Effects Of Backward Integration Strategy On Organizational Performance In Manufacturing Industry (A Case Study Of Nestle Nigeria Plc)

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Effects Of Backward Integration Strategy On Organizational Performance In Manufacturing Industry (A Case Study Of Nestle Nigeria Plc)


Abstract


The firms’ diversification strategy choices and their impact on corporate performance have been the center of attention both empirically and theoretically in the fields of strategy and finance for more than 30 years. However in general, previous studies have analyzed the integration- performance relationship without differentiating the industries that the firms were operating in, but rather the samples were pooled across industries. The aim of this paper is to investigate the performance effects of backward, horizontal, unrelated integration and undiversification strategies. Empirical evidence shows that horizontal (related) integrated companies are outperforming the corporate performance of unrelated diversified firms, and the structure of the market, the level of concentration have varying effects on performance for each type of industry. the Nestle has the highest average performance measure, and the empirical results underline the significant and positive effect of the horizontal integration strategy for the Nestle and manufacture of machinery and equipment industries that were subject to be tested.


Chapter One


1.1 Historical Background of Nestle Nigeria Plc

Nestle Nigeria plc is associated with the nestle group, the single largest food company in the world and it is known worldwide for its top quality products.

Nestle Nigeria plc began simple trading in 1961 and has today grown into a leading manufacturing and marketing company. It is a public quoted company listed since 1978 on the Nigeria stock exchange with about 20,500 shareholders participating.

Nestle Nigeria Plc of Switzerland owns about 43% of the company’s equity. Nestle Nigeria plc manufacturing complex is located at Agbara Industrial Estate in Ogun State.

The main products were designed in line with modern manufacturing methods which ensure efficient production of the following:

  • Infant cereals – nestle golden morn.
  • Instant family cereals, nestle milo – beverage drink.
  • Chocomilo – chocolate sweets, maggi cubes, maggi chicken, maggi crayfish, maggi super onion spices.

Nestle Nigeria plc obtains most of its agricultural raw materials locally from contract farmers and out growers in partnering agreement that enables the benefits from the technical advice and assistance of the company’s agricultural services department and at the same time, guarantee to the company continuous supply of raw materials that meet their high quality standards.

The company pursue the use of backward integration strategy by pursuing its sustainable agricultural initiative(SAI) where she involve herself with collaborative research with the university of agriculture, Abeokuta(UAAB) of popularisation of soya beans which brought into being the a selection of soya beans varieties with improved seed colour, seed size, and seed yield.

The company’s objective is to satisfy the requirements of the consumers with high quality food products with long shelf life adapted to the taste and food habits of the consumers and as a result, she has continuously invested in Nigeria by building and commissioning in 1991 at agbara, ogun state a fully integrated plant producing concentrated sorghum malt extract from locally malted sorghum, and in June 1995, Nestle Nigeria plc commissioned another plant at agbara which produces enzymatic hydrolyzed plant protein mix.(EHPPM).

The investments represent successful and significant effort at replacing imported raw materials in the manufacture of milo food drink and the maggi range seasonings.

The company being conscious of her social responsibility is committed to environmental policies, programmes, and practices into each business as an element of management in all functions. She always thrives to minimize the impact of her environment through the utilization of packaging and manufacturing process that are internationally recognized to have a minimum impact on the environment.

With her historical root in nutrition, wide product portfolio, strong brands, research and development competence, skilled and motivated professionals, and efficient management, the company is positioned to committed to the progress, prosperity, economic development, and industrial growth of Nigeria.

Through the use of vertical integration strategy, the company seeks to achieve a clear cut competitive advantage over competitive products by ensuring that their products are available wherever, whenever, and however the consumers want their continuous attention is also given to developing the professional leadership skills of staffs at all levels so that they can directly contribute to growth and a higher level of performance.

To stimulate industrial growth, the company has a policy of long term sustainability business practice. Over 75% of their raw materials are sourced locally by their selves through the use of employed farmers and suppliers and also support an ever increasing standard of living through employment generation, increased income, infrastructure improvements, and a growing concern for the interest of the community here in Nigeria through the application of the nestle environmental management (NEM) and complies with applicable environmental legislation.


1.2 Statement of Research Problems

In this twenty first century, the world is a global market (Diacon, 2003) characterized by competitiveness where a firm has to compete against another firm all over the world. Backward integration strategy has helped to identify the things that need to be done, gives idea, redefined by experience, as to how they should be done and achieve competitive advantage for the organization.

Backward integration strategy is known and accepted as the process by which a firm takes ownership or increased control of its supply system. It serves to streamline the organization to provide better cost controls, and to eliminate the middleman, because of efficiency and lowered cost of production as it is possible for the firm to become more competitive in the market place.

Although backward integration strategy improves organizations performance, but there are still doubts on the assertions that backward integration strategy is more applicable to manufacturing firms as compare to service companies.

Therefore, the assertions can be made to the followings:

  1. Managing employees’ performance as an integral part of the work.
  2. Quality metrics that were not focused on customers.
  3. The effect of contraction in output that slackening global demand is generating.
  4. Lack of availability of skilled workforce.

1.3 Objective of the Study

The objective of this research study includes the following:

  1. To compose manufacturing industry to the usefulness of Backward integration strategy as designing a management policy that documents the expectations of individual and organizational which provides a meaningful process by which employees can be rewarded for noteworthy contributions to the organization and also provide a mechanism to improve individual/organizational performance as necessary.
  2. To ensure that industries, especially the manufacturing ones sees the usefulness of Backward integration strategy and how it can help in maximizing the net profit of the organization which is achievable by strategizing very simple strategies for both product lines and production processes as per making difficult decisions to cutting costs quickly and cheaply to avoid repeated morale sapping cuts.
  3. To make sure that manufacturers are alerts to opportunities for expansions as valuation drops when owners look for quick exits. Research and marketing may also be the key, enabling strong positioning to take advantage of the future upturn.
  4. To provide suggestions and recommendations on the effect of backward integration strategy on organizational performance and also make appropriate recommendations for future researches on the area of its specialization.

1.4 Statement of Research Questions

  1. What effect does backward integration has on organizational performance in manufacturing industries?
  2. How do manufacturers key into the need of the growing market through integration strategy?
  3. Is backward integration strategy and organizational performance related to growth and profitability?
  4. Does backward integration strategy focuses on customers’ satisfaction?

1.5 Statement of Research Hypotheses

  1. H0  Backward integration strategy does not have significant effect on organization’s performance.
    H1  Backward integration strategy have significant effect organization’s performance.
  2. H0  Backward integration strategy is the same as organization’s growth and expansion.
    H1  Backward integration strategy is not the same as organization’s growth and expansion.
  3. H0  Backward integration strategy increases an Organization’s profitability.
    H1  Backward integration strategy does not increases an organization’s profitability.

1.6 Significance of Study

A study of this kind is expected to make theoretical and practical contributions to the manufacturing industries. This study provides a basis for closer scrutinizing of the formulations and application of backward integration strategy in use.

The study is likely useful for department of interior rating officials to assist with the management performance that is aligned with and in support of the organizational goals.

Manufacturing industries, services and professional industries that are constantly looking for competitive strategies and individuals can benefit from the study as it enhances organizational performance.


1.7 Scope and Limitation of Study

This study wants to look at the effect of backward integration strategy and organizational performance.

However, it shall be limited to manufacturing firms in ogun state alone (nestle Nigeria plc). The reason for the limiting this study to manufacturing firms is because their actions have tremendous effect on the national economy.

The study will therefore be restricted to manufacturing sector and whose ownership structure is strictly Nigerian.


1.8 Operational Definition of Terms

Various terms are expected to be constantly used in this study. Some of them are briefly defined below:

Integration Strategy:

This is the acceptance of a plan or a course of action which is of vital pervasive or continuing importance to the organization as a whole.

Competitive Advantage:

This is the getting ahead of others by outsmarting them in the course of rivalry.

Growth:

This is an expansion of the organization in one or more dimensions without changes in its structures and development as an innovative process leading to the structural transformation of the social system.

Organization:

This is a group of people working together to achieve a special purpose which cannot be achieved by an individual working alone.

Performance:

The action of carrying out or complete an action or function.

Development:

The quantity of changes in the process of production which shall be slow at the initial, but will later increased over a long period of time.

Implementation:

The process of putting a plan into action.


Chapter Five


Conclusion

Both the summary statistics and the empirical results tried to underline the differences between the 5 industries, in terms of the companies’ choices of integration strategies and the effects on their corporate performance. According to the descriptive statistics, the choice and the dominance of strategies are varying based on the industry that the firms are operating in. The Nestle industry is favoring the backward, horizontal and unrelated integration strategies in terms of average operating revenue per employee performance measure. This outperformance could suggest that the Nestle is encouraging the backwardly integrated firms in having the efficiencies of coordinating, monitoring and the enforcement in the process of production (Sudarsanam, 2010). Moreover, the companies in this sector could be reaching the efficiencies of scale, scope and learning economies more favorably for horizontally integrating. Within this industry, the horizontally integrated firms are outperforming the unrelated diversified companies; however the reason of having the highest ORPE out of the remaining industries for this type of diversification could be the effective reductions of transaction costs and making efficient use of internal capital markets. On the other hand, the undiversified companies in the highly concentrated manufacture of chemicals industry have on average highest value of ORPE performance. Apart from the chemicals, food and pharmaceuticals industry; the manufacture of machinery and furniture industries are subject to higher competition and lower values of performance measures are observed for the integration strategies chosen.

The general empirical evidence suggested that high levels of asset specificity and know-how may lead the firms to backwardly integrate (Monteverde & Teece, 1982) in order to prevent the hold-up problem and extensive quasi-rents (Grossman & Hart, 1986; Williamson, 1971). However, the manufacture of food and the manufacture of machinery and equipment industries did not underline a significant positive effect of backward integration strategy, which could be due to not having critical relation-specific assets that would significantly affect the performance of the companies. On the other side, both of the industries have illustrated high significant positive effect for the horizontal integration strategy, which has been consistent with the findings of Rumelt (1982), Bettis (1981), and Montgomery (1994). However, based on the differences of market structures the effects of horizontal integration is not the same, in which higher significance is observed for the Nestle. Finally, the empirical evidence on the effect of geographic diversification generally indicated a positive relationship between the geographic scope and firm’s performance (Delios & Beamish, 1999; Lepetit et al., 2004; Ravichandran, 2009). This study could not observe any significant outcomes for the number of countries that the firms are operating in, although the coefficients were positive for the ORPE measure.


Recommendation

Therefore, the effects of the strategy of backward integration and geographic diversification could not reach a specific conclusion, which may be attributed to the limited observation sample used in the study. The main reason has been the difficulty of finding applicable values for the variables used in the analysis. Future studies could increase the number of industries with different measures of profitability and diversification strategies and the inclusion of more control variables such as R&D intensity and advertising. “As the separate research traditions that study corporate economic performance become integrated, both research and managerial practice will be enriched.” (Montgomery & Christensen, 1981, p. 340)


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