Vertical and Horizontal Integration in the Profitability of Malaysian Broiler Firms

Y. S. Tey, P. Arsil


Vertical integration has been widely promoted for offering production, transaction, and market benefits in the poultry industry. These benefits must be translated into profitability – a proxy of competitive advantage. This study aimed to identify the financial effect underlying the degree of backward, forward, and horizontal integration, alongside the financial strength and management capability of broiler firms. We used random-effects general least squares to analyze a panel dataset of broiler firms that publicly listed in Kuala Lumpur Stock Exchange Malaysia for the 2006-2018 period. Support is found for the hypothesis that forward integration enhanced profitability. In comparison, the operating margin had a greater influence on broiler firms’ financial performance. Notwithstanding value chain development, the relative findings suggest that efficiency remains a priority in a commodity-based broiler market. It is thus recommended that management capability be emphasized.


Abdul Hadi, A. H. I., M. N. Shamsudin, A. Radam, & J. Selamat. 2013. Consumer preference for food attributes in Malaysia: case studies on broiler and beef. J. Int. Food Agribus Mark. 25: 137-153.
Allen, J., & S. Lavau. 2015. ‘Just-in-time’ disease: biosecurity, poultry and power. J. Cult. Econ. 8: 342-360.
Assefa, T. T., M. P. Meuwissen, & A. G. O. Lansink. 2015. Price volatility transmission in food supply chains: a literature review. Agribusiness. 31: 3-13.
Baluch, N., A. S. Ariffin, Z. Abas, & S. Mohtar. 2017. Servitization in Malaysian poultry contract farming: a critical overview. Int. J. Supply Chain Manag. 6: 259-265.
Bamiro, O. M., & A. M. Shittu. 2009a. Vertical integration and cost behavior in poultry industry in Ogun and Oyo States of Nigeria. Agribusiness. 25:1-15.
Bamiro, O. M., S. Momoh, & D. O. A. Phillip. 2009b. Vertical integration and profitability in poultry industry in Ogun and Oyo States, Nigeria. J. Hum. Ecol. 27:149-154.
Barbut, S. 2016. Poultry Products Processing: an Industry Guide. CRC Press, Boca Raton.
Barney, J. 1991. Firm resources and sustained competitive advantage. J. Manage. 17: 99-120.
Bell, D. R., Y. Wang, & V. Padmanabhan. 2002. An explanation for partial forward integration: Why manufacturers become marketers. Working Paper, The Wharton School, University of Pennsylvania.
Ben‐Kaabia, M., J. M. Gil, & M. Ameur. 2005. Vertical integration and non‐linear price adjustments: The Spanish poultry sector. Agribusiness, 21: 253-271.
Bhuyan, S. 2002. Impact of vertical mergers on industry profitability: An empirical evaluation. Rev. Ind. Organ. 20: 67-79.
Bhuyan, S. 2005. Does vertical integration affect market power? Evidence from U.S. food manufacturing industries. Journal of Agricultural and Applied Economics. 37: 263-276.
Blažková, I. & O. Dvouletý. 2018. The causes of firm performance variation in the Czech food processing industry in the context of the outlier effect. Manag. Res. Rev. 41: 968-986.
Brilliant, H. & E. Collins. 2014. Why Moats Matter: the Morningstar Approach to Stock Investing. John Wiley and Sons, New Jersey.
Chaddad, F. R., & M. P. Mondelli. 2013. Sources of firm performance differences in the US food economy. J. Agr. Econ. 64: 382-404.
Chang, W., A. E. Ellinger, K. Kim, & G. R. Franke. 2016. Supply chain integration and firm financial performance: A meta-analysis of positional advantage mediation and moderating factors. Eur. Manag. J. 34:282-295.
Constance, D. H., F. Martinez-Gomez, G. Aboites-Manrique, A. Bonanno. 2013. The Problems with Poultry Production and Processing. In: H. S. James (Ed). The Ethics and Economics of Agrifood Competition. Springer, Dordrecht. p. 155-175.
Damodaran, A. 2007. Return on capital (ROC), return on invested capital (ROIC) and return on equity (ROE): Measurement and implications. Working paper, Stern School of Business. [2 June 2020].
Dobashi, I., J. Fallon, F. C. Eizmendi, M. Loureiro, K. Matchett, R. Parrish, & B. Raquet. 1999. The Value Chain for Poultry. Working Committee on Food Products, Pacific Basin Economic Council.
Espino-Rodríguez, T. F., & V. Padrón-Robaina. 2005. A resource-based view of outsourcing and its implications for organizational performance in the hotel sector. Tourism Manag. 26: 707-721.
FAO. 2008. Poultry in the 21st Century: Avian Influenza and Beyond. Proceedings of the International Poultry Conference, held 5-7 November 2007, Bangkok, Thailand. Edited by O. Thieme and D. Pilling. FAO Animal Production and Health Proceedings, No. 9. Rome. [15 November 2020].
Ferlito, C. & H. Respatiadi. 2018. Policy reform on poultry industry in Indonesia. Discussion Paper. Center for Indonesian Policy Studies. [2 June 2020].
Godwin, M. R. & L.L. Jones. 1971. The emerging food and fiber system: Implications for agriculture. Am. J. Agr. Econ. 53:806-815.
Grau, A. & A. Reig. 2019. The industry effect and the decision to integrate vertically in a crisis context. Euro. J. Fin. 25:1591-1605.
Grau, A. & A. Reig. 2020. Operating leverage and profitability of SMEs: agri-food industry in Europe. Small Bus. Econ. In press.
Gschwandtner, A. & S. Hirsch. 2018. What drives firm profitability? A comparison of the US and EU food processing industry. Manchester Sch. 86:390-416.
Heise, H., A. Crisan, & L. Theuvsen. 2015. The poultry market in Nigeria: Market structures and potential for investment in the market. Int. Food Agribus. Manag. Rev. 18: 197-222.
Henry, R., & G. Rothwell. 1995. The World Poultry Industry. IFC Global Agribusiness Series. World Bank, Washington D.C.
Hirsch, S., & J. Schiefer. 2016. What causes firm profitability variation in the EU food industry? A redux of classical approaches of variance decomposition. Agribus. 32: 79-92.
Hirsch, S., J. Schiefer, A. Gschwandtner, & M. Hartmann. 2014. The determinants of firm profitability differences in EU food processing. J. Agr. Econ. 65: 703-721.
Hoffmann, I. 2005. Research and investment in poultry genetic resources-challenges and options for sustainable use. World’s Poultry Sc. J. 61: 57-70.
Koller, T., R. Dobbs, & B. Huyett. 2010a. Value: The Four Cornerstones of Corporate Finance. John Wiley and Sons.
Koller, T., M. Goedhart, & D. Wessels. 2010b. Valuation: Measuring and Managing the Value of Companies. John Wiley and Sons.
Lotterman, E. 1998. Poultry: a quiet success story. Federal Reserve Bank of Minneapolis, Minneapolis. [4 February 2020].
Mauboussin, M. & D. Callahan. 2014. Calculating return on invested capital. How to determine ROIC and address common issues. Credit Suisse. [20 February 2020].
Minkler, A. P. & T. A. Park. 1994. Asset specificity and vertical integration in franchising. Rev. Ind. Organ. 9:409-423.
Monsur, S. M. T. & T. Yoshi. 2012. Improvement of firm performance by achieving competitive advantages through vertical integration in the apparel industry of Bangladesh. Asian Econ. Fin. Rev. 2: 687-712.
Muazu, U. A., Z. A. Mohamed, M. N. Shamsuddin & I. Abdulatif. 2016. Measuring Market Power in the Integrated Malaysian Poultry Industry: New Empirical Industrial Organization Approach. J. Food Prod. Mark. 22: 455-470.
OECD. 2018. Market examinations in Mexico: Case study of the chicken meat market. Organization of Economic Cooperation and Development. [4 January 2020].
Rahman, M. S., D. H. Jang, & C. J. Yu. 2017. Poultry industry of Bangladesh: entering a new phase. Korean J. Agr. Sc. 44: 272-282.
Rani, N., S. S. Yadav, & P K. Jain. 2015. Financial performance analysis of mergers and acquisitions: evidence from India. Int. J. Comm. Manag. 24:402-423.
Riethmuller, P. C. & N. Chalermpao. 2002. Some issues associated with the livestock industries of the Asia-Pacific Region. RAP Publication No. 2002/06, Food and Agriculture Organization of the United Nations. [2 January 2020].
Saleem, Q. & R. U. Rehman. 2011. Impacts of liquidity ratios on profitability. Interdiscipl. J. Res. Bus. 1: 95-98.
Stuckey, J. & D. White. 1993. When and when not to vertically integrate. MIT Sloan Manag. Rev. 34: 71-83.
Teece, D. J. 2010. Forward integration and innovation: Transaction costs and beyond. J. Retail. 86: 277-283.
Tey, Y. S., M. Brindal, S. Darham, S. F. A. Sidique, & M. Djama. 2020. Early mover advantage in Roundtable on Sustainable Palm Oil certification: A panel evidence of plantation companies. J. Clean. Prod. 252: 119775.
Wernerfelt, B. 1984. A resource-based view of the firm. Strateg. Manag. J. 5:171-180.


Y. S. Tey
P. Arsil (Primary Contact)
TeyY. S., & ArsilP. (2021). Vertical and Horizontal Integration in the Profitability of Malaysian Broiler Firms. Tropical Animal Science Journal, 44(1), 115-122.

Article Details