Diversification Strategies And Performance Of Small And Micro Enterprises Funded By Youth Fund In Embakasi Central Constituency, Nairobi Kenya

ABSTRACT

Majority of studies show that diversification relates with performance of companies significantly. However, most of these studies focus on large firms/companies. This study sought to establish whether diversification enhances the performance of small and micro enterprises funded by the Youth Fund. The main objective of the study was to establish the influence of diversification strategies on the performance of small and micro enterprises funded by the Youth Fund in Embakasi Central Constituency. The objectives of study were to determine the extent to which related diversification affects organisational performance of small and micro enterprises funded by Youth Fund; to determine the effect of unrelated diversification on organisational performance of small and micro enterprises funded by Youth Fund; and, to assess the moderating influence of firm characteristics on the relationship between diversification strategies and performance of small and micro enterprises funded by Youth Fund. Three theories were used to explain the study: - The balanced scorecard, Modern Portfolio theory and the theory of growth of the firm. The study used descriptive longitudinal design where data was collected from a sample of companies for five years. Target population included 220 managers of the small and micro enterprises operating in Embakasi Central constituency. Stratified random sampling was used to select a sample size of 142 distributed according to the wards. A questionnaire was used to collect data while both descriptive and inferential statistics (Panel regression) were used to analyze the data. Tables and graphs were used to present summaries of results. Findings show that there is significant but negative relationship between specialization (focused firms) and performance measured by ROA (p < 0.05). There is significant positive relationship between related diversification and ROA. Unrelated diversified firms have high performance measured by ROCE (p < 0.05). Despite the performance recorded due to diversification, small and micro firms’ managers think that their firms can improve their performance by diversifying further whereby related diversified firms believe that they will enhance their performance by increasing their related diversification while unrelated diversified firms think they will achieve the performance by increasing their current unrelated diversification. Managerial experience does not have any moderating influence on the performance of diversified firms (p>0.05) while age of the firm and size of the firm have influence on performance. The study concludes that small and micro enterprises that have adopted related diversification have high ROA while firms that have engaged unrelated diversification have high ROCE. The performance of related diversified firms increases with age while the performance of unrelated diversified firms increases with size of the firm. The study recommends that unprofitable and underperforming small and micro firms should consider unrelated diversification as a way of increasing ROCE hence profitability. Small and micro firms seeking to engage unrelated diversification strategy must first focus on their growth/accumulation of assets to attain a large firm size as this will contribute to enhanced performance.