thesis- impact of vertical integration strategy on

Impact of Vertical Integration Strategy on the Financial Performance of Olam Nigeria Limited

Ndifreke Clinton-Etim

(A00014716)

M.Sc. Business Administration

School of Business and Entrepreneurship

American University of Nigeria

2020

II

Impact of Vertical Integration Strategy on the Financial Performance of Olam Nigeria

Limited


(A00014716)

A thesis submitted to the School of Business and Entrepreneurship (SBE) in partial

fulfillment of the requirements for the award of the degree of Master of Science

(M.Sc.) in Business Administration in the American University of Nigeria.

Spring 2020

III

DECLARATION

I, Ndifreke Clinton-Etim declare that am the sole author of this thesis “Impact of

Vertical Integration Strategy on the Financial Performance Olam Nigeria Limited”

submitted to the School of Business and Entrepreneurship (SBE) of the American

University of Nigeria (AUN). The thesis is in partial fulfillment of the requirements for

the award of Master of Science (M.Sc.) in Business Administration. This thesis has

never been submitted for any previous academic award in AUN or any other higher

educational institution, it is neither plagiarized nor is it contractual written by another

person except where due reference is made. It depicts an original study conducted by

the author.


(A00014716)

Spring 2020

IV

CERTIFICATION

I certify that this research work has not been previously submitted for any degree or

as part of requirements for a degree except completely acknowledge within this text.

Signature: Date: 2/10/2020


(Author)


Prof. Linus Osuagwu

(Supervisor)


Dr. Lukman Raimi

(Graduate Coordinator, SBE)


Dr. Attahiru Yusuf

(Dean, SBE)

V

DEDICATION

This thesis is dedicated to my best friend and sponsor AVM IG Lubo. His support,

belief in my ability, and follow up of my activities has encouraged me to be persistent

and focus on this feat.

VI

ACKNOWLEDGEMENT

Thanks to God Almighty for grace, favor, knowledge, understanding, and the wisdom

to apply the knowledge acquired through the period.

This journey started about eight years ago with the support and academic approval from

senior colleagues and mentors; Joe Johnson, Thomas Henry, and Alex Cobo. their

unquantifiable continued support and encouragement geared the drive to get me here.

Thank you, seems too simple a word to communicate gratitude to my supervisor Prof.

Linus Osuagwu. His academic support, guide, and baby step teachings indicative of his

passion to impart knowledge. Also, his patience in the learning, and understanding of

my capability to be better able to teach and guide. I still ponder and ask, “how he does

it?”. I hope someday to be able to pay this forward to another. He engaged me in what

seemed like a volume of readings and taskings that has helped me own my work on

this subject matter.

My appreciation also goes to the strategic management faculty for the in-depth class

session with practical examples, applicative case studies, and exams that spurred my

interest in the research topic and have been valuable to this research. Thank you to Sam

Akanno, for his insightful critique of my work towards an acceptable completion.

Much appreciation to JR Isaksen, his numerous open-source works on different vertical

integration have been a useful in putting this paper together.

Thanks also go to my colleagues in graduate school. Specifically, my supportive SBE

course mates: Theo and Nonye. My favorite study partners. All of your supportive

activities and healthy competition kept me focused and on track.

Finally, but not the least, thank you to the AUN School of Business & Entrepreneurship

for the program’s comprehensive course outline/content, applicative tutoring approach,

effective class schedule, and study pattern.

Thank you all.

VII

TABLE OF CONTENT

DECLARATION ......................................................................................................... III

CERTIFICATION ..................................................................................................... .IV

DEDICATION .............................................................................................................. V

ACKNOWLEDGEMENT .......................................................................................... VI

TABLE OF CONTENT ......................................................................................... VII-X

LIST OF TABLES ............................................................................................... XI-XII

LIST OF FIGURES .................................................................................................. XIII

LIST OF APPENDICES .......................................................................................... XIV

ABSTRACT ...................................................................................................... XV-XVI

CHAPTER ONE ..........................................................................................................2

INTRODUCTION .......................................................................................................2

1.1 Background of the study .......................................................................... 2-7

1.2 Statement of the problem ......................................................................... 7-8

1.3 Research questions .......................................................................................8

1.4 Research objectives ..................................................................................... 9

1.5 Research hypotheses .............................................................................. 9-10

1.6 Significance of the study ............................................................................10

1.7 Scope of the study ......................................................................................11

1.8 Justification of the study ...................................................................... 11-12

1.9 Justification of financial performance ................................................. 12-13

VIII

1.10 Limitation of the study ....................................................................... 13-14

1.11 Thesis structure .................................................................................. 14-15

CHAPTER TWO………………..…………………………………………………...16

LITERATURE REVIEW……………...…………….………...……………….…….16

2.1 Introduction…………………..…………………….………...…….…… 16

2.2 Conceptual framework ......................................................................... 16-17

2.3 Conceptual review .....................................................................................18

2.4 Vertical integration .............................................................................. 18-22

2.4.1 Upstream and downstream integration ................................. 22-23

2.5 Performance: financial performance……………….............................24-25

2.5.1 Earnings Before Interest and Tax (EBIT) ............................. 25-26

2.5.2 Return on Investment (ROI) ................................................. 26-27

2.6 Theoretical review…………………………….………….……...……….27

2.6.1 Transaction Cost Theory (TCT)………..…...………...…….27-30

2.6.2 Resource Base Theory (RBT)………..…...…………………30-31

2.6.3 Property Rights Theory (PRT)…………….…….…..…...…32-33

2.7 Comparison of theoretical perspectives………..……….......................33-34

2.8 Empirical review…………..…………………………….....................34-38

2.9 Methodological review.........................................................................39-40

2.10 Research gap………………………………...………………….…...41-46

IX

CHAPTER THREE………………………….……………...………………….…….47

RESEARCH METHODS……………………………………..……………...………47

3.1 Introduction……………………………..………………...…..………… 47

3.2 Research design…………………………………...…………………. 47-48

3.3 Population of study…………………………………...…………………..48

3.4 Sampling procedure and sample size………………………...…..…..….. 49

3.5 Research instruments…………………………..……..…………............. 50

3.6 Reliability and validity of the instrument…………………………….…...50

3.7 Vertical integration-financial performance relationship ............................51

3.8 Data analysis ....................................................................................... 51-52

3.9 Hypotheses tested……………………………………….............……..…52

3.10 Ethical considerations………...…………………………...…………… 52

3.11 Model specification……………..…………..………………..……...53-54

CHAPTER FOUR……………………………………..……………………………. 55

RESEARCH ANALYSIS AND FINDINGS………………………….…….…...… 55

4.1 Introduction……………………..………………………….………….... 55

4.2 Data presentation…………...…………………………………….…. 55-68

4.3 Test of hypotheses…………………………………………..….…….68-75

4.4 Stationary test Augmented Dickey Fuller (ADF)…………………….75-77

4.5 Summary of research findings……………………………..…..……..77-81

X

CHAPTER FIVE…………………………………………..…………………..…… 82 SUMMARY, RECOMMENDATIONS AND SUGGESTIONS FOR FURTHER RESEARCH………………………………………..………………………..……… 82

5.1 Introduction……………………………………..…………..………...… 82

5.2 Summary of the study.………………………...………….................. 82-84

5.3 Conclusion .................................................................................................85

5.4 Recommendations…………………………..…….………...………. 86-87

5.5 Suggestions for further research…………………………………….. 87-88

REFERENCES……………………………………..…….………….……..….. 89-103

APPENDIX……………………………………………………………….….. 104-109

XI

LIST OF TABLES

Table 1.0: An overview of some previous empirical findings on vertical integration on performance/financial performance…………....…11-12

Table 2.1: Comparison of theoretical perspectives……………………….….33-34

Table 2.2: Summary of previous empirical research to define the gaps…..... 41-44

Table 3.1: Study population…………………..…………………………………48

Table 3.2: Reliability statistics……………………….……….………...……… 50

Table 4.1: Distribution of respondents by gender ………………………....……55

Table 4.2: Distribution of respondents by age …………………….....…………56

Table 4.3: Distribution of respondents by educational qualification ……...……56

Table 4.4: Distribution of respondents by organizational position………...……57

Table 4.5: Distribution of respondents by organizational department ….………57

Table 4.6: Distribution of respondents by experience……..……………………58

Table 4.7: Impact of vertical integration on financial performance ……...…59-61

Table 4.8a: Upstream, downstream, EBITDA, ROI data extracts from Olam’s annual financial report (2010-2018) …..…………………………….67

Table 4.8b: Descriptive statistics of vertical integration and financial performance…………………………………………………..…..….67

Table 4.9a: Upstream, and earnings before interest tax depreciation amortization data extracts from Olam’s annual financial report (2010-2018) ……………………….................................................................…….68

Table 4.9b: Relationship between upstream integration and earnings before interest tax depreciation amortization…………………………..……….....…69

Table 4.10a: Downstream, and earnings before interest tax depreciation amortization data extracts from Olam’s annual financial report (2010-2018) ……………………………………………...…..……….…….70

Table 4.10b: Relationship between downstream integration and earnings before interest tax depreciation amortization …………………..…………...71

XII

Table 4.11a: Upstream, and return on investment data extracts from Olam’s annual financial report (2010-2018) ………………………………………...72

Table 4.11b: Relationship between upstream integration and return on investment………….……………………………………..…….....…73

Table 4.12a: Downstream, and return on investment data extracts from Olam’s annual financial report (2010-2018) ………………..…….…...…….74

Table 4.12b: Relationship between Downstream Integration and return on investment……..………………………………………..………....…75

Table 4.13: Unit root test (earnings before interest tax depreciation amortization) …….……………………………………………………………….…76

Table 4.14: Unit root test (return on investment) ………………………………...77

Table 4.15: Summary of research objectives, hypotheses, findings and conclusion …………………………………………………………………....80-81

XIII

LIST OF FIGURES

Figure 2.1a: Conceptual framework (research problem) …………………...…….17

Figure 2.1b: Conceptual framework (research questions) ………….….………….17

Figure 2.2: Olam’s value chain…………………………………..………………19

Figure 2.3: Vertical integration dimension structure………………….………… 21

Figure 2.4: Vertical integration components……………………………….…… 22

Figure 2.5: Financial performance multi-dimension structure …......................…25

XIV

LIST OF APPENDICIES

Appendix 1 Primary research instrument (Questionnaire)……..…….......... 104-108

Appendix 2: Extract from Olam financial records……………………..……..…..109

XV

Abstract

The objective of the study was to provide empirical evidence regarding the impact of

vertical integration on the financial performance of Olam Nigeria Limited. Data

collected were gotten from Olam Nigeria Limited financial record and questionnaires

administered to employees of Olam Nigeria Limited within the study sample frame.

The secondary data was cross-sectional between the period of 2010-2018. While the

administered questionnaire was to 183 employees of Olam selected using convenience

and snowball sampling. An econometrics model was used to identify and evaluate the

impact of vertical integration on financial performance. The study adopted an

explanatory research design and quantitative measurement. The primary data was

analyzed using a Statistical Package for Social Sciences (SPSS) software version 20

was used to analyze the primary data, using frequency and percentage to describe the

primary data. On the other, the secondary data analysis using an econometric-view

statistical package series 7. Furthermore, the secondary data described using

descriptive statistics, ordinary least squared regression to explain the independent

variable’s impact on the dependent variable, and unit root to check if the regression

was spurious; and determine stationarity to test the null hypotheses. The study findings

indicated a positive impact of vertical integration components on financial performance

measures in Olam Nigeria Limited. The findings supported the works of (Behesti &

Hultman, 2014; Isaksen, 2007). Any firm considering vertical integration should

consider their present financial status and the cost implication to the prospective benefit

before embarking on the strategy as it is evidently capital intensive.

2

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

As a consequence of the global market, managers are responsible for developing a

strategy to boost performance. This strategy is often geared towards financial

performance, as it is the primary objective of a business. Hence, managers must

strategize accurately towards a progressive financial performance towards a

competitive edge in the industry. In strategizing to tackle these challenges, many firms

have employed a vertical integration strategy to boost general performance, specifically

financial performance (Zhang, 2013).

Vertical integration action was created by Andrew Carnegie around 1902, in a bid to

have his company Carnegie steel dominate the steel market by making more money

and controlling the market (Ashay & Ananda, 2001; Schmenner, 2009). Gustavus

Franklin Swift Sr. followed suit and implemented this strategy in his meatpacking

business (Chandler, 2009). Over time, other firms adopted the vertical integration

strategy as a corporate move to majorly gain a competitive edge, cut cost, control the

market, among others toward the firm’s objective and favorable performance output.

Vertical Integration (VI) defines a firm engaging in an activity that can otherwise be

from a third party (Hovenkamp, 2010). Furthermore, Porter (1998) describes vertical

integration as the technological expansion to production’s principal activity within the

3

same firm’s structure. Vertical integration is a firm’s merged activities that are not part

of its principal function but linked to the chain of marketing activities (Ayinde, et al.

2017). Williamson (1991) views vertical integration as a firm’s last option when all

other options fail. Studies on vertical integration have shown it to be one of the most

researched corporate strategy, a clear indication of its vast application and significance

across firms.

According to Harrigan (1985) and Hoskisson (1987), “vertical integration strategy is

often employed by firms seeking to increase economies of scale and efficiency” vertical

integration functions as a practical tool used by strategists to respond to supply and

distribution challenges geared towards influencing performance. Unfortunately, this

strategy interface with many dynamic real-world complexities that may affect the

intended expectation on performance. In general, several academic scholars’ studies on

vertical integration remain an issue of intense arguments on the challenges and benefits

of this strategy for the companies and the consumers stemming from the various

vertical integration and performance relations findings. Previous empirical findings on

the impact of Vertical Integration (VI) on Performance (P) show diverse outcomes; co-

variation, positive, negative, and non-significant results.

Vertical integration strategy is a multi-dimensional concept split across internal and

external integration (Harrigan, 1983, 1985; Prajogo, et al. 2012). The internal

integration deals with the internal activities of the firm: process and functional roles.

While external integration deals with the firm’s external activities: supplier/upstream

4

and customer/downstream. However, this study strictly explores dimensions of

external integration as its independent variable; upstream and downstream.

According to Carton & Hofer (2010): Selden & Sowa (2004): Sonnentag & Frese

(2005), performance is a multi-dimensional concept related to action and outcome. The

performance action is subjective, while the performance outcome is objective, but both

performance dimensions are dependent on independent factors aimed at effectiveness

and efficiency. For this study, the independent variable examined is a dimension of

performance outcome. Also, financial performance is the dependent measure of interest

in the study, it has multiple measurable metrics, two of which are the measures

considered in this study; Earnings Before Interest Tax Depreciation Amortization

(EBITDA) and Return on Investment (ROI).

Financial performance is measured using accounting formulas (Carton & Hofer, 2010).

The financial performance of a company is paramount to determine the financial

strength of the firm. Financial performance is an objectively quantifiable measure of

performance. It is a reflection of the business’s financial health over a specific time. It

is also an indicator of how a firm utilizes its resources to increase the shareholder’s

wealth and profitability over a given period. Financial performance is paramount, as

every business’s goal is to minimize cost and make a progressive profit to increase

shareholder’s wealth and have a competitive edge with quality products and pricing in

the industry (Lyndecker, et al. 2015).

5

Nigeria accounts for 2.35% of earth’s population, made up of 36 states inclusive of the

Federal Capital Territory (FCT) Abuja. The country has a growth rate of 2.60% with a

land area of 923,768 square kilometers (Population Division World Population

Prospects (Revision), 2019), most of which are fertile or suitable for farming activity.

Since the 1970s, the country’s income source has been oil (Michael & Oyeyemi, 2018).

However, before discovering oil, the agriculture sector was and still is a significant

aspect of Nigeria’s economy regardless of the oil boom (Izuchukwu, 2011).

Despite decades of the booming oil sector in the Nigerian economy, agricultural is

debatably the most relevant aspect of the economy. In 2017, “Agriculture contributed

around 20.85 percent to Nigeria’s GDP” (Izuchukwu, 2011). Enduring food security

remains the first and most vital to human life and survival. Food security necessitates

a need for strategies that will positively impact agricultural firms’ financial

performance, contributing to the nation’s economy. Vertical integration is considered

an extensively encouraging prospect in agribusiness firms in rural settings (Carillo, et

al. 2016).

One of the many agricultural firms in Nigeria is Olam Nigeria Limited, a subsidiary of

the Olam group, one of the largest and oldest agriculture firms with representation

across over sixty countries globally. Olam has its presence in several countries across

continents: Asia, Europe, Australia, North America, South America, Central America,

including Africa.

In 1989, Kewalram Chanrai Group (KC Group), one of the oldest companies in Africa

and Asia with over 150 years of trade history established Olam Nigeria Limited. Today,

6

the firm is spread across 133 locations across states in Nigeria, and over 3000 direct

employees, approximately 500,000 farmers, and 70,000 seasonal workers. Olam has

offices and operational units across all geopolitical zones in Nigeria.

The firm’s operational scope expands into three major business streams; exports,

imports, branded packages, and food products. Its value chain activities include;

sourcing, processing, marketing, and distributions.

The offerings of Olam Nigeria Limited are grouped into animal feeds and hatcheries,

sourcing and procurement, grading, processing and export of; cocoa, cashew, and

sesame hulling and export, local farming, milling, rice production, and distribution,

wheat milling and pasta, biscuits, candy, and confectionery, culinary ingredients;

spices: onion and garlic, pepper, tropical spices, chili, and specialty products, noodles

and tomato paste, dairy beverages.

Olam Nigeria Limited is one of the sustainability leaders in the industry, and operates

a defensible and differentiated strategy. The firm uses different forms of vertical

integration across their products and businesses. Olam engages in relationship

marketing as a strategy to give them a competitive edge. Also, offer their customers

solutions and services based on their strength and industry trends. Olam has an

advantage of presence in several countries across continents. Their global presence

allows for access to specialists, expertise, product, market, and origin expertise giving

them global strength tending to industry leadership. (Financials, n.d.; No Title, n.d.)

(Nigeria, n.d.).

The increasing global market competitiveness requires a strategy that will give the

business a progressive financial performance. This market requires strategy directed at

7

a firm’s sustainable competitive advantage (Porter, 2002). Hence, it is a requisite for

managers to employ a strategy that will enhance financial performance to enable the

business to meet its ultimate profit goal. One of the most key strategy championed by

strategists in addressing supply and distribution challenges to boost performance is

vertical integration. The vertical integration strategy is an up or down extension of a

business activity employed to enhance performance. Over the years, scholars have

examined the consequence and influence of vertical integration on performance in

different firms across industries and geographical regions.

1.2 Statement of the problem

Vertical integration is a widely employed corporate strategy employed by firms to

control external factors and its product value chain towards improving performance

output. Vertical integration is a broadly explored corporate strategy used by firms to

improve performance across the globe. The works of; Andreou, et al. (2015); Forbes

& Lederman (2010); Maina & Kavale (2016); Lahiri & Narayanan (2013); Mamman,

et al. (2013); Mose (2013)), among others are studies of vertical integration on

performance in different industries across regions.

A review of some of these studies relating to vertical integration on performance has

shown ambiguous findings. These findings range from; positive Gil & Warzynski

(2009); Maroof, et al. (2017) to negative Hamdaoui & Bouayad (2019); Pieri &

Zaninotto (2013), to non-significant Mamman, et al. (2013), and mixed outcomes

8

(Andreou, et al. 2015; Forbes & Lederman 2010; Maina & Kavale 2016; Rothaermel,

et al. 2006; Zhang 2013).

Although there have been studies on the impact of vertical integration on performance

over time, the ambiguity in findings across industries and regions increases continued

interest in this general area. Specifically, to investigate the impact of vertical

Integration on financial performance in Olam Nigeria Limited. This study contributes

to existing literature concerning this subject matter in Olam Nigeria Limited.

This research stated in a comprehensive question: What is the impact of Vertical

Integration (VI) components on Financial Performance (FP) measures in Olam Nigeria

Limited? The study set out to provide verifiable answers to this broad question.

1.3 Research questions

This research provides data-based answers to these questions.

RQ 1. What is the impact of upstream integration on earnings before interest tax

depreciation amortization in Olam Nigeria Limited?

RQ 2. What is the impact of upstream integration on return on investment in Olam

Nigeria Limited?

RQ 3. What is the impact of downstream integration on earnings before interest tax

Depreciation amortization in Olam Nigeria Limited?

RQ 4. What is the impact of downstream integration on return on investment in Olam

Nigeria Limited?

9

1.4 Research objectives

This research aims to contribute to the literature concerning the impact of vertical

integration strategy on the financial performance in Olam Nigeria Limited.

Specifically:

Obj. 1. To ascertain the impact of upstream integration on earnings before interest tax

depreciation amortization in Olam Nigeria Limited.

Obj. 2. To ascertain the impact of upstream integration on return on investment in

Olam Nigeria Limited.

Obj. 3. To ascertain the impact of downstream integration on earning before interest

tax depreciation amortization in Olam Nigeria Limited.

Obj. 4. To ascertain the impact of downstream integration on return on investment in


1.5 Research hypotheses

The suggestions of the study derived from the statement of the problem, existing

literature, and subjective evidence are that:

H0. Upstream integration has no significant impact on earnings before interest tax


H1. Upstream integration has a significant impact on earnings before interest tax


H0. Upstream integration has no significant impact on the return on investment in Olam

Nigeria Limited.

10

H1. Upstream integration has a significant impact on the return on investment in Olam

Nigeria Limited.

H0. Downstream integration has no significant impact on earnings before interest tax


H1. Downstream integration has a significant impact on earnings before interest tax


H0. Downstream integration has no significant impact on the return on investment in


H1. Downstream integration has a significant impact on the return on investment in


1.6 Significance of the study

Generally, this study contributes to the body of knowledge concerning the impact of

vertical integration strategy on financial performance. Furthermore, this study will

assist in managerial action and influence business strategic decisions geared toward

improving Nigeria’s agricultural firms. Specifically, the study improves managerial

awareness and decision making of Olam Nigeria Limited regarding the impact of

vertical integration strategy on financial performance.

This study is structured to meet the need for knowledge of vertical integration in the

Nigerian agricultural sector. Therefore, this empirical research findings serve as an

impetus for further research efforts concerning the impact of vertical integration

strategy on financial performance in other firms of the Nigerian agricultural sector.

11

1.7 Scope of the study

This study is on the impact of vertical integration on financial performance in the

Nigerian Agricultural Sector. It is bordered by the constructs of vertical integration

strategy and financial performance, contributing to the literature on the subject matter.

The employees of Olam Nigeria Limited are study population. The study period spans

through nine (9) months and is limited to Olam Nigeria Limited.

1.8 Justification of the study

Vertical integration on performance has generated global research interest, among other

variables (Zhang, 2013)). However, the findings have been ambiguous. These findings

have varied over time following external factors like change in market needs, industry

expansion, technology, and other uncontrollable external factors. In light of this

ambiguity in previous findings and possible change over time, there is a need for

continuous contribution to the literature on the subject matter across the industry,

region, and time to establish more recent findings for future researchers.

Table 1.1: An overview of some previous empirical findings on the impact of

vertical integration on performance/financial performance.

SOURCE

TITLE

PERFORMANCE DIMENSION

FOCAL

INDUSTRY

FINDINGS

(Hamdaoui & Bouayad, 2019)

Determinants and the effect of VI on performance.

Economic Manufacturing Negative

(Pieri, & Zaninotto, 2013)

Vertical integration and efficiency: an application to the Italian machine tool industry.

Operational/Productivity

Machine Tool Negative

(Maroof et al. 2017)

Does vertical integration strategy for merger and acquisition a fruitful decision? An evidence from Pakistani merger market.

Financial Stock Market Positive

12

(Gil, & Warzynski, 2009)

Vertical integration, exclusivity and game sales performance in the US video game industry

Financial Video Games Positive

(Forbes & Lederman, 2010)

Does vertical integration affect firm performance? Evidence from the airline industry.

Operational Airline Positive

(Mamman et al. 2013)

Effect of vertical integration on the performance of SMEs in Kaduna State, Nigeria.

Financial SMEs No Significance

(Maina & Kavale, 2016)

Effect of vertical integration on the performance of Agricultural commodity business: A Case study of the export trading company limited.

Operational Agriculture Positive/ Negative

(Andreou et al. 2015)

The impact of vertical integration on inventory turnover and operating performance.

Inventory/Operational

Manufacturing service industry

Positive/ No Significance

(Zhang, 2013)

The revival of vertical integration strategic choice and performance influences.

Operational Manufacturing No Significance/ Negative

(Rothaermel et al. 2006)

Balancing vertical integration and strategic outsourcing: Effects on product portfolio, product success, and firm performance.

Financial Microcomputer

Positive/Negative

1.9 Justification of financial performance

Financial performance is a subset of performance outcomes (Samiloglu, et al. 2017). It

is a quantifiable objective measure of performance (Naz, et al. 2016). Financial

performance measures have been used over time as dependent variables by several

scholars such as (Fatihudin, et al. 2018; Maroof, et al. 2017). Financial performance is

an offshoot of other non-financial performance subsets, reflecting of the other non-

financial performance (Fullerton & Wempe, 2008). It is also a mirror of the

organization’s overall performance and the basis for which most business is established

13

and existent. Financial performance is the key to business success and driver of the

other performance dimensions.

This study uses Earnings Before Interest Tax Depreciation and Amortization

(EBITDA) and Return on Investment (ROI) as its financial performance measures.

Olam indicates these measures as their key financial metrics (Olam, 2013). Earnings

before interest tax depreciation amortization tracks the cash flow progress, and the

return on investment gives clarity and connection between the growth earnings and

capital invested in each business and value chain segment (Financials, n.d.).

The works of (Akben-Selcuk, 2019; Ameer & Othman, 2012; Carton & Hofer, 2010;

Richard, et al. 2009) examined earnings before interest tax depreciation amortization

and the return on investment as financial performance measures. The return on

investment is an indicator of the proceeds from capital introduced in business activity.

It is also a medium of assessing efficiency (Zamfir, et al. 2016).

1.10 Limitation of the study

This study has some limitations, which include:

I. The study findings are limited to a single integrated firm within the industry

warranted by convenience and do not allow generalization.

II. The financial data for the study is only on the integrated period. Hence, there is

no comparison to determine if the firm’s integrated position is better than the

previous non-integrated state.

14

III. The access to secondary data was easy, but not the certainty of the data’s

truthfulness cannot be ascertained as there is a chance that it could be to

encourage investors. Further, there is no other performance dimension data

collected to corroborate the financial data public records’ authenticity.

IV. The financial performance measurement metrics are limited to the firm’s

recommended parameter to gauge its progress. There are no other performance

parameters provided to support this metric.

V. The study did not cover the moderating or control variables. According to

(Andreou, et. al. 2015), excluding control variables may result in

underestimating or overestimating the impact of vertical integration on

financial performance. However, the study focused mainly on the independent

and dependent variables as it adopts the study pattern of the works of Hamdaoui

& Bouayad (2019) which study pattern also aligns with the works of (Ayinde,

et. al. 2017; Forbes & Lederman, 2010; Isaksen, 2007).

However, despite these limitations, the study makes significant contributions, relevant

findings’, and suggestions.

1.11 Thesis structure

The study is in five chapters. The first chapter introduces the study, and establishes the

problem, research questions, objectives, hypotheses, study significance, scope of the

study, limitations of the study, and justification of the study.

15

The second chapter entails a detailed and exhaustive literature review dealing with the

impact of vertical integration on performance. It also takes into account the influence

these strategies can have on a firm’s financial position. The third chapter presents the

methodology adopted for this study, exploring different analytical tools, and constructs

implemented to facilitate a sound empirical examination of the research. The fourth

chapter examines the data analysis to test the study hypotheses and discuss findings.

The final chapter summarizes the study, draws conclusions, makes recommendations

based on the study findings, and suggests future studies based on limitations.

16

CHAPTER TWO

LITERATURE REVIEW

2.1 Introduction

Concepts in empirical research are vital, particularly to define terms and role, align the

position of variables, and outline its dimensions. It is the building block of theoretical

frames and variables under study, giving relevance to a definition and review of

theoretical concepts. This chapter reviews; concepts, theory, previous empirical works,

and methodology in vertical integration and financial performance. It gives a distinctive

viewpoint of the diverse related study documented over time. The literature review is

an insight into the study setting, support, and rationale. The literature reviewed is

carried out under these sub-topics; conceptual, theoretical, empirical, and

methodological.

2.2 Conceptual framework

The figure below is a visual illustration of the conceptual framework for this study.

Vertical integration is an independent variable with operationalized components of

upstream integration and downstream integration. Financial performance is a

dependent variable with operationalized earnings before interest tax depreciation

amortization and investment returns.

17

Control variables may influence the independent and dependent variables (Lahiri &

Narayanan, 2013). Regardless, this study is silent on the control variables, it adopts the

Hamdaoui & Bouayad (2019) pattern, which focuses primarily on the impact of vertical

integration on performance concerning independent and dependent variables.

The diagram 2.1a illustrates the variable connection concerning the research problem,

and the diagram 2.1b is an illustration of the research questions.

Independent Variable Dependent Variable

Fig. 2.1a Dependent V. Independent V. Independent V. Fig. 2.1b Conceptual framework of the study

Financial Performance

• EBITDA

• ROI

Upstream Downstream

EBITDA

ROI

18

2.3 Conceptual review

The conceptual review is the author’s perspective of the study’s variables supported by

definitions, descriptions, and viewpoint of previous studies of scholars using these

same variables. It is driven by and guided by the conceptual framework of this study.

2.4 Vertical integration

According to Williamson (1986), vertical integration is the cost of arranging business

transactions to reduce the production process’s overhead cost. From the definition, the

essence of vertical integration is to stabilize or minimize transaction costs incurred by

economic agents to obey the contractual agreement with other parties. The nature of

the sector, the pattern of goods manufactured, and the distribution channel will

determine the quantum of the cost that vertically integrated companies will save. On

the contrary, adopting vertical integration implies more investment, which leads to an

increase in fixed cost, additional risk intake, and colossal operational costs. In essence,

the effectiveness of vertical integration strategy depends entirely on whether the

inherent benefits of vertical integration surpass the additional cost of implementing the

strategy.

Vertical integration involves establishing supply and distribution activities within the

value chain. The value chain includes all the stages that transform raw materials into a

finished product fit for consumption and activities related to pre-production,

production, and post-production. A firm in the middle stream or second chain activity

19

may source raw material from other firms and sell off to distributors. Sometimes, the

middle stream firm may decide to expand its activities or operations to supply or

distribution activities. A firm’s advent towards the supply of raw materials is backward

integration, making the firm a raw material supplier. In contrast, the action of a firm

distributing its products is forward vertical integration.

Agric Inputs: - seeds, fertilizer Harvest Food and produce package

Livestock input: - animal feeds Food and produce preservation

Farming: rice, wheat, spices etc. Transportation

Wholesale activity

Retail activity

Export: cocoa, cashew, sesame

Fig 2.2: Olam’s value chain

Generally, vertical integration provides various aspects through which organizations

can achieve self-reliance in producing goods and services and the distribution of

finished products. Vertical integration strategy is applicable for organizations with dual

production stages: the upstream and the downstream (Perry, 1989). The author further

explained that production output in the upstream stage serves as the input to that of the

downstream stage, and the requirement needed for the completion of the production

process would be from the upstream stage. Flexibility in the production unit and

distribution unit of vertically integrated companies serves as the bedrock of a vertical

integration strategy (Coase, 1937). Furthermore, technical economies of scale are the

20

motive for adopting vertical integration. More importantly, it is a cost advantage tool

to broaden the scale of production. The reduction in inputs for organizations involved

in the upstream process creates tremendous output in the downstream unit due to

technical economies of scale.

Technical economies of scale occur due to the cost-effective benefit to firms and, as

such, known as a sine qua non to vertical integration. Technical economies of scale

show that the reduction influences the downstream unit’s efficiency in inputs cost. The

challenges embedded in the distribution of finished products, particularly the issues

regarding the use of agency for strategic purposes, are rectified through vertical

integration. Based on this, it is arguable to generalize that vertical integration supports

removing the agency relationship in the distribution channel. Arrow (1975) argued that

the role of vertical integration is not only to put a lasting solution to the agency

problems but also to redesign the pattern of distribution of finished products. However,

Crocker's (1983) assertion was somewhat different in that the vertical integration

strategy does not nullify the agency relationship; instead, it involves internal

information provided by an internal auditor. Vertical integration can indeed be applied

to control price fluctuations’ adverse effects by ensuring product synchronization in the

two units (upstream and downstream) and optimizing the distribution of finished

products (Perry, 1982).

According to Maina & Kavale (2016)), agri-business encompasses extraction,

production, storage, distribution, and processing of Agric-based products in the supply

21

of production inputs and the provision of services, such as extension and research.

However, vertical integration is crucial to enhance the agricultural industry’s

competitive level by focusing on adequate market supply with high demand. The

primary aspect of vertical integration is that it creates value addition to its value chain

(Badinger & Egger, 2008). Equally, vertically integrated transaction costs are minimal

and suitable for firms with limited economies.

Fig 2.3: Vertical integration multi-dimension structure Vertical integration is a multidimensional concept categorized majorly across two

constructs; internal and external integration ( Zhao et al. 2011; Stank et al., 2001;

Harrigan, 1985). The figure above is the author’s illustration of vertical integration

dimensions from literature. From the above figure, it is evident that financial

performance is broad and needs to focus on a metric measure of interest given its

Vertical Integration

Internal Integration

Process

Material Management

Purchasing

Material Control

Manufacturing Management

Production

Functional

Distribution

Sales

Distribution Logistics

External Integration

Supplier/Upstream Integration

Customer/Downstream Integration

Full Integration

Partial Integration

Taper Integration

Quasi Integration

22

multiple dimension. Hence, the study focused on upstream and downstream integration

as the independent variable.

Fig 2.4: Vertical integration components

2.4.1 Upstream and downstream integration For scholars in strategic management, vertical integration is when organizations

establish and control its upstream (backward) and downstream (forward) activities.

Upstream vertical integration involves controlling raw materials needed to process

finished products, which otherwise would have been supplied by independent

contractors or external producers (Liu, 2016). A firms’ expansion to upstream

integration ensures availability in the supply of its raw materials in a cost-effective

manner (Loertscher & Riordan, 2019). Upstream integration relates to the inputs’

design for lowering production costs by allowing organizations to supply their primary

resources. It provides the courage for organizations to diversify their resources to

produce raw materials or control the quantum of materials purchased (Perry, 1982). By

implication, the upstream integration strategy ensures a constant supply of resources

and become more proactive and efficient in their production process. In essence,

upstream integration serves two purposes; boosting the firms’ input and minimizing

transaction costs. By adopting upstream integration, organizations can efficiently

23

manage their value chain and strategically reduce the costs along the supply chain

(Nicovich et al., 2007).

Downward vertical integration allows firms to reposition their distribution strategy by

ensuring prompt delivery of finished products towards their consumers (Wheelen &

Hunger, 2011). Put merely, downstream integration provides firms with the liberty to

own and control distribution channels that deliver finished products to consumers

(Scherer & Ross, 1990). However, organizations towards implementing downstream

integration expect to enhance overall performance by ensuring an increase in the

demand for finished goods. Furthermore, downstream integration helps organizations

distinguish their products from that of competitors, allow easy access to the distribution

channel and provide an accurate demand for its products (Porter, 2008). More

importantly, the rate at which an organization would achieve performance depends

entirely on the pattern of communication, the use of technical information, and

efficiency in the decision-making process (Paulraj et al. 2008). Downstream

integration arises from the move organizations made towards ensuring users’

satisfaction in the distribution stage by gaining absolute control in distributing

of finished goods and services to the target markets or providing its outlets to

ensure seamless sale transactions. Again, acquiring the whole or portion of the

control of marketing channels or intermediaries is often regarded as downstream

integration (Jobber, 2006).

24

2.5 Performance: financial performance

Performance is a measurable event described beyond action to analytical and

judgmental practices (Sonnentag & Frese, 2005; Motowidlo et al. 1997). Furthermore,

performance is a multi-dimensional variable divided across two dimensions; action and

outcome (Sonnentag & Frese, 2005; Selden & Sowa, 2004). The performance action

refers to individual behavior, and performance outcome refers to an organizational

result, which is a consequence of individual behavior. The performance action is

subjective, while the performance outcome is objective (Selden & Sowa, 2004).

Performance as a variable is too broad to be measured. Consequently, the study is

measured using financial performance, a subset of performance.

Financial performance seen in figure 2.5 is multi-dimensional with multiple

measurements (Carton & Hofer, 2010). Hence, the selection of the metrics suitable for

this study. Financial performance is the firm’s economic position over a given time. It

entails gathering and using funds measured by pointers of liquidity, solvency, capital,

adequacy ratio, leverage, and profitability (Fatihudin et al. 2018). Financial

performance relates to the financial efficiency of the business. It relies on finance

information reported mainly in income statements and balance sheets. The other

performance variables have a direct or indirect effect on its output. It is measured

majorly using secondary data and, in some approaches using primary data.

According to Naz et al. (2016), financial performance is majorly a reflection of

business results depicting financial health over a period. It is an indicator of how a firm

is employing its resources to increase shareholders’ income and capital.

25

Fig. 2.5: Financial performance multi-dimension structure

2.5.1 Earnings Before Interest and Tax (EBIT)

Earnings quality is a term describing the usefulness of reported earnings for investors

and other accounting information users. The oil industry’s specific characteristics can

also result in variations in earnings quality across firms in the sector. For instance,

current financial reporting regulation allows oil and gas companies to choose between

Performance

Action Outcome

Financial Performance

Activity Ratio

Fixed assets turnover ratio

Debtors turnover ratio

Growth Ratio

Market share growth

Net revenue growth

Net income growth

Profitability Ratio

Return on assets

Return on investment

Net income

EBIT/EBITDA

Liquidity Ratio

Cash ratio

Current ratio

Quick ratio

26

two competing methods to capitalize and expand exploration costs. This choice will

affect both income statement and balance sheet figures, potentially undermining their

usefulness. Several studies find that the existence of two competing accounting

methods affects the value-relevance of oil companies’ earnings (Misund et al., 2008,

2015; Bryant, 2003).

2.5.2 Return on Investment (ROI)

The aim of embarking on a profit-oriented project is to achieve its stated objectives.

However, the objective could be in the form of profit maximization, customer delight,

and pepping up market share. The most important critical aspect of evaluating an

organization’s performance is to analyze profits earned due to the use of the company’s

assets. Evaluating profit to the company’s assets gives the company and other

stakeholders a vivid understanding of the positioning of profits and return on the

invested capital. The notable perimeters used in measuring organizations’ performance

is the Return on Investment (ROI). Return on investment indicates the extent to which

an organization realizes meaningful returns on the use of capital. It equally indicates

whether or not an organization is solvents (Zamfir et al., 2016). Thus, it enables

efficiency assessment of an amount invested or, in other words, ROI allows measuring

the result to the means used to obtain it. The calculation of return on investment is the

ratio between operating profit obtained after the investment and the total amount

invested (or the total investment costs). The result is that the relation obtained is

multiplied by 100, invested capital is Return on Investment (ROI). A single department

27

of the company cannot control the return on investment. To increase ROI, managers

should either increase revenues and reduce costs or lessen the reduced assets. Any of

these actions can have both positive and negative effects (Damodaran, 2007). Thus,

some decisions aiming to reduce ROI can improve the company’s economic condition,

as some decisions aiming to increase ROI may result in an unsatisfactory activity

(Whinston, 2003).

2.6 Theoretical review

The theory is an analysis, definition, and description of existing theories, relationships

between theories, and degree of theories investigated. The existing theories guide the

hypotheses testing in new studies and outline scholars’ schools of thought to the theory.

These theories guide the methodological approach of studies aligned to supported

theory.

2.6.1 Transaction Cost Theory (TCT)

In the 1970s, transaction cost theory developed in studies to vertical integration

concerning “make or buy” or “buy or sell.” The transaction cost theory was due to

incompleteness and inefficiencies embedded in the market contract and potential

organizational responses. The transaction cost theory of integration originated through

the effort of (Joskow, 1985; Klein et al., 1978; Goldberg, 1976; Williamson, 1971,

1975, 1985). The transaction cost theory emphasized the need to adjust negotiation or

28

litigation costs associated with dispute, complexity, or uncertainty that triumphs

between separate entities. By implication, (Klein et al. 1978) explained that mere

foreseeing the likelihood of future disputes or uncertainties, the parties involved may

channel little resources for specific investments. Transaction cost theory implies that is

that these problems are reasonably thoughtless to the uniqueness of specific

transactions. So, hazards tend to increase integration, while integration becomes

optimal when hazards are more severe, but direct transactions encourage non-

integration.

According to Williamson (1985), there is a significant characterization of transaction

costs. The author further explained that uncertainty could be the unexplained portion

under which a transaction takes place. The uncertainty that revolves around business

transactions can be in different dimensions. For instance, Hobbs & Young (2000) stated

that timeliness, durability, continuity, and reliable supply could be buyers’ uncertainty

while searching for reliable buyers, and market conditions could be sellers’

uncertainties. Time-related transactions have a level of internal improbability

associated with an impending attitude of agents and resources established during the

act of transaction (Barney & Ouchi, 1988). Resources and strategic plans of action are

required to tackle evolving trials.

Furthermore, the most empirical determinant of the transaction cost, according to

Williamson (1985), is asset specificity. It relates to the budgeted costs required for

actualizing specific investments. Also, the tool often employed to manage investments

29

is regarded as asset specificity. Sunk investment pattern puts organizations into an

unforeseen situation, such as profit expropriation (Lamoreaux & Raff, 1996). Due to

managerial time constraints and other uncontrollable factors, it is economically feasible

for organizations to manage a vast number of business transactions internally. Again,

bounded rationality restricts market contracts’ ability to handle asset specificity as the

contractual parties cannot envisage with certainty all required outcomes.

Typical examples of transaction cost theory were from transaction literature. Joskow

(1985) explained the applicability of a coal-fired electricity plant situated next to a coal

mine. There is a need to vertically integrate or involve a long-term contractual

relationship with neighboring mine to secure a continuous and affordable supply.

Furthermore, Freeland (2000); Klein (1988); Coase (1988) highlighted the acquisition

that transpired between Fisher Body Corporation (FBC) and General Motors (GM).

The authors explained that FBC was into a long-term relationship with GM as the sole

supplier of metal car bodies to GM. Upon the contract’s expiration with a positive

impact on cars’ demand, there was a need to integrate them vertically. Thus, GM

purchased the whole of FBC.

However, the transaction costs theory has prompted several critics that undermine the

efficiency of the theory. According to Clarke (1991), the descriptive nature of

transactional theory made the hypotheses tentative and lacked operational content. In a

similar assertion, Alchian & Demsetz (1972) based their criticism on two premises.

Firstly, it is not sure to specify the transaction cost pattern and, as such, made the

30

assertion unacceptable. Secondly, the price mechanism’s weakness and vertically

integrated firms’ authority necessitate the readjustment of the transaction cost.

2.6.2 Resource Base Theory (RBT)

The resource-based theory was explained by Wernerfelt (1984) in his book titled “the

resource-based view of the firm.” The theory emphasized the achievement of an

organization’s competitive advantage. Resource-based view theory has created

expansion on theoretical and empirical knowledge of vertical integration decisions. The

core point of this theory is that resources and capabilities owned and controlled by firms

considered heterogeneous evaluated through resource-market imperfections, inimitable

resources, inability to alter stock, among others (Barney, 1991; Dierickx, & Cool, 1989;

Wernerfelt, 1984; Penrose, 1959; Schumpeter, 1942). Rantakari (2010) defined the

resource-based view theory as client companies’ ability to create and sustain a

competitive edge through efficient internal resources utilization. The author further

explained that a firm is combines tangible and intangible resources that necessitate the

company to compete favorably with similar firms. An organization’s resource must

possess four distinct qualities, which include Valuable, Rare, In-imitable, and Non-

substitutable (VRIN), to ensure a viable competitive advantage. According to Barney

(2002), the VRIN technique has become the most widely used method for assessing a

particular firm’s resources. Barney (1991); Talaja (1991) argued that a company that

adopts and leverages its capabilities on VRIN would actualize compelling competitive

advantage and surpass its budgeted objectives.

31

As Lacity & Willcocks (2008) suggested, the resource-based view emphasized that the

primary determinant of a company’s performance and the sustained competitive

advantage is a function of the company resources. That is, organizations should

investigate internal resources that can enhance their competitive advantage. The idea is

that internal resources are in the best position to shift organizations’ financial

performance positively. More specifically, managers should understand the link

between their coffers’ resources the company’s overall performance. According to

Barney (1991), the firm’s resource-based view theory explains the modality in which

unique resources are sources of competitive advantage. The author further said that the

cost of managing an organization’s resources affects the competitiveness of the firm so

long as the costs surpass the estimated value the resources may produce. More

importantly, the resource-based view would be advantageous if the internal resources

that can give an organization the required competitive edge be obtained and examined.

More importantly, the resources specifically designed for competitive advantage must

be devoid of competitors’ replicable elements. Barney (1991) declared that although a

resource is a channel towards attaining competitive advantage, the advantage would

only be benefited for a short period so long that the replicated sustained resources are.

Additionally, the core assumption underpinning the resource-based view is that vertical

integration may be desired by a company that intends to attain a competitive advantage

among its competitors by protecting resource imitation (Barney, 2002).

32

2.6.3 Property Rights Theory

Hart (1995), Hart & Moore (1990), Grossman & Hart (1986) were pioneers of the

property rights theory of integration. The theory stated that the inability to perfect

contractual agreement between the firm and outside market gladiators triggers the need

to integrate vertically. The theory explains the property rights allocation pattern, which

includes the ability to make decisions concerning an asset’s use when unforeseen

contingencies occur or circumstances not included in a contract, changes ex-ante

investment incentives. Ideally, a contract should address contractual parties’ rights in

all circumstances and ensure stiffer penalties should any breach occur. However, in

business reality, contracts are not detailed and subject to constant renegotiation (Hart,

1995). Property rights theory discusses ownership and control over the firm’s tangible

and intangible assets, including intellectual property and technological know-how,

because ownership confers the legal authority to determine assets utilization.

According to the firm’s property rights theory, the essence of integration is to describe

the decision-maker, asset controller, and allocate the profits resulting from the

production processes.

Property rights theory argued that it is appropriate and suitable for the asset owner to

take absolute control of the asset and make the right decisions regarding the asset’s

deployment of the asset. By allocating ownership rights (i.e., residual control rights) to

the party who has the most to gain and the most to lose from asset utilization, it is

possible to ensure that the one who has more substantial incentives to deploy the asset

in its most productive use also has the ownership rights. That is the aligned incentives

with ownership of the asset in question.

33

However, the decision to employ upstream or downstream vertical integration is with

the transfer of ownership. A typical example is a fish farmer who acquires raw materials

and controls machinery equipment or gains privilege over its distribution channels.

Therefore, the property rights channel its argument on the premise that the liberty to

utilize property acquired is unconditional and not affected by an incomplete contract.

Although, the right is limited to tangible assets due to its nature of durability and

transferability. Grossman & Hart (1987) stated that attributing integration to be the

owner of assets and not people indicates the evaluation of benefits and costs implication

of integration. The authors further explained that the right to control one party

necessitates another party’s decline to possess absolute control.

2.7 Comparison of theoretical perspectives

Table 2.1: Comparison of theoretical perspectives

Source Transaction Cost

Theory Resource Base

Theory Property Rights Theory Theory introduction

1937 1959 1960

Pioneers of the theory

Coase Penrose Coase

Developer(s) of theory

Williamson (1970) Wernerfelt (1984) (Grossman & Hart, 1986; Hart, 1995; Hart & Moore, 1990b)

Objective of theory

To reduce cost To achieve competitive advantage

To attain control and ownership

Concept of theory

Coordination and cost efficiency

Firm’s Heterogeneity Ownership and control of the firm’s tangible and intangible asset

Determinant of theory

Assets: The analysis of make or buy comparison

Firm’s resources that ensures competitive advantage

The result of cost and benefit comparison

34

Critique of theory

Lacks operational content, cannot provide empirically verifiable hypotheses (Clarke, 1991)

Organization must be valuable, rare, in-imitable and non- sustainable (J. Barney, 2002)

Comparison of cost and benefit is complex (Grossman & Hart, 1986)

The study adopts the transaction cost theory and resource-based theory for the

following reasons:

The transaction cost theory provides clarity on the rationale of vertical integration. The

motive for transaction cost theory is cutting costs and increasing profitability. Every

business’s primary objective is profit-making and increasing shareholder wealth, and

the transaction cost theory works towards ensuring this.

The resource-based theory explains the link between vertical integration and the

competitive setting. Its objective is to attain a competitive advantage, an indirect

influencer of financial outcome resulting from a competitive edge. The resource-based

theory provides direction on how to outline appropriate vertical integration measures

and emphasizes the importance of resources and how to utilize it to the firm’s

advantage.

2.8 Empirical review

According to Monteverde & Teece (1982), vertical integration occurred when

competitive advantage, including production, technology, among others, is entirely in

possession of a particular organization. For instance, a producer would consider vertical

integration if the cost of relying on a supplier would affect the business turnover or

exposes the business to opportunistic re-contracting. Equally, Langlois & Robertson

35

(1989) stated that discouraging holdup and supply interruptions necessitated vertical

integration among organizations. Historically, Powell (1990) asserted that the strategy

of vertical integration is often employed by firms that intend to enjoy benefits inherent

in the strategy and mitigating constraints associated with supplying firms, Chandler Jr.

(1977) examined the evolution of vertical integration. The author stated that for an

organization to adopt modern technology, ensure mass production, and establish

distribution efficiency, vertical integration is essential. French (1989) argued that

organizations ventured into vertical integration to control raw materials, provide mass

marketing, and ensure internal production efficiency. Williamson (1975) concluded

that the rationale for adopting vertical integration was not only to cater to uncertainty

in the contract but also improved decision making.

Bain (1956); (1959) explained that vertical integration involves different activities

along a value chain and establish market control. Grossman & Hart (1986) stated that

the control and ownership of tangible resources provide room for vertical integration.

Harrigan (1986) similarly relates vertical integration with the requirements needed to

actualize the upstream and the downstream business units. Perry (1989) described

integrated companies as the combination of the dual production process. The author

further explained that the upstream process is a whole or part of the input needed to

survive the downstream unit. Riordan (1990) explained vertical integration as "the

organization of two successive stages of production by a single firm." Harrigan (2009)

stated that vertical integration should be from two perspectives: internal benefits and

costs, and effects on competitive postures. The author further explained that internal

36

benefits affect profitability as the strategy. Simultaneously, strength in competitive

posture enables firms to be more responsive to changes in market needs and less

vulnerable to competitors’ maneuvers. Christopher (2011) asserted that vertical

integration typically implies the absolute control of inputs suppliers and the

organization’s distribution channels, particularly with a vertically integrated supply

chain. Stuckey & White (1993) concurred that it is adopted by organizations to ensure

stability in their value chain. Vertical integration can be motivated by reducing

transaction costs, improving incentives, and limiting the holdup problem between

upstream and downstream firms, especially when it is difficult to contract (Jacobides

& Winter, 2005; Williamson, 1975; 1985). Jacobides & Winter (2005) argued that

vertical integration is the quest to lower transaction costs and enlarge its company’s

capacity.

Erasmus (2008) defined financial performance as a way of monetizing an

organization’s operations and policies solely to highlight a given firm’s financial

strengths and weaknesses. Qi et al. (2014) explained the financial performance as the

overall operating performance realized during a specific period, usually a year. The

author further explained that business growth, profitability, and asset quality are

yardstick in evaluating a firm’s financial performance. In the same vein, Zhang (2010)

defined financial performance as the financial results measured with a financial ratio

analysis tool for an estimated period. According to Zhang (2007), financial

performance displays a company’s financial position to ensure decision-making

efficiency. (Bititci et al. 2000), asserted that in evaluating the financial performance of

37

a firm, relevant data from the organizations’ financial statements and other materials to

determine, compare and analyze the company’s financial status in terms of profitability,

and operating conditions, among others. Horne and Wachowicz Jr. (2008) further

asserted that the suitable pattern of evaluating a firm’s financial standing is to embark

on “checkups” through the use of financial ratio analysis. (Kloptchenko et al. 1998),

supports John and James’s argument by adopting seven financial ratios in evaluating a

firm’s financial performance.

The ratios include operating margin, return on total assets, return on equity, current

ratio, shareholders’ equity ratio, interest coverage ratio, and accounts receivable

turnover ratio. Additionally, Liu (2010) examined China’s top 10 steel industry firms’

financial performance listed on Shanghai and Shenzhen stock using financial ratios and

further employed regression and factor analysis to analyze data pertinent to research

questions. The author found a significant link between financial ratios and financial

performance. Mcquire et al. (1988) adopted market return ratios and accounting ratios

in analyzing the firm’s financial performance. The authors explained variables attached

to market return ratios, including the total market return and risk-adjusted market

return. In contrast, accounting ratios variables entail sales growth, asset growth,

operating profit growth, and total assets. Sikuka (2010) studied the financial

performance of companies involved in the integration business model. The author

found that integrated companies had high financial performance than non-integrated

companies. The author further explained that assets and revenue growth constituted the

bulk of integrated companies’ financial performance through financial ratios analysis

Katchova & Enlow (2013) compared the financial performance of agribusinesses as

38

against non-agribusinesses for fifty years using financial ratio analysis and balance

sheet/income statement items. The authors discovered that the agribusinesses’

performance outweighs other firms’ profitability, liquidity, and market ratios.

Iyakaremye (2015) assessed the financial performance of agricultural companies in the

Nairobi Security Exchange. The author employed return on assets, return on equity and

return on sales for analyzing financial performance.

Financial ratios are the appropriate parameters in determining the financial

performance of a firm. Stigler (1951) explained that vertically integrated companies’

likelihood of triumph is high because of the small input demand for the production

process. Jensen and Meckling (1976) highlighted the need for internal expansion of an

organization. The authors further explained that the need to meet shareholder’s

expectations is often the company’s priority. D’Aveni & Ravencraft (1994) discovered

the benefits associated with the use of a vertical integration strategy. The authors

explained that reducing the general costs and reducing research and development

expenditures make vertical integration a wholesome idea. Randall et al. (1990) pointed

out that vertically integrated firms realized devastating outcomes in their financial

reports, affecting their financial performance.

39

2.9 Methodological review

D’Aveni & Ravencraft (1994) focused on manufacturing companies by adopting

internal goods as a vertical integration metric. Furthermore, the performance measure

with operating revenue over sales. The study found that vertically integrated companies

outperformed non-integrated companies.

Hamdaoui & Bouayad (2019) conducted empirical research on the determinants and

effects of vertical integration on the performance of Moroccan Manufacturing. The

study focused on the vertical integration index to analyze the study variables. The high

cost attached to vertical integration informs bureaucracy, and big size generates an

inverse link between vertical integration and firm performance.

Why does vertical integration destroy firm value? An empirical study was examined

by (Devos & Li, 2016). The aim was to explore the channels through which vertical

integration links to firm value. The vertical integration coefficient measures inter-

divisional vertical relationships in a firm, and a weighted average vertical integration

coefficient to address the inter-divisional vertical relationship between all firm

divisions. The study revealed an inverse relationship between vertical integration and

firm value.

Isaksen et al. (2011) studied vertical integration and performance measurement issues

from the Norwegian fisheries industry, adopting a descriptive survey and Pearson

40

correlation analysis. The study found an impressive correlation between vertical

integration and performance.

Veselská (2005) embarked on vertical coordination and its consequences within the

beer commodity chain in Czech agribusiness and foreign trade. However, the

mathematical model of consumer price simulation was employed. The study revealed

that the coordinated vertical industry realized tremendous improvement in their

performance.

Maina & Kavale (2016) researched the effect of vertical integration on the performance

of agricultural commodity business using Export Trading Company Ltd. The authors

adopted a descriptive survey and stratified sampling technique to extract a sample from

the population. The opinion of the respondents through the use of a structured

questionnaire. The study found a direct relationship between vertical integration and

the performance of agricultural produce.

Andreou et al. (2015) examined the impact of vertical integration on inventory turnover

and operating performance using manufacturing firms as case analysis. The authors

employed path analysis to estimate the empirical model. Furthermore, the listwise

deletion took care of missing data. The study discovered that although raw material and

finished goods, inventory turnover was statistically significant, and it has no significant

effect on work-in-progress.

41

2.10 Research gap

Table 2.2: Summary of some previous empirical research to define gaps

Author/ Year

Research Topic

Industry/Location

Independent Var.

Dependent Var.

Control Var.

Method/Data

Gaps Identified

(Kaiser & Obermaier, 2020)

Vertical (Dis-)

Integration, and Firm

Performance: A

Management

Paradigm Revisited

Manufacturing / Germany

Vertical Integration = Value Added to Sales (VAS)

Financial Performance = Z-Score

Firm size, Firm growth, Market share, Firm age, Herfindahl-Hirschman Index, Leverage, Diversification, Environmental dynamism, Capital intensity, Export ratio

Quantitative measure / Primary & Secondary data

The research was focused on German manufacturing firms on average. It did not cover the study of vertical integration and financial performance on a single firm, and the vertical integration on financial performance relationship in other industries.

(Hamdaoui & Bouayad, 2019)

Determinants and Effects of Vertical Integration on the Performance of Moroccan Manufacturing

Manufacturing/Morocco

Degree of VI = Vi index of industry, share of industry output, No. of industries vertically related to the industry, Total no. of industries

Profitability

Not Applicable

Quantitative measure / Primary data

The author did not specify performance metrics in the study

(Olasupo, 2018)

Integration Strategy and

VI = Ownership/Control of Factor Input, Factor Input/ Quality Control Measures,

Corporate Performance = Profitability, Quality Relation, Market Share

Quantitative

The research did not focus on upstream and downstream integration individually. Also, the research is

42

Corporate Performance in Nigerian Brewery Industry

Brewery/Nigeria

Optimum Regulation of Supply Chain System, Low Cost of Factor Input

Not Applicable

measure / Primary data

carried out in an industry that is pseudo-duopoly not highly competitive in the location of study

(Bor, 2017)

Integration Strategy and Organizational Performance: A Case of Vertical Integration

Banking/Kenya

VI = Human Resource Integration, Organization Integration, Management Integration, Marketing Integration

Organizational Performance

Not Applicable


The study focused on internal integration and did not specify any specific performance dimension. Hence, its leaves an opening in external integration and any specific performance dimension.

(Oloda, 2017)

Vertical Integration and Organizational Survival in Manufacturing Firms in Port Harcourt, Rivers State, Nigeria

Manufacturing / Nigeria

VI = Backward Integration, Forward Integration

Organizational survival

Not Applicable

Quantitative measure / Primary and Secondary data

The study focused on vertical integration and organizational survival not performance. Also, the study is on relationship between variables not on the impact.

(Maina & Kavale, 2016)

Effect of Vertical Integration on the Performance of Agricultural Commodity Business. Case Study of Export Trading

Agricultural Commodity/ Kenya

VI = Warehouses ownership, Transport ownership, Supplier relationship management, Distribution ownership

Performance = Profitability, Sustainability, Agility, Costly

Not Applicable


The study variables metrics cannot be generalized within or outside the industry. The vertical integration measures do not refer directly to the forms or dimensions; backward/upstream and forward/downstream

43

Company Limited

(Andreou, et al. 2015)

The Impact of Vertical Integration on Inventory Turnover and Operating Performance

Manufacturing Services


Inventory Performance = Raw Materials Inventory (RMI), Work in Progress Inventory (WIPII), Finished Goods Inventory (FGI) Operating Performance = ROS

Firm size, Market to book ratio, technological intensity


The study hypotheses do not distinguish the effect on backward and forward vertical integration to individual performance metrics. It looks at vertical integration holistically. The study is not based on a case study.

(Cadot, 2014)

Agency Costs of Vertical Integration – The Case of Family Firms, Investor-owned Firms and Cooperatives in the French Wine Industry

Wine/ France

VI = Ownership structure = Family firms, Outsider-managed firms, Cooperatives

Performance = Operating expense = Marketing effort, Sales, Wine area, Intercept

Not Applicable


The financial indicators of this study are unique to the objective of the study and industry metrics. There are other performance indicators or metrics that were not covered in the study.

(Lahiri & Narayanan, 2013)

Vertical Integration, Innovation and Alliance Portfolio Size: Implications for Firm Performance

Semi-conductor

Vertical Scope

Financial Performance = Net Income. Innovation performance = Portfolio size, Portfolio size-square

Firm age, Firm size, R&D intensity, Other non-manufacturing alliances, Other manufacturing activities.


The study focused on only a single financial performance measure, it neglected other measures that may be relevant to the specific industry

Impact of Supply Chain Integration

Pork/Rwanda

VI = Customer integration, Supplier integration,

Financial Performance, Operational

Competitive strategy

Quantitative measure /

The author did not specify the financial and operational performance

44

(Mose, 2013)

Strategies on Performance of Pork Processing Industry in Rwanda (Case of German Butchery in Kigali)

Internal integration

Performance

Primary data

metrics for the study. The study did not explain vertical integration on performance with regression analysis.

(Alsagheer & Ahli, 2011)

Impact of Supply Chain Integration on Business Performance and its Challenges

Literature/Global

Supply chain Business performance

Not Applicable

Quantitative measure / Secondary data

The report is not based on empirical study but on empirical research carried out by other researchers

(Hwang & Grant, 2011)

Understanding the influence of Integration on ERP Performance

IT Software/Online

System specification integration, Islands of technology integration, Organization integration, Socio-organizational integration, Global integration

ERP Performance

Not Applicable


The study did not address the impact of vertical integration on financial performance.

(Gil, and Warzynski, 2009)

Vertical Integration, Exclusivity and Game Sales Performance in the US Video Game Industry

Video Game/ USA


Performance = Revenue, Quantity, Prices

Not Applicable


The author did not measure vertical integration to performance in dimensions or forms.

Over the last decades, the determinants of vertical integration and performance in the

works of; (Altomonte & Rungi, 2013; Prajogo & Olhager, 2012). Additionally, vertical

integration has been looked at for their multi-dimension in the works of (Mpoyi 2003)

45

and measurement problems (Isaksen et al., 2011a). Also, the relationship of vertical

integration and performance in the works of: (Andreou et al. 2015; Bor, 2017; Forbes

& Lederman, 2010; Isaksen et al. 2011b; Lahiri & Narayanan, 2013; Maroof et al.

2017; Teeratansirikool et al. 2013).

The table above shows the research gaps in some works done in the last decade on

vertical integration on performance. Many of the researchers examined vertical

integration as a singular variable. This method does not allow for an in-depth or detailed

analysis of VI forms or dimensions. Some studies have defined VI components to the

area of interest; in replicated studies across other industries, this restricts applying the

variable’s use.

Furthermore, some of the studies measured performance without metrics and examined

financial performance with a singular measure tied to business relevant to the study or

industry.

A wholesome review of vertical integration on performance over the last decade shows

the literature gap in previous studies concerning; vertical integration dimensions and

financial performance measures, the industry, and geographical region of study. Hence,

this study sums to a relevant contribution to vertical integration and financial

performance, given its study measures that differ from previous studies’ measures. This

study fills the literature gap by examining the impact of vertical integration dimensions

on financial performance measures. This study’s vertical integration dimensions are

defined and derived from the extant literature. The financial performance measures are

metrics not considered in the existing literature on the subject matter and in tune with

46

the firm under study. The research problem spurred from literature gaps in determining

the impact of vertical integration components on financial performance measures in


47

CHAPTER THREE

RESEARCH METHODS

3.1 Introduction

This chapter explains the methodology for the research study. The research objective

was to examine the impact of vertical integration on financial performance in Olam

Nigeria Limited. More importantly, the chapter outlines the type of research design, the

rationale for methods chosen, the population and sample size, the research instrument,

and the study procedures. Equally, this chapter highlights the study’s model

specification and how the study is statistically analyzed.

3.2 Research design

An explanatory research design was best suited for this study. Akhtar (2016) alluded

that contrary to descriptive studies, explanatory studies beyond observation and

description attempt to explain the phenomenon’s causes. To have a better insight and

achieve a vivid understanding of the impact of vertical integration on the financial

performance of Olam Nigeria Limited, a mixed research technique, qualitative and

quantitative research was used. The qualitative approach gets data from the firm’s

employees that can give a first-hand response. The data obtained formed part of the

data converted into information to answer the research questions. Its explanation gave

a clear understanding of the impact of vertical integration on financial performance.

The quantitative approach draws measurable or quantifiable information on the

48

phenomenal subject of the study. The idea of gathering measurable data is to examine

the independent variable’s impact on the study’s dependent variable.

3.3 Population of the study

The study population consisted of all staff members of Olam Nigeria Limited, located

in Lagos metropolis. Lagos state was preferred not only because it is the country’s

commercial hub but also the head office of Olam Nigeria Limited. Therefore, the staff

members for this study chosen from the targeted company’s head office, including

managers, inspectors, marketers, and administrative staff. According to Olam Annual

Report (2018), there are 338 members permanently working at Olam Nigeria Limited

head office in Lagos. The population characteristic was as summarized in the table

below.

Table 3.1: Study population

Target Population

Cadre

Population Size

Olam Nigeria Limited

Managers 22

Inspectors 38

Marketers 63

Administrative 215

Total 338

49

3.4 Sampling procedure and sample size

The convenience sample technique was adopted to extract the sample from the study

population. One hundred and eighty-three respondents were used as the study sample.

The sample size was ascertained using the Taro Yamani formula at a 5% level of

significance. The study focused on managers, inspectors, marketers, and administrative

staff of Olam Nigeria Limited.

Taro Yamane Formula

n = N

1+N (e)2

Where n = sample size sought

N = population

e = error limit (0.05 on the basis of 95% confidence level)

The sample size is, therefore:

n = 338

1+338(0.05)2

n = 183.2

After calculating the sample size, the numbers of the sample are 183.2 persons. The

sample size was calculated by substituting the numbers into the Yamane formula. To

obtain reliable data, the researcher adjusted the sample size to 183 persons. This

formula’s selection was to ensure the sample size be not too far from the population

size (Yamane, 1973). Therefore, the sample size in this study is 183 respondents from


50

3.5 Research instruments

The source of data for the study was primary and secondary. Ideally, this research

should only adopt secondary data, but for clarity, primary data supports the findings of

the research and to ensure rational and robust analysis. Therefore, the data collection

instruments for this study are questionnaires, and financial statements of Olam Nigeria

Limited. The study was conducted in Olam Nigeria Limited among the cadres selected

as the study sample.

However, 183 questionnaires were administered to managers, inspectors, marketers,

and the selected company’s administrative staff. The questionnaires were administered

by the researcher and two other research assistants through the drop and pick up method

to the officers of the selected study sample. On the flip side, secondary data was

obtained from Olam Nigeria Limited audited financial statements and annual reports

between the 2010 and 2018 financial periods.

3.6 Reliability and validity of the instrument

A pre-test was conducted to ensure an adequate and objective designed research

instrument. The questionnaire was submitted to the project supervisor for screening,

editing, and correction. This ensured that the instrument used was able to capture the

objectives of the study effectively. Cronbach’s Alfa coefficient shows a value of 0.942,

indicating high internal consistency among the respondents.

Table 3.2: Reliability Statistics Cronbach's Alpha N of Items

.972 27

51

3.7 Vertical integration-financial performance relationship

According to (Isaksen, 2007) scholars have not reached a concession on measuring

vertical integration and performance. Resulting from the complexities arising from the

multidimensional nature of vertical integration and financial performance. Isaksen

further highlights that;

ü Results from findings across studies are challenging to compare, stemming

from the difference in industries’ uniqueness, and study timeline.

ü Previous research has shown ambiguity in vertical integration on performance

and vertical integration on financial performance findings.

The study measures vertical integration dimensions stated in literature to deal with

vertical integration measurement issues using upstream and downstream. Furthermore,

the study measures financial performance using the firm’s recommended metrics of

earnings before interest tax depreciation amortization, and return on investment.

3.8 Data analysis

Questionnaires retrieved were cleaned, organized, and compared to profile the

characteristics of the data. The questionnaire analysis carried out using frequency and

percentage descriptive tools with the help of a statistical package for social sciences

(SPSS) version 20. To fulfill the study’s primary objective, the researcher focused on

the quantitative analysis using an econometric model to identify and evaluate the

impact of vertical integration on financial performance in Olam Nigeria Limited. More

importantly, the secondary data were analyzed using a time-series ordinary least square

52

regression and unit root tool from an E-view statistical package Series 7, to determine

statistical stationarity and the nexus between the independent and dependent variables.

According to Brooks, 2008, regression is concerned with describing and evaluating the

relationship between dependent and independent variables.

3.9 Hypotheses tested

There were four tested null and alternate hypotheses. The secondary data and responses

from the administered questionnaire helped examine the impact of vertical integration

on financial performance in Olam Nigeria Limited. The study based its conclusion and

recommendations on the result of the hypotheses tested.

3.10 Ethical considerations

The researcher ensured that every individual who participated in the survey was strictly

Olam Nigeria Limited employees in Lagos State. Equally, every participant of the study

assured of full discretion and privacy during the study research. The researcher ensured

that all the survey participants’ consent was sought before the survey to ensure

maximum compliance.

53

3.11 Model specification

Y = a + βjXj + ε

Where:

Y = Financial performance:

Earnings Before Interest, Tax, Depreciation and Amortization (EBITA)

Return on Invested Capital (ROI)

X = Vertical Integration

Upstream Vertical Integration (UVI)

Downstream Vertical Integration (DVI)

a = Intercept

β = Slope

ε = Residual error

Therefore,

EBITDA & ROI = a + β (UVI & DVI) j Xj + ε

The slope is the fluctuation or change in the dependent variable due to a one-unit

change in the predictor(s)/independent variable.

The residual error is the sum of squared differences between the observed and predicted

values of Y. The value of Y would be 0 when the value of X dictates the perfect

prediction of Y.

Conversely, when the differences between the observed and the predicted values are

not 0, then the Y’s differences will not be explained by X. Therefore, there is a residual

error which could be an inaccurate measurement, outliers, and so on.

54

Intercept, otherwise known as estimated Y-intercept derived from the sample data

minimizes the squared residual sum. That is the sum of the squared differences

between the observed and the predicted values. In essence, Y- intercept is the value of

the dependent variable when the predictor/independent is zero.

55

CHAPTER FOUR

DATA PRESENTATION AND ANALYSIS

4.1 Introduction

This chapter presents the results and interpretation of the study. The findings are

presented in tables and figures to provide a visual presentation for easier understanding.

The results relate to the responses from a questionnaire survey and the secondary data

extracted from the annual reports of Olam Nigeria Limited. The findings relate to the

impact of vertical integration on the financial performance of Olam Nigeria Limited.

However, the questionnaires returned was 175 out of the 183 questionnaires

administered, representing a response rate of 95%.

4.2 Data presentation

Table 4.1 Distribution of respondents by gender

Frequency Percent Valid Percent

Cumulative Percent

Valid

Male 105 60.0 60.0 60.0

Female 70 40.0 40.0 100.0

Total 175 100.0 100.0

Source: Field Survey, 2020

Table 4.1 shows the distribution of respondents by gender. The table indicates 105

respondents to be male, while 70 of them were female. Hence, male respondents

dominated the study sample.

56

Table 4.2 Distribution of respondents by age Frequency Percent Valid

Percent Cumulative

Percent

Valid

20-29years 25 14.3 14.3 14.3 30-39years 45 25.7 25.7 40.0 40-49years 55 31.4 31.4 71.4 50years and above 50 28.6 28.6 100.0

Total 175 100.0 100.0 Source: Field Survey, 2020

Table 4.2 shows the age distribution of the respondents. Out of 175 respondents 14.3%

were between the ages of 20 and 29years, 25.7% were between ages of 30 and 39,

31.4% were between ages 40 and 49, and 28.6% were between ages 50years and above.

Hence, the bulk of the respondents are between the ages of 40 and 49.

Table 4.3 Distribution of respondents by educational qualification

Frequency Percent Valid Percent

Cumulative Percent

Valid

ND/NCE 10 5.7 5.7 5.7 HND/B.Sc. 100 57.1 57.1 62.9

M.Sc. 55 31.4 31.4 94.3 Ph.D. 10 5.7 5.7 100.0 Total 175 100.0 100.0

Source: Field Survey, 2020 Table 4.3 shows the distribution of respondents by educational attainment. Among the

survey participants, 5.7% of them possessed ND/NCE, 57.1% of the respondents were

HND/B.Sc. holders, 31.4% held an M.Sc. certificate, and 57% of them were Ph.D.

57

holders. Thus, the majority of the respondents have primary education needed to

understand the term vertical integration strategy.

Table 4.4 Distribution of respondents by organizational position Frequenc

y Percent Valid

Percent Cumulative

Percent

Valid

Managerial 75 42.9 42.9 42.9 Non-managerial 100 57.1 57.1 100.0

Total 175 100.0 100.0 Source: Field Survey, 2020

Table 4.4 displays the distribution of respondent by positions. The table indicates that

42.9% of the respondents are in managerial position while 57.1% of the respondents

belong to other organizational areas, including markers and administrative staff.

Therefore, non-managerial respondents participated actively in this research survey.

Table 4.5 Distribution of respondents by organizational department Frequenc

y Percent Valid

Percent Cumulative

Percent

Valid

Marketing 15 8.6 8.6 8.6 Human Resource 5 2.9 2.9 11.4 Research and Development 15 8.6 8.6 20.0

Sales 35 20.0 20.0 40.0 Finance 40 22.9 22.9 62.9 Production 30 17.1 17.1 80.0 Distribution 15 8.6 8.6 88.6 Others 20 11.4 11.4 100.0 Total 175 100.0 100.0


Table 4.5 shows that 8.6% of the respondents belong to the marketing department, 2.9%

of them are part of the human resource department, 8.6% of the participants affirmed

to be within the research and development department, and while 20% of respondents

58

came from sales department. Equally, 22.9%, 17.1%, and 8.6% of the survey

participants belong to the finance department, production department, and distribution

department, respectively. The table shows that majority of the respondents belong to

the finance department.

Table 4.6 Distribution of respondents by experience Frequenc

y Percent Valid

Percent Cumulative

Percent

Valid

Below 2years 20 11.4 11.4 11.4

2-5years 100 57.1 57.1 68.6 6-10years 55 31.4 31.4 100.0 Total 175 100.0 100.0


Table 4.6 indicates the work experience of the respondents. The table shows 20% of

the respondents have less than 2years work experience, 57.1% of the survey

participants have between 2 and 5 years on the job experience, while 31.4% have been

on the job between 6-10years. The table depicts that majority of the respondents have

between 2 and 5 years of job experience.

59

Table 4.7 Impact of vertical integration strategy on financial performance

S/N Questions VH H AV L VL N Total % of Agreement

1 Information exchange with your major suppliers through information networks

90 45 40 - - - 175 100

2 Suppliers sharing their production capacity with your company

55 70 40 5 5 - 175 94.3

3 Suppliers sharing their production schedule with your company

50 70 40 15 - - 175 91.4

4 Sharing of your firm's production plan with your suppliers

44 70 40 10 - - 175 94.3

5 Strategic partnership with your suppliers

70 70 25 10 - - 175 94.3

6 Linkage with your customers through information networks

65 65 35 10 - - 175 94.3

7 Computerization for ease of customer ordering

80 65 25 5 - - 175 97.1

8 Communication with major customers

55 90 30 - - - 175 100

9 Establishment of quick ordering systems with your major customers

65 80 30 - - - 175 100

10 Sharing of available inventory with the major customers

45 95 30 5 - - 175 97.1

60

11 Sharing of market information from the major customer

50 100 25 - - - 175 100

12 Speed of new product introduction in the market

75 75 20 5 - - 175 97.1

13 Response to changes in market demand

90 70 15 - - - 175 100

14 Delivery time record to your customers

80 75 15 5 - - 175 97.1

15 The firm's customer service to major customer

65 75 30 5 - - 175 97.1

16 The firm's production of raw material reduces production cost

90 65 15 5 - - 175 97.1

17 The firm's production of raw material increases profit

110 35 25 - - 5 175 97.1

18 The firm's production of raw materials influences sales revenue

110 45 15 - - 5 175 97.1

19 Adjusting transaction costs increases profit for your firm

95 80 - - - - 175 100

20 The firm's production of raw material promotes competitive pricing

80 85 10 - - - 175 100

21 Adjusting transaction cost increases return

70 85 15 - 5 - 175 97.1

61


on capital invested in the firm

22 The firm's direct distribution of its products to wholesalers increases its profit

80 55 35 - 5 - 175 97.1

23 The firm's direct distribution of its products to retailers increases its profit

80 70 15 - - 10 175 94.3

24 The firm's distribution of its products through its retail outlets increases its profit

75 70 20 - 5 5 175 94.3

25 The firm's distribution of its products through wholesalers increases its returns on invested capital

35 90 45 - 5 - 175 97.1

26 The firm's distribution of its products through retailers increases its returns on invested capital

35 90 40 5 - 5 175 94.3

27 The firm’s distribution of its products through its own retail outlets increases its returns on invested capital

40 75 45 - 5 10 175 91.4

62

Table 4.7 indicates the impact of vertical integration strategy’s impact on the financial

performance of Olam Nigeria Limited.

Table 4.7.1 When asked about the rate of information exchange with top suppliers. It

indicates that all respondents affirmed that the rate of information exchange with top

suppliers is exceptionally high.

Table 4.7.2 shows the production capacity of suppliers. The survey table indicates that

94.3% of the respondents declared that the sharing of production capacity of suppliers

with the firm is tremendously high while

Table 4.7.3 explains that 94.3% of the survey participants agreed that the extent to

which suppliers share their production schedule with the firm is very significant.

Likewise, Table 4.7.4 indicates the exchange of a firm’s production plan with major

suppliers. The table shows that 94.3% of the survey participants opined that the extent

to which Olam Nigeria Limited reveals its production plan is very significant.

Table 4.7.5 explains the extent of the strategic partnership with the firm’s suppliers.

The survey table shows that 94.3% of the respondents believed that the strategic

partnership between Olam Nigeria and Its suppliers is exceptionally high.

63

Table 4.7.6 shows the relationship between customers and Olam Nigeria Limited. The

table indicates that 94.3% of the respondents affirmed that information networks had

created a robust connection between the firm and its customers.

Table 4.7.7 indicates the rate of adopting computerization for ease of customer orders.

The table shows that 97.1% of the respondents generally believed that the high rate of

adopting computerization in establishing vertical integration strategy had enabled ease

of customer orders

Table 4.7.8 explains the interpersonal relationship between the firm and its customers.

The Table shows that 100% of the respondents agreed that the extent of communication

with top customers is exceptionally significant.

Table 4.7.9 indicates that 100% of the survey participants shared similar opinions about

the inclination of Olam Nigeria Limited towards the establishment of quick ordering

systems with their primary customers.

Table 4.7.10 shows that 97.1% of the respondents affirmed that the rate of sharing

available inventory with the major customers is extensively high.

Table 4.7.11 indicates that all survey participants believed that Olam Nigeria Limited

gathered and derived relevant information about the significant customers’ market

position.

64

Table 4.7.12 shows that 97.1% of the respondents affirmed that the adoption of vertical

integration embarked by Olam Nigeria Limited necessitated creating of new and

modification of existing products to the market.

Table 4.7.13 shows that 100% of the respondents generally believed that the rate at

which Olam Nigeria Limited responds to fluctuation in market demand is tremendously

high.

Table 4.7.14 indicates the impact of vertical integration time records. The table shows

that 97.1% of the respondents believed that the vertical integration strategy had

enhanced the firm’s customers’ delivery time record.

Table 4.7.15 explains the efficiency of the firm’s customer service to its numerous

customers. The survey table indicates that 97.1% of the respondents declared that Olam

Nigeria Limited had established effective customer service to its major customers.

Table 4.7.16 shows the effect of vertical integration on production cost. The table

indicates that 97.1% of the respondents agreed that vertical integration in terms of

production of raw material reduces the firm’s production cost.

Table 4.7.17 explains the relationship between the production of raw materials and

profitability. The table shows that 97.1% of the respondents declared that way, the

production of raw materials increases the profitability of Olam Nigeria Limited is high.

65

Table 4.7.18 shows that 97.1% of the respondents stated that sales revenue had

recorded massive success due to the adoption of raw materials’ in-house production.

Table 4.7.19 shows the impact of transaction cost on the profitability of Olam Nigeria

Limited. The table shows that 100% of the respondents affirmed that adjusting

transaction costs associated with vertical integration enhances its profit.

Table 4.7.20 shows that 100% of the respondents agreed that price competition could

be through raw material production.

Table 4.7.21 explains the link between transaction cost and return on invested capital.

The survey table indicates that 97.1% of the survey participants believed that return on

invested capital would skyrocket if transaction cost drastically controls.

Table 4.7.22 shows the distribution channel and its profitability. The table indicates

that 97.1% of the respondents generally believed that the direct distribution of Olam

Nigeria Limited’s products to wholesalers tended to elevate its profitability.

Table 4.7.23 shows the distribution channel and profitability of Olam Nigeria Limited.

The table indicates that 94.3% of the respondents generally believed that the direct

distribution of Olam Nigeria Limited’s products to retailers tends to elevate its

profitability.

66

Table 4.7.24 explains the apparent effect of increasing profit through retail outlets. The

table indicates that 94.3% of the survey participants affirmed that the firm’s products’

distribution through its retail outlets boosts the company’s margin.

Table 4.7.25 explains that 97.1% of the respondents stated that the distribution of

finished products using wholesalers increases their return on invested capital.

Table 4.7.26 shows an increase in returns on invested capital when distributing

products through retailers, as affirmed by 94.3% of the respondents.

Likewise, Table 4.7.27 shows an increase in returns on invested capital when

distributing products through its retail outlets, as attested by 91.4% of the respondents.

67

Table 4.8a Upstream, downstream, earnings before interest tax depreciation

amortization, and return on investment data extracts from Olam’s

annual financial report (2010-2018) ($ million).

Table 4.8b Descriptive statistics of vertical integration and financial performance

Upstream VI Downstream VI EBITDA ROI Mean 7876.589 4200.700 1071.678 0.094444 Median 7766.700 3794.000 1129.000 0.098000 Maximum 10301.90 6448.200 1327.900 0.115000 Minimum 4209.100 1258.700 610.1000 0.072000 Std. Dev. 2027.810 1995.113 216.4144 0.016040 Skewness -0.480793 -0.172426 -1.045595 -0.111583 Kurtosis 2.124004 1.539743 3.327073 1.492344

Jarque-Bera 0.634506 0.844227 1.680019 0.871062 Probability 0.728147 0.655660 0.431707 0.646921

Sum 70889.30 37806.30 9645.100 0.850000 Sum Sq. Dev. 32896108 31843813 374681.6 0.002058

Observations 9 9 9 9

Year Upstream VI Downstream VI ROI EBITDA

2010 4,209.1 1,258.7 0.112 610.1

2011 5,942.4 1,826.4 0.115 892.8

2012 6,677.8 2,937.8 0.103 990.7

2013 7,448.4 3,481.2 0.107 1,170.8

2014 7,766.7 3,794 0.098 1,129

2015 9,612.3 6,448.2 0.076 1,085.2

2016 10,301.9 6,347.1 0.072 1,202.8 2017 9,719.2 6,113.2 0.084 1,327.9

2018 9,211.5 5,599.7 0.083 1,235.8

68

Table 4.8b shows the descriptive statistics of vertical integration on financial

performance. The mean values indicate each variable’s average figures used for the

analysis during the period under review (2010-2018). The upstream vertical integration

shows the average value of 7876.589 while downstream vertical integration, earnings

before interest and tax, and return on invested capital recorded average values of

4200.7, 1071.678, and 0.0944, respectively. The maximum and minimum values

indicate the highest and the lowest figures in each of the variables.

4.3 Test of hypothesis

The study’s primary objective is to examine the impact of vertical integration

components on financial performance measures. Four developed null and alternate

hypotheses to examine the impact of vertical integration on financial performance in

Olam Nigeria Limited. The secondary data and the statements in section C of the

questionnaire tested the hypotheses of the study. The alternate hypotheses, H1 are

accepted.

Table 4.9a Upstream and earnings before interest tax depreciation amortization data extracts from Olam’s annual financial report (2010-2018) ($ million)

Year Upstream VI EBITDA 2010 4,209.1 610.1 2011 5,942.4 892.8 2012 6,677.8 990.7 2013 7,448.4 1,170.8 2014 7,766.7 1,129 2015 9,612.3 1,085.2 2016 10,301.9 1,202.8 2017 9,719.2 1,327.9

2018 9,211.5 1,235.8

69

H0. Upstream integration has a non-significant impact on earnings before interest tax depreciation amortization in Olam Nigeria Limited.

H1. Upstream integration has a significant impact on earnings before interest

tax depreciation amortization in Olam Nigeria Limited.

Table 4.9b Relationship between upstream integration and earnings before

interest tax depreciation amortization

Dependent Variable: EBITDA Method: Least Squares Date: 03/18/20 Time: 06:13 Sample: 2010 2018 Included observations: 9

Variable Coefficient Std. Error t-Statistic Prob. C 324.6692 149.9367 2.165375 0.0671

UPSTREAM_VI 0.094839 0.018499 5.126823 0.0014 R-squared 0.789691 Mean dependent var 1071.678

Adjusted R-squared 0.759647 S.D. dependent var 216.4144 S.E. of regression 106.0990 Akaike info criterion 12.35975 Sum squared resid 78799.02 Schwarz criterion 12.40358 Log likelihood -53.61889 Hannan-Quinn criter. 12.26517 F-statistic 26.28431 Durbin-Watson stat 1.478469 Prob(F-statistic) 0.001358

Table 4.9b above shows a simple correlation coefficient value (R) of 0.889, which

indicates a high positive relationship between upstream vertical integration and

earnings before interest tax depreciation amortization. The table implies that an

increase in upstream vertical integration tends to elevate earnings before interest tax

depreciation amortization. The coefficient of determination (R2) value of 0.789

signifies that 78.9% of the earnings variance before interest tax depreciation

amortization of Olam Nigeria Limited can be explained by the adoption of upstream

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vertical integration leaving 21.1% unexplained. Equally, the values of r-squared

statistics and Durbin-Watson statistics compared to determine the rate of spurious

regression analysis. Since the value of the r-squared value is less than the Durbin-

Watson value, no recorded element of spurious correlation in this regression analysis.

Hence, the rejection of the null hypothesis. It inferred that the impact of upstream

integration on earnings before interest tax depreciation amortization is positive.

Table 4.10a Downstream and earnings before interest tax depreciation amortization

data extracts from Olam’s annual financial report (2010-2018) ($ million). H0. Downstream integration has a non-significant impact on earnings before

interest tax depreciation amortization in Olam Nigeria Limited. H1. Downstream integration has a significant impact on earnings before

interest tax depreciation amortization in Olam Nigeria Limited.

Year Downstream VI EBITDA

2010 1,258.7 610.1

2011 1,826.4 892.8

2012 2,937.8 990.7

2013 3,481.2 1,170.8

2014 3,794 1,129

2015 6,448.2 1,085.2

2016 6,347.1 1,202.8

2017 6,113.2 1,327.9

2018 5,599.7 1,235.8

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Table 4.10b Relationship between downstream integration and earnings before

interest tax depreciation amortization

Dependent Variable: EBITDA Method: Least Squares Date: 03/18/20 Time: 06:12 Sample: 2010 2018 Included observations: 9


DOWNSTREAM_VI 0.088613 0.023646 3.747448 0.0072 R-squared 0.667354 Mean dependent var 1071.678

Adjusted R-squared 0.619833 S.D. dependent var 216.4144 S.E. of regression 133.4362 Akaike info criterion 12.81825 Sum squared resid 124636.5 Schwarz criterion 12.86208 Log likelihood -55.68214 Hannan-Quinn criter. 12.72367 F-statistic 14.04337 Durbin-Watson stat 1.552862 Prob(F-statistic) 0.007192


indicates a high positive relationship between downstream vertical integration and

earnings before interest tax depreciation amortization. The table implies that an

increase in downstream vertical integration tends to increase earnings before interest

tax depreciation amortization and vice-versa. The coefficient of determination (R2)

value of 0.667 signifies that 66.7% of the earnings variance before interest tax

depreciation amortization of Olam Nigeria Limited can be explained by the adoption

of downstream vertical integration leaving 33.3% unexplained. Equally, the values of

r-squared statistics and Durbin-Watson statistics compared to determine the

existence of spurious regression analysis. Since the value of the r-squared value is less

than the Durbin-Watson value, no recorded element of spurious correlation in this

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regression analysis. Hence, the rejected null hypothesis. Therefore, it inferred that the

impact of downstream integration on earnings before interest tax depreciation

amortization is positive.

Table 4.11a Upstream and return on investment data extracts from Olam’s annual

financial report (2010-2018) ($ million)

Year Upstream VI ROI

2010 4,209.1 0.112

2011 5,942.4 0.115

2012 6,677.8 0.103

2013 7,448.4 0.107

2014 7,766.7 0.098

2015 9,612.3 0.076

2016 10,301.9 0.072

2017 9,719.2 0.084 2018 9,211.5 0.083

H0. Upstream integration has a non-significant impact on return on investment in Olam Nigeria Limited.

H1. Upstream integration has a significant impact on return on investment in Olam Nigeria Limited.

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Table 4.11b Relationship between upstream integration and return on investment

Dependent Variable: ROI Method: Least Squares Date: 03/18/20 Time: 06:08 Sample: 2010 2018 Included observations: 9

Variable Coefficient Std. Error t-Statistic Prob.

C 0.152182 0.009106 16.71307 0.0000 UPSTREAM_VI -7.33E-06 1.12E-06 -6.525024 0.0003

R-squared 0.858802 Mean dependent var 0.094444 Adjusted R-squared 0.838631 S.D. dependent var 0.016040 S.E. of regression 0.006443 Akaike info criterion -7.058411 Sum squared resid 0.000291 Schwarz criterion -7.014584 Log likelihood 33.76285 Hannan-Quinn criter. -7.152991 F-statistic 42.57594 Durbin-Watson stat 2.005368 Prob(F-statistic) 0.000326


indicates a high positive relationship between upstream vertical integration and return

on investment. The table implies that an increase in upstream vertical integration tends

to increase return on investment and vice-versa. The coefficient of determination (R2)

value of 0.859 signifies that 85.9% of the variation in the ROI of Olam Nigeria Limited

can be explained by the adoption of upstream vertical integration leaving 14.1%

unexplained. Equally, the values of r-squared statistics and Durbin-Watson statistics

compared to determine the existence of spurious correlation. Since the value of r-

squared is less than the Durbin-Watson value, no recorded element of spurious

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correlation in this regression analysis, hence the rejected null hypothesis. Therefore, its

inferred that the impact of upstream integration on return on investment is positive.

Table 4.12a Downstream and return on investment data extracts from Olam’s annual financial report (2010-2018) ($ million)

Year Downstream VI ROI

2010 1,258.7 0.112

2011 1,826.4 0.115

2012 2,937.8 0.103 2013 3,481.2 0.107

2014 3,794 0.098

2015 6,448.2 0.076

2016 6,347.1 0.072

2017 6,113.2 0.084

2018 5,599.7 0.083 H0. Downstream integration has a non-significant impact on return on investment

in Olam Nigeria Limited.

H1. Downstream integration has a significant impact on return on investment in Olam Nigeria Limited.

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Table 4.12b Relationship between downstream integration and return on

investment

Dependent Variable: ROI Method: Least Squares Date: 03/18/20 Time: 06:09 Sample: 2010 2018 Included observations: 9


DOWNSTREAM_VI -7.77E-06 7.84E-07 -9.912943 0.0000 R-squared 0.933502 Mean dependent var 0.094444

Adjusted R-squared 0.924002 S.D. dependent var 0.016040 S.E. of regression 0.004422 Akaike info criterion -7.811400 Sum squared resid 0.000137 Schwarz criterion -7.767573 Log likelihood 37.15130 Hannan-Quinn criter. -7.905980 F-statistic 98.26644 Durbin-Watson stat 2.413930 Prob(F-statistic) 0.000023


indicates a high positive relationship between downstream vertical integration and

return on investment. The table implies that an increase in downstream vertical

integration tends to increase return on investment and vice-versa. The coefficient of

determination (R2) value of 0.933 signifies that 93.3% of the variation in the return on

investment of Olam Nigeria Limited explained by adopting downstream vertical

integration leaving 6.7% unexplained. Equally, the values of r-squared statistics and

Durbin-Watson statistics compared to determine the existence of spurious correlation.

Since the value of r-squared is less than the Durbin-Watson value, no recorded element

of spurious correlation in this regression analysis, hence the rejected null hypothesis.

Therefore, its inferred that the impact of downstream integration on return on

investment is positive.

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4.4 Stationary test (Augmented Dickey Fuller)

Table 4.13 Unit root test on earnings before interest tax depreciation amortization Null Hypothesis: EBITDA has a unit root Exogenous: Constant Lag Length: 0 (Automatic - based on SIC, maxlag=1)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -3.450062 0.0422 Test critical values: 1% level -4.582648

5% level -3.320969 10% level -2.801384

The Augmented Dickey-Fuller (ADF) test is employed to determine the stationary of

the series. The table shows that the absolute value of ADF (3.450062) is greater than

the 5% absolute critical value (3.320969), which implies that the series is stationary.

Equally, the ADF critical value indicates that the analysis is statistically significant.

Additionally, the mean, variance, and covariance of the series are constant over time.

Therefore, the rejected null hypothesis assumption that earnings before interest tax

depreciation amortization have a unit root.

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Table 4.14 Unit root test on return on investment Null Hypothesis: ROI has a unit root Exogenous: Constant, Linear Trend Lag Length: 2 (Automatic - based on SIC, maxlag=2)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -5.068084 0.0407 Test critical values: 1% level -7.006336

5% level -4.773194 10% level -3.877714

The Augmented Dickey-Fuller test is employed to determine the stationary of the

series. The table shows that the absolute value of ADF (5.068084) is greater than the

5% absolute critical value (4.773194), which implies that the series is stationary.

Equally, the ADF critical value indicates that the analysis is statistically significant.

Additionally, the mean, variance, and covariance of the series are constant over time.

Therefore, the rejected null hypothesis that the return on investment has a unit root.

4.5 Summary of research findings

The primary data show the following:

The findings from section A of the questionnaire provided subjective evidence of a

positive impact of vertical integration components on financial performance measures.

The result from the primary data supports and validates the secondary data findings as

they both show a positive impact of the independent variables on the dependent

variables.

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The findings in section B of the questionnaire gave descriptive evidence of the

respondents’ demographics. These data showed respondents as an eligible and

qualified participant.

The secondary data findings show the following:

The Prob. value is less than 5%, so the null is rejected. Durbin Watson’s value is less

than 2. Hence upstream integration and earnings before interest tax depreciation

amortization have a positive serial correlation. Also, the R-square value is less than the

Durbin Watson value, indicative of no spurious correlation. Hence the null hypothesis

is rejected, and the alternate hypothesis is accepted. The finding indicates a positive

relationship between upstream integration and earnings before interest tax depreciation

amortization.

Durbin Watson’s value is less than 2. Hence downstream integration and earnings

before interest tax depreciation amortization have a positive serial correlation. The

Prob. value is less than 5%, so the null is rejected. Also, R-square is less than Durbin

Watson, indicative of no spurious correlation. Hence the null hypothesis is rejected,

and the alternate hypothesis is accepted. The finding indicates a positive relationship

between downstream integration and earnings before interest tax depreciation

amortization.

The Durbin Watson’s value signifies no autocorrelation between upstream integration

and returns on investment as it is less than 2. The Prob. value is less than 5%, so the

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null is rejected. Also, R-square is less than Durbin Watson, indicative of no spurious

correlation. Hence the null hypothesis is rejected, and the alternate hypothesis is

accepted. The finding indicates a positive relationship between upstream integration

and returns on investment.

Durbin Watson’s value is greater than 2. Hence downstream integration and return on

investment have a negative serial correlation. The Prob. value is less than 5%, so the

null is rejected. Also, R-square is less than Durbin Watson, indicative of no spurious

correlation. Hence the null hypothesis is rejected, and the alternate hypothesis is

accepted. The finding indicates a high positive relationship between downstream

integration and returns on investment.

The unit root Augmented Dickey-Fuller (ADF) shows that the test statistics are higher

than the critical value at a 5% significance level. Hence, the rejected null hypothesis

and the alternate hypothesis is accepted

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Table 4-15: Summary of the research objectives, hypotheses, findings and conclusion

Research Objectives

Research Hypotheses

Findings Supported Literature Findings

Conclusion

Obj. 1. To ascertain the impact of Upstream Integration on EBITDA in Olam Nigeria Limited.

H0. Upstream integration has a non-significant impact on EBITDA in Olam Nigeria Limited. H1. Upstream integration has a significant impact on EBITDA in Olam Nigeria Limited.

The findings show a positive impact of upstream integration on earnings before interest tax depreciation amortization.

(Isaksen, 2007)

Findings support H1.

Obj. 2. To ascertain the impact of Upstream Integration on ROI in Olam Nigeria Limited.

H0. Upstream integration has a non-significant impact on ROI in Olam Nigeria Limited. H1. Upstream integration has a significant impact on ROI in Olam Nigeria Limited.

The findings show a positive impact of upstream integration on return on investment.

(Isaksen, 2007)


Obj. 3. To ascertain the impact of Downstream Integration on EBITDA in Olam Nigeria Limited.

H0. Downstream integration has a non-significant impact on EBITDA in Olam Nigeria Limited. H1. Downstream integration has a significant impact on EBITDA in

The findings show a positive impact of downstream integration on earnings before interest tax depreciation amortization.

(Beheshti and Hultman, 2014)


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Obj. 4. To ascertain the impact of Downstream Integration on ROI in Olam Nigeria Limited.

H0. Downstream integration has a non-significant impact on ROI in Olam Nigeria Limited. H1. Downstream integration has a significant impact on ROI in Olam Nigeria Limited.

The findings show a positive impact of downstream integration on return on investment.

(Beheshti, and Hultman, 2014)


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CHAPTER FIVE

SUMMARY, CONCLUSION, RECOMMENDATIONS, AND SUGGESTIONS FOR FURTHER RESEARCH

5.1 Introduction

This chapter presents the summary, conclusions made from the findings, and the

recommendations of the study. The summary relates to the synopsis of all the previous

chapters, while the conclusion and recommendation drawn focused on addressing the

study’s questions.

5.2 Summary of the study

A company that embarks on vertical integration extends its operations backward or

forward in the value chain, operating in a similar or different industry. The firm does

for itself what it previously was getting from a third party. The idea of embarking on

such a strategy is to expand its supply chain, shrink input cost, and minimize

intermediate profit losses. This strategy is vital for firms to ensure timely delivery of

finished products, guarantee perpetuity in the production process and elevate the

financial performance. Generally, there are two significant aspects of vertical

integration; upstream vertical integration and downstream vertical integration.

Upstream vertical integration is said to be in force when organizations gain absolute

control in the supply of raw materials to produce of finished products. More

importantly, upstream vertical integration allows an organization to reduce its

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transaction cost and improve its competitive edge, creating improvement in the

production process. On the flip side, a downstream vertically integrated company

secure control over the distribution channels and ensure profit losses to intermediate

entities are strategically curtail and tremendous results in the company’s market share.

The increasing global market competitiveness requires a viable strategy that will give

the business a long term positive financial performance. Also, the strategy can be

directed at an organizational change to drive sustainable competitive advantage.

Therefore, it is a requisite for managers to employ a strategy that will enhance financial

performance to enable the business to meet its ultimate goal. Some previous studies

have shown that vertical integration is one of firms’ strategies to enhance performance

towards a competitive edge. Thus, this study focused on the impact of vertical

integration on the financial performance of Olam Nigeria Limited. Specifically, the

research aimed to ascertain the impact of upstream integration on earnings before

interest tax depreciation amortization in Olam Nigeria Limited; the impact of upstream

vertical integration on return on investment in Olam Nigeria Limited; the impact of

downstream integration on earnings before interest tax depreciation amortization in

Olam Nigeria Limited as well as the impact of downstream vertical integration on

return on investment in Olam Nigeria Limited.

The statistical analysis employed in this study were frequency, percentage, descriptive

statistics, ordinary least square regression, and unit root. The unit root (Augmented

Dickey Fuller’s) test was employed to determine the series stationary level, and

ordinary least square regression analysis to test the stated hypotheses. The result

84

presented in chapter four reflects out of the 183-sample size. The actual participants

were 175 Olam employees in the Lagos headquarters of the firm to examine the impact

of vertical integration on financial performance. Specifically, the impact of vertical

integration components, upstream and downstream on financial performance measures,

earnings before interest tax depreciation amortization, and return on investment. The

findings summary shows that Olam Nigeria Limited engages in both the upstream and

downstream integration practices. The firm produces its raw materials and ensures the

direct distribution of finished products to the final consumers. The findings also show

that the firm has wholesale and retail outlets to achieve vertical integration goals.

Furthermore, the findings show a high level of consistency from the primary data

collected, which positively impacts vertical integration on financial performance. The

findings from the primary and secondary data show a positive impact of vertical

integration on financial performance.

Overall the findings from the primary data and secondary data show uniformity, a

positive impact of vertical integration (upstream and downstream) on financial

performance (earnings before interest tax depreciation amortization and return on

investment). The findings support the alternate hypotheses (H1). The findings imply

that the vertical integration strategy adopted in Olam is beneficial to the firm’s financial

health.

85

5.3 Conclusion

The study focused on the impact of vertical integration components on the financial

performance measures of Olam Nigeria Limited. The study found that the vertical

integration strategy has to assure continuity in its disposition and ensure the positive

progression of its financial performance. The finding is a combination of all resources,

assets, and manpower to replicate the upstream and downstream integration strategy.

More specifically, the results of the findings show a statistically significant impact of

upstream vertical integration on earnings before interest and tax, and the return on

invested capital. The findings supported the assertion of (Dichev et al., 2012) that the

organization’s specific strategy can change the company’s reported earnings. The study

found that upstream vertical integration intervention boosts earnings and return on

invested capital during the review period. Olam Nigeria Limited was able to achieve

success in their earnings and return on invested capital because of the reduction in

inputs’ cost without compromising the standard and quality of their production. The

success of any profit-oriented organization depends significantly on how strategically

cost is control as against the competitors. Furthermore, the downstream vertically

integrated sector of Olam Nigeria Limited recorded a direct relationship with earnings

and returned invested capital. The downstream vertical integration enables an

organization to contact customers through the distribution of finished products directly.

The positive relationship could also result from the timely delivery of finished products

through the combination of the wholesaling and retailing channels of distribution. Also,

positivity could result from engaging in the right direction and level of integration

across product offerings.

86

5.4 Recommendations

Theoretically, the study supports the transaction cost theory guide to a vertical

integration decision. Transaction cost theory involves a cost-benefit analysis to guide

the decision. The study carried out on an existing firm, and the study findings are an

independent report and practical guide for the firm as it builds on its operation.

Academically, the study becomes an addition to the literature reference for future

research in this area. It serves as a reference for study continuity and extension in this

area.

Hence, based on the study’s findings, the researcher puts forth the following

recommendations:

1. Olam seeking to further vertically integrate the upstream and downstream

operations should focus on critical components favorable to overall financial

performance.

2. Disruption in the vertically integrated firm’s value chain may hinder the

production process due to low flexibility in the business structure. Therefore,

the vertically integrated firm should embrace third parties’ participation in

producing raw materials and distributing finished products to make economic

changes when the need arises.

3. The procedures in operating an effective vertical integration strategy are

intense. They require practical training and retraining of staff members to be

acquainted with the needed skills and equipment to achieve a better result.

87

4. The process of vertical integration is capital intensive. Considering this

strategy, the firm should consider their present financial status and cost

implication of this advent to the prospective benefit before embarking on this

move.

5. A technology upgrade for the vertically integrated firm is highly essential to

improving production output and financial performance. Olam should consider

a technology upgrade along the integration path.

6. Vertical integration strategy creates an enabling environment to reduce

transaction costs associated with product development strategies and contract

negotiation. Hence, firms should consider vertical integration strategy when

trying to be cost-effective.

5.5 Suggestions for further research

This study recommends the following areas for further research based on limitations

and other study parameters:

1. The researcher suggests that the study should be replicated in another industry

using the same parameters of measurement.

88

2. The researcher suggests a vertical integration on the financial performance

integration comparison study, using data from the firm’s non-integrated period

and the same firm’s integrated period.

3. The researcher suggests replicating of this study in different industries and firms

to corroborate, support, refute the findings, or establish generality in the

industry.

4. The researcher suggests further study using market performance measures to

corroborate, support, or refute the firm’s findings.

5. The researcher suggests replicating of the study using different financial

performance measurement metrics to corroborate, support, or refute the

findings in the same firm.

6. The researcher suggests an exploratory study using the same methodology in

other branches of the same firm in Nigeria. This study will seek to determine if

the outcome of the study will be the same or different from previous findings.

7. The researcher suggests carrying out the same or a similar study to include

control variables. The study will elaborate on the influence of the control

variables in the study.

89

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Appendix

MSc. Research Project Questionnaire

Dear Sir/Madam,

This survey is conducted for my research project, which will be submitted as part of

the fulfillment of the requirements for the degree of Master of Science in Business

Administration at the American University of Nigeria.

Please try to answer all the questions as honestly and accurately as possible. All

responses to this survey will be held with strict confidentiality.

This survey’s findings will be reported only at the aggregated level, and the anonymity

of individuals that respond to this questionnaire is guaranteed.

Your participation is very much appreciated.

Should you have any questions or comments regarding this questionnaire, do not

hesitate to contact 0803-049-0223 or email [email protected]

Thank you for your kind cooperation and assistance.


Research Student,

School of Business and Entrepreneurship,

American University of Nigeria, Yola.

105

SECTION A: IMPACT OF VERTICAL INTEGRATION STRATEGY ON

FINANCIAL PERFORMANCE.

The following statements relate to the impact of vertical integration strategies on

financial performance in your firm. To what extent do the following vertical

integration issues impact the financial performance of your company.

Please answer by selecting one of the alternatives 6, 5, 4, 3, 2, and 1. You may add

comments to justify your answers:

6 = very high 5 = high 4 = average 3 = low 2 = very low 1 = none

Respondent’s

Choice

Comments

6 5 4 3 2 1

1 Information exchange with your major

suppliers through information

networks.

2 Suppliers sharing their production

capacity with your company

3 Suppliers sharing their production

schedule with your company

4 Sharing of your firm’s production plan

with your suppliers

5 Strategic partnership with your

suppliers

106

6 Linkage with your customers through

information networks

7 Computerization for ease of customer

ordering

8 Communication with major customers

9 Establishment of quick ordering

systems with your major customers

10 Sharing of available inventory with

the major customers

11 Sharing of market information from

the major customer

12 Speed of new product introduction in

the market

13 Response to changes in market

demand

14 Delivery time record to our customers

15 The firm’s customer service to their

major customer

16 The firm’s production of raw material

reduces their production cost

17 The firm’s production of raw material

increases your firm’s profit.

18 The firm’s production of raw materials influence sales revenue

19 Adjusting transaction costs increases profit for your firm.

107

20 Firm’s production of raw material promotes competitive pricing.

21 Adjusting transaction cost increases return on capital invested in your firm.

22 The firm’s direct distribution of its products to wholesalers increases its profit.

23

The firm’s direct distribution of its

products to retailers increases its

profit.

24

The firm’s distribution of its products

through its retail outlets increases its

profit.

25


through wholesalers increases its

Returns on Invested capital.

26


through retailers increases its Returns

on Invested Capital.

27


through its own retail outlets increases

its Returns on Invested Capital.

108

SECTION B: RESPONDENT PROFILE

Instruction: Please tick inside the boxes as appropriate

1. Gender: a) Male b) Female

2. Age: a) 20-29 b) 30-39 c) 40-49 d) 50 years above

3. Educational Qualification: a) WAEC b) ND/NCE c) HND/BSc.

d) Ph.D. e) Others________________________________________________________

4. Position helda) Managerial

b) Non-managerial

5. Function/Department: a) Marketing b) HR c) R&D d)

Sales e) Finance f) Production g) Distribution

h) Others____________________________________________________________________

6. How many years have you been employed by Olam Nigeria Limited?

Less than 2Yrs 2-5Yrs 5+Yrs to 10 Yrs. Over 10 Yrs.

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Secondary data extracts from Olam’s annual financial report (2010-2018) ($ million)

Year Upstream VI Downstream VI ROI EBITDA

2010 4,209.1 1,258.7 0.112 610.1

2011 5,942.4 1,826.4 0.115 892.8

2012 6,677.8 2,937.8 0.103 990.7

2013 7,448.4 3,481.2 0.107 1,170.8

2014 7,766.7 3,794 0.098 1,129

2015 9,612.3 6,448.2 0.076 1,085.2

2016 10,301.9 6,347.1 0.072 1,202.8

2017 9,719.2 6,113.2 0.084 1,327.9

2018 9,211.5 5,599.7 0.083 1,235.8

thesis- impact of vertical integration strategy on

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