Vertical integration and performance of food manufacturing firms in Nairobi

Abstract

This study sought to establish the relationship between the degree of vertical integration and performance in food manufacturing firms in Nairobi. It examined the correlation between profitability performance ratios return on assets, return on investment and net profit margin individually vis-a-vis the degree of vertical integration as indicated by extent of a firm's value addition. A cross sectional survey was carried out on seven food manufacturing firms in Nairobi in the year 2000 consisting of five firms listed on the Nairobi Stock Exchange and two to unlisted firms. An analysis using secondary data from financial reports was done to establish each firm's degree of vertical integration, its three common profitability performance ratios, and finally the relationship between the degree of vertical integration and each of the profitability performance ratios. The findings suggest that a firm's performance was moderately positively associated to it's degree of vertical integration. Further the study suggests that a change in the degree of vertical integration accounted for between 24.4% to 39.7% of the total change in profitability of a firm. The results showed that there was a positive correlation between the degree of vertical integration and the profitability performance of firms in the food manufacturing industry in Nairobi area in the year 2000. The implications of this study are that food manufacturing firm policy makers and managers in Nairobi area should create and adopt policies that take cognisance of and that facilitate vertical integration as a possible strategy, since it is likely to result in improved profitability performance.