DETERMINANTS OF PERFORMANCE OF SMALL-MEDIUM FUEL DEALERS IN KENYA Abdullah ...

23 Pages·2017·0.6 MB·English

DETERMINANTS OF PERFORMANCE OF SMALL-MEDIUM FUEL DEALERS IN KENYA

Abdullah, A.M., & Nzulwa, J. D.
Vol. 5, Iss. 1, pp 872 - 893, March 17, 2018. www.strategicjournals.com, ©strategic Journals
DETERMINANTS OF PERFORMANCE OF SMALL-MEDIUM FUEL DEALERS IN KENYA
Abdullah, A.M.,*1 & Nzulwa, J. D.2
*1MBA Candidate, Jomo Kenyatta University of Agriculture and Technology [JKUAT], Nairobi, Kenya
2PhD., Jomo Kenyatta University of Agriculture and Technology [JKUAT], Nairobi, Kenya

Accepted: March 13, 2018
ABSTRACT
This study sought to establish the determinants of performance of small medium fuel dealers in Kenya. The
specific objectives were: the influence of marketing methods on performance of small medium fuel dealers, find
out if competitive strategy that is cost, differentiation, focus and speed influenced performance of small fuel
dealers, assess whether establishment level influenced performance of small fuel dealers and examine if long-
term strategy influenced performance of small medium fuel dealers. This study design was descriptive research.
The target population was 74 small medium fuel dealers. The sample size was 23 small medium fuel dealers
which is 30% of the population. The research used questionnaire as the main data collecting instrument.
Regression model, relative frequencies and percentages were used for data analysis. The data was presented
using tables. The study established that there is positive correlation between independent variables (marketing
methods, competitive strategy, establishment level and long-term strategy) and dependent variable that is firm
performance. Multiple linear regression model used suggested that value of R squared=0.7662 that implied
76.62% of the variance in Firm Performance was accounted for by four independent variables, and the significant
predictor of the dependent variable was at 1% level of significant. The study recommended that dealers should
take marketing methods serious as it is the key to their success. It helps in discovering the areas affected by
dealers’ growth and thereby helps in creating plans to cater for their customer needs. The dealers should
consider establishment level as an integral part of their business by turning their initial challenges to be enablers
that would propel them to reach the maturity age of ten years. The dealers’ representatives and leaders to be
brought on board or allocated agreeable slots by the regulator to monitor the industry. The dealers should see
long-term strategy of their businesses as critical element and invest in different areas, acquire assets or form an
alliance with other companies in order to get large capital funds, spread risks between more partners, get
survival skills from other partners and enjoy synergy due to combined efforts of varied partners.
Key Words: Marketing Methods, Competitive Strategy, Establishment Level, Long-Term Strategy

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INTRODUCTION internationally (Tullow, 2012). Therefore Kenya
importation of oil is kshs 30.5 Billion of total imports
Petroleum or oil is a natural resource that its
of kshs 123 Billion translating to 30% of total
availability, accessibility or affordability has caused
imports (CBK, 2016).Kenya remains vulnerable to
both generation of wealth and political instability in
shock. In four of the last five years, the Country
the same measures. For the last Four Decades many
experienced political, economic or weather related
countries in the world where oil was discovered
shocks and often combination of shocks.
faced internal conflict. One of the oil rich countries
that benefitted and registered high GDP is United
The current account deficit which remains at 10
Arab Emirates whose GDP stands at $ 402.3 Billion
percent of GDP despite lower oil prices make Kenya
(WB, 2013). Some other countries discovered oil but
external position particularly vulnerable to
faced endless internal conflict and political
increasing oil price (Wangui 2014). According to
instability in lieu of benefit. It would seem that
Kojina (2010) Kenya has an open tender system,
discovery of natural resource that is highly valuable
whereby crude or petroleum products are
on the international petroleum market would cause
purchased by a single company for the entire
great joy for its owner. Despite the prospects of
market on the basis of public tender and shared
investment opportunities that petroleum extraction
among all marketing companies in proportion of
may yield. Evidence has been rather mixed
their share in the market. Questions have been
regarding the actual impact has had on actual
raised about the cost-effectiveness of this system.
owner. In particular most cases of oil development
The Government of Kenya in its vision of 2030
in poor nations have produced outcome of
recognized that Kenya’s energy costs are higher
increased disparity of wealth often resulting to
than those of her competitors and that Kenya must,
political instability countries like Nigeria, Angola,
therefore generate more energy at a lower cost and
Chad, South Sudan and Bolivia provide clear
increase efficiency in energy consumption. The
example. The term used for this phenomenon is
Kenya Government is therefore encouraging foreign
Dutch Disease (Garber, 2007).In 1963 the countries
specified oil product in December 2010.This effort
that produce oil formed OPEC. Their main function
will help the government to meet the domestic
was to control the price of crude oil per barrel. Their
demand for various petroleum fuels on average
decision always had a critical effect both on global
stands at 2.5 Million tons per year all imported from
economy and global politics (Freel, 2009)
Gulf regions either as crude oil or for processing at
Kenya Petroleum Refineries.
Kenya imports its oil from Middle East countries
right from when it got the independence in
Petroleum has been a natural resource that
1963.Importation was done through Multinational
dominated World Economic Politics. The world
Companies like Chevron who were doing both
super power United States of America (USA) has
importation and distribution to their outlets in
used perpetual war in the Middle East Countries in
Kenya importers enjoyed tax rebate. Local
order to get oil. This act of war in order to get oil is
businesses (indigenous people) were not allowed to
called Military Industrial Complex (Oswald, 2007).
do the oil trading until in the year 1994.
The Middle East Countries that suffered and are
Kenya discovered oil in Turkana County in year 2012
war- torn currently include Iraq, Libya and Syria
through British firm Tullow Oil but the products are
while Iran still struggles to defend itself against
not yet distributed locally or exported
Military Industrial Complex. This disturbances cause
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the Organization of Petroleum Exporting Countries growth and any volatility in imports is likely to affect
to keep fluctuating the price (Turley, 2012). In 1973 the process adversely(Kenya Bureau of Statistics
during the Arab-Israel war, Arab countries placed 2013).
embargo on all countries that were supporting
Performance is defined as firm’s ability to continue
Israel especially United State of America.
in operation (Cornwall, 2004). Profitability is the
During the past decade, the price of oil has and vital goal of the small medium fuel dealers. Strategic
travelled from $ 60 per barrel to a peak of $146 in Managers are how to measure profitability or how
2009 and subsequently descended again to below $ to define profitability over the long term or shorter
50 in 2015. While oil is sold in global market the for SMEs. Profitability clearly indicates the dealers’
effect of rising or falling prices can be very difficult ability to satisfy the principal, claim and desire of
for importing countries (Hunja, 2008). Africa as a employees and stakeholders of the dealership. The
region has 38 net- oil- importing Countries. In these ability of any dealer to operate in the long run
Countries in particular, high oil prices have an depends on attaining acceptable level of profit
adverse impact on businesses, consumers, and (Hiriyappa 2012).
Government budgets, to name a few. As a result,
Any dealership which has to achieve customer
these net oil importing countries see their term of
satisfaction, must give its customer exactly what
trade deteriorate, jeopardizing their BOP positions
they want when they want it. Consequently,
and possibly leading to lower economic growth than
dealership must do everything possible to identify
in the absence of the oil (ADB, 2009). Some of the
customer needs and satisfy them. Customer
Countries in this region like Uganda has discovered
Satisfaction is basic function for the strategist for
oil and is seeking to partner with Tanzania for the
achieving super customer satisfaction of dealership.
oil pipeline.
Achieving super customer satisfaction refers to
In Kenya Petroleum has been a major source of dealership or how to respond to customer inquiry,
energy its accounts for over 80% of the Country’s regarding the quality, sales, after sales and its
commercial energy requirement (Macheo & Omiti, products. Small Medium Fuel Dealers is defined as
2002).Due to changes in International oil prices, the individuals or companies owned by indigenous
expenditure on petroleum import has been Kenyan Business People, Which operate at retail
fluctuating widely at times taking a big share of level and which has more than three outlets, They
Kenya total foreign earning (Mureithi, source their products mainly from Multinationals
2014).Transport industry consumes70% of through reseller/ distributors(Macheo & Owiti,
petroleum products used in the country. In 2003). During the decade (1994-2004) the
Agriculture Diesel is demanded to run Mills, Independent Petroleum Dealers became source of
Tractors, Combined harvester and other wealth, job creation and entrepreneurship. Small
machineries. In Industries, generators that run on Medium Fuel Dealers are Companies owned by
Diesel are used as alternative source of energy. indigenous Kenyan business men and women.
During drought periods Diesel is used for electricity
They operate at retail level and have 5 petrol
generation to complement hydro power(Mureithi,
stations per company. They have 5- 100 employees
2014).Kenya imports a total of 3638 tons of oil in
per company. Their annual turnover is between 20
the year 2000 drought period(GoK, 2003).Therefore
Million to 250 Million per company (Macheo &
the demand of oil imports influence economic
Awiti 2003). The targets of the Small Medium Fuel
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Dealers’ investment are Entrepreneurs, Employees, jobs are created by existing and not new Small
Shareholders, Customers and Government. Medium Fuel Dealers.
Statement of the Problem In addition, previous studies of Small Medium
Enterprises performance have focused on
Growth of Small Medium Enterprises is desirable in
performance of new ventures rather than on
order to create wealth for owners, equitably
existing Small Medium Enterprises (Lekhanya,
distribute the development of the country, create
2014). Other Scholars who studied in this related
employment and reduce poverty in population
area to determine factors influencing performance
(GoK, 2005).In 1994 the petroleum industry was
of small medium enterprises (SMEs) are: (Mbugua,
liberalized by the Kenyan Government.
2011), (Kimanyi, 2015) and (Muturi, 2016).The
This increased the number of local companies purpose of this study was to analyze the
getting licenses to conduct oil trading. They were determinants of performance of small-medium fuel
named as Independent Petroleum Dealers. In the dealers in Kenya.
year 2001 their market share increased to 22% up
from 1% in the year 1994. (AKumu, 2010).However Objectives of the Study
these shares dropped to 5% in the year 2016.The The main objective of this research is to examine
small medium fuel dealers registered huge profit in Determinants of performance of the small-medium
their first decade of operations (1994- 2007) .This fuel dealers in Kenya. The specific objectives were:-
success made multinationals like Caltex exit the
 To establish the influence of marketing methods
market and Shell to be acquired by Vivo. However
on performance of small medium fuel dealers.
this great success was cut short and they were hit
by the price control introduced by the ERC of the
 To find out if competitive strategy that is cost,
Ministry of Energy in the year 2008. The price
differentiation, focus and speed influence
control worked to the advantage of multinationals
performance of small fuel dealers.
while killing the small medium fuel dealer’s
motivation and spirit of competition. The price  To assess whether establishment level influence
control caused a wave of closure among small performance of small fuel dealers
medium fuel dealers due to profit margin erosion
 To examine if long-term strategy influence
and high operating cost (Kipeda, 2017).
performance of small medium fuel dealers.
In year 2017 the small medium fuel dealer margins
LITERATURE REVIEW
on a liter dropped to kshs 1.40 after 60 cents for
transportation rate allowed in Nairobi. Job losses
Theoretical Review
became imminent as independent petroleum
dealers borrowed money from bank but are unable
Theory of Marketing
to pay due high overheads, hence facing foreclosure
Theory of Marketing was advanced by Kotler
from banks. Most of the previous studies focused
(2013).The theory states that marketing is based on
on the large companies or new ventures, while the
four P’s that is product, place, promotion and price
growth of small medium fuel dealers seems to have
and he has added another P to the same called
attracted much less attention(Nasiruddin,2011) On
perception, which described the sentiment about
the other hand, it has been shown that most of new
the product in the market.
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For a firm to maximize sales, a firm must position its competitors, building on this basic idea Michael
product or services in the market place in such a porter has referred to low cost and differentiation
way that consumers believe they need a particular as generic business level strategies i.e. the
product for service, or that a product or services strategies represent the two fundamental ways of
they need has a particular benefit. Fuel dealers used trying to obtain a competitive advantage (Hiriyappa,
the traditional methods of marketing. These 2012).
methods have gaps and drawbacks that limit their
Path Dependency Theory
usefulness in strategically managing their
dealership. Combination of traditional methods and This theory known as path dependency theory was
the 4Ps will build a high marketing dealership. advanced by Calo (1995) sheds light on the aspect
of establishment level. it states that the continued
This Marketing theory is linked to marketing
use of product or practice is based on historical
methods as it will help owners and managers of
preference or use, this holds true even if never,
small medium fuel dealers to understand marketing
more efficient products and practices are available
in order to determine who their customers are and
due to the previous commitment made.
what they need. If they get it right the rest is a
matter of formality. If they get it wrong no amount All businesses have business life cycle, that include
of expertise will bring success at market place. infancy stage that is the most riskiest as most of the
(Kiunga, 2012). businesses don’t reach their fourth birthday due to
challenges of adaptability. Youth ship stage is where
Competitive Strategy Theory business generate consistent source of income but
This theory was advanced by Barney (1991) its state challenged by attending to customers, dealing with
that the strategic resources are heterogeneously competition and accommodating expanding work
distributed across the firm and that the differences force. Maturity stage is where the business firmly
are stable over time, the three indicators of the establishes itself in the industry however challenged
potential of firm resources to generate sustained by either push for further expansion or exit the
competitive advantage are cost, differentiation and business. This theory finds its linkage with
focus . establishment level as small medium fuel dealers’
SMEs needs consistency or on-going drive to tackle
Competitive Strategy is a long-term action plan that
challenges of different stages of investment that is
devised to help a company gain competitive
infant, youth ship and maturity.
advantage over its rival. This type of strategy is
often used in advertising campaigns by somehow Corporate Bankruptcy Theory
discrediting the competitor’s product or service.
This theory by Modigliani and Miller (1950) explains
Barney defined the three strategies that can attain
the survival strategy, it states that the market value
competitive advantage as cost, differentiation and
of a firm is determined by its earning power and by
focus.
the risk of its underlying assets and that its value is
dependent on the way it chooses to finance its
This theory is linked to competitive strategy as it will
investment or distribute dividend.
connect small medium fuel dealers with strategies
to succeed in a competitive market place over a
Survival strategy is a logical or rational pattern that
long run because they can do a certain things to
is implanted and implemented to continuously
their customer’s value better than their
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overcome life’s challenges so as to gain Conceptual Framework
sustainability in one chosen environment, in turn, Marketing Methods
gain financial muscles. Small businesses fall on hard
 Guerilla
times facing declining sales and profits. This calls for
 Buzz
survival strategies in order to put the business back  Newsletters

on track to success. Davisson (2002) stated that
Competitive Strategy
there are four growth strategies of small firms using Performance of small
 Cost
innovation orientation and growth orientation as medium fuel dealers
 Differentiation

dimensions include explore, expand, exploit and  Focus  Profitability
restrain. Survival is an assumed goal of affirm if it is  Return on investment
Age/Establishment
 Customer satisfaction
neglected it will impact on the strategic decision
making of the firm for long time, growth refers to  Infant
 Youth ship
overall development of the firm activities. Growth
 maturity

may be proactive change that is necessary for
Long-term Strategy
dynamic business environment; Growth may be

referred to in terms of expansion and diversification  Expansion

 Diversification
(Hiriyappa, 2012).This theory is linked to survival
 Collaboration
strategy as it will help small medium fuel dealers to
Independent Variables Dependent Variable
exist, grow and survive for long term.
Figure 1: Conceptual Framework
Balanced Scorecard Model
This theory was advanced by Norton and Kaplan in Marketing Methods
1990 it states that a company should link its own
Guerilla marketing is all about b ootstrapping,
long-term strategy with tangible goals and actions.
creative leverage use of available resource and

The scorecard allows Managers to evaluate the
highly targeted mix of innovation and effective
company from four perspectives: financial
communication technology, networking, using
performance, customer knowledge, internal
energy and imagination and low co st (Levinson,
business processes and learning and growth. The
2008). Buzz marketing is all about customer
dealers
Balance Scorecard contains a concise definition of
generated information distribution by verbal means
the company’s vision and strategy. Surrounding the
especially recommendations by, through personal
vision and strategy are four additional boxes; each
networking by creating excitem ent information and
box contains objectives, measures, targets and
enthusiasm often connected to events (Rosebloom,
initiative for one of the four perspectives. This
2007).
theory find its link to dependent variable (Firm
Performance) as Balanced Scorecard is a strategic Newsletters are either printed or digital .printed
planning and management system that can be newsletters are not cheap because you have to pay
implemented by small medium fuel dealers as an printing costs, but very informative, they can help
approach to measure their performance that is both keep your name in the minds of your customers and
financial and non-financial measures in order to prospects. Digital newsletters are much cheaper;
provide managers with more relevant information this can be distributed online or uploaded to your
about their performance to check growth of their website. The key to effective newsletter is to make
enterprise. them a useful tool that your prospective customer
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and client can use to solve problem and challenges creates innovations and they form flexible
besides advertisement (Kiunga, 2012) production network. According to (GoK, 2015)
economic survey, establishments are categorized
Competitive Strategy
into 3 groups depending on their age, number of
A company or organization has a competitive employees and survival rate.
strategy when its profit is higher than the average
This is portrayed by the fact that establishments
of its industry. Therefore to achieve competitive
that are more than 10 years of age are in their
advantage a company must either have a lower cost
maturity stages and employed 50% of the
than its competitor or when a company charges a
employees, establishments that are aged between 4
higher unit price than the industry average, it is
to 9 are in their youth ship stages and employed
engaging in premium pricing. From the consumers’
27% of the employees and establishments aged
perspective, if the consumer is to pay a premium
below 4 years are in their infant stages and
price, then the company must add value to the
employed 23% of the employees. The survey
product, these are unique and distinct features that
concluded that establishment at infant and youth
differentiate the product from those offered by
ship stages are more likely to die and
competitors along one or more dimension like
establishments at maturity stages are more likely to
quality, design, delivery time and after sale services
survive.
and support (Hiriyappa, 2012).
Long-term Strategy
Small companies, at least good ones usually thrive
because they serve narrow market niche. This is When a firm desires to expand extents its business
usually called focus, the extent to which a business network widening the scope of its customers group,
concentrates on narrowly defined market. Speed or customer functions and state of the art
rapid response to customer request or market and technologies we have the making of an expansion
technological changes, has become a major source strategy. Expansion Strategy is principally adopted
of competitive advantage. Speed involves the when an organizations enhances its level objective
availability of a rapid, response to a customer by with high targets. Intensive expansion is a
providing current products, quicker accelerating fundamental approach to safeguard and develop
new products development or improvement, the organization product market and thereby
quickly adjusting production processes, and making increase the volume of sales, profit, market share
decisions quickly (Cole 2010). and total business network very rapidly (Hiriyappa,
2012).
Establishment Level
Diversification strategy refers to diverting the
According to World Bank Group (2007), in the
business focus from the existing traditional areas to
majority if not all of the emerging economies, the
new promising areas. Since technology is changing
SME sector is either the private sector or forms a
day by day, it based on customers’ expectations and
large component of the private sector. Moreover
to draw their attention to organization.
SME makes a remarkable contribution to the
Organizations focus to produce or manufactured
regional economic development. They are often the
new and substitute products and services to attract
only feasible engines of development, especially in
and draw attention of customers. These changing
marginal regions like Kenya. They generate societal
attitudes have been opening more and more areas
growth in terms of new jobs and revenues. SME
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of promising business. Diversification can be innovativeness that is essential to SME success
changed business focus may be either in terms of (Zontanos & Anderson, 2008).
customer function, customer group and or new
Networking is the most commonly used means of
alternative technologies (Hiriyappa, 2012).
advertising small businesses and one of the most
Collaborative arrangements come in several ways effective. The principle aim of networking is to
that include: Licensing, this is where licensor grants make friends, establish contacts, and develop
right to intangible assets to licensee. Franchising, relationship before you need them (Kiunga, 2009).
franchisor sells to franchisee use of intangible
Competitive Strategy and Performance
property rights but also operationally assists the
franchisee continuously. Management Contract, this Competitive strategy is an advantage over
is where company transfers its superior competitor gained by offering consumer great
management resource to assist another company value, either by means of lower prices or by proving
for a specific period of time and for a fees.(4) Joint greater benefit and service that justifies high prices.
Venture, this is where business entity is created by There are two components of customer services
two or more parties generally characterized by namely, expected service and augmented service.
shared ownership, shared returns and risks and Expected customer services is the level of service
share governance to achieve a particular purpose that customer want to receive from any retailer,
over a defined period of time(5) Strategic Alliance, such as basic courtesy, augmented customer service
this is an alliance where two or more parties encompasses action that enhances the shopping
develop contractual relationship(Daniels,2015). experience and give retailers a competitive
advantage( Dessler, 2000). Choosing competitive
Empirical Review strategy at the business level is about choosing from
Dudgeon (2008) described empirical review as a three generic competitive advantage that is low
way of gaining knowledge by analyzing cost, differentiation and focus. If industry rivalry
quantitatively and qualitatively previously increases and companies start to compete on price,
conducted researches. This section will cover the cost leader will be able to withstand
previous studies undertaken on the dependent and competition to compete on price, the cost leader
independent variables as highlighted on the will be able to withstand better than other
conceptual framework. companies because of its lower costs. For both
reasons, cost leader are likely to earn above
Marketing Methods and Performance
average profits (Hiriyappa, 2012).
Marketing is the process by which companies create
Cost leadership means you provide reasonable
values for customers and build strong customer
value at a lower price. Companies do this by
relationship in order to capture value from the
continuously improving operational efficiency.
customer in return. Marketing plays a vital role in its
That usually means paying their workers less. Some
fostering of development of entrepreneurial and
compensate by offering intangible benefits such
managerial skills (Kotler, 2007). It is difficult to
as stock options, benefits or promotional
disentangle such networking and relationship
opportunities. Others take advantage of unskilled
building from entrepreneurial action, and thereby
labor surpluses. As these businesses grow, they can
imply that marketing orientation goes to the core of
use economies of scale and buy in bulk (Ritaj, 2009).
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Differentiation means you deliver better benefits Once achieved, the business becomes sellable. But
than anyone else. A company can achieve there are challenges that make this transition
differentiation by providing a unique or high-quality difficult: Delegation of Authority - the owner must
product. Another method is to deliver it faster. A create and submit to systems this enables others to
third is to market in a way that reaches customers assume more responsibility, Change of Leadership -
better. A company with a differentiation strategy the owner brings someone in (or up) to be a
can charge a premium price. That means it usually manager ,the emphasis must switch to systems,
has a higher margin. Companies typically achieve policies, and administration; however, long-time
differentiation with innovation, quality or customer employees may resist this, the founder/owner must
service. Innovation means you meet the same not violate the policies and procedures so as to not
needs in a new way (Ritaj, 2009). Focus means you undermine the new manager, Change Management
understand and service your target market better - the emphasis is now on internal improvement and
than anyone else. You can use either cost leadership quality in every area; however, people do not
or differentiation to do that. The key to focusing is generally like change, they do not like anyone
to choose one specific target market. Often it's a "messing" with how they do things! These
tiny niche that larger companies don't serve (Ritaj, challenges lead to conflict (Cole, 2010).
2009).
Maturity is that season when the business is
Establishment Level and Performance systematized and turnkey. It can run predictably
and consistently without the owner. The problems
Every firm goes through a natural life cycle that is
here are usually around management training and
infant, youth ship and maturity. Infancy is key in this
the ongoing potential to lose entrepreneurial
initial stage is to have sales. Sales are essential for
leaders within the organization. This is where a
cash flow. Typically the sales effort in "Infancy" is
company reinvents itself in some way. Maybe there
much weaker than it should be. The goal in
is a new product line, a new market niche, or an
"Infancy" is to create a sales organization - stabilize
entirely new core focus. Organizations will not stay
the product, create a sales process, and then
in their prime forever. They must renew and
diligently stick to it. Typically everything (especially
reinvent themselves for the future before
sales) revolves around the owner. The biggest
complacency or decline comes in (Cole, 2012).
challenge in "Infancy" is cash flow. Businesses die in
"Infancy" due to a lack of cash flow. That's why
Long-term Strategy and Performance
sales are the most important priority (Cole 2010).
Expansion is where managers must decide on
Youth ship this is where the company goes through appropriate way to compete internationally, a basic
the process of being re-born. The company begins question confronting the managers of any
to find life apart from the founder/owner. Systems organization that competes in more than one
are defines and implemented. The danger in this national market is to what extent the organization
stage is for entrepreneurial leadership within the should customize features for its product and
company to feel inhibited and start to leave. This marketing campaign to different national conditions
happens when the systems are too burdensome (Massie, 2004).Most companies first consider
(e.g. too much paperwork, too much reporting, etc.) diversification when they are generating financial
However, it is critical for the business to find the resources, therefore, it is excess to maintain
right balance between structure and creativity.
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