ANALYSIS OF STRATEGIC CHALLENGES AND OPPORTUNITIES IN FAMILY BUSINESS IN KENYA: ROLE SOCIAL NETWORKING RELATIONSHIP.

CHAPTER 1 1.1 Background This paper argues that the effects of family businesses‟ competitive strategic challenges and opportunities on performance in developing or emerging economies would be moderated by managerial social networking relationships with external entities. This is because social networking relationships fill the “institutional voids” – the absence of market-supporting institutions, specialized intermediaries, contract-enforcing mechanisms, and efficient transportation and communication networks (Khanna and Palepu, 1997) – by garnering the resources and capabilities that serve to facilitate business activities in developing and emerging economies such as those in Africa. Family businesses are prominent in the business landscape in Africa and other developing economies and are widely recognized as playing a significant role in these economies both in terms of their contributions to employment, entrepreneurship, community development, and economic growth and development. The ability of family businesses in Africa to create and sustain competitive advantage depends on their capacity to obtain and leverage financial, human and other resources and capabilities for the organization of business activities.

1.1.2 Strategic challenges The strategic management literature has emphasized that achieving competitive advantage in today’s dynamic and intensely competitive environment hinges on formulating and implementing a coherent business or competitive strategy (Hoskinsson et al., 2000; Porter, 1980, 1985). According to the business strategy perspective, a firm’s competitive advantage lies in its ability to develop or obtain organizational resources and capabilities, take a strategic position in

1997. Li. 2000. 2009. 1993. Miller and Friesen. Acquaah and Yasai-Ardekani. 1980. Campbell-Hunt. 2007. 2007). 2000. Li and Zhang. CampbellHunt. 2004. 2000. Peng and Luo.3 Strategic opportunities The empirical evidence from the competitive strategy literature in both advanced industrialized economies and emerging economies indicate that the implementation of a coherent business or competitive strategy leads to superior performance (Acquaah and Yasai-Ardekani. 2004). 2007. Miller et al. Miller and Dess.. Spanos et al. 2009).. 2008). 1.a market and implement a competitive strategy that takes into consideration the opportunities and threats in the external environment (Porter. 2008. 1986). 2004). government bureaucratic officials and community leaders in developing and emerging economies would provide firms with the opportunity to acquire the necessary resources for their business activities (Acquaah. 1993). Zhou and Shao.1. This is especially relevant to family businesses because of their desire to develop enduring social relationships to create social capital with a wide variety of external entities that could provide them with critical resources and capabilities (Arregle et al. The high levels of market imperfections and the weaknesses inherent in the market-supporting institutions and contract-enforcing mechanisms present serious challenges to family businesses in obtaining resources through arms-length transactions. Kim et al. It has been suggested that developing and utilizing managerial networking relationships with external entities such as political leaders. despite the important role family businesses play in the economies of developing countries. A plethora of empirical studies have been conducted in advanced industrialized economies to corroborate the proposition that the implementation of a coherent business strategy enhances competitive advantage by influencing organizational outcomes (Bowman and Ambrosini. 1997. Research focusing on the business strategic activities of firms in emerging economies is also gradually taking shape (Acquaah et al.. Li et al. 2007. we know little about their competitive strategic activities (Kim et al. However. 2007. Miller and Dess. It has also been shown that social networking . Family businesses in African economies are facing institutional and business environments that are experiencing rapid changes making it difficult to obtain the necessary resources for their business activities. Bowman and Ambrosini.

A family business’ strong sense of loyalty. in terms of challenges and opportunities. identity. highlights the moderating role of social capital developed from social networking relationships on the link between business strategy and performance. Granovetter. 2009) can significantly impact the type of social networking relationships they develop with different external constituents to secure resources. Family businesses offer an interesting setting to examine how the interaction between business strategy and social networking relationships influences performance as the social networking activities of family businesses might augment or hinder business strategy‟s effect on performance because of the unique characteristics of family businesses. commitment to building enduring relationships. Even less is known about how family businesses use social networking relationships developed with external entities to obtain resources and capabilities to bolster their business strategy and build competitive advantage.. despite the importance of business or competitive strategy in creating competitive advantage there has been relatively little attention devoted to the business strategic activities of family businesses. 1985). 1997. The attempt in this study to investigate the moderating effects of social networking relationships on the relationship between business strategy and firm performance in family businesses is one of the few to examine the interdependence of the competitive strategic initiatives and network-based activities. integrity. are embedded in a collectivistic social system that is both a social and corporate organization. The complementary nature or otherwise of social networking relationships is important to family businesses. 2007. this study investigates whether the effectiveness of the business strategic activities of family businesses is facilitated or hampered by the social networking relationships they develop with external entities using data from a developing economy in sub-Saharan Africa – Kenya. Thus personal and social relationships which are part of the social system may affect the effectiveness with which family businesses implement business strategies (Burt. 2008. 2003. and “family-oriented” (Habbershon et al.relationships with external entities in emerging economies enhances firm performance (Acquaah. 2007. Family businesses in Africa in general and Kenya in particular.. To address this research gap. Li et al. but their implication for the implementation of business strategy and the achievement of superior performance is unknown. therefore. Peng and Luo. Li and Zhang. Nevertheless. Miller et al. unique social system. The study. This study therefore examines the effects of business strategy on performance and the interaction of the business strategic activities and social networking relationships of family businesses on performance. 2000). .

The common inclination in all these business strategy typologies is a focus on the relative emphasis a business places on efficiency versus market effectiveness (differentiation). 1980) describes a firm’s relative focus on the search for market opportunities to create and offer unique products and services to customers. 1978) and differentiation strategy (Porter. 1986. Family Finance was to be the institution of choice for the unbanked population. On the other hand.The strategy literature presents several typologies of business or competitive strategic orientations to describe how an organization develops competitive advantage in an industry relative to its rivals (Miles and Snow. coffee. dairy. 1. Porter. . Mintzberg. 1978. 1988. strategic thinking can be stimulated by including outsiders on the board of directors. Miles and Snow’s (1978) defender strategy and Porter’s (1980) overall cost leadership strategy describes a firm’s relative focus on efficiency so as to become the lowest cost producer in the industry. Their aim then (and now) is serving the needs of the mass market which has been ignored by the mainstream banks. the prospector strategy (Miles and Snow.4 Family business in Kenya In most communities. Family business managers should seek out and cultivate relationships with their counterparts to exchange ideas with them and to learn how they've solved business problems with their own relatives (Porter. An ideal example of a family business in Kenya managing the strategic challenges and opportunities is Family Bank. tea. State and national trade associations also are good sources of information and help. This market segment comprised of millions of small and medium scale enterprises. When Family Finance Building Society was started in 1984 the vision was very clear.1. Through them. 2000). In a small corporation. For example. 1980). 1985) generic competitive strategy typology to depict the business strategic orientations of family businesses because of its influence and dominance in strategic challenges and opportunities (Campbell-Hunt. formerly known as Family Finance. Miller and Friesen. 1980 &1985). the managing relative can get facts from non-competitors. the manager of a family-owned business is not alone. jua kali artisans. people who are not relatives and who are from other types of businesses. Other individuals operate small companies for their families and provide a source of information. I focus on Porter’s (1980. support and help.

age or gender. They have been doing this without discrimination as to creed. 2011).1 Personnel Problems A common challenge to family-owned companies is high turnover among top non-family employees. they have no access to credit facilities.1. 1. junior government employees (local authorities and central government). political leaders and government bureaucratic officials. The bank‟s mission over the years has been to liberate the unbanked from financial bondage and the cycle of poverty. teachers. NGO‟s and even private organizations. 1997).1. the income is never put to good use because they have no access to savings facilities and when it came to times of need. labor and capital markets in developing . it is expensive and with lot of bureaucracy (Researcher.4. race. Outside employees who demonstrate fairness and compatibility become a stabilizing force in the company. Even when it‟s available. weak regulatory systems. 1. Again. The family needs these people and should assure them of a future with the firm (Campbell-Hunt. and underdeveloped contract-enforcing agencies and mechanisms (Khanna and Palepu. Some relatives resent outside talent and can make things unpleasant for non-family executives. This may be especially valuable in developing economies as the social networking relationships family businesses are able to establish can make up for the “institutional voids” – the relative lack of intermediary firms. fish and sugar farmers. These institutional voids fetter arms-length transactions and economic exchange in the product. They had observed that although many of these people have some income however modest. parastatal.5 Role of social networking One of the defining characteristic of family businesses is their affinity to establish enduring and committed social connections or networking relationships with external stakeholders such as community leaders. it is wise to counsel non-family employees to avoid taking sides in family disputes. Exit interviews are useful to find the cause of high turnover. Also.grain. 2000). A departing key employee may disclose enough information to help the manager of the family business develop a positive course of action. top-notch managers and workers may leave if most promotions go to family members.

To address this research gap. knowledge acquisition and exploitation. in terms of challenges and opportunities. the researcher investigates whether the effectiveness of the business strategic activities of family businesses is facilitated or hampered by the social networking relationships they develop with external entities using data from a developing economy in sub-Saharan Africa – Kenya. Thus the social networking relationships family firms develop with external stakeholders build social capital and enable them to obtain the critical resources in the form of information. human capital. 1. 1.2 Statement of the problem The empirical evidence from the competitive strategy literature in both advanced industrialized economies and emerging economies indicate that the implementation of a coherent business or competitive strategy leads to superior performance. Nevertheless. 2009). despite the importance of business or competitive strategy in creating competitive advantage there has been relatively little attention devoted to the business strategic activities of family businesses.. It has also been shown that social networking relationships with external entities in emerging economies enhance firm performance.3 General objective This study therefore sets out to identify the strategic challenges and opportunities that are critical to making family businesses a success and whether these are relevant to family businesses in Kenya. Even less is known about how family businesses use social networking relationships developed with external entities to obtain resources and capabilities to bolster their business strategy and build competitive advantage. Khanna and Palepu (1997) argues that the social networking relationships family businesses build with external stakeholders may help provide them with the necessary resources and capabilities that would be required to support their business strategic activities. .economies (Miller et al. financial capital. and marketing and technological opportunities.

ii. . linking these to increased profitability and growth.1.3. Establish if profitability and growth are positively correlated to critical success factors of the family business. What is the profitability level of the family business over the last 5 years? 1.5 Justification of the study The field of small and medium enterprises. What are the moderating effects of social networking relationships on the relationship between business strategy and firm performance in family businesses? 2. What is the interdependence of the competitive strategic initiatives and network-based activities? 3. government and media and other stakeholders.1 Specific objectives The research will: i. iii. including family owned businesses. Examine growth levels of the family business over the last 5 years. attracts substantial attention globally from the banking industry. This is particularly evident in Kenya where entrepreneurship has been identified as a priority growth area. examine profitability levels of the family business over the last 5 years.4 Research questions 1. Establish whether these are true for family businesses in Kenya through questionnaires. It is with this knowledge that the researcher aims to explore the different strategic challenges and opportunities of family businesses in Kenya. In essence this study will examine the strategies and the SWOT factors responsible for successful family businesses. 1. discuss the reasons for success for family-owned businesses in Kenya. iv. Establish the factors affecting sustainability and success of family businesses from the literature and prior research. How are the SWOT factors affecting sustainability and success of family businesses from the literature and prior research? 4.

In order for firms implementing the cost leadership strategy to maintain a strong competitive position and sustain their profit margins for a considerable period of time. Thus. In Kenya. 1980).6 Conceptual Framework Founder/Owner Strategic challenges/opportu nities e. firms implementing the cost leadership strategy can obtain above-normal profits because of their ability to lower prices to match or even below those of competitors and still earn profits.g. environmental. . they have to place a premium on efficiency of operations in all functional areas (Porter. 2011 1. Firms that implement a cost leadership strategy are able to secure a relatively large market share by being the lowest cost producers or service providers in their industry or market. economic and social factors Profitability Increased market share Family Members Employees Dependent Variables Independent variables Figure 1: The Conceptual Model Source: Researcher. political. the cost leadership strategy is widely pursued by firms who manufacture or offer standardized products and services.1.7 Hypothesis Cost leadership strategy Cost leadership strategy is usually developed around organization-wide efficiency.

brand image. distribution networks. long-term hiring strategy.This is because with the low level of incomes in the country price is an important factor influencing consumer choice and purchasing decisions. trustworthiness. Differentiation strategy Differentiation strategy is usually developed around many characteristics such as product quality. advertising and marketing techniques. and customer service. A firm implementing a differentiation strategy is able to achieve a competitive advantage over its rivals because of its ability to create entry barriers to potential entrants by building customer and brand loyalty through quality offerings. and enduring social relationships can facilitate in creating efficiency in the use of resources and capabilities. social relationship building and customer focus of family businesses in Kenya would allow them to build customer loyalty required for the successful implementation of the differentiation strategy. Family businesses characteristics of paternalistic relationship with employees. Although the average disposable income in an African emerging economy such as Kenya is low. the stability and long tenure of family executives. The unique characteristics of trust. a firm that implements a differentiation strategy enjoys the benefit of price-inelastic demand for its product or service. These unique characteristics can also assist in reducing human resource-related and other transactions costs by providing reliable access to low-cost raw materials. which must be difficult for rivals to imitate (Miles and Snow. reliability. 1980). Thus. family businesses in Kenya will benefit by implementing the cost leadership strategy (Miller and Friesen. integrity. flexibility. Thus. firm reputation. and financial resources to sustain capital investments and increase the efficacy of existing manufacturing and service operations. This would in turn help the firm to avoid potentially severe price competition and allow it to charge premium prices leading to above-normal profits (Porter. consumers’ preference for quality and branded merchandise has increased because of their exposure to foreign made goods making the differentiation strategy both appealing and profitable. 1978). the flexibility that can be exhibited by family business managers imply that they have . technology and innovativeness. 1986). Hypothesis 1(a): A cost leadership strategy will be positively related to performance for family businesses in Kenya. reputation. Moreover. durability. paternalism.

Mayors of towns and cities. The extended family and broader community (especially Pastors. 2005). Religious leaders. which define socially acceptable practices and behavior in a community’s business environment (Salm & Falola. whether traditional or modern (e. shared understandings. 1997). it has been found that family businesses in advanced economies tend to value creativity and pay more attention to investment in research and development (Ward. 1986). ..). and inimitable resource that can assist them in implementing a differentiation strategy (Barney. Therefore. This is because of the high levels of shared trust. human and other resources and capabilities of the business. have also become very influential in decision-making among individuals and business leaders in Kenya. and village heads) are seen as the cultural standard bearers. Social Networking Relationship with Community Leaders The social system of Kenya is highly collectivistic and embedded in cultures and traditions that thrive on communal bonds. They can also act more aggressively and decisively when entering new product markets or developing new products (Carney. and strong allegiance to community and family leadership (Adu-Febiri. Islam. In fact. etc. interpersonal relationships.g. The dedicated and motivated workforce of family businesses can also act as a valuable. scarce. and expectations. and they play a critical function in the lives and activities of individuals and organizations. family businesses in Kenya can easily embark on innovative activities to improve the quality and durability of their products or services. Moreover. 1991). Community leaders in Kenya are the guardians of societal norms. Managerial connections with community leaders will provide a family business with the resources for the successful implementation of both differentiation and cost leadership strategies. 2002).greater authority and discretion in how they use the financial. Hypothesis 1(b): A differentiation strategy will be positively related to performance for family businesses in Kenya. 1995). norms and values developed from the repeated informal interpersonal relationships between a community and its traditional and religious leadership (Miller and Friesen. community leaders are very influential in garnering resources and providing access to valuable information and knowledge to family businesses. Christianity.

1980). to implement the cost leadership strategy successfully. corporate reputation for quality. The social networking relationships developed by family businesses with community leaders would facilitate their legitimacy and promote access to resources and information as community leaders endorse and refer the products and/or services of family businesses to their communities. and strong cooperation from distribution channels (Porter. social networking relationships with community leaders will strengthen the effects of business strategy on performance. 2000). Similarly. and/or gain technological know-how.The successful implementation of the differentiation strategy requires resources and skills such as strong marketing capabilities. Thus. and underdeveloped contract-enforcing agencies and mechanisms. product engineering skills. weak regulatory systems and legal institutions. Social Networking with Government Officials The government also plays an important role in regulating business activities and providing resources and opportunities to businesses in Kenya because of the relative lack of intermediary firms. The social networking relationships may also enable family businesses to obtain access to resources such as favorable leases to land for construction or agricultural purposes. Hypothesis 2: Social networking relationships with community leaders will positively moderate the influence of (a) cost leadership strategy and (b) differentiation strategy on the performance of family businesses in Kenya. This creates a high level of organizational dependency on the government for valuable resources and favorable regulations for the strategic organization of . creative flare. a family business would need resources such as secured source of raw materials. and establish links to sources of financial resources and markets for their products (Kuada & Buame. financial resources for sustained capital investments to increase the efficiency of existing operations through continual improvements. and technical personnel with process engineering skills and expertise. access to low-cost distribution networks. enter new market segments or acquire access to new customers. It has been shown that entrepreneurs in Kenya cultivate personal and social networking relationships with community leaders to avail themselves to information about business opportunities. reliable and durable products and/or technological leadership.

and access to financial resources for business activities. politicians are in office usually for a short period of time. However. Both political leaders and government bureaucratic officials have considerable power and control over the allocation of resources in Kenya. because of family businesses desire to create enduring and committed social relationships with external stakeholders. The social networking relationships family businesses in Kenya developed with political leaders at different levels of government. Thus. Khanna and Palepu (1997) argue that while social networking with political leaders may negatively moderate the relationship between business strategy and performance. offering perks. In Kenya. While political leaders are elected into office for a specified period of time. the social networking relationships with political leaders may be costly since they entail significant obligations in the use of resources to reciprocate the favors which may limit the ability of family businesses to effectively implement both the differentiation and cost leadership strategies (Researcher. 2011). Senior government officials are made up of political leaders and bureaucratic officials. political leaders are more likely to request family businesses to reciprocate the benefits they may obtain from their social networking relationships with favors in the form of providing gifts. Moreover.business activities. bureaucratic officials control the regulatory and licensing procedures such as providing certification and approval to newly manufactured products as meeting government standards (Miller and Friesen. social networking with bureaucratic officials will positively moderate the business strategy and performance relationship for family businesses. The political system in Kenya is also characterized by the “winner takes all” syndrome which encourages political leaders to extract as much benefit as possible from their social networking relationships before they leave office. 1986). and hiring unqualified family members. while political leaders have significant influence and control over the award of major projects and contracts. and officials in government bureaucratic institutions provide them with the opportunities to obtain access to resources and opportunities which may help them implement the business strategies of differentiation and cost leadership. bureaucratic officials are supposed to be politically neutral in the performance of their duty and therefore hold their position irrespective of the political regime in power. . there is a distinction between the role of political leaders and bureaucratic officials. Moreover.

1986). This is particularly evident in Kenya where entrepreneurship has been identified as a priority growth area. The study is recommended by the researcher to the following. including family owned businesses. Hypothesis 3: Social networking relationship with bureaucratic officials will positively moderate the influence of (a) cost leadership strategy and (b) differentiation strategy on the performance of family businesses in Kenya. the following hypotheses: Hypothesis 2: Social networking relationships with political leaders will negatively moderate the influence of (a) cost leadership strategy and (b) differentiation strategy on the performance of family businesses in Kenya.Conversely. bureaucratic officials usually have a long-term appointment to their positions and cherish the enduring and committed connections they develop with family businesses. . 1980). family businesses that develop extensive personal and social networking relationships with bureaucratic officials will more easily be able to secure the resources necessary for the strategic organization of their activities and be successful in guiding their firms to higher performance through the implementation of the differentiation and cost leadership strategies (Porter. government bureaucratic officials in investment institutions have the responsibility to promote investment. Moreover. Therefore. attracts substantial attention globally from the banking industry.8 Importance of the study The field of small and medium enterprises. funding and market opportunities. funding and market opportunities to enable businesses succeed. access to available contract to be awarded by the government. and help with certification and approval to newly manufactured products in order to meet government standards (Miller and Friesen. Thus. 1. investment. Thus they are more likely to treat family businesses more favorably by providing them with information about new and impending regulations that may affect their businesses and industry. Bureaucratic officials can therefore provide family businesses access to resources and opportunities which may affect an organization’s activities by maximizing the efficiency and effectiveness and thus facilitate the successful implementation of the differentiation and cost leadership strategies. government and media and other stakeholders.

present an image of the aggressive. setting up independent. The exception was TV drama. A Kenya‟s tax laws can either coax family-owned businesses into the formal sector of the economy or keep them out of it. Like the proverbial Chinese saying goes “do not give a man fish rather teach him to fish”. . Banking industry: Proper information. An impartial legal system that can help settle contract disputes. a key to deciding whether to advance a loan. The media: It is a commonplace in the to blame everything on the media. Any country that refuses to take peculiar attention to unleashing and enhancing the entrepreneurial initiatives would be left behind.The Government of Kenya: Many resources and much time and effort have been put into creating new markets and opportunities for this sector. They employ around 75% of all workers and represent the fastest growing segment of the corporate world (Whitehead. With the emergence and now dominance of reality TV one cannot expect anything less sensationalistic to emerge in mainstream viewing. in the light of fratricidal power struggles. commercial law reform and drafting and clarifying land titles. Between 75% and 90% of all businesses in Kenya are family owned. which has a history of presenting family business. would be helped by adopting clear accounting standards. are vital for growth of the business sector. the general public media generally ignored family businesses. competent and reputable accounting firms and creating more credit bureaus supplying data on the solvency of familyowned businesses. And yet the latter business type is by far the more prevalent and sustainable. as well as effective bankruptcy procedures. 2005). Until recently in Kenya and the rest of Africa. This sits in stark contrast to the decades old. mostly from America. self-centered young entrepreneur as the early twenty-first century business model. „The Apprentice‟ the most popular “business” program on television. Dallas and Dynasty being the iconic shows of this genre. Entrepreneurs: Entrepreneurship has been the backbone of most gigantic and growing economies of the 21st century. generation-to-generation. Empowering people to take entrepreneurial initiatives and helping them to build formidable businesses has been one of the most effective ways of reducing poverty and putting the peoples life into their own hands. solid unchanging brand of the family business image. This paper is not the place to debate the rights or wrongs of this generalization but the researcher will also choose to adopt the same position with regard to how the Kenyan public and the business world perceive family businesses.

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