The Influence of Industry Structure on Competition of Law Firms in Nairobi County

Abstract

The purpose of the study was to investigate the influence of the industry structure on competition of law firms in Nairobi County. The study identified a problem in the industry structure of the service industry in Kenya and narrowed its focus to the legal services industry. The study, guided by Porter’s Five Forces of Competition aimed to answer the three research questions; what is the influence of industry structure on rivalry? What is the influence of industry structure on new entrants? And what is the influence of industry structure on substitutes? In undertaking the research, the study adopted the descriptive research design in order to whether a relationship exists between Industry Structure and Competition. The target population of this study consisted of all law firms in Nairobi County which stood at one thousand four hundred and sixteen at the time the study was conducted. The research used probability sampling particularly simple random sampling technique from which a sample of fifty four respondents was sampled due to the homogenous nature of Law Firms in Nairobi. A structured questionnaire was used to collect the data for the research which questionnaire was subjected to descriptive statistics and inferential statistics which were used to show the relationship between the independent, competition of Law Firms and dependent, industry structure variables. The findings of the study are that overcapacity among law firms, growth of the industry among law firms, diversity of competitors among law firms and product differences among law firms are major factors that determine competition in the industry. The study also finds that among the factors of industry structure influencing new entrants in the legal industry, the most determinant factors were brand identity affects new setup firms and capital is a hurdle for new firms. The study further finds that price performance threat to legal industry and clients in legal industry are price sensitive are the most significant factors influencing substitutes in the legal industry among other factors which comprised of the number of alternatives to legal services is increasing. The regression analysis established that taking all factors into account (rivalry, threat of new entrants and threat of substitutes) constant at zero, industry structure will be twenty two point two eight one. The study set the independent variables as rivalry, threat of new entrants and threat of substitutes and the industry structure as the dependent variable. The three independent variables explain only sixty percent of the Industry Structure which indicates the need for further studies on other factors influencing the Industry Structure. The study found that rivalry had the lowest association to the industry structure with a correlation coefficient of zero point zero three two. This may suggest that the existence of statutory regulation of the legal industry curtails market forces regulating competition. It however supports the thought that price competition is not greatly reliable in achieving competition goals. The Industry found that fixed costs of firms operating in the industry were relatively high thereby curtailing rivalry. Conversely the study also found that the industry was facing overcapacity which in itself would propel rivalry but seems not to have had the expected effect. Similarly, the study found that the industry had relatively low switching costs. Of the three independent variables the study found that, threat of new entrants had the highest association with a correlation coefficient of zero point three seven three. The study also found that there was a great extent in which existing firms would retaliate against new firms. The respondents did not perceive Government Policy as a barrier to enter the legal industry. The greatest challenge that faces new entrants into the industry according to the study is cost of acquiring new clients. This may mean that existing firms have strategies of retaining their existing clients or that the market is loyal to one firm because the study revealed that the legal industry does not possess proprietary product differences. Threat of Substitutes was found to be positively related to the Industry structure with a correlation coefficient of zero point zero seven nine. The respondents largely agreed that the number of alternative service providers had increased and this threat was real due to the fact that clients in the industry were price sensitive. There was a strong indication also that clients were likely to substitute products in the legal industry however this was not conclusive as most respondents were neutral about this aspect. The study concluded that overcapacity among law firms, growth of the industry, diversity of competitors and product differences have a significant influence on competition in the industry. The study further concluded that among the factors of industry structure influencing new entrants in the legal industry, the most determinant were brand identity and capital requirements. The study finally concludes that price performance and price sensitive clients are the most significant factors influencing substitutes in the legal industry. The study recommends for further ways in which law firms can remain competitive based on the three forces of competition. Regarding shifting rivalry to a firm’s favor, the recommendation is that product differentiation should be considered to allow a diversified product portfolio. New entrants into the industry are recommended to seek and utilize sources of funding in order to gain smoother entry into the industry. To have a competitive edge over substitutes, the study recommends that firms should set their prices in reference to market prices.