Influence of Selected External and Internal Environmental Factors on Strategic Management Practices among Commercial Banks in Kenya

Abstract

The study investigated selected external and internal environmental factors influencing strategic management practices in commercial banks operating in Kenya. The selected external factors were regulatory framework and competition while internal factors were organizational structure and resource allocation. The objectives were 1) to examine the role of government policies in influencing strategic management practices, 2) to determine the role of competition in influencing strategic management practices, 3) to establish the impact of competition in influencing strategic management practices, and 4) to determine the impact of resource allocation in influencing strategic management practices in commercial banks. The study used descriptive correlational since the study had variables whose relationships formed the basis of the prospective investigation. A target population of 124 was established and from which a sample size of 96 respondents was drawn from the four participating banks –Equity Bank, KCB Bank, Family Bank, and NIC Bank. Findings on the first objective suggested that the commercial banks suffered immensely from government regulation that negatively affected their strategic management practices. The mean score for government involvement was 2.268 and was interpreted as poor. The government was found to impose unpopular bank and interest rates on the banking sector. The effect of government involvement was found to be at an R Squared coefficient of 0.243 and was thus interpreted as weak. Resource allocation scored a very high mean of 4.667, which was interpreted as very good. The analysis also indicated that the effect of resource allocation was positive and significant but very weak (R2=0.107, p=0.001). Resource allocation was particularly found to be important for the marketing function. It was also observed that resource allocation enabled the strategic expansion of the four commercial banks. It was found that the mean of organizational structure was 3.984, which was interpreted as average. The analysis also established that organizational structures have a weak but significant effect on strategic management practices of the banks (R2=0.164, p=0.000).Organizational structures were found to be crucial as they acted as frameworks for the implementation of strategies. Analysis of findings from the fourth objective suggested that competition had an average effect on strategic management practices of the banks at a mean score of 3.25. The effect of competition was computed to be at an R Squared coefficient of 0.366, which was interpreted as high. Competition from substitutes such as products from microfinance and Fintech firms were found to be very high. It was therefore concluded that all selected internal and external environmental factors had a significant effect on strategic management practices at the banks but to varying degrees. Government policies had a negative effect on the strategic management practices of commercial banks. On its part, resource allocation had a significant effect on strategic management practices. The effect of organizational structures on strategic management practices meant that commercial banks should endeavor to streamline their structures to conform to strategic requirements and expectations. Competition was the most influential factor and needed to be kept in check at all times lest it results in undesirable outcomes. Recommendation on the first objective suggested repealing of the interest rate-capping regulations. The law that came into effect in the year 2016 has worked to negatively affect the strategic management practices of commercial banks. It has interfered with the free competition that had come to characterize the industry then. The issue of resource allocation and its effect on strategic management practices as envisaged in the second objective should be mitigated through more disciplined budgeting. Specifically, budgeting to involve all relevant stakeholders. It will give the budget a more acceptable and inclusive approach that is bound to bear better fruits in terms of its effectiveness during implementation. On the third objective concerning the effect of organizational structures on strategic management practices, a change of organizational structure should suffice. The adoption of a flat based organizational structure will help the commercial banks in closing the gap between seniors and their subordinates. It will also alleviate the effects of bureaucracy and increase delegation of duties to the appropriate centers. Competition issues could be mitigated through the use of technological innovation. It is clear that Fintech companies have only proven to be competitive because of their high technological sophistication that gives clients convenience and faster service delivery. Banks could adopt this strategy and stay ahead of the competition even from microfinance institutions. If these recommendations are realized, there is a high likelihood that the integrity of strategic management practices of commercial banks will improve.