Cost Leadership Strategy and Performance of Milk Processing Firms in Kenya
Performance of milk processing firms in Kenya continues to be impended by cost related performance challenges. It is hypothesized that cost leadership strategy could address these challenges through economies of scale, economies of scope and operational efficiency. However, available literature does not adequately address how the milk processors employ this strategy due to lack of focus on cost management and its effect on performance. Studies done in other sectors have arrived at contradicting conclusions in regard to the effect of drivers of cost leadership. This study was therefore an investigation of the effect that cost leadership strategy has on performance of milk processing firms in Kenya. The specific objectives included to assess the effect of economies of scale, economies of scope and operational efficiency on performance of milk processing firms in Kenya; to establish the mediating effect of competitive advantage and the moderating effect of macroeconomic environment on the relationship between cost leadership strategy and performance of milk processing firms in Kenya. The study was anchored on the resource based view supported by dynamic capability theory, the balanced scorecard model, contingency theory and stakeholder theory. The study adopted a positivist approach and used descriptive and explanatory research designs. The study’s population encompassed all the 29 milk processing firms that were in operation between June 2016 and June 2019 and registered with Kenya Dairy Board. A census survey was conducted where the unit of analysis was milk processing firm and unit of observation was the functional area in the processors. Five functional areas comprising of executive, operations, production, finance and marketing were identified for each milk processor from which 194 respondents were drawn. Both primary and secondary data was used in the study. Primary data was obtained using self-administered semi-structured questionnaires whereas secondary data was collected through review of reports on cost of debt financing and inflation levels from Kenya National Bureau of Statistics and Central Bank of Kenya. Face and content validity was ensured through improvements following the pilot test while construct validity was guaranteed through review of relevant literature and suggestions from experts. Reliability was tested using Cronbach’s alpha. Descriptive statistics were used to summarize data in terms of percentages, means and standard deviations. Multiple regression analysis was used to test hypothesis and draw conclusions. The results were summarized in narratives and tables. The findings indicated that economies of scale, economies of scope and operational efficiency had positive and statistically significant effect on performance of the milk processing firms. Competitive advantage was a partial mediator while macroeconomic environment did not moderate the direct relationship. The study concluded that for firms in the milk processing industry to perform better, they need to pursue relevant approaches to lower costs. It thus has both practical and theoretical value and recommends that milk processors pursue bulk production and invest in related businesses, adopt robust promotional efforts, encourage bulk purchases and innovate to support broader operations. The government as well as other regulatory bodies should implement support programs for large scale operations, facilitate licensing, patent innovations by milk processors, ensure conducive climate for dairy farming and implement credible livestock disease fighting programs. It recommends that further studies include small home-based milk processors not registered with KDB, examine other factors besides cost leadership strategy that affect performance of milk processors and consider other indicators of macro-economic environment like exchange rate and GDP growth that might moderate the direct relationship.