RELATIONSHIP BETWEEN VERTICAL
INTEGRATION AND PERFORMANCE
OF CONSTRUCTION FIRMS IN KENYA
BY
GITONGA AARON MURITHI
A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT
OF THE REQUIREMENT FOR THE AWARD OF
THE DEGREE OF MASTER OF BUSINESS ADMINISTRATION,
SCHOOL OF BUSINESS,
UNIVERSITY NAIROBI
NOVEMBER 2011
DECLARATION
This research project is my original work and has not been presented for a degree in
any other university
^A- W
GITONGA AARON MURITHI
DATE
D61/P/7509/2005
This management research project has been submitted for examination with my
approval as University Supervisor
PROF. F.VANS AOSA
DATE
ACKNOWLEDGEMENT
I am so much grateful to Almighty God for the strength, resources and opportunity He
availed to me to make my studies and this research project a success. Without God on
my side this accomplishment could not have been possible.
Much gratitude to my supervisor. Prof. Evans Aosa, for his guidance, critique,
encouragement and interest on my work. His help was prompt and of much value.
To my loving wife, Irene and very supportive sons Murithi jr and Mutvviri. thank you
for allowing me to rob you your precious family time. I had a warm home to run to
after being drained my energy as I worked on this research project.
To all friends and relatives who encouraged and helped in way or the other, you are
much appreciated and may the almighty God bless you all.
iii
DEDICATION
To my late dad, George Gitonga, keeping your legacy on!
iv
ABSTRACT
There are many strategies at the disposal of the management of companies for their
employ. Vertical integration is one of these strategies and it is widely used. This study
sought to establish if there existed any relationship between the degree of vertical
integration and performance of construction firms in Kenya. This was done by
carrying out a regression analysis between profitability performance ratios: return on
total assets, return on shareholder's equity, net profit margin and operating profit
margin individually against the degree of vertical integration as indicated by the
extent that a firm does value addition to its final product of sale.
A cross-sectional survey was carried out on twenty six construction firms registered
with Ministry of Public Works as Class A contractors. The year under study was 2007
due to the high level of construction activities in this year. The respondents gave data
on their financial performance in the year 2007 from which the degree of vertical
integration and the profitability performance ratios were calculated.
The findings of the study indicated that there exists no relationship between vertical
integration and performance of construction firms in Kenya. The government as it
formulates policies affecting construction industry should study the other strategies
that have a greater impact on performance so that it can put in place policies and
guidelines that support performance enhancement. For the management of
construction firms in Kenya also they ought to put less emphasis on vertical
integration as a strategy and concentrate on other strategies that positively impact
performance more.
The study had three main limitations: the first one was low response rate due to the
sensitivity of the data sought for. Secondly the study limited performance to
profitability only while there are other dimensions to performance. Lastly the study
was limited to the year 2007; a study of more years would have given more indicative
results.
In conclusion the researcher recommends further similar research in the same industry
but taking into consideration other indicators of performance other than profitability.
Also similar studies should be carried out in other countries especially the ones with
different levels of technological advancement and industrialization. Finally a similar
study but covering more years to establish if the findings would be the same is
encouraged.
v
TABLE OF CONTENTS
DECLARATION......................................................................................................... II
ACKNOWLEDGEMENT.........................................................................................Ill
DEDICATION............................................................................................................ IV
ABSTRACT..................................................................................................................V
LIST OF TABLES..................................................................................................VIII
LIST OF FIGURES................................................................................................. IIX
CHAPTER ONE: INTRODUCTION........................................................................ 1
1.1 Background of the Study.................................................................................1
1.1.1
Concept of Vertical Integration...................................................... 2
1.1.2
Construction Industry in Kenya.....................................................2
1.2 Research Problem...........................................................................................4
1.3 Research Objective......................................................................................... 6
1.4 Value of the Study.......................................................................................... 6
CHAPTER TWO: LITERATURE REVIEW........................................................... 7
2.1 Introduction..................................................................................................... 7
2.2 The Concept of Vertical Integration...............................................................7
2.3 Empirical research on vertical integration.................................................... 12
2.4 Implication of vertical integration to a firm’s strategy................................. 14
2.5 How to Measure Performance...................................................................... 16
CHAPTER THREE: RESEARCH METHODOLOGY........................................ 19
3.1 Introduction................................................................................................... 19
vi
3.2 Research Design........................................................................................... 19
3.3 Population..................................................................................................... 20
3.4 Sampling Design........................................................................................... 20
3.5 Data Collection............................................................................................. 21
3.6 Data Analysis................................................................................................ 21
4
CHAPTER FOUR: DATA ANALYSIS, RESULTS AND DISCUSSION ...25
4.1 Introduction................................................................................................... 25
4.2 General Response Information..................................................................... 25
4.3 Descriptive Statistics..................................................................................... 27
4.4 Vertical Integration and Performance of Construction Firms in Kenya...... 28
4.5 Discussion..................................................................................................... 31
CHAPTER FIVE: SUMMARY, CONCLUSION AND RECOMMENDATIONS...33
5.1 Introduction................................................................................................... 33
5.2 Summary....................................................................................................... 33
5.3 Conclusion.................................................................................................... 34
5.4 Recommendations......................................................................................... 35
5.5 Suggestions for further Research.................................................................. 36
5.6 Limitations of the study................................................................................ 36
REFERENCES........................................................................................................... 37
APPENDIX A: QUESTIONNAIRE......................................................................... 42
APPENDIX B: SAMPLED BUILDING AND CONSTRUCTION FIRMS........ 44
APPENDIX C: DETAILED RESULTS OF CORRELATION AND
REGRESSION ANALYSIS.............................................................................. 47
V ll
LIST OF TABLES
Table 1: Financial Ratios......................................................................................... 23
Table 2: Summary of Descriptive Variables..............................................................27
Table 3: Summary of Regression Models of ROTA, ROSE, NPM and OPM
on VI.............................................................................................................28
Table 4: Summary of Coefficients of Regression Models of ROTA, ROSE, NPM
and OPM on VI............................................................................................29
viii
LIST OF FIGURES
Figure 1: Response Rate
26
IX
CHAPTER ONE
INTRODUCTION
1.1
Background of the Study
The success of a firm requires a broad view of management which goes beyond
managing the internal activities of the firm. This transcends into looking at the way
the firm also interacts with the environment in which it operates. Both the immediate
and remote environments have an impact on the success of the firm. The management
needs to look into the firm's objectives and from these objectives set up systems that
are geared towards achieving them; this is largely what strategic management is all
about. Pearce (2005) gives seven areas that objectives are commonly established
around as profitability, productivity, competitive position, employee development,
employee relations, technological leadership and public responsibility.
Strategic decisions determine largely the performance of a firm in the long run and
consume resources (Pearce, 2005). firms in the construction industry in Kenya are not
exempt to these facts about strategic decisions. The construction industry in Kenya is
currently quite vibrant and players in it need to make sound strategic decisions so as
to benefit in the long-run from the current high level of activity. Ability to
differentiate products and lowering of costs are some of the benefits of vertical
integration that construction firms can enjoy if they employed vertical integration as a
strategy.
The two benefits increases the competitiveness of a firm as well as
enhancing its performance (Jones & George, 2009)
1
1.1.1
Concept of Vertical Integration
The systems that the management sets so as to achieve its objectives are dependent on
the strategies that are adopted at the various levels. According to Johnson and Scholes
(2002), vertical integration is a corporate level strategy that supports the actualization
of the chosen business strategy. Vertical integration strategy increases a firm’s
involvement in the value chain within which it operates (Barney, 1997). Forbes and
Lederman (2010) in their study of the airline industry concluded that operationally
there is a performance advantage to vertical integration. Vertical specialization
(opposite of vertical integration) leads to an increase of sales and market share
through which a firm could improve production efficiency and afford to charge a
lower price for its main product (Lu and Tao. 2008).
The number of stages that a firm involves itself in the value chain towards producing
the final product determines its degree of vertical integration. Barney (1997) states
that the more the stages of the value chain that the management decides to engage in,
the higher the degree of vertical integration and vice versa. Vertical Integration as a
strategy, just like all other strategies, is rarely used in isolation but it is often
combined with other strategies.
1.1.2 Construction Industry in Kenya
The construction industry' in Kenya is quite established and is the largest regionally.
Construction involves many stages of value addition and the players have to decide
how many of the stages they will be involved in. According to Government of Kenya
National Accounts Statistics (2008). between the year 2003 and 2008, construction
2
industry was on a growth path hence the performance of the construction firms was
improving.
This improvement in the construction industry is attributed to many factors. These
factors as earlier highlighted could be in the external environment and others within
the internal environment. Among the internal environment factors, adaptation of
vertical integration strategy could be one of them. If this is the case then there would
be said a positive relationship between vertical integration and performance in the
firms in this industry.
The players of construction industry' in Kenya are broadly classified into four
categories i.e. the clients/ developers, the design team/ consultants, the contractors
and the suppliers. This study will be looking at the contractors and their operations.
Contractors are endowed with the task of organizing, moving and assembling various
materials and composite parts to form a composite whole structure (Ilillebrandt P,
1985). The delivery of a construction project has many stages among them are design,
production of building materials, distribution and supply of building materials,
engagement of labour, supervision of labour, selling or letting out of the final product.
In Kenya there are over 4000 contractors who are registered with the Ministry of
Public works in various categories and trades. The categories range from A-H based
on the maximum value of projects that a form has capacity to handle. The trades that
recognized by the Ministry of Public Works include civil works, general building
construction, electrical installations, plumbing and drainage installations and
mechanical ventilations installations.
3
1.2
Research Problem
Pearce and Robinson (1997) define strategic management as the set of decisions and
actions that result in the formulation and implementation of plans designed to achieve
a company’s objective. In strategic management there is; the choosing of long term
direction that the firm will take, the scope of its activities and the way resources at its
disposal will be deployed in the effort of achieving the firm's set objectives. Johnson.
Scholes and Whittington (2005) define strategy as the direction and scope of an
organization over long term which achieves advantage in a changing environment
through its configuration of resources and competences with the aim of fulfilling the
stakeholders’ expectations.
Johnson and Scholes (2002) view corporate level strategies as those strategies that
seek to deal with ways in which the corporate parent firm may add value to its
business units, the logic on which the corporate portfolio will be based on. the nature
of corporate parent control on business units and the nature and extent of diversity of
the corporation. Vertical integration is one of the strategies that a firm may employ as
a specific corporate strategy. Vertical integration is an approach where a firm
increases or decreases the level of control that it has over its inputs and distribution of
outputs.
Vertical integration as a strategy is driven by the opportunities that the management
of a firm perceives exist to create value either by producing the inputs or distributing
and selling to the customers (Jones and George, 2009). Further Jones and George
4
(2009) state that the value creation achieved through vertical integration is either by
making products special or unique or lowering the cost of producing and selling them.
The importance of construction industry to any economy cannot be underplayed. The
industry' is key to the economy such that the consumption of cement, which is one of
its main inputs, is used to gauge the growth of an economy. According to Government
of Kenya National Accounts Statistics (2008), construction industry contributed 3.6%
and 6% of the GDP in the year 2004 and 2005 respectively in Kenya. The industry in
Kenya is growing at a high rate with consumption of cement rising from about
1,267.300 metric tonnes in 2003 to 2,061,400 metric tonnes in 2007. On this basis the
industry has grown by 62.66% in five years.
Mahaga (2003) established that there existed a moderate and positive relationship
between vertical integration and performance of food manufacturing firms in Kenya.
However, Rumelt (1972) found vertically integrated firms to be the poorest
performers in his multi-industry study of corporate strategy. Further, D'aveni and
Ilinitch (1992) established that vertically integrated firms stood a higher risk of
bankruptcy than non-integrated firms.
There has been no study to establish if there exists any relationship between vertical
integration and performance in the construction industry'- Does the degree of vertical
integration affect the performance of construction firms in Kenya?
5
1.3
Research Objective
The research objective of this study is to establish the relationship between vertical
integration and performance of construction firms in Kenya.
1.4
Value of the Study
The construction industry is a major contributor to all economies more so to the
developing countries' economies. As noted earlier the construction industry
contributed about 6% of GDP in the year 2005 in Kenya and in 2008 it is the only
sector that grew other than the telecommunications. This makes the industry a key
sector in the economy hence worth studying as the study would guide the government
on formulation of policies that would propel the economy.
The findings from this study will also form a source of reference material for
management practitioners and scholars with interest in strategic management. The
study will shed more light on vertical integration as a specific corporate strategy.
Furthermore, vertical integration is an expensive strategy for construction firms since
it involves huge capital expenditure and reduces the flexibility in change of strategy.
It is therefore important for the management of construction linns to learn from other
players in the industry who have employed this strategy before adopting it. Those who
have already adopted this strategy will be able to establish its effectiveness in
enhancing performance of their firms.
6
CHAPTER TWO
LITERATURE REVIEW
2.1
Introduction
In this chapter literature review in connection with vertical integration will be
covered. The chapter will cover the following areas: an overview of vertical
integration, vertical integration as a strategy, degree of vertical integration strategics,
implication of vertical integration to a firm’s strategy, advantages and disadvantages
of vertical integration and finally how to measure performance.
2.2
The Concept of Vertical Integration
Corporate strategy aims at identify ing business areas which a company can engage in
order to maximize long term sustainability (Thomson & Strickland, 1989). Firms exist
to create value and deliver it to the parties that require that value and are willing and
able to pay for it. The process of value creation has several stages through which the
inputs pass and finally the finished goods or services are delivered to the customers.
The most common corporate strategy approaches include concentration on a single
business, partial or full vertical integration, related and unrelated diversification,
abandonment, divesture and liquidation or corporate turnaround, retrenchment ,
portfolio restructuring strategies (Thomson & Strickland. 1989),short term and long
term contracts, competitive bidding and strategic alliances (Hill & Jones, 2001).
Vertical integration has been given various definitions. According to Vidal (2008),
vertical integration is the extent to which a firm manages its inputs and the
7
distribution of its products and services. In early 20th century firms used vertical
integration to achieve economies of scale, to guarantee steady supply essential inputs
and also cost reduction (Solar, 2009). However with increase in competition, vast use
of information and telecommunication strategies lowered transaction costs between
markets players led to vertical disintegration (Vidal, 2008). Barney (1997) sees
vertical integration as a move away from business level strategies to expanding
opportunities for controlling their resources and capacities in new industries and
markets. One of the earliest recorded examples of vertical integration was that of
Carnegie Steel Company in the early 1900s, it controlled its steel mills, mines, coal
mines, ships for transporting the materials, railroads that transported raw materials
and an institute that taught steel processing (Retrieved on 16th June 2009 from
www.trinasolar.com).
The number of stages in a product's or serv ice's value chain that a company engages
describes the firm's level of integration. Firms become more vertically integrated by
engaging in more stages of the value chain or disintegrated by engaging in less stages
of the value chain (Barney, 1997). An engagement in the value chain that brings
closer interaction with a product/service’s customer is known as forward integration
while an increase in the value chain that moves firm further from a products or
services ultimate customer is known as backward vertical integration (Porter &
Way land, 1991). In forward integration a firm has control over its distribution while
in backwrard vertical integration it has control over its inputs and supplies (Vidal,
2008). Currently vertical integration is very popular with oil firms (Shell BP, Exxon
Mobil, Royal Dutch shell), airline industries, information technology sector (Apple)
and solar power industry (Solar, 2009).
8
In the strateuy development process, vertical integration is considered a strategic
choice (Heller, 1971). Firms wishing to maintain or augment their performance ought
to choose strategies that utilize opportunities and strengths while neutralizing threats
or avoiding or mending weaknesses (Heller. 1971). Adopting vertical integration as a
strategy mostly ensures cost leadership and product differentiation which gives firms
an edge in the market through gaining competitive advantage.
The concept of vertical integration can be visualized using the value chain model
which sets activities of an organization into a value chain. Barney (1997) defines
value chain as activities that add value to purchased inputs. Optimal integration can be
achieved when the benefits of integration outweigh the costs and without incurring the
rigidities of integration involved in commitment of a firm to becoming a single source
of supply or customer (Heller, 1971).
The degree of vertical integration is an important clement when studying vertical
integration. It can be obtained from a close examination of the firm's value addition
as the percentage of sales computed from a firm’s accounting performance figures
which are widely available if the firm is listed in the stock market (Barney, 1997).
This method is used because it may be intricate to directly observe a firms level of
vertical integration particularly when a firm’s vertical integration is the potential
source of competitive advantage (Barney, 1997). Value added (VA) as a fraction of
sales (S) measures the portion of firm's sales that arc generated within a firm’s
boundary. A firm with high ratio VA/S depicts a high degree of vertical integration
whereas firm with a low VA/S ratio does not have on average as high a level of
integration (Harrigan. 1986). According to Maddigan (1979) value added as a
percentage ot sales is an appropriate way of measuring the level of vertical integration
9
of a firm in a wide range of situations. The sum of net income and income tax should
however be subtracted from VA and sales in order to control for inflation and change
in tax rates over time.
Full vertical integration refers to participation of a firm in all stages of the process of
getting products or serv ices to the end user (Thomson & Strickland. 1989). According
to Vidal (2008) in full vertical integration the company incorporates the value chain
of a supplier and or that of a distribution channel into its own value chain and
therefore performing tasks traditionally undertaken by suppliers or distributors. Partial
or tapered integration refers to building positions in selected stages of the industry’s
total product (Vidal, 2008). In partial integration the firm avoids the need for high
level of investment and the inflexible commitment associated with full /complete
integration (Heller, 1971). In balanced vertical integration firms sets up subsidiaries
that both supply them with inputs and distribute their outputs (Vidal, 2008).
Quasi vertical integration is another form of vertical integration, in which a firm is a
sole customer to a supplier or a sole supplier to a distributor and the supplier/
distributor is totally dependent on the customer/ supplier. Firms gain benefits of
vertical integration without assuming the risks or rigidity of ownership. This is mostly
done by small/new ventures because they find themselves in a viable position of
weakness vis- a - vis their supplier or buyer (Zacharakis, 1997). Quasi vertical
integration differs from full vertical integration in that the downstream firm still
contracts with a supplier for the actual manufacture of the component whereas with
full vertical integration the production process itself is internalized. According to
Stewart (1986) quasi vertical integration is where a firm purchases a large proportion
10
of the suppliers output such that its withdrawal would lead to losses for the suppliers
at least in the short run.
There are several factors that motivate the management of a firm to adopt vertical
integration as a strategy. Harrigan (1986) points out that before a firm considers
vertical integration it should consider how attuned it is with a firm's long term
strategic objectives, how much it strengthens a firms overall position in the market
and the extent to which it creates competitive advantage. An accurate and realistic
SWOT analysis should be done before considering vertical integration.
According to Buzell (1983) a firm can adopt vertical integration as a corporate
strategy if firstly there are major economies of scale to be gained by forward or
backward integration or both in the market. Secondly the firm has adequate quantity
and quality of resources to facilitate vertical integration. The multi-task approach is
another push for vertical integration. In this approach firms vertically integrate on the
basis of the intricacy of the tasks and technology in the total product value chain
(Mahaga, 2003).
Thirdly a firm can adopt vertical integration if there are no significant costs attached
to the strategy. Vertical integration is a path to reduce operational costs. The
transaction costs theory is the most cited explanation of vertical integration, it seeks to
determine when a transaction should be carried out within a single firm rather than by
separate firms in the market (Coase, 1937; Winger, 1994). Transaction costs tend to
increase when information is a major element of the products in the value chain
(Mahaga. 20(b). Transaction cost theory posits that the costs in the market increase
11
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when terms of exchange are uncertain. Strategic uncertainty with suppliers, customers
and competitors (Williamson, 1989; Winger, 1994) and lack of necessary and
sufficient information at critical market stages (Mahaga, 2003) makes integration
imperative all other factors being constant.
Vidal (2008) points out that a firm can push for vertical integration if there is need to
pursue monopoly power, if there are market factors which would make it more
efficient to control input and output and if there are economies of scope which would
make it cheaper to control output and input. Vertical integration can also be adopted
in strategy development for example if suppliers are very powerful, a solution to that
threat would be to buy a number of them. This can be explained by the property rights
approach which posits that the bargaining power and the assets which give a firm
bargaining power should be vested in those people whose endeavors are geared
towards increasing a firm's value (Berlin, 2001).
However even when the above factors seem to be pointing towards vertical
integration the phase of the product in the market should be considered. It is
imprudent to vertically integrate in a declining market.
2.3
Empirical research on vertical integration
According to Buzcll (1983) there is an inverse relationship between integration and
return on investment (ROI). As the degree of integration increases. ROI falls until the
degree ot integration rises above 70% at which ROI recovers. Vertical integration
12
assumes that a firm has to have the competences to undertake and expanded role in
the value chain.
As vertical integration increases the ratio of investments to sales also increases which
in turn causes a decrease in investment productivity. Firms that adopt vertical
integration show a fall in ROl since they have to undertake a disproportionate
increase in investments even as sales margin increase. Buzell (1983) pointed out that
achieving a blend of high capital turnover and high integration is not easy. Vertical
integration reduces flexibility thus depressing rapid introduction of new products.
There is a relationship between vertical integration and returns at the single business
level (Harrigan, 1986). A study by Caulkin (1983) points out that in the US there was
a drift away from vertical integration in the mid 60s but in the early 1970s the trend
reversed, in UK the trend has been on the increase. A study by Mahaga (2003) on
vertical integration and performance of food manufacturing firms in Nairobi indicated
that there was moderate positive association between vertical integration and return
on equity (ROE). The research also concluded that the performance of food
manufacturing firms in Nairobi area is moderately and positively related to the degree
to which firms are vertically integrated. Mahaga (2003) also found out that firms in
the food manufacturing industry had varying degrees of vertical integration and
different extents of value adding activities. Further in his findings there was a positive
correlation between the degree of vertical integration and the turnover of food
manufacturing firms in the year 2000.
13
Studies show that there is a positive relationship between scale of business and
profitability of integration. This is the reason why vertical integration is stronger
when a firm enjoys large economies of scales at each of the linked stages in the value
chain. Statistical evidence on vertical integration is sparse but the data present
suggests that the vertical integration strategy should be undertaken with certain
amount of prudence.
2.4
Implication of vertical integration to a firm’s strategy
Porter (1980) highlights the following as gains of vertical integration; a single
organization leads to better management. The administration link in stages of the
value chain makes it cheaper, reliable and convenient. Owning wholesale/retail
distribution is cheaper than using independent distributors. Forward integration leads
to a smoother and more economical production flow. Vertical integration eliminates
costs for example transactional, distribution, transport and preservation costs.
Efficient managerial synchronization of supply and demand for components reduces
unnecessary levels of stock holding and inventory pile ups and a loss of economies of
scale. Backward integration reduces uncertainty of supplier dependency (Thomson &
Strickland, 1989). Vertical integration gives manufacturers an insight into the supply
process and therefore monitoring price and cost conditions.
Backward integration gives firms control over raw materials and forward integration
leads to a gain on steady wholesale and retail networks through which products reach
end users (Thomson & Strickland, 1989). For a manufacturer, forward integration
could build a chain of closely supervised dealers and therefore ensure a high degree of
14
control over the entire value chain. Vertical integration expands a firm and therefore it
captures profit that would go to the supplier or the customer. Through backward
integration of once suppliers, firms can convert cost centers to profit producers
(Thomson & Strickland. 1989).
Vertical integration raises the entry barriers to potential new entrants into the market.
Vertical integration of existing player will increase the capital requirement of entry
into a market. Backward integration lessens a firm’s exposure to powerful suppliers
who hike prices (Thomson & Strickland. 1989). It also puts potential entrants at cost
disadvantage where a new entrant has to rely upon the integrated competitor for
distribution of its product.
Vertical integration is an opportunity for learning especially about the customer thus
giving firms insights on what customers want and therefore meet their needs
accordingly (Barney, 1997). Forward integration in manufacturing may help a firm
realize more product differentiation (Barney, 1997) and improved product quality and
quality control (Heller, 1971). Product differentiation can be in terms of design,
packaging, quality and promotion which may lower costs and therefore lead to high
profits.
Vertical integration enhances competitiveness in the market, strengthens a firm’s
market position, and offers streamlined manufacturing process with shorter
production phases (Solar, 2005). Vertical integration also ensures no repeat tasks e.g.
packaging, unpacking and shipping hence lower cost and also elimination of logistical
nsk. All the above discussed are benefits of vertical integration to a firm.
15
However, vertical integration has its pitfalls also and one of them is difficulty in
appraising each division separately and loss of specialization. The other pitfall is time
conditions may make it difficult for a firm to achieve change in output levels (Heller.
1971). Lack of competition in vertical integration can cause bureaucratic rigidity
among firms division (Economist.com. March 27Ih, 2009). Inflexibility problems of
balancing capacity at each stage in the value chain may occur due to vertical
integration. Firms are also obligated to operate outside their comfort zone (ibid). In
some cases unit costs incurred through in- house suppliers may be way higher than the
cost of obtaining them from the market (Heller, 1971).Costs of upgrading technology
may be high. Large capital requirements and investment cause a strain to financial
resources.
2.5
How to Measure Performance
Performance measurement serves not only as a scorecard for an organization but also
as a compass that can indicate the direction that needs to be taken for improvement in
an organization's activities (White, 1996). Barley (1997) develops a lens of viewing
organizational performance that defines it based on the comparison between the value
that an organization creates using its productive assets with the value that the owners
of the assets expect to obtain. In this view, when value created is higher than the
expected value by the asset owners then the performance is seen as above normal and
when lower than the expected value it is seen as below normal.
Barley (1997) gives a variety of techniques of measuring performance of which none
lacks limitations hence it is advisable to use multiple of them when evaluating a
16
firm's performance. These techniques are firstly, survival as a measure of
performance then accounting measures thirdly shareholder’s measures and finally
present value approaches.
Barley (1997) and Maincs et al (2002) point out that historically performance
measures have taken the form of accounting although there are several drawbacks in
this approach including subjectivity to managers, short-term biasness, backward
looking, undervaluing a firms intangible resources and capabilities and providing
little insight into a company’s future performance, rhere is evidence that nonfinancial performance may predict future financial variables and that analysts and
other market participants use non-financial measures to value stocks measures subject
to firm specific, industry, environmental and regulatory factors (.Maines et al, 2002;
Kaplan and Norton 1992; White, 1996). Due to their lack of a theoretical prediction,
these analysts do not have the confidence in attributing observed relations to the
specific non-financial performance measures, the non-comparability among types and
formats are likely to hamper investors ability to use non-financial measures, hence the
focus is primarily on financial measures for assessing performance (Maines et al.
2002; White, 1996)
The use of financial performance indicators as a key analytical tool for many
investors and management consultants especially when emphasis is on evaluating past
and current performance and where projections on the future performance are being
made is popular ( Williamson, Jenkins, Cooke and Moreton, 2004). According to
Kaplan and Norton (1992) financial performance measures indicate whether the
company's strategy, implementation and execution are contributing to bottom-line
17
improvement. Further they give the typical financial goals as profitability, growth and
shareholder value.
Williamson (2004) point out that for one to financially evaluate a firm then they must
have access to financial information most of which is contained in the profit and loss
and balance sheet statements. These statements are particularly important in strategic
analysis because they provide information for the calculation of financial ratios which
enable comparisons to be made with other companies in the same industry or sector.
The ratios can be used to measure profitability, liquidity, corporate activity, the
efficiency with which the company uses the assets it has in its disposal, and how the
stock market values the firm. Further, the information that these financial statements
contain is particularly useful because all companies have to provide equivalent types
of information, which means we can make quite robust comparisons between
companies.
A financial ratio is a relationship at a given time between items on a financial
statement. For a ratio to have any meaning then the items must be synergistic i.c.
when put together they say something about the performance of the company
(Williamson. 2004).
18
CHAPTER THREE
RESEARCH METHODOLOGY
3.1
Introduction
This chapter presents the research methodology that was used to inform data
collection, management and analysis that gave an insight into the relationship between
vertical integration and performance of construction firms in Kenya. The chapter will
discuss the research design, the study population, sampling design, data collection and
data analysis procedures that were employed by the researcher.
3.2
Research Design
The data used in this research is of quantitative nature and was analysed using
descriptive and inferential statistics. The data was collected using a questionnaire
administered to a sample within a short period of time. Cross sectional survey design
guided this research project.
According to Saunders, Lewis and Thornhill (2009), cross sectional surveys seek to
describe the incidence of a phenomenon or to explain how factors are related in
different organizations, further, they put it that survey strategy allows one to collect
data which can be analyzed using descriptive and inferential statistics. In addition
they recommend survey strategy to be used to establish relationships between
variables and to produce models for these relationships. This research project sought
to establish the relationship between vertical integration and performance in the
construction industry, hence the suitability of cross sectional survey research design.
19
3.3
Population
Building and construction companies formed the units of analysis for this study. The
building and construction firms in Kenya are classified according to classes ranging
from class A to H. The population for this study was all building construction firms in
Kenya listed under the Ministry of Public Works in Class A as per year 2009 register.
From the official list the number of class A companies listed as at the end of 2009
were 112. The firms should have been operating in 2005 through to 2008.
3.4
Sampling Design
When picking the sample the researcher considered the project type, its purpose, time
limitations and its complexity. The researcher used purposive sampling to select the
sample for this study. Kombo and Tromp (2006) describe purposive as a sampling
method where the researcher targets a group that is believed to be reliable for the
study.
The method was appropriate because the building construction firms are private
companies and some may have been unwilling to share financial information due to
its sensitivity. The researcher picked companies that he had contacts that could
introduce him to the management. For this study the researcher used a large sample
since a large sample increases the accuracy of the study. Appendix B shows the list of
the 60 out of the 112 companies that constituted the sample for this study. These 60
companies are the ones that the researcher had established contacts with the
management.
20
3.5
Data Collection
The two types of data are primary data and secondary data. Saunders, Lewis and
Thornhill (2009) define secondary data as data that has already been collected for
some other purpose which can be reanalyzed to meet the objectives of a study. The
data used in this study is primary data: this was the financial performance measures as
given by the respondent companies.
The data collection tool for this research was structured questionnaires that the
researcher filled in (See appendix A).
The structured questionnaires allowed for
comparability of responses from the various companies.
The researcher approached the management of the companies that formed the sample
and explained to them the importance of the study to the construction industry. The
researcher also reassured them that the information was to be used purely for purposes
of the study and it was to be treated with utmost confidence.
3.6
Data Analysis
In analyzing the data collected, descriptive statistics as well as correlation and
regression analysis were be employed. Descriptive statistics are used to present
quantitative descriptions in a manageable form by reducing lots of data to simple
summaries (Trochim, 2006). A positive response to any of the questions in part 2 of
the questionnaire implied that a firm was vertically integrated to some degree. The
mean, range and standard deviation of both the independent variable (VI) and the
21
dependent variables i.e. Return on Total Assets (ROTA), Return on Shareholder's
Tquity (ROSE), Net Profit Margin (NPM) and Operating Profit Margin (OPM) were
established.
Correlation technique is used to analyze the degree of relationship between two
variables while regression analysis is aimed at finding out whether an independent
variable predicts a given dependent variable (Mugenda and Mugenda, 2003). Both
correlation and regression analysis were used to establish the relationship between the
independent variable (VI) and the dependent variables, that is, Return on Total Assets
(ROTA), Return on Shareholder's Equity (ROSE), Net Profit Margin (NPM) and
Operating Profit Margin (OPM).
ROTA, ROSE, NPM and OPM were regressed against the degree of vertical
integration to establish the relationship as per the equation. Y= a + bX where Y
represented the dependent performance variable and X represented the independent
variable, degree of vertical integration.
The independent variable, vertical integration, according to Maddigan (1979) is
computed as follows: Degree of vertical integration = Value added-(net income + income taxes)
Sales-(nct income + income taxes)
Where, Value Added = Depreciation + amortization + fixed charges + interest
expenses + labor and related expenses + pension and
retirement expenses + income taxes + net income (after
taxes) + rental expenses (Tucker & Wilder, 1978)
22
As a measure of performance the following ratios which are the dependent variables
were used (Table 1).
Table 1: Financial Ratios
Ratio
Method of Calculation
Analytical Value
Net Profit Margin ( Net Profit after tax and interest
Indicates the percentage of
return on sales)
profit
Sales
available
distribution
for
and
reinvestment
Return on Total Assets
Profit after tax + Interest
Total Assets
Measure the return on total
assets
Return on shareholders'
Profit after tax
Measures the rate of return
equity (net on net worth)
Shareholders' equity
on
the
shareholder's
investment
Operating Profit Margin Profit before interest and tax
A measure of the firm's
(return on Sales)
profitability irrespective of
sales
interest and tax charges
Source: Williamson. D..Cooke. P., & Moretton, K. M. (2004). Strategic Management
and Business Analysis. Butterworth - Heinemann.
Both the independent and dependent variables were calculated using the data from the
questionnaires. The resulting variables were keyed into Microsoft Excel then analyzed
using descriptive statistics and correlation and regression functions.
23
I he coefficient of correlation (R) indicates the strength and direction of the
relationship between the independent variable (VI) and dependent variables (ROTA.
ROSE, NFM and OPM). Regression analysis yields coefficient of determination (R:)
which indicates to what extent a change in the independent variable (VI) brings a
change in the dependent variable (ROTA, ROSE and NPM).
24
CHAPTER FOUR
DATA ANALYSIS, RESULTS AND DISCUSSION
4.1
Introduction
The data collected was analyzed as presented in this chapter in line with the objective
of the study which is establishing if there exists a relationship between vertical
integration and performance of construction firms in Kenya. The first section gives
general information on the response showing the response rate and the period the
respondents have been registered as Class A construction firms by the Ministry’ of
Public Works. The data collected and analyzed is presented under the topics
descriptive statistics and vertical integration and performance of construction firms in
Kenya. A discussion on the findings closes this chapter.
4.2
General Response Information
Twenty six out of the sixty firms approached agreed to participate in the research and
filled in the questionnaires. However only seven out of the twenty six filled
questionnaires were duly filled in with all the information requested for. The other
nineteen questionnaires had part (3) not duly completed, this part requested for
information regarding the financial performance for the year 2007. The other thirty
four firms approached declined to avail the requested citing its sensitivity and
company policies. Below is a chart showing the response rate.
25
Figure 1: Response Rate
■ Did Not respond
■ Partly Filled-in
Questionnaires
Duly Filled-in
Questionnaires
Source: Researcher's data
The other information sought from the respondents is the period that they have been
operational. All the twenty six respondents that had duly completed questionnaires
indicated that they were operation through the period in consideration (year 20052007). This indicates that the twenty six respondents qualified in this aspect for
further analysis.
ITie second part (part 2) of the questionnaire sought to investigate if the respondents
carried out any value addition activities in their businesses. All the twenty six
respondents answered at least three questions of part (2) in affirmation. This indicates
that the firms engage in some level of vertical integration.
Only seven duly filled questionnaires qualified to go to the next stage of data analysis
and data from these questionnaires was entered into an excel worksheet and the
following variables were computed: degree of Vertical Integration (VI), Return on
Total Assets (ROTA), Return on Shareholder's Equity (ROSE), Net Profit Margin
(NPM) and Operating Profit Margin (OPM). Using the data analysis tools available in
Microsoft Excel, the data was analyzed to give the descriptive statistics (mean, range
26
and standard deviation). Further four equations were established between the
independent variable (VI) and the four dependent variables (ROTA, ROSE, NPM and
OPM), these were used to compute the coefficient of correlation (R) and the
coefficient of determination (R:).
4.3
Descriptive Statistics
The research was aimed at establishing if there existed any relationship between
vertical integration and performance of construction firms in Kenya. Below is a table
giving the mean and the standard deviation of the VI, ROTA. ROSE, NPM and OPM
from the data of the seven respondents considered for analysis.
Table 2: Summary of Descriptive Analysis of Variables
Variable
Degree of Vertical
Integration (VI)
Return on Total Assets
(ROTA)
Return on Shareholder's
Equity (ROSE)
Net Profit Margin (NPM)
Operating Profit Margin
(OPM)
Source: Researcher's data
Mean
Std. Dev.
Range
0.24
0.14
0.1 -0.44
0.07
0.09
(0.10) - 0.18
0.17
0.27
(0.18)-0.63
0.03
0.05
(0.05) - 0.07
0.05
0.07
(0.08)-0.1
As shown in the table above the degree of vertical integration varied from a minimum
of 0.1 to a maximum of 0.44 with a mean of 0.24 and a standard deviation of 0.14.
The value of return to total assets varied from a minimum of -0.10 to a maximum of
0.18, with a mean of 0.07 and a standard deviation of 0.09. Return on shareholder’s
27
equity varied from a minimum of -0.18 to a maximum of 0.63, with a mean of 0.17
and a standard deviation of 0.27. For net profit margin, the variance was between 0.05 at the minimum and 0.07 at the maximum with a mean of 0.03 and a standard
deviation of 0.05. The value of operating profit margin varied from a minimum of 0.08 to a maximum of 0.10, with a mean of 0.05 and a standard deviation of 0.07.
4.4
Vertical Integration and Performance of Construction Firms in
Kenya
The objective of the study being to establish the relationship between vertical
integration and performance of construction firms in Kenya four regression runs were
done to establish the nature and strength of the relationship between degree of vertical
integration and the four profitability ratios (ROTA, ROSE. NPM and OPM). The
table below gives the summary results of the regression run (details of the runs
provided in appendix C).
Table 3: Summary of Regression Models of ROTA, ROSE, NPM and OPM on
VI
Regression Statistics
Coefficient of Correlation (R)
Coefficient of determination R?
Standard Error of the Estimate
Observations
Source: Researcher’s data
ROTA
0.086
0.007
0.150
7
28
ROSE
0.162
0.026
0.148
7
NPM
0.152
0.023
0.149
7
OPM
0.329
0.108
0.142
7
Table 4: Summary of Coefficients of Regression Models of ROTA, ROSE, NPM
and OPM on VI
Dependent
Model Coefficients
Variable
ROTA
Intercept
0.231
VI
0.131
ROSE
Intercept
0.254
VI
-0.083
NPM
Intercept
0.228
VI
0.455
OPM
Intercept
0.206
VI
0.688
Source: Researcher's data
Standard
Error
0.074
0.683
0.068
0.227
0.067
1.326
0.069
0.884
t Stat
3.128
0.192
3.739
-0.367
3.403
0.343
2.974
0.779
P-value
0.026
0.855
0.0130.728
0.019
0.750
0.031
0.471
From tables 3 and 4 above the regression model of ROTA on VI resulted to a
coefficient of correlation of 0.086 indicating there was a very low but positive
association between ROTA and VI. The coefficient of determination (R2) value is
0.007 implying that only 0.7% change in ROTA could be attributed to change in VI.
However the P-value of the independent variable (VI) in this model is 0.855
indicating that there is an 85.5% probability that the results of this model would have
come up in a random distribution. This suggests that there exists no relationship
between degree of vertical integration (VI) and return on total assets (ROTA).
As tabulated in tables 3 and 4 above the regression model of ROSE on VI resulted to
a coefficient of correlation value of 0.162 indicating a low but positive relationship
between ROSE and VI. The coefficient of determination (R2) value is 0.026
suggesting that only 2.6% change in ROSE could be attributed to change in VI.
However the P-value of the independent variable (VI) in this model is 0.728
29
indicating that there is a 72.8% probability that the results of this model would have
come up in a random distribution. This suggests that there exists no relationship
between degree of vertical integration (VI) and return on shareholder's equity
(ROSE).
From tables 2 and 3 above the regression model of NPM on VI has a coefficient of
correlation value of 0.152 indicating low but positive relationship between NPM and
VI. The coefficient of determination (R~) value is 0.023 implying that a marginal
2.3% change in NPM could be attributed to change in VI. However the P-value of the
independent variable (VI) in this model is 0.75 indicating that there is a 75.0%
probability that the results of this model would have come up in a random
distribution. This suggests that there exists no relationship between degree of vertical
integration (VI) and net profit margin (NPM).
From tables 3 and 4 above the regression model of OPM on VI resulted to a
coefficient of correlation of 0.329 indicating there was a low positive association
between ROTA and VI.
The coefficient of determination (R2) value is 0.108
implying that only 10.8% change in ROTA could be attributed to change in VI.
However the P-value of the independent variable (VI) in this model is 0.855
indicating that there is a 47.1% probability that the results of this model would have
come up in a random distribution. This suggests that there exists no relationship
between degree of vertical integration (VI) and operating profit margin (OPM).
30
4.5
Discussion
The findings unveiled that construction firms in Kenya had different degrees of
vertical integration indicating that they had varying levels of value adding activities to
their final product, from the results the degree of vertical integration accounted for
between 0.7% and 10.8% of the resultant change in profitability performance as
represented by the ratios: return on total assets, return on shareholder's equity, net
profit margin and operating profit margin. However the P-value of the independent
variable (VI) was more than 0.05 all through the four models ranging from 0.471 to
0.855 implying that there is a probability of between 47.1% and 85.5% that the results
would have come up in a random distribution. The P-value results indicate that there
exists no relationship between degree of vertical integration (VI) and performance of
construction firms in Kenya in the year 2007.
The most cited explanation of the strength of vertical integration is transaction costs
theory which proposes that vertical integration reduces the transactions costs since the
transactions arc carried out within a single firm rather that separate firms in the
market (Coase, 1937; Winger, 1994). If this was to hold all through then there would
always be a positive a relationship between degree of vertical integration and
performance of firms. The findings in this research have shown that there exists no
relationship between vertical integration and performance of construction firms in
Kenya. This implies that transaction costs in the construction industry are not a
significant factor in the performance of construction firms in Kenya. This may be
attributed to the fact that there has been a high rate of information technology
advancement lately making it easy to compare prices and shop globally hence
31
lowering the transaction costs unlike when transaction costs theory was being
developed.
A similar research done in food manufacturing companies in Kenya established that
there existed a moderate positive relationship between vertical integration and
performance in the year 2000 (Mahaga. 2003). However, the findings in this research
indicate that there exists no relationship between vertical integration and performance
in construction firms in Kenya. The two differing findings indicate that either
transaction costs differ from industry to industry hence the different results for food
manufacturing and construction industries or the transaction costs have been reducing
with time hence becoming less significant to performance of firms.
The implication from the results is since there is no relationship between vertical
integration and performance in construction firms there ought to be other benefits
associated to vertical integration other that profitability performance since the strategy
is still being employed.
32
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATIONS
5.1
Introduction
This chapter gives the summary of the research linking the objectives of the research
with the results. The summary is followed by the conclusion that the researcher draws
from the findings and the recommendations to the policy makers and management
practitioners. Further this chapter gives suggestions for further study that would shed
more light on the relationship between vertical integration and performance of firms.
Finally the limitations of the study that the researcher indentified are given.
5.2
Summary
This research project was aimed at establishing the relationship between vertical
integration and performance of construction firms in Kenya. The firms under the
study had varying degrees of vertical integration ranging from 0.10 at the minimum to
0.44 at the maximum. The performance ratios also varied as follows: return to total
assets varied from a minimum of -0.10 to a maximum of 0.18; return on shareholder's
equity varied from a minimum o f -0.18 to a maximum of 0.63. For net profit margin,
the variance was between -0.05 at the minimum and 0.07 at the maximum and finally
operating profit margin varied from a minimum of -0.08 to a maximum of 0.10.
From carrying out a regression analysis runs between the degree of vertical
integration and the profitability performance ratios return on total assets (ROTA),
return on shareholder's equity (ROSE), net profit margin (NPM) and operating profit
33
margin (OPM) the coefficients of correlation (R) ranged from 0.086 to 0.329
indicating a low but positive association between degree of vertical integration and
performance. The coefficient of determination (R2) ranged from 0.007 to 0.108
indicating that between 0.7% and 10.8% of the change in the dependent variables
(ROTA, ROSE, NPM and OPM) were attributed to changes in the independent
variable (VI). However the P-value of the independent variable (VI) was more than
0.05 all through the four models ranging from 0.471 to 0.855 implying that there is a
probability of between 47.1% and 85.5% that the results would have come up in a
random distribution. This implies that there exists no relationship between degree of
vertical integration (VI) and performance of construction firms in Kenya.
5.3
Conclusion
The study sought to establish the relationship between vertical integration and
performance of construction firms in Kenya. The study showed that construction
firms in Kenya had vary ing degrees of vertical integration indicating that they had
varying levels of value adding activities to their final product. Further the findings
concluded that there was no relationship between degree of vertical integration and
performance in construction firms in Kenya. The results differ from a similar study
done in food manufacturing industry that concluded that there existed a moderate and
positive relationship between vertical integration and performance of food
manufacturing firms in Kenya (Mahaga, 2003).
The results suggest that vertical integration does not affect performance of
construction firms hence considering the high cost of vertical integration and the
34
inflexibility that comes with it: construction firms should adopt this strategy with
caution and following a thorough SWOT analysis. From the study it can also be
concluded that there are other factors that impact performance of construction firms in
Kenya as opposed to vertical integration.
5.4
Recommendations
The findings of the study indicate that there is no relationship between vertical
integration and performance of construction firms in Kenya. The government as it
formulates policies affecting construction industry should study the other strategies
that have a greater impact on performance so that it can put in place policies and
guidelines that support performance enhancement.
For the management of construction firms in Kenya, they also ought to put less
emphasize on vertical integration as a strategy and concentrate on other strategies that
positively impact performance. Since vertical integration as a strategy hinges on the
fact that it lowers the transactions cost hence lowering the operation costs is becoming
less popular with the advancement of information technology that has generally
lowered the transaction costs. This implies that management practitioners should look
more favorably at outsourcing as a strategy since it is not as costly as vertical
integration.
35
5.5
Suggestions for further Research
Similar studies in the same industry that take into consideration other indicators of
performance other than profitability should be carried out for the same period of
study. Also similar studies should be carried out in other countries especially the ones
with different levels of technological advancement and industrialization. Finally
studying other years to establish if the findings would be the same is encouraged.
5.6
Limitations of the study
The researcher experienced difficulty in getting the sampled firms agree to participate
in the research. This lead to a low response rate with most of the firms citing company
policies and sensitivity of the data as their reasons of not being able to respond. The
second limitation was that the study limited performance to profitability only while
there are other angles to performance. These other angles include but are not limited
to asset base growth, efficiency in delivery, customer satisfaction, staff motivation
levels and reputation in the industry-.
Lastly this study was limited to one year only. A study of more years would have led
more indicative results since the year in consideration might have had its unique
events leading to unique results. More time and resources would have been required
to spread the study to cover more years.
36
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41
APPENDIX A: QUESTIONNAIRE
VERTICAL INTERGRATION IN CONSTRUCTION FIRMS IN KENYA
Dear respondent,
I am a final year MBA student at University of Nairobi. I am conducting a research
on vertical integration in construction firms in Kenya. This study is in partial
fulfillment of the requirements for a Master of Business Administration in Strategic
Management. I am requesting you to assist by providing the information as required
by the questions below. The information that you will give in this research will be
treated with utmost confidentiality and will only be used for the purposes of this
research.
1. When did your company get registered as a class A Building Construction
firm with the Ministry of Public Works?
2.
Hyes
No
Do you produce any building
materials?
Do you have your own in-house
architects?
Do you have your own in-house
engineers?
Do you have your own in-house
quantity surveyors
Do you own any equipment that
you use?
Do you have skilled or unskilled
laborers
on
permanent
employment?
As building contractors are you
also developers
As building contractors are you
hired to build for other
contractors as sub-contractors?
42
Reasons
3. Below is a content analysis table, kindly provide the information requested for in
the gwen format:_________ _________________________________
Financial measures from annual
Amount (million Ksh)
reports of 2007
Total sales year
Total operating income
Shareholder's total equity
Income taxes
Net depreciation
Amortization
Fixed charge
Interest expenses
Labor and related expenses
Pension and retirement expenses
Net income after expenses
Rental expenses
43
APPENDIX B: SAMPLED BUILDING AND CONSTRUCTION
FIRMS
FIRM
LOCATION
1
Canon Aluminium Fabricators Ltd
Nairobi
2
China Fushun Number One Building
Nairobi
3
Don-Woods Company Ltd
Nairobi
4
Epco Builders Limited.
Nairobi
5
Ernie Campbell & Co Ltd.
Nairobi
6
H Young & Company (E A) Ltd
Nairobi
7
Intex Construction Ltd.
Nairobi
8
Kartar Singh Nyeri Ltd.
Nyeri
9
Kay Construction Company.
Nairobi
10
Kilimanjaro Construction Ltd
Nairobi
11
Kuverji Govind Patel & Sons Ltd
Nyeri
12
Laxmanbhai Construction Ltd
Nairobi
13
M R Shah Construction Company
Nairobi
14
Masosa Construction Ltd
Nairobi
15
Mavji Construction Company Ltd
Nairobi
16
N. K. Brothers.
Nairobi
17
Nelliwa Builders & Civil Engineers
Nairobi
18
Ongata W orks Ltd.
Nairobi
19
Orbit Enterprises.
Nairobi
20
Seyani Brothers & Company.
Nairobi
21
Spencon Services Ltd
Nairobi
22
Terracraft (K) Ltd
Nairobi
23
Triple Eight Construction (k) Ltd
Nairobi
24
Twiga Construction Company
Nairobi
44
25
Vakkep Building Contractors.
Nairobi
26
W arren Enterprises Ltd.
Nairobi
27
Dinesh Construction Ltd
Nairobi
28
Njuca Consolidated Co. Ltd
Nairobi
29
Magic General Contractors Ltd.
Nairobi
30
Parbat Siyani Construction Ltd
Nairobi
31
Milicons Ltd
Nairobi
32
Jinsing Enterprises Company Ltd
Nairobi
33
China Zhongxing Construction Company
Nairobi
34
Atlas Plumbers & Builders(K) Ltd.
Nairobi
35
Italbuild Imports Ltd
Nairobi
36
Cementers Limited
Nairobi
37
Hayer Bishan Singh & Sons.
Nairobi
38
Karsan Murji & Company Ltd
Nairobi
39
Lalji Meghji Patel & Company Ltd
Nairobi
40
Manji Keshra Contractors
Nairobi
41
Jambo Construction Company.
Nairobi
42
Janki Enterprises Ltd
Nairobi
43
Meghjibhai Pancha & Company.
Nairobi
44
Minikin Services Ltd
Nairobi
45
Muljibhat J. Vekaria Ltd.
Nairobi
46
Njama Construction
Nairobi
47
Northern Construction Company Ltd
Nairobi
48
Oriental Construction Company Limited
Nairobi
49
V.K Construction Company Ltd.
Nairobi
50
Victory Construction Company Ltd
Nairobi
51
Hari-cons (K) Ltd
Nairobi
52
Precast Portal Structures Ltd.
Nairobi
45
53
Raman Enterprises Ltd
Nairobi
54
Ray Enginering & Construction International Ltd
Nairobi
55
Pelican Engineering & Construction Company
Nairobi
56
Northline Ltd.
Nairobi
57
Capital Construction Company Ltd
Nairobi
58
Devcon Group Limited
Nairobi
59
Liteline Enterprises Ltd
Nairobi
60
Nyoro Construction Company Ltd
Nairobi
46
APPENDIX C: DETAILED RESULTS OF CORRELATION AND REGRESSION ANALYSIS
Results of Correlation and Regression Runs of Return on Total Assets (ROTA) on degree of Vertical Integration
Regression Statistics
M ultiple R
0.08550592
R Square
0.007311262
Adjusted R Square
0.191226485
Standard Error
0.14985753
O bservations
7
ANOVA
dl
SS
MS
Regression
1
0.000827002
0.000827002
Residual
5
0.112286397
0.022457279
Total
6
0.113113398
Coefficients
Standard Error
tStat
F
Significance F
0.036825553
Pvalue
0.855370708
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept
0.231033346
0.073861943
3.127907767
0.026018805
0.041165176
0.420901515
0.041165176
0.420901515
X Variable 1
0.131000903
0.682652441
0.191899852
0.855370708
-1.623813061
1.885814866
-1.623813061
1.885814866
47
Results of Correlation and Regression Runs of Return on Shareholder’s Equity (ROSE) on degree of Vertical
Integration
Regression Statistics
M u ltip le R
R Square
0.16206671
Adjusted R
0.026265618
-
Square
0.168481258
Standard Error
0.148419948
Observations
7
ANOVA
MS
F
Significance
F
Regression
1
0.002970993
0.002970993
0.134870551
0.728465997
Residual
5
0.110142405
0.022028481
Total
6
0.113113398
tStat
P-value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
df
SS
Coefficients
Standard Error
Intercept
0.254241203
0.067994136
3.73916369
0.013443139
0.079456713
0.429025693
0.079456713
0.429025693
X Variable 1
-0.08336733
0.227005996
0.367247261
0.728465997
-0.66690482
0.500170159
-0.66690482
0.500170159
48
Results of Correlation and Regression Runs of Net Profit Margin (NPM) on degree of Vertical Integration
Regression Statistics
M u ltip le R
0.151754702
R Square
0.023029489
-
Adjusted R
Square
Standard Error
0.172364613
0.148666374
Observations
7
ANOVA
<9
MS
F
Significance
F
0.002604944
0.002604944
0.117861743
0.745329448
0.110508455
0.022101691
55
Regression
1
Residual
5
Total
6
0.113113398
Coefficients
Standard Error
tStat
P-value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Intercept
0.227660546
0.066908651
3.402557722
0.019197678
0.055666384
0.399654708
0.055666384
0.399654708
X Variable 1
0.455108065
1.325647636
0.343309981
0.745329448
2.952577668
3.862793798
2.952577668
3.862793798
49
Results of Correlation and Regression Runs of Operating Profit Margin (OPM) on degree of Vertical Integration
Regression Statistics
M ultiple R
R Square
0.32883788
0.108134351
-
Adjusted R
Square
0.070238779
Standard Error
0.142043623
Observations
7
ANOVA
df
SS
MS
F
Significance
F
0.606225563
0.471434529
tStat
P- value
Lower 95%
Upper 95%
Lower 95.0%
Upper 95.0%
Regression
1
0.012231444
0.012231444
Residual
5
0.100881954
0.020176391
Total
6
0.113113398
Coefficients
Standard Error
Intercept
0.206033324
0.069283194
2.973784996
0.031021363
0.027935203
0.384131445
0.027935203
0.384131445
X Variable 1
0.688191998
0.883878348
0.778604883
0.471434529
1.583889628
2.960273623
1.583889628
2.960273623
50