EFFECT OF VALUE CHAIN MANAGEMENT PRACTICES ON PEFORMANCE OF MEDIUM AND LARGE SCALE RETAIL OUTLETS IN NAKURU COUNTY, KENYA

ABSTRACT 

The Kenyan retail outlets sector operates in a dynamic environment faced with intense competition. This calls for organizations to employ an efficient and effective value chain and this is achieved through coordinating operations in a manner that ensures the involved companies are able to create more consumer satisfaction than their competitors. However, past empirical studies have not focused on the effect of value chain management practices and organizational performance, particularly in retail outlet sector. The overall objective of this study was to determine the effect of value chain management practices on performance of medium and large scale retail outlets in Nakuru County. The specific objectives of the study were to: determine the effect of firm’s supplier relationship on performance, determine the effect of internal value chain activities on performance, determine the effect of customer relationship on performance and establish the joint effect of firm supplier relationship, internal value chain activities and customer relationship on organizational performance. The study was based on the resource-based view theory. The study employed explanatory research design. The population of the study was 43 medium and large scale retail outlets. Census study was carried out among 43 medium and large scale retail outlets in Nakuru County. Primary data was collected using close- ended questionnaires. The questionnaires were administered through drop and pick method. Data collected was summarized using descriptive statistics such as percentages, means and standard deviations. To examine the relationship between value chain management practices and organizational performance, Pearson’s correlation analysis was used. To examine the effect of value chain management practices on organizational performance, multiple regression analysis was used. The results revealed a positive significant relationship between supplier relationship and organizational performance. The findings also revealed a higher positive significant relationship between internal value chain activities and organizational performance. The results also revealed a positive significant relationship between customer relationship and organizational performance. Further, the results demonstrated that the joint effect of supplier relationship, internal value chain activities, and customer relationship explained a greater variance in organizational performance, than the variance explained by internal value chain activities alone. The study recommended that while internal value chain activities need to be the key vision of value chain management practices in firms, all value chain management practices dimensions should be combined for a greater increase in organizational performance. There is also need to cover other factors (scale, capacity utilization, vertical integration, learning, policy decisions and government regulations) related to value chain management practices that can impact on organizational performance to a larger extent since the factors used in this study explained 77.7% of the increase in performance. To minimize the effect of single respondent bias, future research can use multiple respondents including executive officers and middle managers.

CHAPTER ONE 

INTRODUCTION 

Background of the Study 

There is increased sophistication in the shopping pattern of consumers, which has resulted in big retail chains coming up in the international arena. Global players like Wal-Mart and Tesco have set pace in the way retailing is done to meet the ever changing consumer taste and preferences. Kenya and the rest of the world have not been left behind. The retail growth is being driven by changes in lifestyle, surge in income and the advent of devolution, which is supported by favourable demographic patterns (Liedholm, 2001). 

Increasing risk of error, costly mistakes and even economic ruin are causing professional managers in 21st century to take strategic management seriously in order to keep their organizations competitive in an increasingly volatile environment (Hunger & Wheelen, 2006). This has forced businesses to look into their activities that are performed to design, produce, market, deliver and support their products. Thus, some organizations have employed value chain management to integrate communication and increase cooperation between production chain members in order to decrease delivery times, reduce inventories and increase customer satisfaction. 

Value systems integrate supply chain activities, from determination of customer needs through product/service development, production/operations and distribution, including first, second and third-tier suppliers. The objective of value systems is to position organizations in the supply chain to achieve the highest levels of customer satisfaction and value while effectively exploiting the competencies of all organizations in the chain (Hitt, Ireland, & Hoskisson, 2007). 

Understanding why organizations can create value and whether it can continue to it in the future is a vital step in diagnosing a firm’s potential for achieving a competitive advantage in the marketplace (Hitt, Ireland, & Hoskisson, 2007). The overall goal is to provide customers with superior value products and services which in turn translate to better financial organizational performance. Hence, it is essential to understand how firms create value and then look for ways to add more value to it. 

Moreover, as buyer-value relationship competition increases, the challenges associated with producing a product and service to the right place at the right time at the lowest cost increases. Organizations begin to realize that it is not enough to improve efficiencies within an organization, but their whole value chain has to be made competitive. Value chain analysis becomes an important tool to measure value creating processes of a company (Porter, 1985). This research gives emphasis on the impact of value chain management practices on organization performance and firm competitiveness. 

Porter (1985) divided internal value chain activities, one of the components of value chain management practices into primary and support activities. The primary activities include inbound logistics, operations, outbound logistics, marketing and sales and services. The support activities include procurement, technology development, human resource management and firm infrastructure. Hence there should be value creating processes from the beginning of purchasing raw materials to the end customer. 

Kaplinksy and Morris (2001) explained that primary activities represent functionality of the value chain, while support activities represent the strength of the value chain. In order to survive in the industry, the company has to gain competitive advantage by delivering a customer value. This is where value chain management practices comes in. As mentioned by Gereffi (1994), firm competitiveness is determined by competitiveness of the value chain. Hence, the investigation of the value chain management practices on firm competitiveness and performance is highly effective. 

Guided by the resource based view (RBV), it was postulated in this study that both the internal value chain activities and the various buyer – supplier relationships and the linkages between them are core resources that enhance competitive advantage and performance. As suggested by RBV, it was expected that medium and large scale retail outlets practice value chain management practices to enhance competitive advantage and superior performance. 

Retail outlets perform specific activities such as anticipating consumers’ wants, developing assortments of products, acquiring market information, and financing (Neville, 2007). However, medium and large scale retail outlets in Kenya have for years faced challenges such as depressed domestic demand, inflation and transport costs. In fact 50 % of retail outlets in Kenya as established in a study by Liedholm (2001), closed within the first three years of operation depicting a high mortality rate. Over the last decade, the retail industry has experienced major transitions. The growth of e-commerce has created both new competition and a new selling channel for retailers hence increased need for effective and efficient management of value chain management practices (Kumar, 2005). 

Value Chain Management Practices 

The concept of value chain management practices was first introduced by Porter (1985) and has now become an integral part of strategic management for many businesses in 21st century. Firms use value chain management practices as a tool to create and sustain competitive advantage. Primary and support activities are vital in developing competitive advantage. For example, in the retail outlet sector, the activities which are critical in distribution of goods and services from the manufacturer to the consumer must be well optimized and coordinated. Hence, managers should optimize on the linkages between the activities in order to enjoy the benefits of cost and differentiation advantages (Henry, 2011). 

Value chain management practices are broken down into three main components namely, supplier relationship management, internal value chain activities and customer relationship management which are found to compare with best practices globally (Kaplinksy & Morris, 2001). Supplier relationship management involves strategically planning for and managing all interactions with third party organizations that supply goods and / or service to an organization to maximize value of those interactions (Chen, Paulraj, & Lado, 2004). Internal value chain activities are interdependent building blocks by which firms deliver products to the customer, earn profit/ margins as well as develop advantages over rivals (Porter, 1985). Finally, customer relationship management entails managing customer interactions with a view to identifying the most valuable customers, trying to personalize activities to their needs and then establish and maintain long-term and profitable relationships (Dawes & Swailes, 1999). 

The concept of value chain management practices emerged from the realization that appreciable, continual improvements in system design and organizational performance occurs when businesses seek closer coordination and integration with suppliers and customers than traditional transactional buyer-seller relationships allow (Sparling, 2007; Gruen, 1997; Wilson, 1995). By developing closer strategic relationships with customers and suppliers, businesses can learn and adapt more effectively thus improving and sustaining organizational performance. 

According to Leopoldo and Daniel (2012), value chain is a business system that creates end- user satisfaction and realizes the objectives of other member stakeholders and therefore need for value chain management practices to facilitate the realization of these objectives. Value chain management practices has the potential to dramatically reduce time-to-market and to match the increasing expectations of customers and consumers. Firms use the value chain management practices approach to better understand which segments, distribution channels, price points, product differentiation, selling propositions and value chain configurations will yield them the greatest competitive advantage. 

In the face of cut throat competition and the ever increasing needs of customers in the 21st century, value chain analysis allows for an assessment of the linkages and interrelationships between and amongst productive activities; thus providing a framework to analyze the nature and determinants of competitiveness in a business. Linkages are relationships between the way one value activity is performed and the cost or performance of another. In value system, suppliers have value chains that create and deliver the input to be used in a firm. Then firm’s products or services pass through the value chains of distributors (channels) to the buyer. Distributors perform additional activities that affect the buyer as well as influence the firm’s activities. At last, a firm’s product becomes part of its buyer’s value chain determining buyer needs (Nguyen & Kira, 2001). 

Organizational Performance 

Organizations have an important role in our daily lives and therefore, successful organizations represent a key ingredient for developing nations (Lynch, 2006). Thus, many economists consider organizations and institutions similar to an engine in determining the economic, social and political progress. Organizational performance comprises the actual output or results of an organization as measured against its intended outputs/goals and objectives. According to Porter (2013), organizational performance encompasses three specific areas of firm outcomes: financial performance (profits, return on assets, return on investment); product market performance (sale, market share) and shareholder return (total shareholder return, economic value added). 

On the other hand, Inayatullah and Amar (2012) pointed out that overall organizational performance can be divided in to three parts: financial performance, product performance and operational performance. Financial performance of organization includes: market share, return on investment, profit margin, inventory turnover rate, and productivity. Product performance includes: functionality, service, operating expenses, comfort, and ease of use. Higher product performance enhances the customer and employee satisfaction. Operational performance includes: product/service quality, lead time/service completion time, product development time, utilization of resources, responsiveness to customer demand, and operational cost. 

Many organizations have also attempted to manage organizational performance using the balanced scorecard methodology where performance is tracked and measured in multiple dimensions to align business activities to the vision and strategy of the organization, improve internal and external communications and monitor organization performance against strategic goals. It is a performance management method that maps an organization’s strategic objectives into performance metrics in four perspectives, that is: financial, customers, internal main processes, learning and growth. It added strategic non-financial performance measures to traditional financial metrics to give managers a more ‘balanced’ view of organizational performance (Kaplan & Norton, 1992). 

The performance measurement system employed in an organization must therefore measure the performance of all assets including the human ones. When fully deployed, the balance scorecard transforms strategic planning from an academic exercise into the nerve centre of an enterprise. The Balance Scorecard includes both financial measures that tell the results of actions already taken, and operational measures that are the drivers of future financial performance (Kaplan & Norton, 2006). 

A broader conceptualization and more effective business performance should include indicators of operational performance in addition to those of financial performance. There are many advantages of using non-financial measures, including the fact that nonfinancial measures are more timely than financial ones, they are more measurable and precise, they are consistent with company goals and strategies, and non-financial measures change and vary over time as market needs change and thus tend to be flexible (Medori & Steeple, 2000). 

Hooley, Greenley, Fahy and Cadogan (2004) noted that using financial measures alone overlooks the fact that what enables a company to achieve or deliver better financial results from its operations is the achievement of strategic objectives that improve its competitiveness and market strength. Non-financial measures include innovativeness and market standing. Performance is therefore measured by both financial and non-financial measures. 

The choice of key performance indicators is strongly company-specific and depends on the state, orientation, and positioning of the organization on the market, its mission statement and vision. These will define a preference for some performance indicators as more important than others. For example, cost efficiency and profit might be central for an organization, others might include customer satisfaction (if the success of its operations depends strongly on retaining customers), employees’ motivation (if a sufficiently qualified personnel is difficult to recruit), environmental impact, growth, market share, among others (Viara & Alexei, 2010). In this study, Managers were not willing to disclose their financial statements to the researcher due to exposing confidentiality. Hence, this study has mainly borrowed from perceptual measures where the market performance (sales growth, market share) was the performance indicator. 

Retail Sector in Kenya 

Retail outlet refers to any business enterprise whose sale volumes comes primarily from availing goods and services to the customer. These are the business entities in a distribution channel that links manufacturers to customers. Manufacturers typically make products and sell them to retailers or wholesalers. Wholesalers resell these products to the retailers and finally, retailers resell these products to the consumers. However, recent approaches have demonstrated that any organization selling to customers whether a manufacturer, wholesaler or retailer is doing retailing (International Journal of Business and Commerce, 2013). 

There are two categories of retail outlets, that is, store and non-store outlets. Store retail outlets operate at fixed point of sale locations, are located and designed to attract a high volume of walk-in customers unlike non-stores outlets, for example, independent stores like hardware and bookshops. Other categories of store retail outlets are chain stores, for instance, Naivas and Tuskys supermarkets, conventional supermarkets like Society stores and service stores like hotels. There are two types of retailing; goods and service retailing. The main differences between the two are on account of intangibility, simultaneous production and consumption, perishability and inconsistency. This study focused on goods and service retailing because the medium and large retail outlets offer goods/ products and services (Kotler & Armstrong, 2006). 

The outlook for the retail sector is strong and Kenya is starting to be seen as an ideal point of entry for launching retail outlets and consumer goods distribution into East and Central Africa. Only about 16.8% of the Kenyan population currently falls into the middle class, but that should grow strongly. Kenya’s retail market comprises a mixture of modern retail outlets that supply consumer goods from major international firms and informal traders or family-run concerns that sell more basic goods. The country’s Vision 2030 includes plans to improve the efficiency of the retail market and once the formal retail expands, there should be significant opportunities for logistics service providers (Price waterhouse Coopers Kenya, 2013). 

The retail trade sector has evolved significantly, with firms becoming more concentrated over the last few decades. This is manifested in closer linkages between manufacturers, wholesalers and retailers. Traditional shops selling basic products are facing stiff competition from medium and large chain stores, supermarkets, exhibition centres and shopping malls. Besides, there is a general reduction in the role of traditional wholesalers, with firms integrating to provide a wider variety of value chain from manufacturer to retailer. This is reflected in retail outlets such as Nakumatt, Tuskys, Naivas, among others, which provide space for manufacturers in their outlets and offer a myriad of goods including fruits, vegetables, furniture, clothing and food items (Kenya Institute for Public Policy Research and Analysis, 2016). 

Medium and large retail outlets have spread their operations in several urban centres especially with the advent of devolution in various counties in Kenya and Nakuru County is no exception. In a report by New York Stock Exchange research firm Nielsen, Kenya was ranked second in terms of the degree of modernization of its retail services, behind South Africa, in a survey targeting five Sub-Saharan economies (Nielsen, 2015). Medium and large scale retail outlets in Kenya act as the main outlet for Kenyans to get products. 

The growth of medium and large retail outlets in Nakuru County continues to face numerous challenges that limit their growth and in some instances contributes to their eventual closure. Though mushrooming everywhere the small retail outlets are the most affected since they are difficult to track measure and analyze, a fact that has necessitated this research to focus on medium and large retail outlets. Customers are attracted towards the medium and large retail outlets because they provide all the facilities including the leading brands that they require since they are fairly established and with formal system in place as compared to the small ones (Liedholm, 2001). 

Retail outlets must be ahead in the race for reaching and gaining of customer’s confidence by creating a one stop shop for their businesses. Thus, there is need for management of a value stream which would result in improved service, growth in market share, suppliers and distribution channels and provides invaluable analytics for continuous improvement (Neville, 2007).

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Item Type: Kenyan Topic  |  Size: 79 pages  |  Chapters: 1-5

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