EFFECT OF FORWARD INTEGRATIONON MANUFACTURING INDUSTRY PERFORMANCE

(A STUDY OF CADBURY NIGERIA  PLC)

CHAPTER ONE

INTRODUCTION

1.1      BACKGROUND OF THE STUDY

Businesses used integration strategies to increase market share and profit and thus enhance firm's performance. Vertical integration is very common among larger businesses interested in growing their event further. Vertical integration occur when business expand into new areas connected with its business processes.

Various strategies exist for each types of integration designed to increase profits for the company. Market expansion occurs when businesses attempt to expand into area that increase their market share but not necessarily in different areas or even the same products.

Forward integration is a vertical strategy where businesses either enter industries in the supply chain ahead of them. In otherwords, vertical forward integration is a means of guaranting distribution channels for products and services by building relationship with or taking control of distribution.

Businesses save money by selling products they creates and free the supplier from the threat or influence of major buyer. Firms tend to add new product to their portfolio as they acquire new knowledge and integrate it with their existing knowledge base particularly in highly dynamic industries.

The new knowledge often builds upon the existing knowledge, allowing for improvement in existing products such as high quality and ability to safety consumer's needs. As a result, this process of knowledge creation and integration often improves the success of related products in the portfolio. The mix of different knowledge stocks enriches the firm's capability to offer a greater variety of related products. In so doing, the firm can better satisfy customers' needs in a manner superior to competitor's product offerings. (Aluko, Odugbesan, Osuagwu et al 1997).

On the other hand, the manufacturing industry remain one of the most critical engines for Economics growth and its performance as a catalyst to transform slow growing and low­ value activities to more productive activities that enjoy greater margins and have higher growth prospects but its potential benefits are even greater in present time with rapid technological change and for reaching liberalization and bridge income gap with the industrialized world. (Mike, 2010).

However, vertical integration implies that fortunes of a business unit are least partly tied to the ability of its in-house supplier or customer (who might be its distribution channel) to complete successfully. Technological changes, changes in product design involving components strategic failures or managerial problems can create a situation in which the in-­house supplier is providing a high cost, inferior or inappropriate products and services. Essentially, there are two types of vertical integration strategy. Backward integration and forward integration. (Kazmi, 2002).

Backward integration strategy exists when firms develop its own sources of raw materials. It occurs when a firm develops into activities which are concerned with the inputs into its current business. (Oyedijo Ade, 2004).

Forward integration strategy on the other hand occurs, when a firm is disposing off its own output by gaining ownership or increase control over distributors or retailers.

Increasing number of manufacturers today is pursuing a forward integration by establishing web site, distribution outlet e.t.c. to sell their products directly to consumers. Thus, forward integration strategy is an issue that concern with the company outputs i.e. the firm goes further forward in the value chain by creating and providing its own distribution outlets, transportation system, repairs and servicing.

It is argued that increased vertical integration has resulted in lowering prices of both the unmerged input suppliers and the vertically integrated firm (Porter, 1980). Theoretically, literature contends that vertical integration or coordination will create efficiencies by reducing the transaction costs associated with market exchange. (Fernando, 1995). Other most commonly argued benefits of vertical integration include the reduction of risk, improves supply chain, coordination, captures upstream and downstream profit margins, the ability of integrated firm to innovate and differentiate, it enhances steady near capacity production operation through the creation of ones own dependable channels for pushing product to the end -users, increased efficiency in the exchanged of information and organizational structures and improved market positions of the integrated firm.

Therefore, the main purpose of this study is to empirically examine the effect of vertical integration on the performance of integrated firms. More specifically, it seeks to examine the impact of forward integration strategy on the performance of Cadbury Nigeria Plc.

1.2      STATEMENT OF PROBLEM

Since problems and difficulties are common to all industrial sectors, manufacturing industrial sectors have no immunity. This research work is carried out with the objective to provide solution to problems facing manufacturing industries that failed to adopt corporate level strategy using vertical integration approach in order to gain competition hedge over rivals. The problems ranges from inadequacy of vertical integration planning, lack of gaining control over distributors, unlimited availability of qualified and competent distributors weak form of machineries that is put in place to implement forward integration strategy, lack of enough capital and human resources needed to manage the business as result of high cost of market transactions and administration activities within an organization to lack of stable production desire to gain competitive relative cost advantage over rivals through the use of forward integration strategy and the enhancement of selling prices to the end users in which the organization can increase the predictability of demand for its outputs through forward integration.

1.3      OBJECTIVES OF THE STUDY

The objectives of this research are:

i.          To evaluate the effect of forward integration strategy on manufacturing industry performance.

ii.         To determine how forward integration strategy affects the attainment of organization goals.

iii.        To examine the extent in which organization's retail outlets has increase market share.

iv.        To evaluate the       effect of an organization servicing department on productivity.

v.         To know the effect of lower selling prices to end users on the profitability of manufacturing industry.

1.4      RESEARCH QUESTIONS

The following research questions will guide the study

i.          Does organization's retail outlets increases market share?

ii.         To what extent has servicing department of an organization contributed to productivity?

iii.        Does the adoption of forward integration strategy helps in the attainment of organization goals?

iv.        Does forward integration strategy increase the profitability rate of manufacturing industry?

v.         Does organizational control of sales have any impact on organizational profitability?

1.5      RESEARCH HYPOTHESES

1. Ho: There is no significant relationship between organization retail outlets and market share.

Hi:          There is significant relationship between organization retail outlet and market share.

2. Ho:    There is no relationship between servicing department of an organization and productivity.

Hi:          There is relationship between servicing department of an organization and productivity.

3. Ho:    There is no correlation between forward integration strategy and the attainment of organizational goals.

Hi:          There is correlation between forward integration strategy and the attainment of organizational goals.

1.6      SIGNIFICANCE OF THE STUDY

Forward integration strategy as a general strategy helps to position a company to sustain a competitive hedge over its rivals. In many industries, independent sales agent, wholesalers and retailers handled competing brands of the same product having no allegiance to any one company's brand they tend to push whatever sells and earns them the biggest profits a manufacturer can be frustrated in his attempt to win higher sales and market share or maintain steady, near-­capacity production, if it must distribute its products through distributors and/or retailers who are only half heartedly committed to promoting and marketing its brand as proposed to those of rivals. In such cases, it is advantageous to a manufacturer to integrate forward into wholesaling or retailing via company own distributorship or chain of retail stores.

Another important relevance of forward integration is franching, where the franchisor grants to its franchises the right to use the franchisors name, reputation and business skills at a particular location or area. This helps to lessen the financial burden of swift expansion and so permit rapid growth of the company and help reap the advantages of large scale advertising as well as economics of scale, management and distribution. Business can expand rapidly by franchising because costs and opportunities are spread among many individuals.

Relevance of Forward Integration

i.                    It is a means of maximizing profit for organization.

ii.                  It is an avenue to exploit other line of business.

iii.                It is a means of strengthening business

1.7      SCOPE AND LIMITATIONS OF THE STUDY

The scope of this research work shall be restricted to Cadbury Nigeria Plc. The research work focus on forward integration strategy as a tool to achieving lower selling prices to the end users. However, the study was limited by the following:

·        Time: This is also a limiting factor in carrying out the study and the high cost of sourcing all the relevant information from different location in the country.

·        Finance: One of the major constraint that affect the effective research work in due to the high cost of financing research work. For instance, the cost of gathering the research instrument such as journals, administering of questions etc.

·        Information availability: This study is limited by the unavailability of the most current information due to the delay in respondents response.

1.8      DEFINITION OF TERMS

§  Strategy: This is refers to as the ideas, plans that firm employed to compete successfully against rivals.

§  Manufacturing: This is the transformation of raw materials into finished goods.

§  Performance: It is refers to the end result of activity.

§  Integration: This is the process of combining two or more things in order to work together.

§  Profitability: This is the money someone made in business after paying the costs involved.

§  Productivity: Is the rate at which a worker or company produces goods and amount produced, compared with how much time and money is needed to produce them.

§  Competitor: A person or organization that compete against others especially in business.

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