This chapter started by explaining theories that are related to the study to guide the study towards the most applicable aspects of empirical reviews and conceptual framework. Then presented relevant studies on the general research objectives to differentiation strategies.
A theory is defined as a set of principles developed to explain the outcome of facts or phenomenon especially the one that is repeatedly applied or broadly accepted and used in many scenarios to make an outstanding contribution to the occurrence of a phenomenon (Mugenda, 2012).
The relevant theories relating to differentiation strategy developed were Resource Based View Theory and Theory of Competitive Advantage.
Resource Based View Theory was proposed by Barney (1991) and states that strategic development process starts by looking at the relative position of a firm in a specific industry. This involves considering the firm’s environment and then tries to assess what strategy that can apply and maximize the firm’s competitiveness. According to Barney the firm in question is assessed in terms of competitive advantage, resources and capabilities which are core strategies (Dang, 2011).
The Resource Based View Theory has been criticized for weaknesses. Lawrence (2010) assesses several critiques on the resource-based theory.
The Resource Based View Theory misses managerial implications or operational validity. The Resource Based View Theory explains that managers have to develop and obtain strategic resources that meet the criteria valuable, rareness, non-imitable and non-substitution (VRIN criteria) and how an appropriate organization can be developed. However, the Resource Based View Theory does not explain how managers can do this (Connor, 2002; cited in Hasan, 2009).
Connor (2002) argues that the RBV Theory LACK applicability towards smaller firms because of no competitive advantage affected by static resources.
Michael (1990) introduced the Theory of Competitive Advantage, which states that competitive advantages depends on labor, capital, material, land and assets, and infrastructure.
Second, the importance of demand conditions affects competitive advantage. Demand determines how firms perceive, interpret, and respond to buyer behavior. Segment structure of demand is a favorable competitiveness market representation but has fewer shares. Buyers’ sophistication or demand exerts pressure towards quality. This helps in sustaining the acquired advantage. Finally, competitive advantage involves anticipatory buyer needs. Priority of firms over competitors is indicated for this to be successful.
In order for a clear relationship between this attribute of home demand and competitive advantage to be established, a number of its characteristics should be considered. An important factor, which could spur activities intended to create or upgrade competitive advantage, is the rate growth of home demand. The latter could lead firms to adopt new technologies faster and to make changes for increased efficiency without fearing that there would be no response on the part of consumers.
Related to supporting industries, determining competitive advantage in specified industry requires special account of the industries, so as to provide international market access advantage. Access to competitive industries provides cost-effective operations. Increase in globalization process makes investment available on the global markets; as emphasis are put on effective utilization.
Partner firms assist firms with competitive advantage to apply new methods and opportunities such as technological innovation. Influencing a partners’ technical efforts leads to development of new ideas. On the other hand, the theory states that firm strategy, structure, rivalry factors determine competitive advantage. The goals of strategies are widely influenced by national environment.
Firm structure is a reflection of goals, prestige, and priority. Company goals are strongly determined by ownership structure, corporate governance, and incentive processes. The theory assumes that adequate competitive opportunities engage in competitive advantage of the degree that optimizes firm’s potential, and move up the value chain.
Increased competition in any industry reduces profitability of individual firms if there is no proper innovation strategies employed. Competition exerts pressure towards pro-activeness; and formulate of strategies to respond to changes in market dynamics (Masila, 2009). Companies are now using competitive advantage to compete effectively.
By identifying core competences, firms concentrate on competitors, and provide a competitive advantage (Moha, 2009). Wasuna (2014) found that core competences are difficult to imitate because management links the distribution chains.
Bohman (2009) noted that management is primarily about the continuing development of the organization and its employees. Demands are constantly evolving and adjusting according to demand (Wanyande, 2006). Combined strategy involves matching corporate objectives to available resources. Managers have become concerned with reconciling the business by allocating resources (Tindi, 2016). According to Tavitiyaman (2012), strategy is the pattern of major objectives, purposes or goals and essential policies or plans for achieving these goals, stated in such a way as to define the kind of business a company does.
Diversification helps a firm in eliminating the unevenness of geographical reach, product-process innovation, exploit economies of scale and scope, reap benefit of advanced technology, and diversify risk along with mobilization of additional capital. Diversification has for example opened the door for commercial banks to earn fee income from investment banking, merchant banking, insurance agency, securities brokerage, and other nontraditional financial services.
Routledge (2013) classify the banks’ motive to diversify as synergy (or economic) motive, managerial motive, value maximization motive, increased market power motive, capital strength and risk diversification motives among others. Determinants of diversification is categorized external determinants (global presence of financial conglomerates, economies of scale, dynamics of competition, and disintermediation in banking activities). The internal determinants include risk reduction motive, decline in interest margin, cost of production, low cost of capital, technology up gradation (Prinz, 2012).
The variety of diversification strategies in the banking sector can be summarized under four main headings. The first is direct cross-border sales, which means trade of financial services without any physical presence of banks in target markets. A low contribution to the integration of retail marketing is achieved by direct cross-border sales of financial services (Wasuna, 2014).
Product differentiation strategy is used to provide customer’s needs. In satisfying individual customer’s needs, quality has become a major differentiating factor among products (Odoyo & Simiyu, 2014), thus making customers to be willing to pay more, thus achieving competitive advantage through product differentiation.
Cost differentiation strategy, Porter (1985), requires that a broad target or mass market be supplied with standard products or services. A successful cost leader in an industry will be the lowest cost producer in the sector and offer the mass-market products and services of a quality comparable to that offered by direct competitors. A firm can achieve cost leadership through economies of scale, extremely efficient production or very efficient distribution processes.
Cost leadership involves reducing cost of products through lowering operationalized and input costs (Johnson et al., 2011). Low pricing is close to competitors in the features. The firm can then make small price cuts to compensate the slightly lower quality (Johnson et al., 2011). The low cost strategy should translate to a profit margin that is higher than the industry average. Porter stated that cost leadership, and differentiation strategies are linked to profitability and superiority of firms’ (Porter, 1985).
Differentiation strategies involve product creation and uniqueness. Product differentiation is attained through offering valued variation of physical product. Armstrong and Kotler (1999) indicated that that differentiation can occur by manipulating many characteristics, including features, competitiveness, style, design consistency, durability, reliability, or reparability.
Common differentiation services include speed, responsiveness, quality, competitiveness, ease of integration and availability. If organization is in the unique position of having only one product or service to offer potential customers then it should consider accessories, partners or other options to create a variety of levels from the perspective of its future customers (Porter, 1980).
Rapid international expansion coupled with the life cycle of engineering organizations can be analyzed based on the organization-resource positioning portfolio (Jahnukainen & Veps?l?inen, 1998). The portfolio has two dimensions: the resource base and the organizing principle of the company.
The resource base considers the increasing geographical scope of sourcing, production and marketing activities from local to multinational and further to global. The other dimension indicates the organizing principle starting with functional hierarchy (leadership of a pioneer) and developing via multidivisional and matrix forms (functional management) to increasingly complex structures of distributed units and process-based structures.
This chapter captured literature pertaining differentiation strategies. This section detailed the existing gap in knowledge that the study intends to fill. From the outlined studies, banks focus on gaining competitive advantage to enable them compete effectively in the market (Pearce & Robinson, 2005).
Differentiation strategies involved product differentiation towards competitive advantage (Shammot, 2011). Cost differentiation was discussed towards mass market. In the Kenyan perspective, the applied literature was less applicable to the banking sector.
This implies to mean that there was lack of proper evidence to address differentiation strategies in Kenyan banks, and thus the need to conduct this study in Kenya. There was evident on the lack of adequate information regarding current studies addressing the influence of differentiation strategies on competitiveness of Family Bank in Nairobi Kenya.
The chapter on research methodology was concerned with the fieldwork procedures involving conducting data collection and analysis. The chapter presented research design, study population, research instruments, data collection and its analysis.
The methodology part exclusively detailed fieldwork processed followed by the researcher in coming up, using and analyzing research tools for the study.
The study was conducted using a case study research design at the Family Bank Ltd Kenya. The research design allowed a lot of detail to be collected, and that it was conducted using the whole population of managers at the bank’s management department. It saved operation cost since it concentrated on one place unlike survey research. It also allowed the collection of data using an interview.
Target population represents all cases of people or organizations, which possess certain characteristics; it is the larger group from which a sample is taken (Mugenda & Mugenda, 2008). Borg and Gall (2009) define the target population as all the members of real or hypothetical set of people, events, or objects from which the study wanted to generalize the results of the research.
The target population for the study consisted of senior managers at Family Bank. The respondents included finance, marketing, strategy, operations and the human resources directors. This gave rise to total of Five (5) respondents.
The study collected information from key informants identified above by use of an interview schedule. The interview mode of data collection according to Kothari (2000) was very useful in extensive inquiries and led to reliable results.
The study used interview schedules to interview employees and heads of departments. Interview schedules were important because they helped to elicit effective responses from the respondent’s through probing process.
Data was analyzed using content analysis. Content analysis was an analytical method where by the responses obtained from respondents were grouped together in terms of uniformity and similarity by themes.
These similarities were then explained by the researcher. It was a useful method of analysis especially when the researcher was interested in qualitative information, which was rich in content.