Relationship Between Vertical Integration and Performance of Construction Firms in Kenya

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.