Relationship between Threat of Substitutes and Competitive Advantage of Large Multinationals in Kenyan Beverage Industry

Abstract

The threat of substitutes is determined by factors like brand loyalty of customers, close customer relationships, switching costs for customers, the relative price for performance of substitutes and current trends. The dimensions on which competition takes place, and whether rivals converge to compete on the same dimensions, have a major influence on profitability. The beverage industry as a whole faces challenges as a result of the slumping economy and changes in consumers' consumption patterns due to increased health consciousness. There is fierce competition that forces companies to diversify their product range in an effort to better satisfy the customers. Organizations thus, have been forced to implement changes to align themselves with the changes in the environment as well as to realize their set goals.

This paper sought to answer how do substitute products affect competitive advantage of large multinational firms in Kenya? A descriptive survey design was used to achieve the purpose of this paper reflecting the philosophy of positivism. This paper adopted a cross sectional survey research design. The population was the Beverage Industry with the target population being drawn from the three Beverage Companies in Kenya totalling 230. Yamane's (1967) formula was used to calculate sample sizes of the respondents. A proportional sample of 146 respondents (60 from EABL, 50 from Coca Cola and 36 from Nestle Foods Ltd) was selected. Questionnaires were used as the main instrument for primary data collection since the paper was concerned with variables that cannot be directly observed such as views, opinions, perceptions and feelings of the respondents. The analysis was based on 136 respondents who completed and returned the questionnaires forming a response rate of 93.2%. Descriptive statistics was used to generate frequencies and percentages as well as mean scores and standard deviation. Inferential analysis was also used to analyse findings which aimed to establish the relationship between the independent variables and the dependent variable mainly Chi-square statistics, Karl Pearson's Product Moment Correlation analysis and Bi-Variant analysis.

This paper finds that availability of a substitute goods and services threat influences the profitability of a sector because buyers can decide to pay for the substitute commodity or service as an alternative to the business' commodity or service. The paper concludes that substitute product constrains the ability of firms in an industry to raise prices. The paper recommends that since substitutes are posing challenges to the firms' products, the multinational firms in the Kenyan beverage industry should research and understand the growing health trend of its consumers and innovate appropriately, realize the world is becoming a global village and adapt by taking advantage of the growing middle class through dynamic product propositions.