Effect of Cognitive Capabilities on Sustainable Strategic Fit on Competitive Advantage at Selected Commercial Banks in Kenya

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Chapter one. Introduction

1.1 Background of the Study

Competitive advantage ensures that the firm survives and is placed in a prominent position in the market (Allan 2019). Thus, it is important for firms in an industry to develop competitive advantage over its competitors. According to De wit and Meyer (2010), a firm has a competitive advantage when it has the means to edge out and outsmart rivals when contesting for the favour and following of customers. Schermerhorn et al. (2014) says a competitive advantage comes from operating in successful ways that are difficult to imitate. Competitive advantage in banking sector as a broad concept deals with business re-engineering process (BRP) that will put the banks in a lead among other competitors within their sector (Agha, Alrubaiee & Jamhour, 2016). It specifically addresses what the banks have in stock that will achieve an advantage in the competitive market. In these stances, constructs like strategic planning, competitive intelligence, corporate social responsibility, innovation and creativity are used as synonyms to competitive advantage (Diab, 2014). On another hand, competitive advantage is seen as a performance construct that shows a phenomenon of organizational progress. In such cases, constructs like organizational performance, operational efficiency, financial performance, financial sustainability, organization creativity, and innovation (Perren, 2013) have also been used in describing competitive advantage (Prescott, 2014).

A competitive advantage can only be achieved and sustained after careful examination of strategy and the strategic management process. A strategy is the direction and scope of an organization over the long term, which achieves an advantage in a changing environment through its configuration of resources and competencies with the aim of fulfilling stakeholders” expectations (Johnson, Scholes, &Whittington, 2018). By strategy, managers mean their large-scale, future-oriented plans for interacting with the competitive environment to achieve company objectives.

The ability to outperform competitors and produce above-average profits lies in the pursuit and execution of an appropriate business strategy (Yoo, Lemak& Choi, 2016). The growth and diversity in the international business has brought about new challenges and heightened the competitiveness of firms across the globe and to remain relevant, firms have been forced to re-examine themselves internally in order to improve their performance. This has resulted in greater attention to analyzing competitive strategies under different environmental conditions. According to the resource-based view theory, the firm is regarded as a unit of resources and capabilities. The acceptance of this concept has prompted interest in identifying the nature of these various resources and in evaluating their potential to generate a competitive advantage (Lopez, 2015). Indeed according to Day and Lichtenstein (2016), many firms have spent vast amount of resources in order to improve their competitiveness and sustainability by looking at their internal processes.

A firm’s ability to seek and maintain a competitive advantage rests on its ability to acquire and deploy resources that are coherent with the organization’s competitive needs and as such, alignment requires a shared understanding of organizational goals and objectives by managers at various levels and within various units of the organizational hierarchy. However, most recent research suggests that firms may improve the value of their established competitive advantage through their strategic orientation, business structure and information technology (Stewart, 2017).

The concept of strategic fit began with the research of Skinner (1969). He suggested that companies should tailor their production systems to perform the tasks that were vital to corporate success and consistent with the corporate strategy (Wang and Shyu, 2008). Strategic fit, also referred as strategic alignment, has received significant attention in literature. Strategic fit has been conceptualized in various ways. This conceptualization implies that high level of strategic fit is advantageous; therefore, an organization’s fit should be maximized. The search for strategic fit has been a core concept in normative models of strategy formulation (Zajac et al., 2000). Strategic fit expresses the degree to which an organization is matching its resources and capabilities with the opportunities in the external environment. The matching takes place through strategy and it is therefore vital that the company have the actual resources and capabilities to execute and support the strategy. Dess and Lumpkin (2003) assert that the strategic fit process involves management of all other internal elements within an organization to ensure that the implementation process is successful. Miles and Snow’s classification of the strategic fit is as the following: Defenders: aiming at stability and defending a narrow range of products within a narrow market segment; Prospectors: searching for new product and market opportunities; Analyzers: seeking to minimize risk while seizing opportunities, a balanced approach and Reactors: inconsistent and unstable, simply reacting to the environment (Sadler, 2013).

Scholars of contingency theory argue that firms must have an alignment of internal-external resources, strategies and typical patterns in order to achieve successful results. For example, Powell (1992) emphasizes that successful results are achieved through fit between endogenous design variables such as organization structure and exogenous context variables such as environmental uncertainty and organization size routine. The importance of strategic fit is also underscored in resource-based view (RBV) study. According to the RBV viewpoint, firms generate profits to the extent that they accumulate rent-producing resources that, in addition to providing economic value, meet the tests of scarcity, imperfect imitability, and imperfect trade ability in factor markets (Barney, 1986a, b; Dierickx& Cool, 1989; Peteraf, 1990). The ability to align corporate resources to fit becomes important in order to meet these tests. Thus, the need to analyze effect of strategic fit on competitive advantage of commercial banks.

In addition, some scholars have been theorizing on the cognitive capabilities that can build a competitive advantage, whereas others have been calling for more empirical evidence for the role of individuals and their patterns of interaction (Coff&Kryscynski, 2014; Foss, 2014; Gavetti, 2015; Winter, 2013). In strategic management, the term ‘capability’ refers to the capacity to perform a function or activity in a generally reliable manner when called upon to do so (Helfat and Winter, 2014). The capacity to reliably perform an activity of some type implies only that a capability meets a minimum standard of acceptable functionality (Helfat et al., 2017). As Winter (2013) notes, how well a capability performs its intended function is a matter of degree. Capabilities develop in part through practice. As an individual or an organization gains experience performing an activity, the capacity to perform this activity again in the future tends to improve, particularly early in the development of a capability (ZolloandWinter, 2012)

Research in strategic management has most commonly analyzed cognition, including heterogeneity of cognition among managers, in terms of information structures and mental maps (Gary and Wood, 2014). Adner and Helfat (2013) recognized early on that some managers may have ‘dynamic managerial capabilities’ with which to build, integrate, reconfigure, and competitively reposition organizational resources and capabilities. Adner and Helfat (2013) also observed that manager cognitive capabilities depend in part on managerial cognition. To date, the cognitive underpinnings of dynamic managerial capabilities remain largely unexplored (Eggers and Kaplan, 2013). This study will focus on how cognition may help to explain why some top managers have more effective capabilities than others for choosing a strategy that fit in responding to the demands of an evolving environment

1.1.1 Global Perspective on Strategic Fit /Choice, Cognitive Capabilities, and Competitive Advantage

In Korea, Yin and Zajac (2004) in their study of fit between strategy and governance systems, posited that fit brings about superior performance and that it is significant. Loius and Francois (2007) from a contingency perspective, did a survey of 107 canadian manufacturers, analyzed data through correlation analysis and results indicated strategic fit has positive performance outcomes for manufacturing SMEs in terms of growth, productivity and financial performance, however the study considered only profile deviation perspective of fit.

In China, ShichunXu et al., (2006) did a study on multiple perspectives of strategic fit (moderation, mediation, profile deviation, and covariation) explored their effects on firm performance. Empirical results based on 206 MNCs supported the mediation, profile deviation, and covariation perspectives, but they failed to confirm the moderation perspective. in France, Amadi (2004) highlighted that in the manufacturing industry, the importance of strategic alignment is no longer an issue for debate, but rather a foregone conclusion. Unlike manufacturing strategy very few authors have contributed to strategic fit (or alignment) in domain of competitive advantage.

Narasimhan et al. (2010) investigated fit between strategic integration and manufacturing capabilities. Chi et al. (2009) studied the alignment between business environment characteristics, competitive priorities, supply chain structures, and firm in US textile industry. In Germany, Calantone et al. (2012) conclude that the strategic fit of marketing and operations opens up important two-way communications: marketing will know more about operations, and can also communicate credibly with operations about its needs (such as new product development and range of product offering). In Thailand, strategic fits reflects an outward-looking view of the fit between strategic choices and environment and strategic orientation as a strategic choice should lead the way firms get, allocate, and deploy resources to generate dynamic capabilities (Zhou and Li, 2017).

Bank in Italy, see strategic fit as values that direct and influence the activities of an organization and generate the behaviors intended to ensure its viability and performance (Hakala, 2011). In Thailand, Theodosiou, Kehagias and Katsikea (2012) indicated that the organization is maximizing its performance by implementing strategic fit with other orientations that are appropriate for its environmental conditions and organizational characteristics. Some scholars relate that with activities, such as describing strategic fit as principles that guide and impact the activities of an organization to renew an excellent behavior for preserving the organization and improving performance (Deutscher et al., 2016; Ho, Plewa& Lu, 2016)

Empirical evidence has documented the effects of managerial cognition on efforts directed toward strategic change. In his study of NCR, Rosenbloom (2010) demonstrated that managerial cognition, specifically the ways in which top management conceived of NCR’s business, had a critical impact on both NCR’s difficulty in transitioning to mainframe computers and its eventual success in doing so. Taylor and Helfat (2013) also found that the cognition of top management helped IBM in its successful transition to mainframe computing. In contrast, Tripsas and Gavetti (2010) documented that top management cognition, in terms of how executives conceived of their business, prevented Polaroid from successfully adapting as the camera industry shifted to digital imaging technology. Similarly, Helfat et al. (2017) documented the way in which the mindset of Rubbermaid’s CEO contributed to the company’s difficulty in adjusting to a changing marketplace. Additionally, in a study of the typewriter company Smith-Corona, Danneels (2014) showed that top management’s misunderstanding of which company resources had value, and of the potential application of company resources to new markets, contributed to the company’s demise

Based on the above past studies on Strategic Fit have been done in the developed world’ specifically focusing on firm performance (Loius and Francois, 2017; Yan and Zajac, 2014). Other studies have also focused on sectoral-level constraints, attributing the poor performance to reduced funding (Wangenge-ouma, 2018) and in-effective governance (Mwiria et al., 2016).

1.1.2 Local Perspective on Strategic Fit /Choice, Cognitive Capabilities, and Competitive Advantage

In Nigeria, Olufemi and Olayinka (2013) examines the impact of strategic fit on organizational performance in the African textile industry in Nigeria. However, there are cautions that being too customer-focused can lead to lack of focus and anecdotal evidence suggests that it may be better to ‘ignore your customer’ when developing new products. Building on the market orientation research stream, the authors examine the impact of three alternative strategic orientations—customer orientation, competitor orientation, and product orientation—on a variety of subjective and objective measures of performance in an organization, which is marked by high rates of innovation and largely unpredictable customer preferences. The results indicate that the association between strategic fit and performance varies depending on the type of performance measure used. However, the most unambiguous result is that a customer orientation exhibits a negative association with sale.

In Malaysia, Nasir and Mohd (2013) highlighted the importance of the concept of strategic fit or ‘strategic directions implemented by a firm to create proper behaviors for the continuous superior performance of a business. Similarly, in Ghana, Nasution et al, (2014) Strategic fit is related to the decisions that businesses make to achieve superior performance. Strategic orientation is an organization’s direction for reaching a suitable behavior in order to attain superior performance. Competitor and customer orientations are the most important for organizations to achieve long term success.

Locally there are related studies on Competitive Advantage and strategy alignment for example Asava (2009) study on Knowledge management for Competitive Advantage of Commercial Banks in Kenya, Kitua( 2009) studied The internet as a source of competitive advantage for Insurance Finns in Kenya, Muketi (2009) studied Technological Resources for Sustainable Competitive Advantage in manufacturing, Njeri (2009) researched on Direct sales strategy and Competitive advantage of Commercial Banks in Kenya, Nyatichi (2009) studied Competitive Strategies adopted by Multinational banks in Kenya, Kimari (2010) wrote about Sustainable competitive advantage in the mobile telephony sector in Kenya. Oori (2010) studied Strategies employed by Commercial Banks in Kenya to build Competitive advantage and Mbewa (2010) studied Factors employed by Barclays Bank of Kenya to achieve competitive advantage. ‘ From the studies on Competitive Advantage of Commercial Banks, it is found that Competitive advantage is important for survival of Commercial Banks. The studies also indicate that different strategies may be used by different commercial banks depending on their size, presence and market share. However no study has been carried out on effect of strategic fit on Competitive Advantage of Commercial Banks in developing countries.

1.1.2 Commercial bank of Kenya

As at 31st December 2012, the banking sector consisted of the Central Bank of Kenya as the regulatory authority, 43 commercial banks and 1 mortgage finance company, 5 representative offices of foreign banks, 8 Deposit-Taking Microfinance Institutions (DTMs), 2 Credit Reference Bureaus (CRBs) and 112 Forex Bureaus. Out of the 44 banking institutions, 31 locally owned banks comprise 3 with public shareholding and 28 privately owned, while 13 are foreign owned. During the year 2012, banks increased their branch network by 111, which translated to a total of 1,272 branches. The increase is an indication of increased provision of banking services. The banking sector registered an increase in staff levels by 1580 from 30,056 in 2011 to 31,636, representing an increase 15 of 5.3 percent. All the cadres of staff increased with the exception of supervisory level which reduced by 84. The banking sector was sound and stable and recorded improved performance in 2012 as indicated by total net assets which increased by 15.3 percent from Ksh 2.02 trillion in December 2011 to Ksh 2.33 trillion in December 2012, with the growth being supported by the increase in loans and advances. Customer deposits grew by 14.8 percent from Ksh 1.49 trillion in December 2011 to Ksh 1.71 trillion in December 2012. Pre-tax profit increased by 20.6 percent from Ksh 89.5 billion in December 2011 to Ksh 107.9 billion in December 2012. The growth was largely attributed to income generated by increased loans and advances coupled with regional expansion initiatives. However, the ratio of non-performing loans to gross loans increased from 4.4 percent in December 2011 to 4.7 percent in December 2012 (Central Bank of Kenya Bank Supervision Annual Report, 2012).

There are 43 commercial banks in Kenya. These banks have realized that increased competition in this industry dictates the development of strategies to compete so as to enhance performance. The strategies developed will also lead to the bank survivals. Banks without clear strategies will find it hard to survive in this market. The banking environment in Kenya has drastically changed due to government regulations and stiff competition. According to Dulo (2006), each bank should know how to venture into the market and thereafter form, guard and uphold its competitiveness.

1.2 Statement of the Problem

Competitive advantage comes from an ability to meet customer needs more effectively, with products or services that customers value more highly or more efficiently at lower costs. Meeting customer needs more effectively can translate into the ability to command a higher price, which can improve profits by boosting revenues. Meeting customer needs more cost effectively can translate into being able to charge lower prices and achieve higher sales volumes, thereby improving profits on the revenue side as well as the cost side. Furthermore if a company’s competitive edge holds promise for being sustainable (as opposed to just temporary), then so much the better for both the strategy and the company’s future profitability. What makes a competitive advantage sustainable, as opposed to temporary, are elements of the strategy that give buyers lasting reasons to prefer a company’s products or services over those of competitors – reasons that competitors are to nullify or overcome despite their best efforts(Thompson, Petraf, Gamble & Strickland, 2014).

The products offered by Commercial Banks are generic hence making the competition very stiff. In order for the firms to survive they need to employ a unique strategy which is difficult to imitate and is sustainable. In order to remain competitive Commercial Banks in Kenya over the years have structured their products to suite the market needs. We have also seen acquisitions like Commercial Bank of Africa acquiring ABN Amro Bank. Equatorial Commercial Bank acquiring Southern Credit Bank. Cfc Bank merged with Stanbic Bank to form CfCStanbic Bank all in a bid to strengthen their competitiveness. Commercial Banks have gone through phases as they try to ensure their survival: Barclays Bank closed several Branches upcountry only to try and tap into that market again. Building Societies like East African Building Society have evolved to a Commercial Bank. We have also had several Banks exit the market examples include Delphis Bank, chase bank, imperial bank, Dubai bank, Euro Bank. Kenya Post office savings bank, all which collapsed with Depositors funds. For Commercial Banks to survive, they need to ensure that they have identified a strategy which is right products and fit for the market and created a sustainable structure to support their competitive advantage.

Thus, the strategic fit could be relevant competitive advantage of banks in Kenya, however, Information on strategic fit and competitive advantage of banks is not known. In addition, studies document that top management cognitive capabilities are associated with heterogeneity of strategic fit efforts and outcomes. However, relatively little of this research has focused for indirect on direct of cognitive capabilities on competitive advantage ( Eggers and Kaplan, 2009 and Gavetti, 2012.). Thus this study focuses on moderating effect of cognitive capabilities that enable mental activities, elaborate on the heterogeneity of these capabilities, explain how they underpin dynamic managerial capabilities and assess their potential impact on competitive advantage of banks.

1.3 Research Objectives

1.3.1 General Objective of the Study

The general objective of the study will be to determine effect of cognitive capabilities on the relationship between strategic fit /choice and competitive advantage in Commercial Bank in Kenya

1.3.2 The Specific Objectives the Study

This research endeavored to achieve the following specific objectives:

To determine the effect of defender strategy on competitive advantage in Commercial Bank in Kenya
To determine the effect of prospector strategy on competitive advantage in commercial bank in Kenya
To determine the effect of analyzer strategy on competitive advantage in commercial bank in Kenya
To determine the effect of reactor strategy on competitive advantage in commercial bank in Kenya
To determine the moderating effect of effect of cognitive capabilities on the relationship between strategic fit (defender strategy, prospector strategy, analyzer strategy, and reactor strategy ) and competitive advantage in Commercial Bank in Kenya

1.4 Research Hypotheses

Based on the stated specific objectives, the following null hypotheses will be derived and tested.

Ho1 There is no significant effect of defender strategy on competitive advantage in Commercial Bank in Kenya
Ho2 There is no significant effect of prospector strategy on competitive advantage in commercial bank in Kenya
Ho3 There is no significant effect of analyzer strategy on competitive advantage in commercial bank in Kenya
Ho4 There is no significant effect of reactor strategy on competitive advantage in commercial bank in Kenya
Ho5a Cognitive capabilities does not significantly moderate the relationship between defender strategy and competitive advantage in Commercial Bank in Kenya
Ho5b Cognitive capabilities does not significantly moderate the relationship between prospector strategy and competitive advantage in commercial bank in Kenya
Ho5c Cognitive capabilities does not significantly moderate the relationship between analyzer strategy on competitive advantage in commercial bank in Kenya
Ho5d Cognitive capabilities do not significantly moderate the relationship between reactor strategy on competitive advantage in commercial bank in Kenya

1.5 Justification of the Study

This study seeks to establish the contributions and importance of its outcomes to a number of players in the banking industry.This research is significant in several ways and it contributes to the literature both in terms of theory and practice. By empirically investigating the effects of cognitive capabilities on the relationship between strategic fit and competitive advantage in Commercial Bank in Kenya, this thesis proposal anticipates: – that the following individuals, groups and institutions will benefit from the study findings

1.5.1 To Commercial Banks

Commercial Banks can be able to find out whether they have adopted the best strategy compared to theirpeer. They shall be able to find out what they are doing right and continue doing it or what they are doing wrong and what they need to do so as to give them an edge. Once the Commercial Banks identify the types of strategy fit and how they affect competitive advantage they shall be able to position themselves well within their environment

1.5.2 To the Investors

They will benefit directly because the study will enable investors devise strategies that will ensure the competitive advantage is sustained. This will translate to a high return on investment for the investors.

1.5.3 To the Government and policy makes

The government through its agencies like the central Bank of Kenya will also benefit because the findings of this study will help them in the formulation of policies to regulate the conduct of players in the banking industry in Kenya.

1.5.4 Competitors

They also stand to benefit from this study because it will reveal to them some of the determinants that have made some banks have a continued sustained advantage. They can learn from this and try to get hold to some of those sources and apply some of the strategies used by superiors banks so as to better compete in the banking industry in Kenya.

1.5.5 To theory, scholars, and academicians

This study will add to existing knowledge on types of competitive advantage enjoyed by Commercial Banks in a developing country like Kenya and how strategic fit affect competitive advantages. Scholar’s academicians and researchers can use the study as a reference point in evaluating moderating effect of cognitive capabilities on relationship between strategic fit and competitive advantage of Commercial Banks in Kenya. In general This study seeks to contribute further to this wealth of knowledge and find out other strategic fit that can be adopted to gain competitive advantage. Commercial banks and other organizations shall be able to borrow from these other factors while formulating their strategies.

1.6 Scope of the Study

The current study will only focus on effects of cognitive capabilities on the relationship between strategic fit and competitive advantage in Commercial Bank in Kenya. The study will target top management employees from the 47 commercial banks registered under Central Bank of Kenya. The study will choose four strategic fit dimensions based on Snow and Mill Model which includes analyzer strategy, prospector strategy, defender strategy and reactor strategy. The study will be conducted for a period of four months based on university postgraduate calendar.

Conceptual Framework

(Independent variables ence) (Dependent variable) (Moderating variable)(Cognitive capabilities) (H5aa) (H2) (H01) (Reactor strategy) (Competitive advantage) (Prospector strategy) (Defender strategy) (Analyzer strategy) (Figure 1: Conceptual Framework)(H5ca) (H5ba)(H05d)(H3)(H4)

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