Replacement Business Strategies and Financial Performance: Evidence from Companies in Puntland State of Somalia

Abstract

Firms in fragile economies face persistent challenges arising from institutional weaknesses, capital constraints, and market volatility, which often limit the effectiveness of conventional diversification strategies. In response, many organizations adopt replacement strategies renewing productive capacity, reselling non-core assets, and recycling existing resources as pragmatic approaches to sustain financial performance. This study investigates the impact of such strategies on the financial performance of companies in the Puntland State of Somalia. Anchored in the Resource-Based View (RBV) and guided by a positivist philosophy, the research employed a descriptive-explanatory design. Data was collected from 160 department heads across 53 firms in Puntland, representing telecommunications, banking, construction, manufacturing, trading, and accommodation sectors. Structured questionnaires on a five-point Likert scale were used to measure replacement strategies and financial performance, assessed through indicators including Return on Assets (ROA), revenue growth, liquidity, and cost efficiency. Analysis conducted using SPSS version 28, applying descriptive statistics, Pearson correlation, and multivariate regression, revealed that capacity renewal and resource recycling exert significant positive effects on profitability, asset utilization, and revenue growth. Conversely, asset resale strategies enhanced short-term liquidity but had limited influence on long-term profitability when applied in isolation. The study concludes that replacement strategies can meaningfully enhance firm performance in fragile economies when strategically aligned and supported by managerial capability. It recommends that firms prioritize capacity renewal and resource recycling, while policymakers strengthen institutional frameworks to maximize the effectiveness of these strategies.