CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Problem

The most critical issue facing companies in the world today is how to manage the future.
The more uncertain and unstable the world is, the more companies must rely on
innovation to create their desired futures. Successful innovation strategies demand
creative efforts to understand and influence future conditions. These innovations in
technology create new knowledge for both product and services for which companies
enhance development (Nystrom, 1990).

A company’s competitiveness globally, depends heavily on innovation to meet the

changing needs of customers. In addition to goods and services designed to meet their
needs, today’s demanding consumers expect the latest technology which is of high
quality, dependable and has competitive prices. The firm with a capacity to innovate is in
a better position to compete in markets than one which lacks innovative capacity
(Morrison, 2009).

Looking back on human affairs man has experienced three major transformations. The
first was the Agricultural Revolution, characterised by the transition from a society based
on hunting and gathering to one based on cultivation. The second great transformation
was the Industrial Revolution. Its inception was the invention of the steam engine, electric
power and steel chemical. Today, mankind is faced with its third great transformation,
brought about by innovative ideas and Information Technology (Heidi & Lawrence,
1991).

Continuous innovation therefore, lies at the heart of sustained competitive advantage, and
managing it effectively has a strong international business component. Most large firms in
the world are involved in product/service development and process development i.e.
activities that support the creation of new products and services that make more
customers want them instead of those of rival firms. This means improving the way

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products/services are produced, making them quicker, cheaper, and of better quality
(Alan & Simon, 2009).

A firm’s performance greatly depends on how technologies are implemented. Successful

establishment of innovative technologies require that organizations develop a human
resource strategies for the same. Equally, firms have to overcome financing challenges
that inhibit the acquiring new and unexplored technologies. Successful firms also requires
quality controls to accompany innovations as a way of enhancing best technological
practices (Baldwin & Sabourin, 2002). Generally, the effectiveness of innovative
technologies is measured through environmental accountability such as productivity,
cycle time, efficiency, waste reduction and regulatory compliance that enhanced a firm’s
performance (Venkatraman & Ramanujam, 2001).

The dynamism and global competitiveness in today’s business environment has made
innovation feisty and pertinent due to three crucial trends: overarching international
competition, flagellant and dynamic markets, and varied and technologies encumbered by
change overdrive (Wheelwright & Clark, 1992). They further argue that, the rate of
change in telecommunication sector in many countries is dramatic and services providers
on a worldwide scale are intertwined and interrelated while new business types and
corporate objectives and strategies are under immense exploration. They concluded that
efficient industry conglomeration, market mix and segmentation, plus varied delivery
mechanisms will yield expanded product offerings.

Research studies on innovation have been prioritized in most developed and promising
developing countries. However, it mainly deals with technological aspects, and the field
has essentially focused on inputs and support instruments (Mothe et al., 2011). Innovation
and technology have to go hand in hand to develop change in organizations that
anticipate, create and respond effectively to change in the external and internal
environments to maintain optimal profits. Change dynamics has greatly influenced most
of the sectors that rely on technology innovation in Kenya. This include technological
advancement regulation, and competition, (Letangule &Letting, 2012).

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A study by Deloitte and Touché (2006) determined that the long-term success of
companies in emerging markets depended on innovative product offerings and not minor
adjustments to existing products. In the last decade, the Kenyan telecommunications
industry has seen the economy of Kenya grow by leaps and bounds (Okiro & Ndungu,
2013). Being the market leader in terms of profitability, Safaricom Limited for instance
attributes its success to innovation and information technology and has continued to reap
huge profits over the last couple of years. Safaricom, looks for ways to delight their
customers. They aim to be the best through innovative technology, products and services,
launching exciting new promotions, and offering exceptional customer experiences
(Safaricom Strategic Review, 2014). When it comes to innovation, more
telecommunication firms are not only seeing the value of thinking outside the box, but
also understand that innovation does not happen in isolation. (Hoffman, 2010).

Safaricom has more than 20 Million subscribers commanding 67% of the market share.
On mobile technology, Safaricom equally commands the wisest coverage. As a result,
Safaricom has great mobile tariffs that are attractive to a nationwide subscribers.
Similarly, Safaricom has a massive network of product and service dealers, quality staff
and management. Consequentially, Safaricom has managed to hold to a leader’s role not
only in Kenya, but in the region as a whole. As a way of developing an effective CSR
program, Safaricom established Safaricom Foundation, which is charged with the
mandate of community outreach and partnership. Safaricom foundation has disbursed
over 2 billion shillings in varied initiatives towards fostering sustainable community
based solutions, in communities it operates. (Safaricom Business Review, 2014).

Safaricom’s money transfer platform M-PESA has over 17 million clients. Safaricom
equally has a network of over 79,000 agent’s outlets across the country. As a result, M-
PESA has been voted as the world’s leading mobile money transfer platform. Safaricom
similarly has a revolutionary product M-Shwari which is used to bank the bankless, and
with options where members can save and borrow money. Digital technology has enabled
shareholders to get information about Safaricom quickly and more cost effectively. This
has ensured that there is a constant flow of information between Safaricom and investors
enabling them work hand in hand and more effectively to build the brand and the nation at
large (Safaricom Annual Report, 2014).
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1.2 Statement of the Problem

It is widely regarded that product innovation and development allows companies to gain
competitive advantage, retain existing customers, attract new customers while at the same
time strengthen ties other partners (Kotler & Keller, 2006). The question that remains
however is whether the Kenyan telecommunication industry has become so good at
innovation to an extent of sustaining a competitive advantage and continue being
profitable. The change in the telecommunication industry is taking place at a very fast
pace, as a result of the advent of globalization that seems to leave everybody who does
not adapt last. Furthermore new entrants have come into the market changing the status
quo with major transformations and innovation capacity. As a result competition becomes
an issue these mobile providers had to design innovative ways of surviving competition
without necessarily involving themselves in malpractices (Xavier & Ypsilanti, 2008).

The world today has undergone massive changes. Both emerging and developed
economies are focusing on innovation, competing globally for talent, resources, and
market shares. Innovation in mobile service provision is becoming an everyday
phenomenon in Kenya. Stiff competition among existing players has left firms with no
option but to find ways to attain a competitive advantage through innovation. The
telecommunication sector is going through re-packaging of mobile service provision to
satisfy the ever-increasing needs of customers and ward off competition from
telecommunication companies. More service providers are increasingly offering new
products (CCK, 2013).

Telecommunication firms are faced with globalization pressures, competition and volatile
market dynamics are constantly seeking new ways to add value to their services (Soteriou
& Zenios, 1999). This statement captures the prevailing environment in the
telecommunication sector in Kenya. Jones (2005), states that the recognition of the
relationship between diversity, creativity, innovation and competitive advantage has
stimulated both academicians and business community.

Sarri, Bakouros and Petridou (2010), oppose that the ability of any organization to grow is
dependent in the capability to generate new ideas and utilize them effectively for the long
term benefit of the organization. They argue that innovation is regarded as the means
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of gaining and sustaining a competitive advantage and to have an impact on employment
rate and wealth creation.

Supporting this are Elmquist, Fredberg and Ollila (2009), who identify innovation as the
main driver for firms to grow, prosper and sustain high profitability. The focus in
academic literature is on how to innovate and how innovation processes are managed.
According to Elmquist, Fredberg and Ollila (2009), the future portends and environment
of intensified competition in the telecommunication sector arising from the introduction of
new information technologies that enhance the processes and products.
Telecommunication institutions will therefore be expected to redefine their business
strategies while leveraging on innovative and affordable products so as to retain and
capture new market segments.

This study therefore, sought to address the knowledge gap in how the innovation and
competitive advantage affects the relative performance of mobile service providers. It
identified the connection between organization innovation, information technology and its
effect on firm performance, competitive advantage and profitability in the
telecommunication sector and their implications. Houthfold, Desmit and Fidalgo (2010)
posit that the underlying motivation for this kind of study is the quest for those factors
that may provide firms with a competitive advantage and hence drive firm profitability.

1.3 General Objective

The general objective for this study was to determine the effect of organizational
innovation and information technology on firm performance in Kenya.

1.4 Specific Objectives

1.4.1 To establish whether organizational innovation has improved Safaricom

performance.
1.4.2 To assess how innovative activities affect productivity at Safaricom Ltd.
1.4.3 To determine whether Safaricom performance has been improved through
information technology.

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1.5 Significance of the study

1.5.1 Telecom Industry

The findings of this research will be vital to any potential players wishing to enter the
telecom industry as well as the current players in the telecom industry as it will provide
information on how to remain competitive in the industry.

1.5.2 Researchers
The study will be significant to researchers who are keen in finding the extent to which
innovation technologies influences organizational performance.

1.5.3 Investors, Business and Individuals

The research would shed light on customers and individuals who want to know what
Safaricom is are offering and what is the best deal in the market. They would be informed
on whether they are getting true value for their money and be able to choose exactly what
they need.

1.6 Scope of the Study

This research was limited to Safaricom Ltd. Other organizations were not surveyed due to
financial and time constraints. The population of the study was 120 respondents, drawn
from Safaricom employee, agents, and managers. The study was conducted in a period of
six month. The limitation of the study was demographic coverage. Only Nairobi County
was covered by the study due to financial and time constraints.

1.7 Definitions of Terms

1.7.1 Innovation
Innovation can be viewed as the application of better solutions that meet new
requirements, inarticulate needs, or existing market needs (Nelson, 1993).

1.7.2 Worker Skills

The technical abilities workers are endowed with to professionally perform a task (Black
& Lynch, 2001).

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1.7.3 Organizational Change
Organizational change involves planning, design, production, and management
approaches to effective delivery of organizational objectives both internally and
externally (Gera & Gu, 2004).

1.7.5 Information Technology

Information technology involves processes used in the creation, storage, exchange, and
usage of information in its various forms so as to create awareness, enhance productivity,
and innovation (Rouse, 2012).

1.7.6 Firm Performance

A general measure of a firm’s overall financial health over a given period of time, and
can be used to compare similar firms across the same industry (Venkatraman &
Ramanujam, 1986).

1.8 Chapter Summary

This chapter introduced the effects of innovation and information technology to
organizational performance. The background of the study, statement of the problem,
scope of the study, significance of the study and definition of terms have been covered in
this chapter.

Chapter two will deal with literature review, chapter three will deal with research
methodology, chapter four with findings, while chapter five will deal with discussions,
conclusions, and recommendations.