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The Impact of New Entrants in the Cement Industry in Nairobi

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The Impact of New Entrants in the Cement Industry in Nairobi 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).
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