AN APPLICATION OF PORTER’S DIAMOND MODEL TO ANALYSE COMPETITIVENESS OF KENYA’S TOURISM INDUSTRY
By YVAHOGO, JAMES KARARI
IU J
f
A RESEARCH PROJECT REPORT SU BM ITTED IN PARTIAL FU LFILM E N T OF T H E R E Q U IR EM E N TS FOR THE A W A RD OF A DEGREE OF M A ST E R S IN B U SIN E SS AD M IN ISTR ATIO N (MBA), UNIVERSITY OF NAIRO BI
AUGUST 2006
DECLARATION
I, the undersigned declare that this is my original work that has not been submitted to any other college, institution or university other than the University of Nairobi for academic credit.
Signed........ ................................................ Date .W O V ^ .t ^ ..2 roO fa Name: James Karari Wahogo Reg. No: D/61/P/8600/2001 This project has been presented for examination with my approval as the appointed supervisor
Name: Mr. Jackson Maalu, Senior Lecturer, Department o f Business Administration, Faculty of Commerce
A B STR AC T
Tourism is the world’s largest export earner and an important factor in the balance of payments o f many countries. The tourism industry in Kenya has experienced tremendous growth contributing to the strengthening of the Kenya shilling against regional and international currencies. Tourism earnings grew by 27% from Kshs 38.5 billion in 2004 to Kshs 48.9 billion in 2005. The sector’s remarkable performance was attributed to rigorous marketing by government and private sector.
To achieve competitive advantage for its tourism industry, any country must ensure that its overall appeal, and the tourist experience offered, must be superior to that of the alternative destinations open to potential visitors. Existing and potential visitation to any county is inextricably linked to that country’s overall competitiveness, however that is defined or measured.
The research seeks to capture the main elements of competitiveness as highlighted in the Michael Porter diamond model in his book published in 1998 titled “The Competitive Advantage o f Nations”, while appreciating the special issues involved in exploring the notion of competitiveness as emphasized by tourism researchers. The Porter Diamond model has framework that can be used to measure the competitiveness of any industry within a nation. The set of indicators allows identification of the relative strengths and weaknesses of Kenya tourism industry and can be used by industry and Government to increase tourism numbers, expenditure and positive economic impacts.
From the study security, advertising and marketing, airports, natural attractions, and pricing, are the highest rated factors from the tourism stakeholders perspective. While the presence of
tourism clusters, demand by local, science and technology infrastructure, level of rivalry and rail network are at the bottom of the ranking in terms of their contribution to Kenya’s competitiveness as a tourist destination.
Finally, recognising the limitations of this study, it is recommended that further research be carried on qualitative aspects, using in depth interviews of the stakeholders. In addition it is recommend that the University o f Nairobi and the tourism industry establish formal collaboration where research as this could be used to guide policy by the government considering the importance of tourism in the country’s economy.
ACKNOWLEDGEMENT
This work would not have been completed without assistance from a wide variety of individuals. I would like to thank my supervisor Jackson Maalu for his invaluable guidance during the study, Jane Karanja for assistance in data collection, and finally fellow students who encouraged and assisted me throughout the MBA course in one way or another.
DEDICATIO N
This work is dedicated to Anthony, Joan and Lucy for foregoing precious time that I would otherwise have spent with them to allow me complete the course.
TABLE O F C O N T E N T S
ABBREVIATIONS...............................................................................................................IX CHAPTER 1:
INTRODUCTION...................................................................................... 1
1.1
Background ...........................................................................................................1
1.2
Statement of Problem ........................................................................................9
1.3
R esearch O bjective ........................................................................................... 10
1.4
S ignificance of the R esearch............................................................................ 10
CHAPTER 2: LITERTURE REVIEW 2.1
T he Concept of Competitiveness..................................................................... 12
2.2
C ompetitiveness and C omparative Advantage.............................................17
2.3
C ompetitiveness in T ourism ..............................................................................19
2.4
C omparative and C ompetitive Advantages in T ourism ..............................21
2.5
T ourism Competitiveness Monitor ................................................................. 22
2.6
K enya’s Ranking in G lobal Tourism .............................................................. 23
2.7
C ritic on Competitiveness Indexes................................................................. 23
2.8
Porter ’s Diamond M odel (1998).......................................................................24
2.9
J ustification of Using Porter Model to Analyze T ourism
Competitiveness................................................................................................................. 28 CHAPTER 3:
RESEARCH METHODOLOGY............................................................. 30
3.1
R esearch Design ................................................................................................. 30
3.2
Population ...........................................................................................................30
3.3
Sample size ...........................................................................................................30
3.4
Data collection and analysis..........................................................................31
CHAPTER 4: FINDINGS AND DISCUSSIONS................................................................ 33 4.1
Introduction .......................................................................................................33
4.2
Context of F irm Strategy and R ivalry ........................................................ 33
4.3
Factor Conditions............................................................................................. 36
4.4
Demand Conditions............................................................................................ 43
4.5
Related and Supporting Industries................................................................ 46
4.6
Summary Comparison of R esponses................................................................ 49
4.7
O verall Ranking in Importance...................................................................... 51
vii
CHAPTER 5:
CONCLUSIONS, SUMMARY AND RECOMMENDATIONS
53
5.1
S ummary and Conclusion ................................................................................53
5.2
R ecommendations for Further Research ...................................................54
REFERENCES....................................................................................................................56
APPENDICES................................................................6i
viii
Abbreviations
BCI
Business Competitive Index
FDI
Foreign Direct Investment
GCI
Global Competitiveness Index
GDP
Gross Domestic Product
IMD
International Institute for Management Development
ITC
International Trade Centre
KATA
Kenya Association of Travel Agencies
KATO
Kenya Association of Tour Operators
KEDS
Kenya Export Development Support Project
KHKC
Kenya Hotel Keepers and Caterers Association
RPED
Regional Programme on Enterprise Development, Department o fE Economics, Universities o f Nairobi/Gotenborg
UNDP
United Nation Development Program
WB
World Bank
WEF
World Economic Forum
WTO
World Tourism Organisation
WTTC
World Travel and Tourism Council
IX
CHAPTER 1:
1.1 1.1.1
INTRODUCTION
B ackground K en ya’s C om petitiveness
The vitality and resilience of Kenya’s private sector had traditionally been one of the country’s strengths enabling it to create a strong and diversified economy. In the beginning of 1990s, Kenya had second largest stock market in the continent, a dynamic tourism market, largest Africa exporter in tea and horticulture. Instead of capitalizing on these strengths, the past decade saw an erosion o f private sector’s ability to contribute economic growth (World Bank, 2004). The result was stagnation of private sector investment, deterioration of investor perceptions o f country risk, and sharp decline in Foreign Direct Investment (FDI) flow. As a result, Kenya’s competitiveness and participation in the world economy has deteriorated. The share of Kenya’s exports in world exports is now around 0.02 percent, half of what it was in the 1980’s. At the same time real exports per capita have increased five times in East Asia and doubled in South Asia and Latin America (World Bank, 2004).
Competitiveness means different things to different people.
It is helpful to consider
competitiveness at three different levels of aggregation, the firm, the industry or group o f industry and
the nation (McFetridge,
1995). Competitiveness is a complex concept
encompassing various elements, both observable and unobservable that can be difficult to measure. In addition, identifying the elements o f competitiveness itself is contentious because o f the conceptual problems embodied in the definition o f competitiveness. Competitiveness is a relative concept and its measure will vary, depending on the choice o f base year or base country.
1
To be competitive and generate profits superior to those o f their competitors is the central aim o f almost all firms. A company that is unable to achieve competitive advantage vis-a-vis its rivals will not be able to prosper and grow. The concept o f competitiveness can loosely be defined as doing things better and/or doing better things than your rivals. It deals with everything from productivity in production to the ability to innovate and the strength of marketing functions.
According to Lehmann (2004), Kenya has enormous potential for the development of small businesses if bureaucratic hurdles are removed, further, the country’s optimistic population and new reform-minded makes the country a perfect investment opportunity for foreigners looking to break the Africa’s growing market.
Although Kenya has attracted some foreign dollars through tourism and export based flower and tea industries, a majority of Kenyans remain mired in poverty. Although its future could be bright Kenya has no exploited its substantial political and economic assets in a way that will allow it to fully tap into international markets. Yet the country has key assets that should enable it participate in global economy. (Lehmann, 2004).
According to Lehmann (2004), in Europe most imported flowers originate from Kenya. Horticulture is the country’s fastest growing industry and is ranked third after tourism and tea in terms of foreign exchange earnings. He further observes, at a time when most investors were wary of committing money in Kenya, horticulture invited a lot of foreign investments. However, horticulture does not need to be the only shining star in Kenya’s global success. The country’s political openness places it in a good position to benefit from globalization (Lehmann, 2004)
Since the mid 1980s, Kenya has been under increasing pressure to strengthen its industrial competitiveness. This pressure is attributable to a number of factors including the on-going 2
globalization, the country’s entry into various regional integration arrangements, liberalization o f the economy to both domestic and external forces. In addition the government has declared its intention o f becoming a newly industrialized country by 2020. To achieve this goal its imperative to radically increase the country’s competitiveness and to expand its export market (Siggel et.al. 2000).
According to Siggel et.al (2000), the historical factors that contributed to lack of competitiveness include: the import substitution industrialization strategy after independence, that heavily protected local industries through tariff and non-tariff measures, exchange controls and import licensing, direct control o f pricing by the government; wweakness o f the country's infrastructure, and failure o f local industries to enjoy economies of scale after the collapse o f the East African Common Market in 1977.
The ability o f African countries to develop competitive manufacturing sectors depends on the quality of African business environments and labour forces relative to those of the export powerhouses o f the developing world (Eifert and Ramachandran, 2004). From an assessment o f Investment Climate Data collected by the World Bank, Eifet and Ramachadran are bale to identify major bottlenecks as microeconomic instability, policy uncertainty, poor access to finance, shoddy electricity service and governance. Other dimensions of the business environment are market structure, transportation, telecom, tax administration and regulatory quality. These bottlenecks have increased costs o f African economies and hurt competitiveness.
Porter(1998) argues that in the modem global economy, prosperity is nation’s choice. Competitiveness is no longer limited to those nations with favorable inheritance, rather, nations choose posterity if they organize their policies, laws an institutions based on productivity.
3
Why does a nation achieve international success in a particular industry? According to Porter( 1998), the answer lies in four broad attributes o f a nation that shape the environment in which local firms compete that promote or impede the creation o f competitive advantage. The Porter model for competitiveness in productivity and the business environment identifies four determinants, they are: Context for firm strategy and rivalry; Factor (Input) Conditions; Demand Conditions; and Related and Supporting Industries
The four factors are interrelated and form a diamond shape. The diamond is a mutually reinforcing system; hence the effect o f one determinant is contingent on the state o f others. Competitive advantage based on only one or two determinants is possible in natural resource dependent industries involving little sophisticated technology or skills. Such advantage usually proves unsustainable however because it shifts rapidly and global competitors can easily circumvent it. Two additional variables can influence the national system in important ways, and are necessary to complete the theory; these are government and chance (Porter 1998).
Porter (1998) asserts further, that firms gain competitive advantage where: Home base allows and supports the most rapid accumulation of assets and skills, sometime solely due to greater commitment: Home base afford better ongoing information into product and proceeds needs; and where goals o f owners, managers, and employees support intense commitment and sustained investment
The notion o f tourism competitiveness must be consistent with international competitiveness in business literature (Jonker, 2004).To achieve competitive advantage for its tourism industry, any country must ensure that its overall “appeal”, and the tourist experienee offered, must be superior to that of the alternative destinations open to potential visitors. Existing and potential visitation
4
to any county is inextricably linked to that country’s overall competitiveness, however that is defined or measured (Dwyer & Kim, 2003).
1.1.2 Tourism Many people believe that tourism is a service industry that takes care of visitors when they are away from home. Some restrict the definition of tourism by number o f miles from home, overnight stays in paid accommodations, or travel for the purpose of leisure while others think tourism should not be defined as an industry. Hunt and Layne (1991) acknowledge the problems o f defining tourism. They say that travel was most accepted term until 1897 and that since that time tourism is the accepted term used to singularly describe the activity o f people taking trips away from home and the industry which has developed in response to this activity. McIntosh and Goeldner (1986) say that tourism can defined as the science, art, and business of attracting and transporting visitors, accommodating them, and graciously taking care of their needs and wants. They also introduce the notion that tourism is interactive and that tourism may be defined as the sum of the phenomena and relationships arising from interaction o f tourists, business suppliers, host governments and communities in the process of attracting tourists and other visitors.
Tourism and travel related services are among the most tradable sectors. The account for about 11% of the world Gross Domestic Product (GDP) and employ about 200 million people worldwide. They also represent 8% o f total world receipts of goods and services according to the World Travel and Tourism Council (WTTC, 2003). Furthermore given that there are about 700 million international travellers per year, tourism and travel related sectors have become dynamic sources ot income and a major strategic sector for development in many countries especially in the global south (Sahli et all 2003).
5
Tourism is the world’s largest export earner and an important factor in the balance of payments o f many countries. Foreign currency receipts from international tourism reached US S 476 billion in 2000, outstripping exports o f petroleum products, motor vehicles telecommunications equipment, textiles or any other product or service (Goorochum & Sugiyarto, 2004). Further, travel and tourism is an important job creator, employing an estimated 100 million people around the world. Job creation in tourism is growing one and halftimes faster than any other industrial sector. The vast majority of tourism businesses are in small or medium sized, family owned enterprises (SM E’s). The Tourism industry provides governments with revenues through accommodation and restaurant taxes, airport user’s fees, sales taxes, park entrance fees, employee income tax and many other fiscal measures. Tourism stimulates enormous investments in new infrastructure, most of which helps to improve the living conditions o f local residents as well as tourists. Tourism development projects often include airports, marinas, sewage systems, water treatment plants, and restoration o f cultural monuments, museums and nature interpretation centres.
Tourism businesses and jobs are usually created in the underdeveloped regions of a country, helping to equalise economic and other opportunities throughout a nation and providing an incentive for residents to remain in the rural areas rather than move into overcrowded cities (Goorochum & Sugiyarto,2004).
The WTTC forecast that tourism and travel account for over 11% of GDP in Sub-Saharan African countries in 1999 and have growth rate of over 5% in real in the ensuing decade. They forecast that jobs in tourism in the region will account for 7.5
%
o f total employment, with an
annual growth of 3.4% between 2000-2010. However, o f the Sub-Saharan countries, only South Africa is listed in the top 40 destinations worldwide, while Africa as a whole attracts just fewer than 4% of total world tourists. Given the small share o f travel and tourism and the expected
6
dynamic growth o f the sector worldwide, Sub-Saharan countries can expect to increase their share of the market. As an essential condition, tourism must create value added for international travellers and provide an experience that is unique for them. Thus the tourism products and services must be built upon intrinsic tourism assets - coastal, wildlife, and nature, cultural aspects that can compete internationally. The natural assets must be accompanied by and packaged with appropriate and competitive built assets i.e. accommodation, tourist services, and infrastructure, as well as a safe and healthy environment for tourists. The packages should create a distinctive quality product that draws tourists to them and away from alternatives elsewhere in the world (Christie and Crompton, 2001).
Tourism in Kenya has been one o f the top five foreign exchange earners. The country has certain key aspects that enable it to participate in the global tourism industry. First, it is a breathtakingly beautiful country, endowed with fantastic natural attractions. Though tourism declined because of terrorist attacks in 2002, the sector is expected to revive soon (Lehmann, 2004). Indeed the signs are that the path to recovery is on course and future prospects look very promising. According to the Economic Survey (2005), by the Central Bureau of Statistics, the tourism sector recorded a remarkable growth in 2004. Tourism earnings increased significantly from Kshs 25.8 billion in 2003 to Kshs 39.2 billion in 2004, an increase o f 51.9%. International visitor arrivals increased by 18.7 % from 1,146,100 in 2003 to in 1,360,700 in 2004.
The rapid pace of change of the global economy has brought into sharper focus the increasing role-played by other factors, other than natural resources, macroeconomic and institutional issues, in enhancing the ability of countries to grow. For instance, the sw ift pace o f innovation in information and communications technology, and the concomitant fall in the costs o f communication is leading to an accelerated pace of integration of the global economy (LopezCarlos, 2004). Other factors include; the global perspective of business in decision making, 7
increased internalisation o f labour force, innovations in transportation which have reduced costs of freight i.e. location is no longer important.
According to Dwyer and Kim (2002) to succeed in the international market place, any country/destination must ensure that its overall attractiveness, and the integrity of the experiences it delivers to visitors, must equal or surpass that of the many alternative destination open to potential visitors. Competitiveness o f tourist destinations has become increasingly important for tourist destination countries as they are striving for a bigger market share of the fast growing industry of travel and tourism. The issue is especially crucial for many “tourism dependent” countries, which rely heavily on tourism for their economies (Gooroochum and Sugiyarto, 2003). Tourism has become a fiercely competitive business the world over and competitive advantage is no longer natural, but increasingly man-made, driven by science, technology, information and innovation (Jonker, 2004). As such it is not simply the stock o f natural resources of Kenya that will determine her share in the tourism market, but rather how these resources are managed and integrated with other competencies to create competitive advantage.
To ensure that the benefits from increasing globalisation are shared all countries need to ensure that they have necessary level of competitiveness(Dwyer and Kim, 2001). As the WTTC recently stated “maintaining competitiveness has become an increasing challenge o destinations”(WTTC, 2001). However, it is not always clear where inefficiencies that could be rectified might exist. The constantly growing number o f travel destinations and the enhanced quality o f existing ones put great pressure on those responsible for a given destination to find better ways to compete in the tourism marketplace and to do so in a sustainable manner. The first step in achieving this goal is to better understand those forces and success factors that determine the competitiveness of major tourism destinations. Success factors of a specific destination can then be identified and 8
integrated to ensure sustainable growth for the destination within a competitive environment (Jonker, 2004).
1.2
Statem en t o f Problem
Notwithstanding Kenya’s endowment of, good climatic conditions, beautiful beaches, game reserves, rich cultural heritage and many natural attractions, its tourism industry is yet to be fully exploited owing to poor physical infrastructure, safety and security concerns and business environment in comparison to countries that are less naturally endowed.
From various researches that have been conducted by institutions such as the World Bank and the World Economic Forum, on business environment and competitiveness, Kenya and countries of Sub-Sahara Africa, have indicators that rank poorly in comparison to their international competitors. A recent survey by World Bank in 2004 on the investment climate in Sub-Sahara Africa concluded that, the shortcomings of African countries create a high cost environment that depresses competitiveness and growth. It therefore demands a vastly increased effort at reform across the spectrum of investment climate issues.
From the Investment Climate Assessment data by the World Bank, the record o f competitiveness is very poor for firms in Sub-Sahara Africa. The major reasons are often common across countries and include finance, electricity, macro-economic instability and policy uncertainty, with governance as a cross cutting issue. More specifically, competitiveness is adversely affected by
bottlenecks
in key
areas
o f the
business
climate,
in
particular
infrastructure
services(electricity, transport and telecommunications), the regulations on firm entry, land, labour markers, customs and trade; and by the cost and productivity of labour (World Bank,
9
2004). For Kenya, specifically, a significant competitiveness arises from deficiencies in physical infrastructure i.e. power, water and roads.
Tourism has enormous potential as a catalyst for future economic and social development for Kenya. To make these a reality, Kenya must become more competitive as an international destination. It is evident that tourism in Kenya has been hampered by specific factors that are within the control of Kenyans. Some of this include poor infrastructure such as dilapidated roads, perception o f safety and security o f tourists, poor domestic and international marketing.
1.3
Research O bjective
The objective o f the research is to apply the Porter Diamond model, in analysing the competitiveness of Kenya’s tourism industry.
1.4
Significance of the Research
The study shall provide a comprehensive analysis o f the present competitiveness of Kenya's tourism industry and identify prospects for the future. The study will provide a base of factual and analytical data on the development of the tourism sector, both in quantitative and qualitative terms. The conclusions could be used to contribute towards the Kenya’s tourism industry competitiveness and assist in formulation of policy that could improve on the current conditions o f competitiveness.
In today’s global market, businesses are now looking for the right combination of labour costs, skills, infrastructure and the support provided by good micro-economic and institutional environment. In tourism a country competes with other destination in the type and price o f tourism it offers (Christie and Crompton, 2001). Therefore if Kenya is to be successful in 10
competing in the international tourist market, industry stakeholders must identify and enhance critical successful factors while simultaneously removing the barriers in the industry. The research will attempt in identifying both the critical success factors and barriers that impede the grow th o f tourism in Kenya.
The significance and potential of this study can be discussed from both theoretical and practical standpoints. The study shall contribute towards modelling of tourism competitiveness, an emerging and topical subject in world leading universities, in Kenya.
The research shall model and index the various factors, in terms of relative importance. This would enable interested academics and researchers to replicate this research to determine how the factors change from time and affect the income from tourism. The study shall develop specific strategic recommendations for Kenya as a tourism destination. Interested authorities and stakeholders in influencing government policies and actions aimed at the tourism numbers; expenditure and economic impacts could therefore use the results of the research.
11
C H A P T E R 2: L IT E R T U R E REV IEW
2.1
The C on cep t of C om petitiveness
The concept o f competitiveness has evolved over time with economic development and with formulation o f development theories. Classical economists viewed competitiveness as arising from “market mechanisms”(Smith), which force enterprises to measure up with each other in the production and distribution of goods and services at the best possible price and quality. Market mechanisms foster competition and efficiency in resources allocation, promote survival of the fittest enterprises and eliminate less efficient ones (Economic Commission for Africa, 2001).
Despite all the discussions on competitiveness, no clear definition or model has yet been developed. It has proved to be very broad and complex concept because o f a whole range o f factors account for it. Competitiveness is both a relative concept (i.e. compared to what?) and is multi-dimensional (i.e. what are the salient attributes or qualities o f competitiveness?) (Dwyer and Kim, 2001). Perspectives in various disciplines reveal that competitiveness is a multi-faceted concept. We can regard the notion o f competitiveness as associated with four major groups o f thought (Waheeduzzan and Ryans, 1996). These are: comparative advantage and/or price competitiveness perspective; strategy and management perspective; historical and social cultural perspective; and development of indicators of national competitiveness.
Gooroochurn,
(2004),
Crouch
and
Ritchie
(1999)
argued,
a
further complexity
of
competitiveness arises due to the limit of analysis and the perspective o f the analyst
“..
politicians are interested in the competitiveness of the economy(national, regional or local), industries or trade associations confine their interests to their own industry, and business owners and managers worry about their ability of their own firms to compete in specific areas”. 12
A sound microeconomic, political, legal and social context creates the potential for competitiveness, but is not sufficient. Competitiveness ultimately depends on improving the microeconomic capability of the economy and the sophistication o f local companies and local competition, in both their operations and strategy!Porter 2004).
Furthermore, Porter (1998) argues that, it is firms not nations that compete in international markets. He argues that one must understand how firms create and sustain competitive advantage in order to explain what role the nation plays in the process. Porter asserts that the basic unit o f understanding competition is the industry. Whereas many discussions o f competition employ overly broad industry definitions such as banking, chemical and machinery, these are not strategically meaningful industries because both the nature of competition and sources o f competitive advantage vary great deal within them.
A nation’s industry consists of a group of companies competing not only amongst themselves, but also as an aggregate against the same industry in other countries. Firms position themselves within an industry through different strategies. In most cases, however, firms in a nation’s industry pursue similar strategies that make the industry’s strategy clearly different from the strategy o f the same industry in another nation. A nation’s industry is competitive relative to other nations’ industries if the industry as aggregate has a competitive advantage that allows it to consistently create higher profits than rival industries in other nations (Porter, 1996).
At the level o f individual firms, competitiveness is the ability of a firm to survive and prosper, given the competition of other firms for the same profits. The competitiveness of a firm is the result of a competitive advantage relative to other firms. Porter (1996) defines competitive advantage as the ability of a company to make products that provide more value to the customer than rival products, leading to higher sales and higher profits for that company. Porter(2004) 13
asserts that perspectives o f a firm’s success can be viewed as either internal or external. Internal, because the competitive advantage resides inside a company or industry, and that the competitive success depends primarily on company choices. External, because the competitive advantage resides partly on the locations at which the company’s business units are based, and cluster participation is an important contributor to competitiveness.
Competitiveness in Kenya has been analyzed in several studies in particular (RPED11, 1993, to 1995; KEDS 1993 and 1994; Biggs and Raturi, 1997; Wignaraja and Ikiara,1996). Since the mid 1980s, Kenya has been under increasing pressure to strengthen its industrial competitiveness. This pressure is attributable to a number of factors including the on-going globalization, the country’s entry into various regional integration arrangements, liberalization of the economy to both domestic and external forces. In addition the government has declared its intention o f becoming a newly industrialized country by 2020. To achieve this goal it’s imperative to radically increase the country’s competitiveness and to expand its export market (Siggel et.al. 2000 ) .
According to Siggel et.al (2000), the historical factors that contributed to lack of competitiveness include: the import substitution industrialization strategy after independence, that heavily protected local industries through tariff and non-tariff measures, exchange controls and import licensing; direct control o f pricing by the government; and weakness of the country’s infrastructure, failure of local industries to enjoy economies of scale.
Kenya global competitiveness as a nation, was ranked, among 102 nations o f the world in the Global Competitiveness Report (2003-04), prepared by the World Economic Forum(WEF). The report attempts to capture a nation's business environment, which reflects its capability to
14
promote economic growth using two indices namely the Growth Competitive Index (GCI) and the Business Competitive Index (BCI). The comparability across nations allows potential investors to scan target countries and identify which country provides the best environment for production. From a country perspective, governments can assess their standing vis a vis other countries and determine areas o f further reform.
The GCI was developed by Jeffrey Sachs of Columbia University and John W. McAuthur of The Earth Institute.
The GCI is founded on the basis that process o f economic growth can be
analyzed within three important broad categories: the microeconomic environment, quality o f public institutions and technology. The 3 components namely “microeconomic index”, “public institutions index” and “ technology index” are combined to calculate the GCI (Sala-l-Martin, 2004). According to Lopez-Carlos(2004), the GCI has been a useful tool in thinking about macroeconomic and institutional elements critical to the growth process.
The BCI as a complementary o f the GCI, was developed by Michael Porter of the Harvard University and is based on the premise that an economy cannot be competitive unless companies operating there are competitive, whether they are domestic firms or subsidiaries of foreign companies. Further, the sophistication and productivity o f companies is inextricably intertw ined with the quality o f the national business environment. Also, it recognizes that the more productive company strategies require more highly skilled people, better information, more efficient government processes, improved infrastructure, better suppliers, more advanced research institutions and more intense competition pressure among other things. In deriving the BCI two sub indexes are used namely; sophistication o f company operations and strategy, and the quality of national business environment.
15
The World Economic Forum has continued to shed light on the question o f why some countries are able to grow on a sustained basis for prolonged periods of time, in the process pulling large segments o f their population out o f poverty, while others remain stagnant or, worse actually see an erosion o f living standards ( Lopez-Carlos, 2005).
According to Lopez-Carlos(2005), the underlying concept of the BCI is that while macroeconomic and institutional factors are critical for national competitiveness, they are necessary but not sufficient for creating wealth. Wealth is actually created at the microeconomic level by the companies operating in each economy. The BCI evaluates two specific areas, critical to the business environment in each country: the sophistication o f the operating practices and strategies of companies, and the quality of the microeconomic business environment in which the nation’s companies compete.
For the year, 2003-04, the comparative ranking of Kenya among 101 countries of the world, using the overall
Business Competitiveness Index
was 67 according to the Global
Competitiveness Report 2003-04. For the year 2004-05, overall Kenya’s ranking improved from position 67 the previous year to position 63
According to Lehmann (2004), Kenya has enormous potential for the development of small businesses if bureaucratic hurdles are removed, further, the country’s optimistic population and new reform-minded makes the country a perfect investment opportunity for foreigners looking to break the Africa’s growing market.
The vitality and resilience o f Kenya’s private sector had traditionally been one o f the country’s strengths enabling it to create a strong and diversified economy. In the beginning of 1990s, 16
Kenya had second largest stock market in the continent, a dynamic tourism market, largest Africa exporter in tea and horticulture. Instead o f capitalising on these strengths, the past decade saw an erosion o f private sector’s ability to contribute economic growth (World Bank, 2004). The result was stagnation o f private sector investment, deterioration of investor perceptions o f country risk, and sharp decline in Foreign Direct Investment (FDI) flow. As a result, Kenya’s competitiveness and participation in the world economy has deteriorated. The share of Kenya’s exports in world exports is now around 0.02 percent, half o f what it was in the 1980’s. At the same time real exports per capita have increased five times in East Asia and doubled in South Asia and Latin America (World Bank, 2004).
From the investment climate assessment data by the World Bank, the record of competitiveness is very poor for firms in Sub-Sahara Africa. The major reasons are often common across countries and include finance, electricity, macro-economic instability and policy uncertainty, with governance as a cross cutting issue. More specifically, competitiveness is adversely affected by
bottlenecks
in
key
areas
o f the
business
climate,
in
particular
infrastructure
services(electricity, transport and telecommunications), the regulations on firm entry, land, labour markers, customs and trade; and by the cost and productivity of labour (World Bank, 2004). For Kenya, specifically, a significant competitiveness arises from deficiencies in physical infrastructure i.e. power, water and roads.
2.2
C om petitiveness and C om parative A dvantage
According to a report by the Economic Commission for Africa (2001), enterprises that are competitive in national markets are positioned to become eventually competitive in world markets. Hence the need to promote market friendly policies at the national level that simulates competition. Comparative advantages are more and more built and depend less and less on 17
natural resources endowment. Hence the need to for governments to make strategic choices to identify niches where enterprises can compete and put in place a wide range of supportive policies to enhance their competitiveness.
Porter(1998) observes that the 18th century work on Adam Smith and David Ricardo on factor comparative advantage cannot provide explanations for most of the trade that takes place today. More recent explanations involving macro-economic variables, cheap and abundant labour or natural resources, government policy, product life cycles or management practices are unsatisfactory.
Classical economic theory defines comparative advantage as the natural endowment that would position a trading nation to relatively better position to produce and trade in goods/service derived from exploitation o f such endowment. Competitive advantage, on the other hand, the existence of man made structures, dynamic in nature that would position a trading nation to relatively better position amongst her trading partners. Comparative advantage is fairly static, while competitive advantage is dynamic. Both are relative attributes and should be looked from a reference point (ITC, 2002).
Several surveys have been done on the lack of competitiveness of businesses in Africa. According to Eifcrt and Ramachandran (2004), the results of the surveys indicate that Africa’s scant human capital and rich natural base ensure that manufactured exports will always be unprofitable. However, dynamic trade theory suggests that comparative advantage is partly endogenous, because a country's production and trade are not limited by its endowed resources only but also by a process o f searching and learning stimulated by competition in an appropriate institutional setting. The policies, institutions and infrastructure maintained by African governments and the effects they have on transaction costs are crucial in encouraging, or 18
discouraging firm-specific learning and the development of competitive advantage and export industries. The main difference between the concept o f competitive advantage and comparative advantage is the notion o f a one-time advantage versus sustainable advantage in dynamic competition. A country’s industry develops a competitive advantage if it’s able to utilize its resources to create more value than its rivals, and if it can maintain this better performance over time. While the concept of comparative advantage rests largely on historic factor advantages, the concept o f competitive advantage stresses the importance of continuous efforts, learning and innovation in an ever-changing environment where one-time factor advantages can easily be competed away (Hoefter, 2000).
2.3
C om petitiveness in T ourism
The competitiveness of an industry is a critical determinant of how well it performs in world markets (Crouch & Ritchie, 1999). The potential for any country’s tourism industry to develop will depend substantially on its ability to maintain competitive advantage in its delivery of goods and services to tourists (Dwyer, Forsyth & Rao, 2000).
>
Competitiveness implies improving productivity, which is notoriously difficult in the service sectors,
where
moreover,
productivity, changes
are
hard
to
measure.
Nevertheless,
competitiveness is critical to the success of a tourist destination, given that these compete globally (Christie and Crompton, 2001). Further they argue that a tourist destination is competitive if it can provide products and services in a way that creates value to the tourist.
Viewing the production of tourism commodity as a standardised process seems questionable because the tourism industry is inherently heterogeneous and complex (Lash & Vry, 1994). A number of authors assert that tourism is not an industry, claiming instead that it consists o f many 19
industries connected through their function o f supplying tourist needs. According to Jonker, (2004), other authors (Baretje & Defert, 1972, Leiper, 1979, WTO 1983, and Smith 1988) argue that tourism should be considered on its own right because of commercial importance. They debate that many commonsense groupings of economic activities are referred to as industries even when they include multiple trades scattered across differentiated firms. The tourism industry is a constellation o f business, public agencies and non-profit organizations that create products to facilitate travel and activity away from their environment (Jonker, 2004).
Different approaches for measuring competitiveness o f tourist destinations can be distinguished from the literature. Studies such as Kozak and Remmington (1998, 1999) and Haahti and Yava (1983) use survey data of tourist’s perceptions and opinions about their experience of different destinations to compute measures o f competitiveness. One major advantage o f this approach is its ability to capture intrinsic characteristics of destinations, such as quality of beaches, friendliness o f local people, shopping facilities and so on, that are important factors for competitiveness and normally difficult to measure. On the other hand, the results are subject to the usual limitations and prejudices associated with survey data. Moreover, such surveys are usually only undertaken for limited number of countries/destinations, which are direct competition with each other. Other studies such as Dywer et al. (1999,2000) covering only 19 countries use published data (to measure the competitiveness of tourist destinations. However, these studies do not cover a wide range of countries (Goorochum and Sugiyarto, 2004).
The most detailed work undertaken by tourism researchers on tourism competitiveness is by Crouch and Ritchie. In their research, they have found out that to be competitive, a destination development o f tourism must be sustainable, not just economically, but socially, culturally and politically as well. They focus on long-term economic prosperity as the yardstick by which destinations can be assessed competitively (Dwyer and Kim, 2003). 20
Consumers around the world today face and endless array o f choices - from mass marketed no frill getaways to customized tours. At the end o f spectrum, beach hotels in Mombasa currently feature overnight stays from previously unbelievable $5 to S10. Over construction of hotels in Mombasa has itself created pressure on prices. Yet despite the low prices, ethnic flare-ups in year 2000 caused European tour operators to withdraw from the market. The downward spiral created bankruptcies and speculative takeovers at rock-bottom prices, again putting downward pressure on room rates. At the other end of the price spectrum, in a beach not apparently dissimilar to Mombasa, luxury hotel rooms in Mauritius are commonplace at $ 1,500 per night. The two polar experiences illustrate that tourism can deteriorate if important elements of the overall tourism product are absent, in this case physical security (Christie and Crompton, 2001).
2.4
C om parative and C om petitive A dvantages in Tourism
In tourism, comparative advantage would relate to inherited or endowed sources such as climate, scenery, flora and fauna while competitive advantage would relate to a destination’s ability to use the resources over a long-term such as quality of management, skills o f workers, service levels and government policy (Crouch & Ritchie, 1999).
Comparative advantages concern a destination’s factor endowments, both naturally occurring as well as created these are identified in five broad categories of endowment: human resources, physical resources, knowledge resources, capital resources and infrastructure. In the tourism context it seems appropriate to add historical and cultural resources as an additional resource and to expand the infrastructure to include tourism superstructure (Crouch & Ritchie, 1999).
Competitive advantage relate to destination’s ability to use the resources effectively over a long term. A destination endowed with a wealth o f resources may not be as competitive as a 21
destination lacking in resources, but which is utilizing the little it has more effectively (Ritchie, 2001) .
2.5
Tourism C om petitiveness M onitor
The tourism competitive monitor has been developed by the World Tourism and Travel Council (WTTC) who have hosted in a website www.wttc.org. The monitor tracks a wide range of information, which indicates to the extent a country, offers a competitive environment for tourism development. The monitor is researched and produced in partnership with Chistel DeHann Tourism and Travel Research Institute at the University of Nottingham.
The Competitiveness Monitor offers an analytical framework which: a) Provides an ongoing record of policy indicators and developments which impact tourism b) Compares national performance statistics, policies and agreements c) Indicates the effective o f national policies to attract foreign direct investment and tourist expenditure in a globally competitive market; and d) Highlights the importance of long-term planning and need to factor tourism into government policy developments and decisions.
The monitor distinguishes eight tourism competitiveness indicators, which are provided for over 200 countries, enabling specific and comparative analyses o f the industry to be undertaken. The main themes are, price competitiveness, infrastructure development, environmental quality, human tourism indicator, technology advancement, human resources, openness and social development.
22
2.6
K enya's R anking in G lobal T ourism
The Competitiveness Monitor provides a presentation o f the extent to which an individual country offers a competitive framework o f travel and tourism. More than 200 country reports are found in the monitor. For Kenya the results of indexes (o= least competitive; most competitive = 100) and among 212 countries is as follows:
1 2 3 4 5 6 7 8 Source
Index Value Ranking Environment 76 26 Price Competitiveness 59 49 Infrastructure 37 104 34 Human Resources 114 Openness 26 131 Technology 25 134 Social 25 141 Human Tourism N/A N/A World Tourism & Travel Council: Website (March, 2005)
As can be discerned from the above table, Kenya rates very well in environment and price competitiveness, while performing poorly in technology and social aspects as defined by WTTC.
2.7 C ritic on C om petitiveness Indexes
The concern with competitiveness has spawned a significant industry, with a large audience on policy making and corporate circles. Its output is diverse, ranging from productivity and cost studies to general strategy papers. The best-known products are the competitive indexes by IMD and WEF. Some countries, particularly in East Asia, consider these indices highly and consider competitiveness as a matter of national survival. Academic economists largely ignore the competitiveness and its preparation “ industry” and are disdainful of its indices. However, this is changing as well-known academics are drawn into the competitiveness debate and the rigorous preparation of the indices (Lall 2001) 23
In his paper Lall (2001), argues that, whereas developing countries policy makers worry about national competitiveness and closely
watch
indices
ranking
international competitive
performance, the indexes have weak theoretical and empirical foundations and may be misleading for analytical and policy purposes. He asserts that the definitions are too broad, the approach biased, methodology Hawed and inconsistent, and many measure vague, redundant or wrongly calculated.
Krugman (1994) argues that competitiveness is a meaningless word when applied to national economies. And the obsession with competitiveness is both wrong and dangerous. His argument is that when economies trade with each other they do not (as firms do) compete in a confrontational manner. They engage in a non-zero game that benefits all parties. Trade theory shows that countries specializing according to their factor endowments do better than in the absence of trade regardless of whether one is technically more efficient than another in particular, or indeed all, activities.
2.8
Porter’s D iam ond M odel (1998)
Porter’s (1980), five forces o f competition model identifies the basic sources of competition at the organization and product level. The five forces - industry competitors, substitutes, potential entrants, suppliers and buyers -
lie within the domain of the company’s competitive
microenvironment. Whereas the five forces model could be applied at the level of firms in the tourism industry, the national diamond model suggests the fundamental structure of competition among national tourist industries, that is the nation as tourist destination (Jonker, 2004).
24
Porter (1998) argues that in the modem global economy, prosperity is nation’s choice. Competitiveness is no longer limited to those nations with favorable inheritance; rather, nations choose posterity if they organize their policies, laws an institutions based on productivity.
Why does a nation achieve international success in a particular industry? According to Porter (1998), the answer lies in four broad attributes o f a nation that shape the environment in which local firms compete that promote or impede the creation o f competitive advantage. The Porter model for competitiveness in productivity and the business environment identifies four determinants, they are: Context for firm strategy and rivalry; Factor (Input) Conditions; Demand Conditions; and Related and Supporting Industries
The four factors are interrelated and form a diamond shape. The diamond is a mutually reinforcing system; hence the effect of one determinant is contingent on the state of others. Competitive advantage based on only one or two determinants is possible in natural resource dependent industries involving little sophisticated technology or skills. Such advantage usually proves unsustainable however because it shifts rapidly and global competitors can easily circumvent it. Two additional variables can influence the national system in important ways, and are necessary to complete the theory; these are government and chance (Porter 1998).
Porter (1998) asserts further, that firms gain competitive advantage where; home base allows and net2000ke.com eaws®,kenvaweb.com ioefofeastafricasafariventures.com
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