Assessment of the effect of Cost Leadership Strategy on the performance of Liquefied Petroleum Gas Companies in Eldoret town, Uasin Gishu County, Kenya

International Journal of Business and Management Invention
ISSN (Online): 2319 – 8028, ISSN (Print): 2319 – 801X
www.ijbmi.org || Volume 4 Issue 4|| April. 2015 || PP-01-07
www.ijbmi.org 1 | Page
Assessment of the effect of Cost Leadership Strategy on the
performance of Liquefied Petroleum Gas Companies in Eldoret
town, Uasin Gishu County, Kenya
1
Nyauncho M. Josiah , 2
Nyamweya Isaac Nyagara
1
Lecturer, Moi University
2
Accountant, University of Eldoret
ABSTRACT: The objective of the study was to investigate the effects of cost leadership strategy on
performance of LPGC in Eldoret town. In doing this, the study adopted Porter's Generic Competitive Strategies
which states that, cost leadership is a firm sets out to become the low cost producer in its industry. The study
used a survey design and targets a population of 175 which comprise of 10 station managers, 40 departmental
heads, 20 supervisor and 105 employees. A sample size of 64 was selected using stratified sampling. The study
used questionnaires and interview schedule as data collection instruments. Data analysis was carried out using
descriptive statistics such as Spearman rank coloration, means. Pearson’s product moment correlation
coefficients were used to assess the degree of linear relationship among competitive strategies and between
competitive strategies and performance of the liquefied petroleum gas companies. Normality of the variable was
tested for cost–leadership using skewness and Kurtosis. Homogeneity of variances was tested using Levenne’s
test of equality of variances across gender of respondents. The study established that the company uses cost
minimization of operational costs (M=427, SD=1.058) Minimization of procurement costs (M=4.54,
SD=0.770), evaluation of labour costs (M=4.17,SD=0.966) and Conducts costing of its promotion activities
(M=3.98 SD==1.2050.The study concluded that, cost leadership influences the performance of LPGCs
performance enabling the company to reduce price leading to high volume of sales visa a-visa profit margin,
increase in service delivery, less return inwards, reduced operational costs and reduced wastages. The study
recommended that, Liquidified petroleum companies should carry out through market research to identify the
gaps in the markets. The gaps should be varied that is product gap, market gap and promotion gap before
designing the competitive strategies.
KEY WORDS: Cost leadership strategy, performance
I. INTRODUCTION
Background Information: Competitive advantage as the ability to stay ahead of present or potential
competition, thus superior performance reached through competitive advantage will ensure market leadership.
Also it provides the understanding that resources held by a firm and the business strategy will have a profound
impact on generating competitive advantage. Powell (2001) views business strategy as the tool that manipulates
the resources and create competitive advantage, hence, viable business strategy may not be adequate unless it
possess control over unique resources that has the ability to create such a unique advantage. Competitive
advantage occurs when an organization acquires or develops an attribute or combination of attributes that allows
it to outperform its competitors. These attributes can include access to natural resources, such as high grade
scores or inexpensive power, or access to highly trained and skilled personnel (Clulow et al.2003). New
technologies such as robotics and information technology can provide competitive advantage, whether as a part
of the product itself, as an advantage to the making of the product, or as a competitive aid in the business.
Statement of the Problem: Keeping pace with changing business environment the present day environment
is so dynamic and fast changing thus making it very difficult for any modern business enterprise to operate.
Hence the product leaders have a challenge on how to be very creative and fast in problem solving while
maintaining their team work in order to successed. According to Monroe (2004), consumer electronics, fund
management, automotive and pharmaceutical industries include many companies pursuing a strategy of product
leadership

Assessment of the effect of...
Objective of the Study: To investigate the effects Cost Leadership Strategy on the performance of LPGC in
Eldoret town.
Research Hypothesis: Ho1: Cost Leadership Strategy has no significant effect on the performance of LPGC
in Eldoret town.
II. LITERATURE REVIEW
Cost Leadership Strategy: According to Porter's Generic Competitive Strategies, cost leadership, a firm sets
out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the
structure of the industry. They may include the pursuit of economies of scale, proprietary technology,
preferential access to raw materials and other factors (Peteraf, 1993). A low cost producer must find and exploit
all sources of cost advantage. If a firm can achieve and sustain overall cost leadership, then it will be an above
average performer in its industry, provided it can command prices at or near the industry average.
The goal of Cost Leadership Strategy is to offer products or services at the lowest cost in the industry.
The challenge of this strategy is to earn a suitable profit for the company, rather than operating at a loss and
draining profitability from all market players. Companies such as Walmart succeed with this strategy by
featuring low prices on key items on which customers are price-aware, while selling other merchandise at less
aggressive discounts. Products are to be created at the lowest cost in the industry (Amit and Zott, 2001). An
example is to use space in stores for sales and not for storing excess product. This strategy involves the firm
winning market share by appealing to cost-conscious or price-sensitive customers. This is achieved by having
the lowest prices in the target market segment, or at least the lowest price to value ratio (price compared to what
customers receive). To succeed at offering the lowest price while still achieving profitability and a high return
on investment, the firm must be able to operate at a lower cost than its rivals. There are three main ways to
achieve this (Kotler and Armstrong 2010).
The first approach is achieving a high asset turnover. In service industries, this may mean for example
a restaurant that turns tables around very quickly, or an airline that turns around flights very fast. In
manufacturing, it will involve production of high volumes of output. These approaches mean fixed costs are
spread over a larger number of units of the product or service, resulting in a lower unit cost, i.e. the firm hopes
to take advantage of economies of scale and experience curve effects (Chesbrough, Rosenbloom, 2002). For
industrial firms, mass production becomes both a strategy and an end in itself. Higher levels of output both
require and result in high market share, and create an entry barrier to potential competitors, who may be unable
to achieve the scale necessary to match the firms’ low costs and prices.
The second dimension is achieving low direct and indirect operating costs. This is achieved by offering
high volumes of standardized products, offering basic no-frills products and limiting customization and
personalization of service. Production costs are kept low by using fewer components, using standard
components, and limiting the number of models produced to ensure larger production runs (Gregson, Andrew
2008). Overheads are kept low by paying low wages, locating premises in low rent areas, establishing a cost-
conscious culture, etc. Maintaining this strategy requires a continuous search for cost reductions in all aspects of
the business. This will include outsourcing, controlling production costs, increasing asset capacity utilization,
and minimizing other costs including distribution, R&D and advertising. The associated distribution strategy is
to obtain the most extensive distribution possible. Promotional strategy often involves trying to make a virtue
out of low cost product features.
The third dimension is control over the supply/procurement chain to ensure low costs. This could be
achieved by bulk buying to enjoy quantity discounts, squeezing suppliers on price, instituting competitive
bidding for contracts, working with vendors to keep inventories low using methods such as Just-in-Time
purchasing or Vendor-Managed Inventory. Wal-Mart is famous for squeezing its suppliers to ensure low prices
for its goods (Kotler and Armstrong 2010). Dell Computer initially achieved market share by keeping
inventories low and only building computers to order. Other procurement advantages could come from
preferential access to raw materials, or backward integration.
Some scholars assume that cost leadership strategies are only viable for large firms with the
opportunity to enjoy economies of scale and large production volumes. However, this takes a limited industrial
view of strategy. Small businesses can also be cost leaders if they enjoy any advantages conducive to low costs.
For example, a local restaurant in a low rent location can attract price-sensitive customers if it offers a limited
menu, rapid table turnover and employs staff on minimum wage. Innovation of products or processes may also

enable a startup or small company to offer a cheaper product or service where incumbents' costs and prices have
become too high (Monroe, 2004),. An example is the success of low-cost budget airlines who despite having
fewer planes than the major airlines, were able to achieve market share growth by offering cheap, no-frills
services at prices much cheaper than those of the larger incumbents.
A cost leadership strategy may have the disadvantage of lower customer loyalty, as price-sensitive
customers will switch once a lower-priced substitute is available. A reputation as a cost leader may also result in
a reputation for low quality, which may make it difficult for a firm to rebrand itself or its products if it chooses
to shift to a differentiation strategy in future. This dimension is not a separate strategy per se, but describes the
scope over which the company should compete based on cost leadership or differentiation. The firm can choose
to compete in the mass market (like Wal-Mart) with a broad scope, or in a defined, focused market segment with
a narrow scope. In either case, the basis of competition will still be either cost leadership or differentiation
(Amit and Zott 2001).
In adopting a narrow focus, the company ideally focuses on a few target markets (also called a
segmentation strategy or niche strategy). These should be distinct groups with specialized needs. The choice of
offering low prices or differentiated products/services should depend on the needs of the selected segment and
the resources and capabilities of the firm. It is hoped that by focusing your marketing efforts on one or two
narrow market segments and tailoring your marketing mix to these specialized markets, you can better meet the
needs of that target market. Market leadership in one of the three disciplines, and perform to an acceptable level
in the other two which include Operational excellence and Customer intimacy (Gregson and Andrew 2008).
Operational excellence aims to accomplish cost leadership. Here the main focus centres on automating
manufacturing processes and work procedures in order to streamline operations and reduce cost. The strategy
lends itself to high-volume, transaction-oriented and standardized production that has little need for much
differentiation. It is ideal for markets where customers value cost over choice, which is often the case for
mature, commoditized markets where cost leadership provides a vehicle for continued growth. Leaders in the
area of operational excellence are strongly centralized, with strong organizational discipline and a standardized,
rule-based operation (Gregson and Andrew 2008).
III. METHODOLOGY
Research Design: The study adopted a descriptive survey design, so as to help the researcher to gather data
from a sample of population at a particular time. This helped the researcher to assess the phenomenon as it is on
the field. The research design is the glue that holds all the elements in a research together and constitutes a blue
print for the collection measure and analysis of data Kothari (2003) Survey research is getting information from
a large number of people by interviewing a few of them to represent the whole population through the data
offered by the respondent. The survey method attempted to picture or document current conditions or attitudes,
that is, to describe what exists at the moment (Wimmer, 1987). The survey method tends to be time conscious as
it can be carried out on a large number in a shorter period of time.
Population: The target population was 175 respondents (see table 1), comprising of 10 station managers, 40
departmental heads and 20 supervisors and 105 employees from liquidified petroleum gas companies.
Table 1 Target Population
Strata Target position
Station manager 10
Departmental heads 40
supervisors 20
Employees 105
Totals 175
Source: ERC (2015)
Sample and Sampling Techniques: The sample size used was 64 respondents comprising of 4 station
managers, 15 departmental heads, 7 supervisors and 105 employees was selected using stratified sampling. This
was calculated according to Yamane (2007), who developed a formula that was used to calculate the sample
size. This is ideal for population size that is smaller than 500. This formula is given as;

n=N/1+N (e) 2
Where n- is the required sample size
N-is the population size
e-is the error margin
Where N=175
e=.10
Hence n=175/1+175(.1)2
=64
The sample size used was 64 which make up for 36.6%of the target population. The sample size was
differentiated in their strata based on the 36.6% .This was done according to stratified method. This was ideal
since the workers belong to different categories and each category has different role from each other Gay
(2001). The categories were put into four strata; the station managers, head of departments, supervisors and
employees strata were calculated as follows
Table 2 Sample size
Strata Target population sample size
Station manager 10*0.366 4
Departmental heads 40*0.366 15
supervisors 20*0.366 7
Employees 105*0.366 38
Totals 175*0.366 64
Source: author (2014)
To sample respondents form each stratum the names of the target population was written and placed in a basket
and the required sample size selected hence giving each member in the target population an equal chance of
beings selected.
Data collection instruments
The data collection instrument used was questionnaires.The questionnaires were administered to the station
managers, departmental heads, supervisors and employees. The questionnaires were used because they can be administered
to a large number of correspondents simultaneously and require fewer skills to administer (Feverman, 1997). It also helped
the researcher to get responses from different respondents concerning the variables considered by the researcher and closed
and open-ended questions were used. At the same time the questionnaires was used as they give the accurate information as
the name and identity of the respondent is always not disclosed. The questionnaires also make data analysis easier to the
researcher after the research. The major demerit of the questionnaires is that it is normally bound to be lost in case the
respondent is given time to go and fill in the questionnaire at later time than immediately.
Validity of Instruments
For the validity to be ascertained the instruments ought to give the same results when repeated in the same
category of the population with the same conditions subjected to. Hence, validity is the accuracy and meaningfulness of
inferences which on the research results Validity on the other hand, according to Kane (2001), was determined and
demonstrated where an instrument performs what it was designed to perform. The research instruments were made available
to the thesis supervisors in the faculty of commerce. This helped the instruments measure the content they intended to
measure (content validity); correlate the results (concurrent validity) and measure what the instruments purport to measure
(face validity). The measure of reliability was therefore be to ensure that the responses was consistent across variables
(consistency); individuals do not vary in their responses if the instruments were administered a second time (stability).
Reliability of the Instruments
Data reliability involves the consistency and precision in which the measuring instrument
demonstrates. This means that if the instruments which was used are exposed to the same test but at a different
environment it has to give the same results provided the measurement in question are the same. Also it means
that in case the same test is carried over and over again by different people but the same situation it must give
the same outcome expected, reliability of the instrument will be tasted by carry out a pilot study in the adjacent
town of Iten.

Reliability is the extent to which results are consistent over time and an accurate representation of the
total population under study is referred to as reliability and if the results of a study can be reproduced under a
similar methodology, then the research instrument is considered to be reliable (Orodho, 2003).
Data Analysis and Presentation
Data to be obtained for this study was coded and edited for completeness. The study used descriptive
such as mean and standard deviation and inferential statistics such as product moment correlations, multiple
regression analysis were used to analyze data. The data collected was presented using graphs, pie charts and
tables.
IV. FINDING AND RESULTS
Univariate outliers: According to Stevens (2002), outliers are cases that have extreme values. Such values
when in existence can alter the results of data analysis. In the study, a case was considered a univariate outlier if
it’s standardized score lay outside the interval -3.0 to +3.0 (Stevens, 2002). Results presented in Table 3 reveal
that variable of cost leadership strategy had univariate outliers. Cost leadership strategy had two outliers in cases
30 (z=5.05159) and 31(z=5.05159). The case was revisited and the extreme values were then removed. The case
was then used for further analysis.
Table 3: Univariate Outliers
Testing for Normality
Normality of the variables was tested for cost–leadership. Response scores for the item measuring a given
construct were first summated and averaged to give a particular score for the construct.
Normality was then assessed using skewness and Kurtosis (Tabachnich & Fidell, 2007). The distribution across
the variable was considered to be normally distributed if skewness and kurtosis values fell between -20.0 to 2.0.
As shown in Table 4 which shows the skewness and kurtosis values for the study variable, skewness and
kurtosis values for the variable in the study were within the acceptance range. Normality assumption was
therefore considered to have been met.
Table 4: Testing for the Assumption of Normality
Skewness Kurtosis
Statistic Std. Error Statistic Std. Error
Cost Leadership -.889 .325 .322 .639
Source: Survey Data (2013)
Testing for Linearity: Multiple regression analysis assumes that variable in the analysis are related to each
other in a linear way; that the best fitting function is a straight line. Pearson’s product moment correlation
coefficients were used to assess the degree of linear relationship among competitive strategies and between
competitive strategies and performance of the liquefied petroleum gas companies. Results displayed in Table 5
reveal that there were positive associations among the competitive strategies as well as between competitive
strategies and firm performance. Linearity assumption was therefore supported.
Table 5: Testing the Assumption of Linearity
Cost Leadership Differentiation Focus Pricing Performance
Cost Leadership 1
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
Testing for Homogeneity of Variances: Homogeneity of variances was tested using Levenne’s test of equality
of variances across gender of respondents. The study tested the assumption that the variance of each of the male
and female sub-groups was the same on the study variables. The desired outcome was therefore failure to reject
this assumption, in which case it would be concluded that the variance of the subgroups was the same.
Variable Case Z-Value
Cost leadership strategy 30
31
5.05159
5.05159

Results shown in Table 6 indicate that at the alpha level of 0.05, hence the variable was significant. The variable
was transformed and then found to be non-significant. It was therefore concluded that homogeneity of variances
was supported.
Table 6: Test of Homogeneity of Variances
Levene Statistic df1 df2 Sig.
Cost Leadership .000 1 52 .987
Descriptive Statistics of Study Variables: Means and standard deviations were used to examine respondents
perceived prevailing levels of competitive strategies as well as performance of the liquefied petroleum gas
companies in the study area.
Levels of Cost Leadership strategies among liquefied petroleum gas companies
Research objective one sought to investigate the effects of cost leadership strategy on the performance
of LPGC. In this regard, five items were used to measure the prevailing levels of cost leadership strategies in
LPGC in the study area. Respondents were asked to indicate their agreement or disagreement with the five
items. Responses were elicited o a 5-point scale ranging from 1-strongly disagree, to 5-strongly agree.
Results presented in Table 7 reveal that on the overall liquefied petroleum gas company’s in the study
area incorporate cost leadership strategies in their operations. In particular, respondents tended to agree that the
company minimizes its procurement costs (M=4.54, SD=0.770); that the company minimize on its operational
costs (M=4.22, SD=1.058); that the company conducts costing of its labour (M=4.17, SD=0.966); that the
company conducts costing of its services (M=3.98, SD=1.281); and that the company conducts costing of its
promotion activities (M=3.98, SD=1.205).
Table 7: Cost Leadership strategy Among Liquefied Petroleum Gas Companies
Mean Std. Deviation
The company minimizes its procurement cost 4.54 .770
The company minimizes on operational cost 4.22 1.058
The company conducts costing of its labour 4.17 .966
The company conducts service costing 3.98 1.281
The company conducts costing promotion activities 3.98 1.205
These results show that LPGCs within the study area endeavour to adopt cost leadership strategies in
their operations. These strategies include among others procurement cost strategy, operational cost strategy,
labour costing strategy, service costing strategy and promotion costing strategy.
Testing the impact of cost leadership strategy on performance of LPGC
Research hypothesis one postulated a lack of significant effect of cost leadership strategy on
performance of LPGC. Results of the multiple regression coefficients presented in Table 8 below indicate that
the standardized coefficient for cost leadership strategy was significant (β=0.357, P=0.011). The hypothesis that
cost leadership strategy has no effect on performance of LPGC was therefore rejected.
Table 8: Regression Coefficientsa
Model Unstandardized coefficients Standardized
Coefficients
Collinearity Statistics
B Std. Error Beta t Sig Tolerance VIF
1 (Constant) 2.260 .204 11.063 .000
Cost
leadership
strategy
.180 .068 .357 2.639 .011 .210 4.751
a. Dependent Variable: Performance of LPGC
These results imply that cost leadership strategy has a positive effect on performance of LPGC.
Consequently, an increase of 1 standard deviation in cost leadership strategy is likely to result in an increase of
0.357 in performance of LPGC.

V. CONCLUSION AND RECOMMENDATION
From the findings it is evident that cost leadership influences the performance of LPGCs performance.
The gain cost leadership through minimizing procurement cost minimizing, operational costs, conducting cost of
its labour, service costing and evaluation of promotion costs. Cost leadership enables the company to reduce
price leading to high volume of sales visa a-visa profit margin, increase in service delivery, less return inwards,
reduced operational costs and reduced wastages.
Liquidified petroleum companies should carry out through market research to identify the gaps in the
markets. The gaps should be varied that is product gap, market gap and promotion gap before designing the
competitive strategies. This will enable appropriate strategy geared towards increasing performance.
REFERENCES
[1]. Amit, R.; Zott, C. (2001): Value creation in e-business. Strategic Management Journal 22, 493 520.
[2]. Chesbrough, H.; Rosenbloom, R.S.( 2002). 'The role of the business model in capturing value from
innovation: evidence from Xerox Corporation's technology spin‐off companies.' Industrial and Corporate
Change, 11:3, 529-55.
[3]. Gregson, Andrew (2008). Pricing Strategies for Small Business Self Counsel Press.
[4]. Kothari, C.R. (2005) Research Methodology. Methods and Techniques (Second Revised).
[5]. Orodho A.J, (2003) Essentials of Educational and Social Science Research methods: Qualitative and
Quantitative Approaches. Nairobi Acts Press.
[6]. Peteraf M.A., (1993) "The Cornerstones of Competitive Advantage: A Resource-Based View," in
Strategic Management Journal 1993, Vol. 14, pp. 179-191.
[7]. Porter, Michael E., (1985) Competitive Advantage., Ch. 1, pp 11-15. The Free Press. New York.

Assessment of the effect of Cost Leadership Strategy on the performance of Liquefied Petroleum Gas Companies in Eldoret town, Uasin Gishu County, Kenya

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