Page 1 of 8

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 07

August 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 605

The Relationship of Organizational Structure and Return on

Assets of large Manufacturing Firms in Kenya

Paul Muturi Kariuki,

University of Nairobi, Kenya Department of business administration School of Business

paulmuturikariuki@gmail.com

Abstract

The general objective of this study was to

determine the effect of organization structure

on return on assets of large manufacturing

firms in Kenya. The specific objective of this

study was to determine the influence of

organizational structure on return on assets

of large manufacturing firms in Kenya. The

study was a cross sectional survey targeting

102 large manufacturing firms and the

response rate was from 94 firms. The data

was analyzed using Statistical Package for

Social Sciences. Null hypothesis was tested

and results indicated that organizational

structure had no influence on return on

assets. The study was limited in that change

of variables of study was not monitored or

observed over time as would be the case with

longitudinal studies.

Key terms: Organizational structure,

Return on assets (ROA), Manufacturing

firms, Performance, Formalization,

Centralization

Introduction

There have been debate whether

organizational structure influence return on

assets or not. The study aimed at establishing

the position regarding this debate in Kenya

large manufacturing firms. Organizational

structure is how the organization is designed

to meet its goals and objectives. This study

used return on assets as measure of

performance. The Kenya manufacturing

sector decelerated from an expansion of 3.4

percent in 2011 to a growth rate of 3.1

percent in 2012. The slower growth was due

to high cost of production, stiff competition

from imported goods, high cost of credit and

political uncertainty due to the 2013 general

elections (Kenya National Bureau of

Statistics (KNBS), 2013). Manufacturing

exports are targeted at both regional markets,

including the Common Market for Eastern

and Southern Africa (COMESA) and the

East African Community (EAC) as well as

European and American markets. Kenyan

manufacturers have in recent years through

African Growth Opportunity Act (AGOA)

and associated export processing zones,

increased exports of textiles, mainly

targeting the US market.

Karabag and Berggren (2013) study, based

on 1,000 largest manufacturing firms in

Turkey found that firm related factors did

not significantly influence performance,

instead factors related to industry structure

and business groups membership were the

strongest determinants of firm perspective.

Chen (2010) showed that firm factors

Page 2 of 8

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 07

August 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 606

explained a substantial part of Korean and

Taiwanne firm performance. Zheng, et al.,

(2010) study observed a negative effect of

structure on organizational effectiveness.

Review of previous studies indicates they

have been conflicting results and this study

sought to determine the relationship of

organizational structure and return on assets

of large manufacturing firms in Kenya.

Research Objective

The specific objective was to determine the

influence of organizational structure on

return on assets of large manufacturing firms

in Kenya.

Literature Review

Organizational Structure and

Performance

Chandler (1962) substantiated ‘structure

follows strategy' thesis based on four case

studies of American conglomerates that

dominated their industry from the 1920's

onward. The ensuing debate on the

contingent relationship between strategy,

structure, and firm performance flourished in

the 1970s and 1980s. Researchers have used

ground-breaking work by Chandler (1962) to

build the Strategy-Structure Performance

(SSP) paradigm, which has become the most

important sub stream of research on

structural contingency theory (Galunic &

Eisenhardt, 1994). Rather than seeing each

of strategy or structure alone having an

important impact on performance, the

paradigm holds that it is the linkage between

them that is important (Lenz, 1980; Miller,

1988). According to Akinyele (2011) the

organizational structure and strategies

adopted by oil and gas marketing companies

affect market share positively. Lavie (2006)

gave evidence that the level of organizational

structure and strategies was positively

related to company effectiveness. Grewal

and Tansuhaj (2001) reported that more

successful companies had well defined

organizational structures in sharp contrast to

less successful companies. Focusing on large

firms (Ekpu, 2004) found a positive

relationship between the unstructured

organizational patterns and large firm

financial performance.

Organizational structure is normally

described as the way responsibility and

power are allocated, and work procedures are

carried out among organizational members.

Robbin and DeCenzo (2005) argue that the

organizational structure performs a

significant role in the achievement of

organization’s set objectives and

accomplishment of its strategic goals and

direction. The organizational structure

becomes more relevant when it is in

harmony with the objective mission,

competitive environment and resources of

the organisation. The believe “one cap fits

all” is non-existence in an organizational

structure design as no two firms are entirely

similar and as such faces different challenges

from its environment.

Mansoor, et al., (2012) asserted that

performance effect of organizational

structure is moderated by changes in the

Page 3 of 8

Journal for Studies in Management and Planning

Available at http://internationaljournalofresearch.org/index.php/JSMaP

e-ISSN: 2395-0463

Volume 01 Issue 07

August 2015

Available online: http://internationaljournalofresearch.org/ P a g e | 607

environment and hence, conclude that to

attain desired superior performance by an

organization, adequate attention is required

to have organizational structure that can

match the prevailing environment dynamism

in place. These structures are characterized

with different attributes such as control,

communication, organizational knowledge,

task, prestige, governance and values.

Hajipour, et al., (2011) studied on

relationship between industry structure,

strategy type and organizational

characteristics and the results indicated that

industry structure determine organizational

characteristics. Mansoor, et al., (2012)

contended that ideal organizational structure

is a recipe for superior performance.

Organizational structures are discussed in the

extant literature with reference to two key

factors; formalization and centralization

(Bucic & Gudergan, 2004). Organizational

structure includes the nature of layers of

hierarchy, centralization of authority, and

horizontal integration. It is a multi- dimensional construct in which concerns:

work division especially roles or

responsibility including specialization,

differentiation or departmentalization,

centralization or decentralization,

complexity, and communication or

coordination mechanisms including

standardization, formalization and flexibility.

The main feature of new organizational

structures is the flexibility and the ability to

acclimatize to the changing environment

(Lenz, 1980). Mintzberg (1979) indicated

that an organic structure, with its low degree

of formality and high degree of information

sharing and decentralization, improves an

organization's flexibility and ability to adapt

to continual environment change.

Organizations having different levels of

adaptation would utilize different strategies

to match their structural arrangements.

According to Miles and Snow (1978),

strategy typology organizations with a high- level of adaptation would exhibit a

prospector strategy and organic structure

while organizations with a low-level of

adaptation would adopt a defendant.

Oyewobi, et al., (2013), study on impact of

organizational structure and strategies on

construction organizations performance,

found that organization structure had no

direct impact on both financial and non- financial performance. Qingmin, et al.,

(2012) study in Austria and China found that

organizational structure influence

performance directly and indirectly.

According to Robbin and DeCenzo (2005)

organizational structure has two essential

functions which were control and

coordination. Controls involved making sure

that decision makers at all levels use the

managerial or hierarchial constrains as of

one of the criteria in making their decisions.

According to Bucic and Gudergan (2004),

there are four generic types of control

mechanism which include centralization,

formalization, outputs and cloning. Robbin

and DeCenzo (2005), defines formalization

as degree to which jobs are standardized

while defines centralization as a situation

where decisions are made at the top of the

organization. Bucic and Gudergan (2004),