FORECASTING TECHNIQUES, OPERATING ENVIRONMENT
AND ACCURACY OF PERFORMANCE FORECASTING FOR
LARGE MANUFACTURING COMPANIES IN KENYA
CHINDIA, Elijah Wakhungu
A Thesis Submitted in Fulfillment of the Requirements for the Award of
the Degree of Doctor of Philosophy in Business Administration
School of Business, University of Nairobi
2013
1
DECLARATION
This doctoral thesis is my original work and has not previously, in its entirety or in part,
been presented as a degree at any other university.
…………………………………………..
……………………………..
CHINDIA, Elijah Wakhungu
Date
D80/P/8052/02
This doctoral thesis has been submitted for examination with our approval as university
supervisors.
……………………………………….
………………………………
Prof. Francis N. Kibera, PhD
Date
………………………………………
……………………………..
Prof. Ganesh P. Pokhariyal, PhD
Date
………………………………………
………………………………
Prof. Gituro Wainaina, PhD
Date
2
COPYRIGHT
All rights reserved. No part of this thesis may be used or reproduced in any form by any
means, or stored in database or retrieval system, without prior written permission of the
author or University of Nairobi on that behalf except in the case of brief quotations
embodied in reviews, articles and research papers. Making copies of any part of this
thesis for any purpose other than for personal use is a violation of the Kenyan and
international copyright laws. For any information, please contact Chindia Elijah
Wakhungu using the following address:
P.O. Box 4577,
00506 - NAIROBI
Kenya.
Telephone: +254 20 272 6928
Mobile: +254 718 429 072
E-mail:ewc2811@gmail.com
3
DEDICATION
To the Lord, for He is good; His love and His kindness go on forever. To my children, for
the love and support; and to the memory of my dad and mum.
4
ACKNOWLEDGEMENTS
The completion of this thesis is partly due to the encouragement and prompting of many
individuals to whom I render due honour and thanks. I am pleased to acknowledge the
guidance and assistance of my supervisors, Prof. Francis Kibera from the School of
Business, Prof. Ganesh Pokhariyal from the School of Mathematics and Prof. Gituro
Wainaina from the School of Business, University of Nairobi. My appreciation also goes
to Dr. Murang’a Njihia of the School of Business, who edited my initial work and
provided additional reading material. I am very grateful for the many hours of dedication
and tireless effort these resource persons spent in critiquing this work and providing
useful comments and direction. I accept full responsibility for the general arrangement of
the thesis and I am also prepared to forfeit many of the plaudits provoked by the textual
material.
I would like to recognize my parents, the late Jeremiah Lutatwa and the late Morina
Makokha, my brothers and sisters Simiyu, Mark, Wanyama, Mwenje, Rhoda, Nanzala,
Maria and Keta, who have always stood by me over the years. My late parents can be
remembered for being a great source of inspiration in our lives. They encouraged all of us
to continue with the struggle to learn, despite the many challenges. My wish to succeed
was as much for them as it was for me. I will always remain grateful for the influence
they brought in my life, even when everything else appeared dark and gloomy. Most
importantly, I wish to express my profound appreciation to my loving children Jei
Lutatwa, Tim Samadi and Morina Avoga for bringing a lot of excitement in my life and
by challenging me to complete a study of this magnitude.
For everyone who contributed emotionally, intellectually, spiritually and socially to
translate this thesis into a readable whole, may God bless you abundantly in your pursuit
to make this world a better place to live. Your efforts will go a long way to change and
enrich this turbulent environment, especially in the field of business management where
much more still needs to be done.
5
TABLE OF CONTENTS
DECLARATION…………………………………………………………. ……. ii
COPYRIGHT ………………………………………………………………….. iii
DEDICATION …………………………………………………………………
iv
ACKNOWLEDGEMENTS ……………………………………………………. v
LIST OF TABLES ……………………………………………………………. x
LIST OF FIGURES ……………………………………………………………. xvi
ABSTRACT …………………………………………………………………….. xvii
ABBREVIATIONS AND ACRONYMS …...………………………………… xviii
CHAPTER ONE: INTRODUCTION ………………………………………….. 1
1.1
Background of the Study……..……………………………………………. 1
1.1.1
Forecasting Techniques, Environment and Accuracy of
Performance Forecasting …………............................................... 1
1.1.2
Forecasting in Large Manufacturing Companies and the
Manufacturing Sector in Kenya .................................................... 4
1.2
Research Problem ……………………………………………….............. 7
1.3
Research Objectives …………………………………………………….. 11
1.4
Value of the Study …………..…………………………………............... 11
1.5
Outline of the Thesis……………………………………………………… 13
CHAPTER TWO:
LITERATURE REVIEW ……………………………… 14
2.1
Introduction ……………………………………………………………… 14
2.2
Forecasting Methods ……………………….............................................
2.3
14
2.2.1
Judgmental Forecasting Method ………………………………… 15
2.2.2
Objective Forecasting Method ………………………………….. 16
2.2.3
Combined Forecasting Method …………………………………. 17
Environmental Factors and Forecasting…………………………..……… 19
2.3.1
External Operating Environment ……………………………….. 19
2.3.2
Internal Operating Environment ………………………………… 21
6
2.4
Forecasting, Bargaining Power and Customer Demand Theory ………… 23
2.5
Forecasting Performance and Measurement……………………...…….... 24
2.6
Conceptual Framework ……………….…………………………………. 27
2.7
Hypotheses ………………………………………………………………. 28
CHAPTER THREE: RESEARCH METHODOLOGY ………………………. 30
3.1
Introduction………………………………………………………………… 30
3.2
Research Philosophy ……………………………………………................ 30
3.3
Research Design …………………………………………………………. 31
3.4
Population of the Study………………………………………………......... 32
3.5
Sample Design …………………………………………………………….. 32
3.6
Data Collection Method…………………………………………………… 35
3.7
Data Collection Instrument ………………………………………………. 36
3.8
Types of Variables ………………………………………………………. 36
3.9
Operationalization of Variables ………….……………………………....... 38
3.10
Data Analysis ……………………………………………………………... 40
3.11
Reliability and Validity……..……………………………………………. 44
3.12
Validity Tests for Instrument Used ……………………………………… 44
3.13
Analytical Techniques Applied …………………………………………. 45
CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSIONS .. 48
4.1
Introduction ……………………………………………………………..
4.2
Response Rate …………………………………………………………… 48
4.3
Characteristics of Large Manufacturing Firms in Kenya ………………. 49
4.4
External Operating Environment ………………… ……........................
54
4.5
Internal Operating Environment ………………………………..………
63
7
48
CHAPTER FIVE: FORECASTING METHODS, OPERATING
ENVIRONMENT AND ACCURACY OF PERFORMANCE
FORECASTING ………………………………………………………………… 71
5.1
Introduction ……………………………………………………………… 71
5.2
Forecasting Methods and Business Performance in Large Manufacturing
Firms, in Kenya ………………………………………….. …….……….
71
5.3
Forecasting and Measures of Business Performance …………………..
76
5.4
Forecasting Methods, Operating Environment and Accuracy of
Performance Forecasting ………………………………………………
81
5.5
Results of the Study……………………………………………………… 139
5.6
Discussion of Results …………………………………………………..... 141
5.6.1 Comparison of Forecasting Methods in Accuracy of Performance
Forecasting ………………………………………………………………. 141
5.6.2 Identification of Performance Measures Influenced by the Operating
Environment ……………………………………………………………... 142
5.6.3 Assessment of the Moderating Effect of the External Operating
Environment on the Relationship Between a Forecasting Method and
Accuracy of Performance Forecasting ………………………………….. 142
5.6.4
Examination of the relationships among forecasting techniques,
operating environment and accuracy of performance forecasting ……… 142
5.6.5
Comparison with Previous Studies ……………………………………… 143
CHAPTER SIX: SUMMARY, CONCLUSION AND
RECOMMENDATIONS ……………………………………………………….. 146
6.1
Introduction ………………………………………………………………. 146
6.2
Summary………….………………………………………………………. 146
6.3
Conclusions ……..…..…………………………………………………….. 148
6.4
Recommendations……..…………………………………………………. 149
6.5
Implications …..………………………………………………………….. 150
6.6
Limitations ……………………………………………………………….. 151
6.7
Suggestions for Future Research …..…………………………………….. 152
8
REFERENCES …………………………………………………...………………. 153
APPENDICES …………………………………………………………………... 158
Appendix I:
Letter of Introduction …………………………………….... 158
Appendix II:
Research Questionnaire …………………………................ 159
Appendix III:
Determination of Sample Size……………………………... 168
Appendix IV:
Cronbach Reliability Tests ………………………………... 169
Appendix V:
Tests for Linearity, Collinearity and Homoscedasticity ….. 172
Appendix VI:
Zero-order Correlation for the Forecasting Methods ……. 196
Appendix VII:
Sampling
Frame
–
Kenya
Association
of
Manufacturers
Directory ……………………………………...…………... 198
9
LIST OF TABLES
Table
Page
1
Classification of Business Size by Number of Employees …………….… 7
2
Summary of Knowledge Gaps …………………………………………….. 26
3
Summary of Operational Definitions of the Variables ……………………. 39
4
Summary of Analytical Methods Employed ……………………………… 43
5
Distribution of Firm Ownership ………………………………………….. 49
6
Year of Establishment of the Firms ………………………………………. 50
7
Sectors of the Large Manufacturing Firms …………………………..…... 50
8
Distribution of Employees in Firms by Category……………………...... 51
9
Target Markets ………………………………………………………….... 51
10
International Standards Organization Certification – Frequency Table …. 52
11
Respondents’ Positions …………………………………………………
12
Respondents’ Education Level …………………………………………... 53
13
Respondents’ Years of Experience ……………………..………………… 54
14
Variables of the External Operating Environment – Descriptive Statistics...55
15
Origin of Customers – Descriptive Statistics ……………………………. 55
16
Concentration of Customers – Descriptive Statistics ……………………. 56
17
Market Share - Model Summary ………………………………………… 56
18
Growth in Market Share – Coefficients ………………………………..... 57
19
Customer Market Share – Model Summary …………………………….. 57
20
Origin of Customers and Market Share – Coefficients ………………….. 58
21
Customer Market Penetration – Model Summary ……………………..... 58
22
Customer Market Penetration – Coefficients ……………………………. 59
23
Origin of Competitors – Descriptive Statistics …………………………. 59
24
Concentration of Competitors – Descriptive Statistics …………………
25
Competitors’ Market Share and Market Penetration – Descriptive
Statistics ..………………………………………………………………..
53
60
60
26
Competitors’ Market Share – Correlations ……………………………... 61
27
Origin of Suppliers – Descriptive Statistics …………………………….
28
Characteristics of Suppliers – Descriptive Statistics …………………… 62
10
61
29
Importance of Substitute Products – Descriptive Statistics …………….
62
30
Origin of Substitute Products – Descriptive Statistics ………………….
62
31
Pricing of Substitute Products – Descriptive Statistics …………………
63
32
Importance of Demographic Characteristics – Descriptive Statistics …... 63
33
Forecast Horizons – Descriptive Statistics ……………………………… 64
34
Forecasting Focus – Descriptive Statistics ……………………………… 64
35
Leadership – Kaiser-Mayer-Olkim and Bartlett’s Test …………………. 65
36
Leadership - Rotated Components Matrix ………………………………. 65
37
Strategy – Kaiser-Mayer-Olkim and Bartlett’s Test ……………………. 66
38
Strategy - Rotated Components Matrix …………………………………. 67
39
Organizational Structure – Kaiser-Mayer-Olkim and Bartlett’s Test …..
40
Organizational Structure – Factor Reduction …………………………… 69
41
Organizational Culture – Kaiser-Mayer-Olkim and Bartlett’s Test …….. 69
42
Organizational Culture – Factor Reduction ……………………………… 70
43
Forecasting Methods – Descriptive Statistics …………………………… 72
44
Forecasting Methods – Model Summary ………………………………… 72
45
Forecasting Methods - Regression Analysis Coefficients ……………….. 73
46
Judgmental Forecasting Method – Model Summary ……………………. 73
47
Judgmental Forecasting Method - Regression Analysis, Coefficients…… 74
48
Objective Forecasting Method – Model Summary ………………………. 74
49
Objective Forecasting Method - Regression Analysis, Coefficients …….. 75
50
Combined Forecasting Method – Model Summary ……………………… 75
51
Combined Forecasting Method - Regression Analysis, Coefficients …..… 76
52
Measures of Business Performance – Descriptive Statistics …………….. 77
53
Profit Growth - Model Summary ……………........................................... 77
54
Profit Growth – Regression Analysis, Coefficients …………………….... 77
55
Return on Assets - Model Summary ……………………………………... 78
56
Return on Assets – Analysis of Variance ………………………………... 78
57
Return on Sales - Model Summary ……………………………………… 78
58
Return on Sales – Coefficients …………………….................................
78
59
Growth in Sales - Model Summary ……..................................................
79
11
68
60
Growth in Sales – Regression Analysis, Coefficients ………………….. 79
61
Growth in Market Share - Model Summary ……………………………. 79
62
Growth in Market Share – Regression Analysis, Coefficients ………….
80
63
Employee Growth - Descriptive Statistics ………………………………
80
64
Quarterly Employee Growths - Correlation Matrix …………………….
80
65
New Products’ Development – Descriptive Statistics ………………….. 81
66
New Products’ Correlations – Correlation Matrix ………………………
67
Objective Forecasting Method – Analysis of Variance …………………. 82
68
Objective Forecasting Method – Coefficients …………………………… 83
69
Objective Forecasting Method – Analysis of Variance …..…………….. 83
70
Objective Forecasting Method – Coefficients …………………………… 83
71
Objective Forecasting Method – Analysis of Variance …………………. 84
72
Objective Forecasting Method - Coefficients …………………………... 84
73
Objective Forecasting Method - Coefficients ……………………………. 84
74
Judgmental Forecasting Method – Analysis of Variance ……………….. 85
75
Judgmental Forecasting Method – Coefficients ………………………… 85
76
Judgmental Forecasting Method – Analysis of Variance………………… 86
77
Judgmental Forecasting Method – Coefficients………………………….. 86
78
Judgmental Forecasting Method – Analysis of Variance………………… 86
79
Judgmental Forecasting Method – Analysis of Variance………………… 87
80
Combined Forecasting Method – Analysis of Variance…………………. 87
81
Combined Forecasting Method – Coefficients…………………………… 88
82
Combined Forecasting Method – Analysis of Variance………………….. 88
83
Combined Forecasting Method – Coefficients…………………………… 88
84
Combined Forecasting Method – Analysis of Variance…………………. 89
85
Combined Forecasting Method – Analysis of Variance…………………. 89
86
Internal Operating Environment – Model Summary…………………….. 90
87
Internal Operating Environment – Coefficients…………………………... 91
88
Internal Operating Environment – Coefficients…………………………... 91
89
Internal Operating Environment – Coefficients…………………………... 92
90
External Operating Environment – Coefficients………………………….. 93
12
81
91
External Operating Environment – Coefficients………………………….. 93
92
External Operating Environment – Coefficients…………………………. 94
93
External Operating Environment – Coefficients…………………………
94
94
External Operating Environment – Model Summary……………………
96
95
External Operating Environment – Coefficients…………………………
96
96
External Operating Environment – Model Summary……………………. 97
97
External Operating Environment – Coefficients…………………………. 97
98
External Operating Environment – Model Summary…………………….. 98
99
External Operating Environment – Coefficients………………………….. 98
100
External Operating Environment – Model Summary……………………… 99
101
External operating environment – Coefficients…………………………… 99
102
External Operating Environment – Model Summary…………………….. 100
103
External Operating Environment – Coefficients…………………………. 100
104
External Operating Environment – Model Summary…………………….. 101
105
External Operating Environment – Coefficients…………………………. 101
106
External Operating Environment – Model Summary…………………….. 102
107
External Operating Environment – Coefficients…………………………. 102
108
External Operating Environment – Model Summary……………………. 103
109
External Operating Environment – Coefficients…………………………. 103
110
External Operating Environment – Model Summary……………………. 104
111
External Operating Environment – Coefficients…………………………. 104
112
External Operating Environment – Model Summary…………………….. 105
113
External Operating Environment – Coefficients………………………….. 105
114
External Operating Environment – Model Summary……………………… 106
115
External Operating Environment – Coefficients……………………………106
116
External Operating Environment – Model Summary……………………… 107
117
External Operating Environment – Coefficients……………………………107
118
Internal Operating Environment – Model Summary……………………… 108
119
Internal Operating Environment – Coefficients…………………………… 108
120
Internal Operating Environment – Model Summary……………………… 109
121
Internal Operating Environment – Coefficients…………………………… 109
13
122
Internal Operating Environment – Model Summary………………………. 110
123
Internal Operating Environment – Coefficients……………………………. 110
124
Internal Operating Environment – Model Summary………………………. 111
125
Internal Operating Environment – Coefficients……………………………. 111
126
Internal Operating Environment – Model Summary………………………. 112
127
Internal Operating Environment – Coefficients…………………………… 112
128
Internal Operating Environment – Model Summary………………………. 113
129
Internal Operating Environment – Coefficients…………………………… 113
130
Internal Operating Environment – Model Summary………………………. 114
131
Internal Operating Environment – Coefficients……………………………. 114
132
Internal Operating Environment – Model Summary………………………. 114
133
Internal Operating Environment – Coefficients…………………………… 115
134
Internal Operating Environment – Model Summary………………………. 115
135
Internal Operating Environment – Coefficients……………………………. 116
136
Internal Operating Environment – Model Summary………………………. 116
137
Internal Operating Environment – Coefficients…………………………… 117
138
Internal Operating Environment – Model Summary………………………. 117
139
Internal Operating Environment – Coefficients…………………………… 118
140
Internal Operating Environment – Model Summary……………………… 118
141
Internal Operating Environment – Coefficients…………………………… 119
142
Internal and External Operating Environments – Model Summary………. 120
143
Internal and External Operating Environments – Coefficients……………. 121
144
Internal and External Operating Environments – Model Summary……….. 121
145
Internal and External Operating Environments – Coefficients……………. 123
146
Internal and External Operating Environments – Model Summary……….. 123
147
Internal and External Operating Environments – Coefficients……………. 124
148
Internal and External Operating Environments – Model Summary……… 124
149
Internal and External Operating Environments – Coefficients……………. 125
150
Internal and External Operating Environments – Model Summary……….. 125
151
Internal and External Operating Environments – Coefficients…………….. 126
152
Internal and External Operating Environments – Model Summary………. 126
14
153
Internal and External Operating Environments – Coefficients……………. 127
154
Internal and External Operating Environments – Model Summary……….. 128
155
Internal and External Operating Environments – Coefficients…………….. 128
156
Internal and External Operating Environments – Model Summary……….. 129
157
Internal and External Operating Environments – Coefficients…………….. 129
158
Internal and External Operating Environments – Model Summary……….. 130
159
Internal and External Operating Environments – Coefficients……………. 131
160
Internal and External Operating Environments – Model Summary……….. 131
161
Internal and External Operating Environments – Coefficients……………. 133
162
Internal and External Operating Environments – Model Summary……….. 132
163
Internal and External Operating Environments – Coefficients……………. 133
164
Internal and External Operating Environments – Model Summary……….. 134
165
Internal and External Operating Environments – Coefficients……………. 135
166
Summary of Hypotheses Test Results…………………………………….. 136
15
LIST OF FIGURES
Figure
Page
1
Porter’s 5-Forces Diagram ……………………………………………… 20
2
Conceptual Framework …………………………………………………
3
Leadership – Scree Plot…………………………………………………… 66
4
Strategy – Scree Plot……………………………………………………… 68
5
Organizational Structure – Scree Plot……………………………………. 69
6
Organizational Culture – Scree Plot……………………………………… 70
16
28
ABSTRACT
This study explored the relationship among forecasting techniques, operating
environment and APF in LMFs. Study objectives were to compare forecasting techniques
in APF, identify performance measures influenced by the operating environment, assess
moderating effects of the operating environment on the relationship between a method
and APF and to examine the relationships among forecasting methods, operating
environment and APF. A model and framework were formed on the basis of previous
research, an empirical testing of the model was done after collecting data using a
structured questionnaire. From a sample frame of 487 LMFs proportionate stratified
random sampling was used to select a sample of 217 firms. Response rate was 81 percent.
Data analysis used descriptive statistics, factor analysis, ANOVA, correlation and linear
regression. Hypotheses were tested by analyzing independent effects of selected variables
on APF. Results indicated there was empirical evidence that the effect of objective and
combined forecasting techniques, and external operating environment on APF was
strong. Conversely, empirical evidence indicated the effect of variables of the internal
operating environment on APF was not strong. Further, the effect of variables of the
external operating environment accounted for more variation in APF compared to
variables of the internal operating environment. There was statistical evidence that
competitors and external customers influence APF. For objective one the hypothesis on
the influence between a forecasting method and accuracy of performance forecasting was
tested using objective, judgmental and combined forecasting methods. Measures of
accuracy of performance forecasting used were EV, ROS, ROA and growth in market
share. Results provided statistical evidence that the three forecasting methods yielded
APF against expected value and ROS. It was concluded that the three forecasting
methods could be used to accurately forecast expected value and ROS. Objective two was
to identify performance measures that were influenced by the operating environment in
LMFs. The above performance measures were tested against leadership, strategy,
structure and culture as elements of the internal operating environment and customers,
competitors, suppliers, substitute products and demographic characteristics as parameters
of the external operating environment. There was statistically significant evidence that,
except for EV and ROS, external operating environment had an influence on APF.
Objective three assessed moderating effect of external and internal operating
environments on the relationship between a forecasting method and APF. Using
regression analysis, results indicated that external operating environment had a partial
moderating effect on the relationship between each of the forecasting methods and APF,
with respect to ROS and ROA for the objective method and ROA for both combined and
judgmental methods. Conversely, the internal operating environment had a moderating
effect on the relationship between objective forecasting method and APF with respect to
ROS. Objective four examined relationships among forecasting techniques, operating
environment and APF. Using regression analysis, results showed that the joint effect of
the operating environments had a partial moderating effect on the relationship between
objective and combined forecasting methods and APF, with respect to EV and ROS.
Study findings indicated that objective and combined forecasting yielded APF in a
competitive environment. For APF a forecasting method should not ignore the effects of
the operating environment. The study contributes by developing an exploratory model to
link LMFs APF with variables of the operating environment.
17