EFFECT OF DIVERSIFICATION ON THE PERFORMANCE  OF SELECTED MEDIUM SCALE ENTERPRISES IN MARARABA

EFFECT OF DIVERSIFICATION ON THE PERFORMANCE  OF SELECTED MEDIUM SCALE ENTERPRISES IN MARARABA

CHAPTER ONE

INTRODUCTION

1.1       Background of the Study

In the context of turbulent business setting, organizations have to learn to acclimatize themselves to remain very competitive over time (Auster et al., 2011). Consequently, intentional and organized learning has to be there to an ongoing systematic shift between the business setting and the organization‟s strategies that result in efficiency and effectiveness improvement so as to increase their performance and achieve long term growth (Grant, 2008). He further argues that for organizations to remain successful businesswise, understanding the challenges, opportunities and threats provided by the external setting is needful, for the organization to take advantage of the opportunities and avoid threats by applying appropriate response strategies as well as developing the diversification strategies that will enhance their performance, survival and competitiveness.

Diversification has been a key strategy employed by organizations in an attempt to improve their attractiveness and performance. In the banking industry, diversification boosts the performance as it helps in initiating actions which leverage in the existing internal as well as external resources which in turn support other venture hence complement the overall performance of the organization. According to Thomson et al. (2012), diversification helps organization build the urgency and the need of improving shareholders value by using existing resources. Ansoff (1965) argued that diversification is manifested through product development, market development and market penetration representing product market structure changes.

The medium scale enterprises has been cited as one of the sector of the economy in which cut throat competition thrives. Just like other sector of the economy, medium scale enterprises have in essence been provoked to better their performance in order to remain significant in the market. Diversification as espoused by Miller (2009) in the Transaction Cost Economics theory has been widely used by firms world over to ensure there is vertical integration and competitors are blocked thus relevancy in the market place and as well enhancing their absolute performance.

According to Rhonda (2010), there are different types of business strategies that a firm can employ in planning which are the growth strategy, product differentiation, entry, exit, marketing and acquisition strategies among others. Commercial banks also apply different strategies depending on their objectives and level of development; these strategies play critical roles in banks‟ achievement of their mission and objectives. This may include capital formation, new enterprises investments, trade and industry promotion, agriculture sector development among others (Dess, 2005).

According to Murimiri, (2009), performance is the extent to which an investment is profitable. Basically, performance is the criteria through which an organization determines its capability to survive in the corporate world. McCann (2004) argued that organization performance is related to the efficiency and effectiveness of the firm while Hofer (1983) defined performance as the background concept related with the phenomenon being studied. Maxine, (2012) argued that banks are the intermediaries in the transactions between money demanders and suppliers at a given consideration.

According to March and Sutton (1997), the three sources of variations in firm performance include analytical models that are usually used, information concerning the apparent determinants of variations in performance and finally the theoretical ideas. Financial measures of organizational performance include profit, profit ratios (ROI, EPS, NPR), market share and revenue growth (Pandey, 1999). There are three economic objectives which describes an organization‟s performance as given by strategic direction (Pearce & Robinson, 2007). These include existence in the market, progress and prosperity.

1.2       Problem Statement

There has been increased competition among several medium scale enterprises in quest for survival over the last few years coming from improved transformations among the key players and new participants into the market (Pearce & Robinson, 2007). The sector has witnessed entrance of many business enterprises, small and medium scale enterprises have provide several services to the growth of the economy in both rural and urban areas (Kamau, 2009).  Corporate strategy of diversification either in product line, subsidiary, income or regional line is crucial for the firms to compete favourably and survive on the long run. Most empirical research found a positive relationship between diversification and corporate performance. But due to self-interest, inexperience, incompetence and opportunistic behavour of most managers, most diversification strategy leads to negative or low performance of companies in Nigeria (Ade, 2010). Most of studies on this area were conducted in developed countries such like; United States of America (USA) Germany, UK, and China. Studies that have explored the subject of diversification and financial performance in Nigeria are seen to be very limited, and have not cover that small and medium scale enterprises, thus this study seek to examine the effect of diversification on the performance of selected medium scale enterprises in Mararaba.

1.3       Objective of the Study

The general objectives of the study is to examine the effect of diversification on the performance of selected medium scale enterprises in Mararaba.

The specific objectives of the study is to:

1. To ascertain the effects of product diversification on performance of selected medium scale enterprises in Mararaba
2.  To determine the effect of business subsidiary diversification on performance of selected medium scale enterprises
3. To examine the effect of diversification on the overall performance of selected medium scale enterprises in the study area.

1.4       Research Questions

1. What is the effects of product diversification on performance of selected medium scale enterprises in Mararaba?
2. What is the effect of business subsidiary diversification on performance of selected medium scale enterprises?
3. What is the effect of diversification on the overall performance of selected medium scale enterprises in the study area?

1.5       Statement Of Hypothesis

H0: Diversification has no significant effect on the overall performance of selected medium scale enterprises in Mararaba.

H1: Diversification has significant effect on the overall performance of selected medium scale enterprises in Mararaba.

1.5       Significance of the Study

Medium Scale enterprises will understand and appreciate the diversification strategies. Appropriate decisions will be made by owners and managers of Medium Scale enterprises following the studied strategies that have been executed by the Medium Scale enterprises thus successfully expanding their operations. Challenges experienced in the adoption and implementations of diversification strategies will also be made aware to the managers thus helping them in the making of appropriate adjustments countering these challenges and in the achievement of optimal performance.

The study will provide insights to regulators and policy makers on the diversification strategies enhancing the sector’s growth and functioning, which will help in regulation and policy formulation. Development new policies and reviewing of existing policies will be possible thus achievement of synergy in the banking sector.

The study will also be of paramount help to the private sectors in understanding and appreciating the potential of development small and medium scale enterprises. This is crucial because any cost inferences which will need to be catered for by customers in exchange for better service delivery, will be accepted without bargain.

1.       Scope of the Study

The scope of this research is limited to the effects of diversification on the performance of selected medium scale enterprises in Mararaba. The study is futher limited to Mr. Biggs Restaurants. The collection of data and its analysis shall be based on information gotten from Mr. Biggs Abuja alone as this topic has wide scope of to be covered.

1.8       Limitation of the Study

Certain Limitations were encountered in the course of this study. Key among these includes:

1. Unavailability of Data: One of the greatest challenges the researcher encountered in this study relates to access to and collection of data due to extreme data gaps and scarcity. This compelled the researcher to limit the study to Small and Medium Scale Business thus excluding Cottage and Micro Enterprises whose challenges though comparable, could be fundamentally different from those of SMEs.
2. Time and Funds: Another limitation of this study relates to time, funds and logistics constraints, which limited the intensity of the spread or area of coverage of the study. Even though SMEs are spread throughout the length and breadth of Nigeria with negligible concentrations in some States and less urban areas, this study focused largely on small and medium scale business
3. Resistance of Respondents: The researcher was also limited by the reluctance of some respondents to complete the questionnaires promptly and those who even failed to complete them at all. This thus limited the number of respondents involved in the study despite the researcher’s efforts and approaches to them explaining the potential benefits of the study to them.

1.9       Definition of Relevant Terms

1. Diversification: Diversification refers to a firm’s strategy of entering and competing in new product markets. Diversification allows firms to maximize value by enhancing the scope of markets and industries in which they compete and supply product offerings to newer customers (Purkayastha, Manolova, & Edelman, 2012).
2. Small Scale business: – Small scale business is any processing, serving or manufacturing industry with an investment in machinery and equipment below N500,000 (Waboi, 2012).
3. Management: – According to Akpala (2000) Management is the process of combing and utilizing an organization input (men, materials and money) by planning, organizing, directing and controlling for the purpose of producing output (goods and services).
4. Entrepreneur: – According to Hagen, an entrepreneur is an individual who conceives the idea of business, design the organization of the firm, accumulates capital, recruits labour, establishes relations with supplies, customers and the government and converts the conception into a functioning organization business.
5. Opportunity: An opportunity is a potential gainful situation that must be recognized and exploited; an opportunity has the qualities of being attractive, durable and timely. It is anchored in product or services which creates or adds value for its buyers or end users.
6. Development: This entails growth of the business, increases in goods and services and t he improvement of lives of the citizen.