DIFFERENTIATION STRATEGY AS A DETERMINANT OF COMPETITIVE ADVANTAGE AMONG MANUFACTURING SMALL AND MEDIUM ENTERPRISES IN NAIROBI CITY COUNTY, KENYA

Manufacturing small and medium enterprises (SMEs) in Nairobi’s Industrial Area operate under rising input costs, aggressive import competition and high rates of business closure, yet Kenyan evidence linking a specific competitive strategy to measurable competitive outcomes in this sector remains scarce. This article examines the effect of differentiation strategy on the competitive advantage of manufacturing SMEs in Nairobi City County. Anchored on Porter’s generic strategies framework and interpreted through the resource-based view and dynamic capabilities theory, the study adopted a quantitative cross-sectional correlational design and a census of the 66 manufacturing SMEs registered with the Kenya Association of Manufacturers and operating within the Industrial Area. Structured questionnaires using five-point Likert items were administered to owners and senior managers between July and August 2025, and 58 usable responses were returned, a response rate of 87.88%. Data were analysed in SPSS version 27.0 using descriptive statistics, Pearson product-moment correlation and multiple linear regression, with differentiation estimated simultaneously with cost leadership and focus strategy so that its effect is net of the other two. Differentiation was strongly adopted (composite M = 4.20, SD = 0.85) and was strongly and significantly associated with competitive advantage (r = 0.781, p < 0.01). Within the regression model it retained a positive and significant effect (B = 0.741, β = 0.646, t = 3.140, p = 0.003) and recorded the largest standardised coefficient of the three strategies, which jointly explained 79.0% of the variance in competitive advantage (R² = 0.790, F(3, 54) = 21.015, p < 0.001). The null hypothesis was therefore rejected. Adoption is strongest in low-cost, adaptive practices such as customer-responsive packaging and benchmarking, and weakest in genuine exclusivity, suggesting that firms should invest in less easily imitated forms of differentiation and that policy support should target product innovation capacity.