cut costs due to increased competition
49. Building the company's image through increase5 d4 advertisin3 2 g spending
50. Sub-dividing markets into smaller manageabl5 e 4unit 3 s 2s o as to fight off competition
51. Creating barriers to entry into establishe5d marke4 3 t 2segment s
52. Getting into exclusive distribution agreement5 s4 wit3 h 2dealer s so as to stop them from stocking competitors products
53.Targeting non users/potential users of cemen5 t s4o a3s t2o fight off new entrants
54.Carrying out uncoordinated attacks on new entrant5 4 s3 in2 the market
55.Enticing new entrants into costly competitio5 n 4 3 2
56. Carrying out heavy promotion for existing product5 4 s3 s2o as to fight off new entrants
57. Expanding corporate social responsibility program5 4 s3 so2 as to fight off new entrants
58. Increased involvement with the industry experts5 4 / 3heav 2 y users so as to fight off new entrants
59. Increasing workers pay and comforts in orde5 r t4 o retai3 2 n talent and fight off competition
THANK YOU FOR TAKING YOUR TIME TO COMPLETE THE QUESTIONNAIRE
82