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COMPETITIVE DYNAMICS AND CORPORATE PERFORMANCE OF SELECTED FLOUR MILLING COMPANIES IN NIGERIA

10,000 3,000

Topic Description

CHAPTER ONE

INTRODUCTION

1.1 Background to the Study

Competition in the flour milling subsector of the manufacturing sector in Nigeria technically began about ten years ago when most players, in a bid to gain more market share commenced stiff competition on the level of expansion in their production capacity (Kelikume, 2015). Their intention was to increase their product offerings by increasing their capacity to produce more and in effect gain more market share. Less attention was paid to growing the consumer based to accommodate the expansion and having invested so much billions of naira in capacity expansion, they are now being faced with capacity utilization challenges which are adversely affecting their corporate performance (Njokwu & Kalu, 2015).

 

The industry has a few number of players that can be categorized based on their capacity installation. The leading three operators have an installed capacity of 18,600mt per day and are responsible for about 70% of the market share while other operators control about 30% of the market share. Based on the industry’s high fixed cost of operation, profitability is mainly dependent on the company’s capability to increase volumes (Lead Capital, 2013). Currently, there are nine (9) active flour milling companies in Nigeria providing employment opportunities for upward of 100,000 people in Nigeria.  About 80% of market share is controlled by only five (5) of the nine (9) firms and as such, there is a lot of discrepancy between the ‘big players’, the ‘mid-size firms’ and the smaller flour milling companies (IBF Agusto & Co., 2012). The five (5) major players by market share are: (1) Flour Mills of Nigeria Plc, (2) Crown Flour Mills Ltd, (3) Honeywell Flour Mills Plc, (4) Dangote Flour Mills Plc, and (5) Standard Flour Mills Ltd.  The remaining are:  BUA Flour Mills Ltd. (recently acquired by Crown Flour Mills Ltd), Life Flour Mills Ltd, Valumbra Flour Mills Ltd. and Pure Flour Mills Ltd.

Table 1.1: A Table Showing the Topicion Capacity of Sampled Companies

S/NSampled Companies Topicion Capacity in %
1Flour Mills of Nigeria Plc38
2Dangote Flour Mills Plc18
3Honeywell Flour Mills Plc14
4Standard Flour Mills Ltd7
5Crown Flour Mills Ltd8
 Total 85

Source: Researcher’s field survey, 2015

 

Based on the strong grip of the total market by the ‘big 5’, there are ‘imperceptible entry barriers’ for potential and ambitious flour millers. Intense competition exists across the various levels of the market. There is however a wide gap between the top level category and the other companies in the industry (Njokwu & Kalu, 2015). The stiff competition in the industry actually reduced the number of players to 9 from the initial 17 players. Flour Mills of Nigeria acquired six (6) and merged them into Flour Mills of Nigeria while Crown Flour Mills Ltd also acquired two (2) bringing the number of active players in the market to nine (9).

 

The level of competition within the industry is extremely intense. With the accomplishment of each distinct player hinged on its capacity to gain market share, industry actors go through various extents and dimensions to grow capacity. Also, as an oligopolistic industry, the pricing is until recently being regulated by the Flour Millers Association of Nigeria who fixes a price which the flour manufacturers are not permitted to surpass. This fixed price is nonetheless often dishonored particularly by the players who control major share of the market. As a primary food with many alternatives within the consumer goods sector, the foodstuffs are characterized by high resistance of demand (Kelikume, 2015). Any small increase in price of these products could lead to a decrease in quantity demanded as consumers will promptly shift their favorite to other cheaper substitutes.

 

Because the success of each company in the industry hinges on its capacity to gain market share, industry actors in the last three years have gone through to great length to increase production capacity. Today, because there is no significant growth in the consumer base of these flour millers, they have resulted to the prevailing competitive pricing that threatens expected performance and survival of most players in the flour milling sub sector of the manufacturing industry in Nigeria. From the study, competitive pricing is the only competitive strategy and tool being deployed first by the major players and others follow suit without any consideration to the resultant effect on their profit margins. As a result of this unbridled competitive pricing, compounded by the recent devaluation of naira by the Central Bank of Nigeria,  profit margins are thinning out and flour milling operations are being downsized along with its attendant staff redundancy and job losses (Kelikume, 2015).

 

Competitive dynamics in the sector has overtime focused mostly on pricing strategy with varied incentives and promotional tools to the trade (IBF Agusto & Co., 2012). Although, managing competitive behaviour, people management practices, supply chain strategy, external business environment and product offerings are being leveraged upon to an extent, good attention is not being paid to the capabilities of these variables in producing desired corporate performance. This study shall therefore evaluate the competitive dynamics and performance of manufacturers in the flour milling industry in Nigeria

 

1.2 Statement of the Problem

The overall problem that necessitates this study is the prevailing competitive pricing strategy that threatens the performance and survival of most players in the flour milling industry in Nigeria. As a result of this unbridled competitive pricing strategy (Kelikume, 2015), profit margins are thinning out and flour milling operations are being downsized along with its attendant staff redundancy and job losses.  The focus on competitive pricing strategy suggests a contradiction to the business expectations of companies in the industry as this has been shown to reduce their profit margins. Findings from the annual reports and literature also revealed a consistent drop in the financial results, increase in the overhead cost and cost of sales, reduction in the staff strength, more pressure from the regulatory agencies, poor infrastructural support, and shrinking product offering  of all players in the industry despite their various competitive moves and responses, mostly in competitive pricing strategy (Flour Mills of Nigeria, 2014; Dangote Flour Mills Plc, 2014; Honeywell Flour Mills Plc, 2014 & IBF Agusto & Co., 2012).

 

A review of the competitive behaviours of key players in the industry revealed that they are relentlessly altering the competitive landscape to the detriment of other players. In the same vein, firms contemplating imitation of a competitor’s innovation face a dilemma, imitate a new, unproven offering, or forgo imitation and perhaps miss out on the “next big thing”   (IBF Agusto & Co., 2012). In spite of the improved market statistics of Flour Mills of Nigeria,   the shareholders of the company do have every reason to be concerned based on the company’s nine months results ended December 31, 2014. Its net profit went down by about 44 % in 2014 matched to corresponding period of 2013 (Egene, 2015). The question of whether reactive response to competitive moves produce value addition and sustainable competitive strength therefore come to bear in determining Flour Millers competitive behaviour and this study intend to provide an empirical answer to this question.

 

Manufacturing firms in the flour milling industry in Nigeria in a bid to gain a sizable market share have engaged in competitive behaviours that have generated stiff competition and have made a good number of millers to wind down their operation. A good example is the expansion projects of Flour Mills of Nigeria completed in 2012 (Flour Mills of Nigeria Plc, 2013) that has made it capable of supplying the flour requirements of the entire nation and parts of West Africa countries. This giant stride has put competitors at the disadvantaged position and they are reactive in a bid to sustain their market shares and survive. If the competitive behaviours of companies in the flour milling companies in Nigeria is not strategically managed to know when to initiate competitive action, react or respond to competitive moves and how and to what extent the action must take, there is a high probability of losing out of the targeted corporate performance.    Companies such as Honeywell Flour Mills Plc, completed in 2013 (Honeywell Flour Mills Plc, 2014), Crown Flour Mills Ltd. completed in 2013 (Lead Capital, 2013) and Dangote Flour Mills Plc are at the forefront of reactive response to competitive moves (Dangote Flour Mills Plc CEO, 2013), while Bendel Flour Mills Ltd., Eagle Flour Mills Ltd, Supreme Flour Mills Ltd are gasping for survival in the heat of competition. This study therefore examined the relationship between competitive behaviour and corporate performance and the moderating effect of competitive capability on the relationship between competitive behaviour and corporate performance of selected flour milling companies in Nigeria.

 

To cope with the problems caused by undue attention on competitive pricing strategy, some players have begun to downsize their operations and staff strength. In February 2015, Flour Mills of Nigeria retrenched about 600 people from their employment (Flour Mills of Nigeria Plc, 2015), Standard Flour Mills Ltd also retrenched about 50 of their sales workforce, while other players are also following suit with the exemption of only Honeywell Flour Mills Plc. The adverse employment effects of acquisitions are also looming as acquisition talks are being concluded between Crown and BUA Flour.  This signals great danger for the economy at large and the labour market specifically.    According to Armstrong (2009), people management practices is basically about the relationship between people management and strategic management. It also affirms, that people management is the overall direction a firm intends to chart in order to accomplish its objectives using its people.

 

From Armstrong (2009), one may logically deduce that strategic people management practices is a strategic method to managing human resource capability of a company to achieve competitive edge and corporate performance. This agrees with various allusions to the fact that people are the most valuable assets by all players in their annual reports (Flour Mills of Nigeria Plc, 2014; Dangote Flour Mills Plc, 2015; Honeywell Flour Mills Plc, 2014, Standard Flour Mills Ltd., 2012  and Crown Flour Mills Ltd., 2013). If this affirmation is genuine and they all pay good attention to their people management practices, one may begin to wonder why most flour millers are recording decline in their performance with attendant job losses across levels in most of these companies (Flour Mills of Nigeria Plc, 2014; Dangote Flour Mills Plc, 2014 & Standard Flour Mills Ltd, 2015).

 

Oludayo and Omonijo (2013) also agree with these companies’ statements on the centrality of people, that organizational people are the major determining factors of competitive advantage and the need for effective workforce administration has become more significant than what it used to be. Wright and Snell (2001) also stressed that people management practices could lead to increased corporate performance and be the core of continued competitive advantages. The question of why these same most valuable assets are the first to be disposed whenever the company is under economic pressure was examined in this study by examining the relationship between people management practices and   corporate performance and assessing the moderating effect of competitive capability on the relationship between people management practices and corporate performance.

 

The influence of effective supply chain strategy on the performance of manufacturers in the flour milling industry in Nigeria has been very visible in the face of recent competition as companies with less competence in supply chain strategy are recording consistent decrease in their performance indices (IBF Agusto & Co., 2012). Corroborating IBF Agusto’s position, Iyer, Germain and Claycomb (2009) shows that consequences of supply chain strategy on competitive performance diminishes as product instability and demand volatility mutually improved. Inbound and outbound areas of supply chain strategy was not being handled as strategic with a view to effectively managing the cost of inputs. And this has directly increased the cost of production and hinders the companies’ ability to compete favourably. There is an increasing demand from the Board of directors and shareholders to the operators of companies in the industry   to increase values on their investments and at the same time the customers are requesting for  lesser prices and improved quality; it therefore mean that these companies have to consistently find means of managing their operating and cost of sales in all areas with good focus on supply chain strategy (Honeywell Flour Mills Plc, 2015; Dangote Flour Mills Plc, 2013 & Flour Mills of Nigeria Plc, 2014).

 

In the competitive landscape of the flour milling industry in Nigeria, all players patronise the same machinery and other resources, the same raw materials and sources of raw materials. Ability of any player to leverage on strategic sourcing with a view to buying right, superior quality, right price, right place, appropriate time and the most efficient transportation system, will therefore determine the extent to which any player can go in the battle for market share and corporate performance.  This is so because getting things wrongly at any of these stages will disable the competing firms from producing at the minimal cost and erode values and in effect lead to poor performance. Almost all companies in the industry have been concentrating on competitive pricing at the end point, rather than strengthening

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