ENVIRONMENTAL DYNAMISM, COMPETITIVE STRATEGY AND NON-FINANCIAL PERFORMANCE OF MANUFACTURING FIRMS IN NIGERIA
CHAPTER ONE INTRODUCTION
Background to the Study
Nigeria depends substantially on oil for its export and this dependence has a significant impact on other sectors (Hale, 2002). The monolithic nature of the economy has thrown up calls for diversification from oil and gas to other sectors of the economy. For example, Hale (2002) also stated that the direct foreign investment witnessed in the 1960s and 1970s after Nigeria‟s independence contributed in a no small measure to the positive development of its manufacturing sector. This, he said, was made possible by the new manufacturing technology introduced by the foreign investors which produced efficiency and improved the quality of the manufactured products. This post - independence positive growth phase was however short-lived as some challenges which contributed to low growth surfaced from the end of 1980s to date. These challenges included dependence on oil for income, weak infrastructure, inadequate skilled labour and financial resources and improper management and planning.
Alli (2008) states that the Nigerian manufacturing sector cannot aid economic development in its present state, but it has enormous potential given its large market in the region with over 140 million consumers and additional millions in the neighbouring countries. Therefore, it is imperative to work towards the mitigation of these challenges in order to empower the Nigerian manufacturing organisations so that the manufacturing sector can play a desired effective role in the country‟s economic development.
Organisations exist within certain external environments that promote or inhibit their performance, the contexts of which include the regulatory, economic, political, socio-cultural
and technological environments which also contain certain key factors that direct the operations of the organisation (Universalia, 2004). Environmental Dynamism, being a derivative of this phenomenon, is concerned with the amount of uncertainty resulting from the external environment (Baum & Wally, 2003). In a situation of environmental uncertainties, managers tend to constantly orchestrate complementary and co-specialised assets in order to sustain superior firm performance (Chan, Shafer & Snape, 2004). The main argument of the researchers is that uncertainty is brought about by instability in the environment, which results in a dearth of information required to determine the future from the past.
In highly dynamic environment, therefore, frequent changes in market demand, technology and business approaches challenge organisations to continuously modify their products or services in order to remain competitive (Oghojafor, 2007; Revila, Prieto & Rodriguez, 2008). Moreover, KetKar and Sett (2012) state that managerial perception of the environmental uncertainties is an important condition precedent to the managerial choice of strategies to be deployed to influence performance. The emphasis here is that a company‟s business environment and the strategies it adopts have significant effects on its performance. Chandler (1962) illustrates this by stating that “strategy is the way in which a firm, reacting to its environmental circumstances, deploys its principal resources and directs its efforts in the pursuit of its objectives” (p.13).
Given the aforementioned, a growing consciousness of the importance of determinants of organisational performance suggests that a properly formulated strategy is a function of understanding of environmental dynamism. This shows that information about the environment is important and it could be a basis for competitive strategy to influence organisational performance (Nham & Hoang, 2011; Barney & Clark, 2007). In other words, a well formulated
strategy in a flourishing environment is a sine quo non for effective performance.
Generally, strategy and its formulation play an important role in the firms‟ management process. Gibcus and Kemp (2003) state that the strategy gives the direction that an organisation has in mind and the way they want to achieve their goals. Earlier research appropriately demonstrates that organisations that set out a clear strategy, such as differentiation or cost leadership strategy, will perform better than those firms that deploy a mixed strategy (Baum, Locke & Smith, 2001). The focus, according to Gul (2011), has been on the value enhancing or destructive effects of diversification as Santalo and Becerra (2008) underline that diversified firms are more productive compared to stand-alone businesses. Apart from these integration strategies, geographic diversification plays a key role in the strategic behaviour of the large organisations and their corporate performance (Gul, 2011).
Organisational theorists emphasise the need to study the management practices of firms in order to establish the factors that have contributed to organisational performance. Precott (1986) notes the need for an investigation of those factors that can determine the success or failure of an organisation and reported the significant relationship among environmental dynamism, strategy and organisational performance. According to Universalia (2004), most organisations assess their performance in terms of effectiveness (mission fulfillment), ongoing relevance (the extent to which the organisation adjusts to the dynamic environment), and financial viability. They note that the forces which drive performance include capability of an organisation, forces in its external environment, and the internal motivation of the organisation. According to Ong and Teh (2009), two types of the measures of the organisational performance exist in literature as follow: (1) financial/objective measures which include return on equity, return on sales and
return on assets; and (2) non-financial/subjective measures which include operating efficiency, performance stability, public image, employee morale, environmental adaptation, new ideas and social impact on the society. Thus, organisational performance reflects the way the organisation uses and exploits tangible, intangible resources to achieve its goals (Wheelen & Hunger, 2010). Studies have investigated a number of interesting determinants of organisational performance from strategic and environmental dynamism viewpoints. However, very few studies have investigated the determinants of non-financial performance (Barney, 2002; Ku, Mustapha & Goh, 2010). Argument had been advanced that organisational performance is not only a function of financial performance measures, and that non-financial performance measures also provide a more robust view of performance in addition to contributing to financial performance. While firm performance can be defined as the actual output or results of an organisation as related to the goals and objectives, several classifications of organisational performance have been reported in the literature. A two-way classification of performance into financial and non-financial performance measures is therefore of relevance to this study (Borman & Motowidlo, 1997; Campbell, McCloy, Oppler & Sager, 1993). The non-financial performance measures include performance stability, employee morale, environmental adaptation, new ideas, operating efficiency, social impact on the society and public image. Nagar and Rajan (2001) argue that these non-financial measures are key indicators of economic performance, and a potential source of information about cash flows in the future. Banker, Porter and Srinivasan (2000) also report that non-financial measures are better indicators of the future performance of the organisation than financial measures.
Banjoko (2009) notes that the manufacturing sector in Nigeria has been incapacitated to the extent that its ability to create employment, expand wealth and contribute meaningfully to the Gross Domestic Product (GDP) has been severely weakened in recent years. He notes further that the factors that have contributed to the abysmal performance include overdependence on oil, lack of manufacturing friendly environment, frequent policy reversal, spurious levies and charges, infrastructural decay, erratic power supply and inadequate funding among others. Similarly, capacity utilisation in the nation‟s manufacturing sector continued to drop from its low record of about 50 percent following poor gas supply to industrial layouts from Transmission Company of Nigeria (Adekoya, 2016). The absence of a conducive manufacturing environment and basic infrastructure would continue to draw back the sector, except something urgent is done to reverse the situation. However, the manufacturing organisations in Nigeria can no longer afford to remain stagnant, given their economic importance as stagnation in contemporary competitive environment will lead to depreciation of market share or quick failure (Tellis & Golder, 1996; Kemelgor, 2002). Hence, the panacea for reversing the trend of poor performance of the manufacturing sector is an increase in firms‟ level of efficiency and competitiveness.
The main policy issue that will be facing the Nigerian government and in particular the manufacturing organisations is to understand and address the factors that will elevate the efficiency and competitiveness of the sector. For organisations seeking improvement in performances in the present day changing and dynamic environment, they are required to constantly seek and exploit new opportunities to build sustainable competitive advantage from such opportunities. Hence, a study of environmental dynamism and competitive strategy which may enhance organisational performance becomes relevant and imperative for addressing the
poor performance of manufacturing firms in Nigeria.
Statement of the Problem
Manufacturing sector is very basic and relevant to the development of any nation, most especially the underdeveloped and developing ones (Olorunfemi, Obamuyi, Adekunju & Ogunleye, 2013). It has been stated that small and medium enterprises (SMEs) now constitute about 95% by numbers, of the organised manufacturing establishments in the country (Ibrahim, 2008). However, in contrast to the situation in industrialised and some developing economies, the contribution of SMEs to the Nigerian economy, in terms of output, exports and employment, is relatively low. CBN (2008) maintains that the manufacturing sector does not make significant contribution to the Nigerian economy compared to oil and agricultural sub-sectors. This decline in manufacturing output, according to Medee (2015) persists despite the fact that the CBN rolls out various strategies aimed at stimulating industrial production and enhancing capacity utilisation of industrial sector.
Several literatures exist on environmental dynamism, competitive strategy and performance. Infact, preliminary investigation by the researcher shows that organisational performance amongst firms in the manufacturing sector in Nigeria has been generally poor and this situation has been a source of continuous concern among managers and stakeholders in this sector (Asikhia & Binuyo, 2012). However, the following previous studies on this subject discovered different variables or factors that influence or affect firm performance in developing countries including Nigeria.
The study by Mohd, Idris and Momani (2013) on the impact of environmental dynamism on marketing strategy comprehensiveness and organisational performance used the resource based view (RBV) theory. Some of the criticisms of RBV however, according to Foss (1998), relate to the neglect of the environment which is a key variable in this study. Furthermore, the study by Kektar and Sett (2009) on Environmental Dynamism, HR Flexibility and Firm Performance established a general proposition that in a dynamic environment superior firm performance results when the flexibility of HR actually possessed by the firm matches the demands of the environment for such flexibilities as perceived by the managers of the firm. The researchers however recommended the need to investigate beyond the general proposition to examine whether different types of environmental change (continuous vs discontinuous), or different types of strategies adopted by the firms to encounter such change, require different types of HR flexibilities.
Abdullahi, Abubakar, Aliyu and Umar (2015) carried out a study titled “Empirical review on the determinants influencing firm performance in developing countries”. Most of the studies reviewed did not state their sample size, method of data collection and the theory or theories that support and give direction to their studies. They therefore suggested that future researchers should make use of variables that serve as the determinants of firm performance in developing countries. They also stated that methodology should be clearly stated in terms of sample size and method of data collection. Also in the analysis of strategic factors affecting the performance of small and medium industries (SMEs) in Borno State of Nigeria by Ibrahim (2008), it was noted that the contending claims that (i) the industrial sector had not responded positively to the interventions and incentives offered by the government and (ii) the inappropriateness of the
various policies, incentives and strategies put in place for the industrial sector, accounted for the low performance of the sector. These two contending positions implied that some issues that are critical to the development and performance of the industrial sector had not been factored into the various strategies and management of the SMEs. Asikhia and Binuyo (2012) in their journal article titled Competitive Intensity as a Moderator in Customer Orientation – Performance Relationship in Nigeria suggested the investigation of the impact of other environmental factors on the customer orientation-performance relationship.
While the above studies have revealed that manufacturing firm thrives within the boundaries of strategies and environment, the findings have remained largely inconsistent. Also, observations by the researcher in addition to preliminary investigations amongst managers in this sector reveal that the business operating environment has remained hostile and turbulent over time. Therefore, in view of these observations, research is needed to examine the influence of environmental dynamism and competitive strategy on non-financial performance with focus on the gaps in the literature uncovered in the previous studies.
Aim and Objectives of the Study
The main aim of this study is to investigate the influence of environmental dynamism and competitive strategy on the non-financial performance of the manufacturing firms in Nigeria.
The specific objectives of the study are therefore to:
(i) evaluate the extent to which market turbulence significantly determines performance stability of manufacturing firms in Nigeria.
(ii) investigate whether competitive intensity has significant influence on employee morale in manufacturing firms in Nigeria.
(iii) assess the impact of uncertainty on environmental adaptation of Nigeria manufacturing firms.
(iv) evaluate the extent to which industry forces lead to generation of new ideas in manufacturing firms in Nigeria.
(v) measure the influence of generic strategy on non-financial performance of manufacturing firms in Nigeria.
(vi) measure the effect of environmental dynamism and competitive strategy on non- financial performance of manufacturing firms in Nigeria.
Research Questions
The following research questions were posed in line with the research objectives:
(i) To what extent does market turbulence significantly determine performance stability of manufacturing firms in Nigeria?
(ii) To what extent does competitive intensity have significant influence on employee morale in manufacturing firms in Nigeria?
(iii) What impact does uncertainty have on environmental adaptation of Nigeria manufacturing firms?
(iv) What is the extent to which industry forces lead to generation of new ideas in Nigeria manufacturing firms?
(v) To what extent does generic strategy influence non-financial performance of manufacturing firms in Nigeria?
(vi) What is the effect of environmental dynamism and competitive strategy on non-financial
performance of manufacturing firms in Nigeria?
Research Hypotheses
The following null hypotheses from the foregoing research questions were formulated:
(i) Market turbulence does not significantly determine performance stability of manufacturing firms in Nigeria.
(ii) Competitive intensity does not have significant influence on employee morale in manufacturing firms in Nigeria.
(iii) Uncertainty does not significantly impact on environmental adaptation of manufacturing firms in Nigeria.
(iv) Industry forces do not significantly lead to generation of new ideas in manufacturing firms in Nigeria.
(v) Generic strategy does not significantly influence non-financial performance of manufacturing firms in Nigeria.
(vi) Environment dynamism and competitive strategy have no significant effect on non- financial performance of manufacturing firms in Nigeria.
Significance of the Study
The study is significant in several respects. Effort is made to enunciate the relevance of the study to the investors in the manufacturing sector. Its relevance as well as contribution to academia, and the general relevance to the larger economy are discussed below:
It is believed that knowledge of environmental dynamism and competitive strategy will enable
managers of industries to provide insight into all relevant decisions to be taken in order to create a fit between their organisations and their current and future environment so as to improve their firms‟ performance.
This study will highlight and lead to the understanding of the environmental dynamism and competitive strategy implications that are facing Nigerian manufacturing organisations and its importance in achieving high levels of performance and contribute to the achievement of objectives in the long term. Thus, the study would specifically provide an insight into the possible influence of market turbulence on the manufacturers‟ performance stability. It will also reveal the effect of competitive intensity on employee morale in Nigeria manufacturing firms. The study is therefore significant as its results will hopefully provide useful ideas that can be developed into tools for the use of Nigerian top managers towards the improvement of their organisations.
For the academia, this study will help advance knowledge about the relevance of non-financial performance measures in contribution to overall organisational performance. Furthermore, it would emphasise the relevance or importance of competitive strategy to firm‟s performance. It will also provide further insight into how environmental dynamism shapes competitive strategy and organisational performance. Specifically, the study would showcase how new ideas generated through the influence of industry forces can be developed for the use of the manufacturing sector in Nigeria. It will also contribute to the application of organisational theories developed in advanced countries to Nigeria for higher effective and efficient performance. As an academic approach, this study raises research questions which are relevant to the problems and investigates the factors that have implications on the problems in a manner that
provides answers and solutions for the use of policy makers and top managers of organisations in Nigeria. The study can unfold new horizons for other studies that deal with environmental dynamism and competitive strategy topics especially in the Nigeria-based manufacturing companies.
This study would emphasise the importance of the manufacturing sector to the economy through meaningful contribution to the Gross Domestic Product. The study will also provide an insight into policy regimes of government that will enhance sustainable development of the manufacturing sector.
Scope and Delimitation of the Study
The scope of this study is based on the Manufacturers Association of Nigeria (MAN) list of companies in Lagos metropolis. This is because 70% of Nigeria‟s manufacturing firms are based in Lagos state (MAN, 2013). Besides, the Lagos metropolis contains the most heterogeneous population of workers with diverse socio-economic backgrounds, including foreigners and therefore constitutes a suitable sample of the population of strategic managers of manufacturing firms in Nigeria
The key variables in this study which may determine its scope are environmental dynamism, competitive strategy and manufacturing firm‟s non-financial performance in Nigeria. There is no doubt that each of these variables covers extensive areas of theory.
There are indeed a myriad of factors in all levels of the environment, too many to be managed in one study. Thus in this study, environmental dynamism is limited to market turbulence, competitive intensity, and uncertainty. This study which has competitive strategy as one of the
independent variables is specifically limited to the investigation of generic strategy and Industry Forces. Also, for the purpose of this study, the constructs of firm‟s non-financial performance will be limited to operating efficiency, performance stability, public image, employee morale, environmental adaptation, new ideas and social impact on the society. The measurement of these constructs will be based on the perception of the respondents.
Operational Definition of Terms
The study made use of the following definitions for the key terms indicated below:
Competitive Advantage: This refers to the strategies that a firm has to implement in order to enhance performance in competitive markets.
Competitive Strategy: This is determined by the structure of the industry to which the firm belongs and the firm‟s positioning in the same industry.
Contingency Theory: Contingency model explains how the performance of a firm depends on external environmental characteristics and firm‟s chosen strategies in response to existing and potential contingency factors.
Core Competence: The attribute of a firm which the firm can leverage on as a competitive advantage.
Cost Leadership Business Strategy: This term is used when the competitive advantage of a firm can be found in its lower cost of products or services than what the competitors can offer.
Differentiation Business Strategy: This is a strategy that is adopted when a firm is seeking to be unique in its industry along some attributes of its product or service that are widely valued by customers.
Environmental Dynamism: Environmental Dynamism represents the rate of change in an environment. It is also known as the degree of instability or turbulence of such key operating concerns as market and industry conditions as well as more general technological, economic, social, and political forces.
Firm Performance: Firm performance can be defined as the actual output or results of an organisation as related to the goals and objectives. Examples include non-financial performance which covers operating efficiency, performance stability, public image, employee morale, environmental adaptation, new ideas and social impact on the society. This term can interchange with organisational performance.
Focus Business Strategy: Focus Business Strategy essentially depends on either cost leadership or differentiation, but applies to a narrow segment or a group of the segments of the total market to the exclusion of others. The more commonly used grounds for identifying groups are the demographic characteristics (age, gender, income, occupation etc.)
Industry Forces: This is about the threats of new entrants and substitute products or services, the bargaining power of suppliers and buyers, and the rivalry among existing competing firms in an industry.
Manufacturing Industry: Manufacturing industry refers to any business that converts raw materials into finished or semi-finished goods using machines, tools and labour. Manufacturing sectors include production of food, chemicals, textiles, machines and equipment.
Market Turbulence: Market Turbulence is the irregular rate of change in the composition of customers and their preferences.
Non-financial performance measures: These are subjective measures of organisational performance which recognise the fact that financial measures are insufficient in some areas of performance.
Resource-based View: This theory emphasises the firm‟s resources as the determinants of competitive advantage and performance.
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