SU+ @ Strathmore University Library Electronic Theses and Dissertations This work is availed for free and open access by Strathmore University Library. It has been accepted for digital distribution by an authorized administrator of SU+ @Strathmore University. For more information, please contact library@strathmore.edu 2022 Economic sustainability in the floriculture value chain in Kenya. Njogu, George M. Strathmore Business School Strathmore University Recommended Citation Njogu, G. M. (2022). Economic sustainability in the floriculture value chain in Kenya [Thesis, Strathmore University]. http://hdl.handle.net/11071/13112 Follow this and additional works at: http://hdl.handle.net/11071/13112 https://su-plus.strathmore.edu/ https://su-plus.strathmore.edu/ http://hdl.handle.net/11071/2474 mailto:library@strathmore.edu http://hdl.handle.net/11071/13112 http://hdl.handle.net/11071/13112 Economic Sustainability in the floriculture Value Chain in Kenya GEORGE M. NJOGU Masters of Management in Agribusiness of Strathmore University April 2022 Economic Sustainability in the floriculture Value Chain in Kenya GEORGE M. NJOGU ADM NO.102281 A Research Project submitted to the Strathmore Business School in partial fulfilment for degree of Masters of Management in Agribusiness of Strathmore University April 2022 ii DECLARATION I declare that this work has not been previously submitted and approved for the award of a degree by this or any other university. To the best of my knowledge and belief, the report contains no material previously published or written by another person except where due reference is made in the thesis itself. © No part of this dessertation may be reproduced without the permission of the author and Strathmore University Name of Candidate: George Muchichu Njogu Approval The desertation of George M. Njogu was reviewed and approved by the following. Name of the supervisor: Dr. Dennis Otieno Strathmore University Business School Dr. Angela Ndunge Ag. Executive Dean Strathmore University Business School. Dr. Bernard Shibwabo Director, Office of Graduate Studies iii ABSTRACT This study analyzed the value addition process in floricultural value chain among small scale, medium and large scale producers in Central Kenya. The analysis took an evaluative process and assessed the conversion of inputs to outputs by employing resources that add value during the production process. Value chain in agribusiness is a continuum which starts from the point of production where inputs are sourced and used by actors to facilitate basic agricultural production, activities and successive input from other stakeholders such that in each process step, value is added until the product reaches the end consumer. The objective of this study was to conduct an in-depth analysis of floriculture value chains and their economic sustainability in Kenya. The research used a mixed method approach using quantitative and qualitative data. A sample of 103 small scale, medium scale and large- scale firms was drawn from a population of 179 Kenya Flower Council members. A questionnaire was used to collect general firm data, production data, supply chain strategies and challenges along the floriculture value chains. Data was tabulated, classified, cleaned then analyzed using tables, charts, graphs and other statistical tools. The results showed that supply chain strategies had variable effects on economic performance. The study established that firms that used direct/mass market made higher returns than those that used auctioneers and therefore better positioned towards achieving economic sustainability. There was a strong correlation between marginal cost and economic performance. Despite the significant correlation between the two variables, marginal cost alone was not a good predictor of performance and economic sustainability of floriculture firms in Kenya. However, the utilization of economies of scale in horizontal integration yielded lower marginal costs. In particular, the utilization of performance management as a tool was statistically significant in enhancing marginal cost effect for improved economic performance of floriculture industry in Kenya. The study identified freight cost of floricultural products as the major value chain constrain that had significant effect on performance of floriculture industry economic sustainability. The researcher suggested a need for firms to utilize the opportunity in mass/direct markets, mainstream performance management tool, jointly lobby and seek alternatives to airfreight in order to cement a trajectory for economically sustainable floriculture value chains. Key words: Value chain, agribusiness, Floriculture, Economics, Sustainability iv TABLE OF CONTENTS DECLARATION ii ABSTRACT iii LIST OF FIGURES vii LIST OF TABLES viii ABBREVIATION AND ACRONYM x DEDICATION xi ACKNOWLEDGEMENTS xii CHAPTER ONE: INTRODUCTION 1 1.0 Overview 1 1.1 Background information 1 1.2 Research Problem 4 1.3 General objective of this study 5 1.4 Specific Objectives 5 1.5 Research questions 5 1.6 Research scope 6 1.7 Justification 6 1.8 Definition of Terms 6 CHAPTER TWO: LITERATURE REVIEW 8 2.1 Introduction 8 2.2 Theory of Value Chain 8 2.3 Cost and Profit Structure along the Floriculture Value Chain 9 2.4 Sources of Inefficiency along the Value Chain 10 2.5 Potential Interventions to Control Inefficiencies in the Value Chain 11 2.5.1 Industry specific upgrading options 11 2.5.2 Firm Specific upgrading Options 12 2.6 Sustainability and Value chain Analysis 12 2.7 Empirical Literature review 13 2.7.1 Cost Advantage and Value Chain 14 2.7.2 Differentiation and Value Chain 15 2.7.3 Competitive advantage and Value chain 15 2.7.4 Agricultural value chain 18 2.7.5 Challenges of Value chain Approach 19 v 2.8 Economic Sustainability 19 2.8.1 Overview of Economic Sustainability 19 2.8.2 Economic Sustainability in floriculture Value chains 22 2.9 Conceptual Framework 23 CHAPTER THREE: RESEARCH METHODOLOGY 24 3.1 Introduction 24 3.2 Research Design 24 3.3 Population 24 3.3 Sampling Frame and sample selection 24 3.4 Data Collection 26 3.5 Data Analysis 27 CHAPTER FOUR: PRESENTATION OF RESEARCH FINDINGS 30 4.1 Introduction 30 4.2 The general Information 30 4.2.1 The characteristics of Floriculture value chain used in Kenya 30 4.2.2 The cost and Profit structures along the floriculture value chain 37 4.3 Sources of Inefficiency/bottlenecks along the chain that negates financial sustainability in floriculture value chain 41 4.4 The effects of value chain constraints on performance of floriculture industry in Kenya 43 4.5 The association between marginal cost and performance 43 4.6 Investigating the effect of value chain strategy on Performance 45 4.7 Strategies that can be used to improve the business environment along the floriculture value chain in Kenya to optimally use their business environment 47 4.8 Economic Sustainability 52 4.9 Summary of the Results 54 4.10 Summary of the Chapter 56 CHAPTER FIVE: DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS 58 5.1 Introduction 58 5.2 Discussions 58 5.2.1 Discussion of the General Information 58 5.2.2 Discussion of the results on the effect of value chain strategy on performance/Economic sustainability 61 5.2.3 Discussions of the results on the association between marginal cost and performance 62 vi 5.2.4 Discussions of the results on the effects of value chain constraints on performance on floriculture industry in Kenya 63 5.3 Conclusion 64 5.4 Contributions to Knowledge 64 5.5 Recommendations 65 5.5.1 Recommendations for Policy 65 5.5.2 Recommendations for Practice 65 5.6 Suggestions for Future Research 65 5.7 Limitations of the Research 66 BIBLIOGRAPHY 67 APPENDICES 70 Appendix I: RESEARCH QUESTIONAIRE 70 Appendix 2: Cut flower supply chains actors from Kenyan producers to Consumers. 75 Appendix 3: The growth of Kenya’s agro-food exports to the EU between 2000 and 2009 76 Appendix 4: Floriculture revenues and volumes between 2010 and 2017 77 Appendix 5: ETHICAL APPROVAL FORM 78 Appendix 6: RESEARCH LICENCE 79 vii LIST OF FIGURES Fig 1.1The growth of Kenya’s Agri-food exports to the European Union between 2000 to 2009 ……………………………………………………………………………………76 Fig 1.2 Floriculture revenue and volumes from Kenya 2010-2017………………………77 Fig. 1.3 Depicting Flower value chain main actors in each level of the chain from production to consumer …………………………………………………………..….75 Fig 2.1 Competitive diamond ……… ……………………………………...………… 16 Fig 2.2 Conceptual frame work…………………………………………………………..23 Fig 4.2.1: Comparison of area (ha) per tonnage between roses and summer flowers among the medium and large-scale farms………………………………………………………..32 Fig 4.2.2: Comparison of stems produced between roses and summer flowers among the medium and large-scale farms……………………………………………………………33 Fig 4.2.3: Comparison of the leased area between roses and summer flowers among the medium and large-scale farms . …………………………………………………..…. 34 Fig 4.2.4: Comparison of the owned area between roses and summer flowers among the medium and large-scale farms……………………………………………………….…..35 Fig 4.2.5: Stacked columns charts comparing the cost along the floriculture value chain……………………………………………………………………………………..38 Fig 4.2.6: Frequency distribution of the performance…………………………….……..40 Fig 4.7.1: Frequency distribution against strategies most adopted………………..…….49 Fig 4.7.2: Mean plot for the effect of market access and performance management on floriculture industry performance………………………………………………………..52 viii LIST OF TABLES Table 3.1 Sample stratification…………………………………………………..……….25 Table 4.2.1: Descriptive statistics for the characteristics of n the Enabler firms’ category………………………………………………………………………………….31 Table 4.2.2: Descriptive statistics for the floriculture value chain used in Kenya ……...36 Table 4.2.3: Descriptive Statistics for the performance measure……………………..….39 Table 4.2.4: Performance across farm categories…………………………………….….41 Table 4.3.1: Regression model’s ANOVA………………………………………………42 Table 4.3.2: Regression model’s Coefficients…………………………………………...42 Table 4.5.1: Regression Model’s Summary statistics……………………………………44 Table 4.5.2: Correlations result …………………………………………………..….44 Table 4.6.1: One-Way ANOVA for the mean comparison across value chain strategies.45 Table 4.6.2: Performance measure across value chain strategies……………………..…46 Table 4.6.3: Group Statistics…………………………………………………….……….46 Table 4.6.4: Independent Samples Test ………………….…………………..……… 47 Table 4.7.1: Tests of Between-Subjects Effects…………………………………………50 Table 4.7.2: Multiple Comparisons………………………………………………….…..51 Table 4.81: Descriptive Statistics ………………………………………………….…..53 Table 4.8.2: Performance Management Utilization ……………………….…..53 Table 4.8.3: Affordable Financing………………………………………………….…..54 Table 4.8.4: Fair Trade ………………………………………………….…..54 ix x ABBREVIATION AND ACRONYM HFA- Holland Flower Alliance, An association of florists, whole sellers and auctioneers in Holland. KFC- Kenya Flower Council. A lobby body for floriculture industry in Kenya HCD- Horticulture Crops Directorate, Government Corporation dealing with licensing and compliance of Horticulture entities. RFH- Royal Floral Holland Cooperative of growers and dealers with in the flower industry. Based in Holland and have branches all over the world. Owns the Auctions in the Netherland EU- European Union KEPHIS- Kenya Plant Health and Inspection organization, a government parastatal in Kenya dealing with regulation of plants and inspections. FPEAK- Fresh produce exporters association of Kenya KRA- Kenya Revenue Authority KPA- Kenya Ports Authority xi DEDICATION I dedicate this work to my girls, Clara and Esther and son Brandon for their jokes and perseverance during my studies xii ACKNOWLEDGEMENTS I acknowledge the almighty God for good health, my wife Pauline for her strength, my syndicate, colleagues for their critic and my supervisor Dr. Otieno for relentless support throughout my work in this project. 1 CHAPTER ONE: INTRODUCTION 1.0 Overview The eminent theme of this study is an exploratory analysis of the floriculture value chain. This chapter captures the background information, states the research problem, outlines the purpose of study with objectives, research questions and details the significance of the study together with the scope and limitations thereof. 1.1 Background information From independence, Kenya has depended on agriculture as the main driver of the economy. Agricultural sector has been the main contributor to the country’s gross domestic product (GDP). The sectors contribution has stagnated over time ranging between 25% and 27 %. Dairy, tea and horticulture are the main subsectors that contribute the bulk of revenue in agriculture (Salvi & Pahurkar, 2020). Horticulture is defined as the science and art of development, sustainable production, marketing, and use of high-value, intensively cultivated crops and ornamental plants. In the agriculture sector, horticulture continues to post positive growth of 13.6 % (Horticultural crops directorate, 2018). It has four disciplines namely olericulture, floriculture, landscaping and pomology. This study is limited to the floriculture sector that has been growing steadily over the last two decades. Over the years, the flower industry has grown both in value and volume from 10,946 tons in 1988 to 86,480 metric tons in 2008 and 136,301 tons in 2014 and 159,961 tons in 2017 (Horticultural crops directorate, 2018). According to Horticulture crops directorate (HCD), the floriculture sector earned Kshs.82.248 billion (USD 823 million ) in 2017,up from Kshs 70.829 billion in 2016, an increase of over 16% from year 2016 (Kenya Flower Council, 2018).The floriculture industry has contributed significantly to employment especially of the youth and women in the semi-arid areas where many flower farms are located .Further, more people are employed by the supporting and linkage industries such as transport and logistics, freight forwarding, input manufacture, distribution. Other people are employed by the mushrooming small-scale businesses around the horticulture centers which include provision of amenities and housing needed by the working populations (Kenya Flower Council, 2018). Floriculture industry is a global value chain that involves many countries in the world who play 2 various roles from input distribution, seed manufacture, production and trading of cut flowers, potted plants and bending plants. Netherlands is the epicenter of flower trade and a gateway to the European market for flowers from around the world. There are 5 channels on which flowers are sold three of which go through the auction and thus auction is the main channel for the bulk of the flowers. Floriculture value chain has been identified as a key component for the country’s achievement of Vision 2030 which aligns to millennium sustainability goals. Foreign direct investment in Floriculture have led to more farms being set up and creating jobs for the locals thereby contributing to millennium development goals of reducing poverty. Over 2million people are employed indirectly and 100,000 directly in the value chain. (Kenya Flower Council, 2018) Value chain originates from the commodity approach and was coined in by Gereffi (1994) to investigate relationships between multi-national companies, the “lead firms”, and other participants in international value chains. In this theoretical stream power relationships and information asymmetry are key concepts in the analysis of global value chains. Later works by Gereffi and others brought in the issue of upgrading value chains in developing countries. Gereffi (1999), Gereffi et al. (2005); Kaplinsky (2000). Looking at global commodity chains through the GVC lenses leads to the conclusion that inserting small developing countries into global markets through commodity exports is not sufficient to sustain real income growth, and may even prove detrimental to their long-term development prospects. Only by virtue of upgrading export industries – which entails moving towards differentiated products with a higher content of technology, skills and innovation – will developing countries be in a position to seize the opportunities brought about by globalization. (Farfan, 2005) Exports of fresh cut flowers have experienced remarkable growth. Green bean exports also grew moderately. Traditional African export crops such as tea and coffee have grown moderately. The growth of avocado had stagnated during the period (Hortiwise, 2012) A wide range of cut flowers are grown in Kenya and they include gypsophilla, alstromelia, erygiums, hypericum, statice, lilies and roses (Horticultural crops directorate, 2018). Kenya is the third largest producer and exporter of flowers in the word after Netherlands and Ecuador. It is closely followed by Ethiopia, Tanzania, Uganda, Zimbabwe and Rwanda. Flowers from Kenya are exported to various destinations in the world, the bulk being delivered to European Union, Australia, Japan, UK and Middle East. In total Kenya exports her flowers to 60 countries around the world (Kenya Flower Council, 2018). The floriculture industry has many 3 critical players along the value chain. There are also many processes which add value to the product to realize the final product. Identifying, each player and examining their contribution to value addition may provide a clear understanding of activities along the value chain. A value chain is a model used to describe all the processes in which actors and their actions procure raw materials in a business, convert them into finished product which are then distributed to end consumers (Porter, 1985). Increasing revenues can be attributed to increasing area under production with new firms out of foreign direct investment as well as local investors (Mulangu, 2017). The existing firms are also expanding their production areas to improve their economies of scale. There is a growth in portfolio of the Kenyan cut-flowers with high end tea hybrid rose varieties from high altitude areas coming in to compete with Ecuadorian flowers (Kenya Flower Council, 2018). A producer would choose one or more than one of the five channels of value chain. The choice of the VC that a business adopts mainly would depend on the marketing strategy in the short and long run for the firm as well as the varieties grown or traded. For example, sweetheart roses are traditionally meant for supermarkets (mass markets) and are grown mainly in low to medium altitude areas whereas the tea hybrids are traded by florists and grown mainly in high altitude areas. The value chain consists of chain enablers including inputs providers to the farms (chemicals, fertilizers and soil testing), logistic service providers e.g. (K+N, Q7, Panalpina), support activities providers in marketing and audits e.g., Royal flora Holland and Kenya flower council are also part of this chain at various levels. KEPHIS on the other hand offer regulatory role for the industry in the issuance of phytosanitary certificates and inspections at the exit ports. The role of specialized wholesalers has changed significantly over the last decade. Functions carried out by today’s wholesalers involve coordination, quality control, logistical services, facilitating the value chain (Hortiwise, 2012). 4 1.2 Research Problem A study by Hortiwise (2012) indicates a possibility of saturated market as a result of increased supply. The linear growth in volumes and value reported in the floriculture industry in Kenya have not really made actors better off. Instead, there is a backdrop in declining profitability increasing production costs in labor, inputs, regulatory and compliance requirements to mass markets thus rendering some businesses unviable. Studies have indicated that all actors must work systematically as a whole through all supply chain links to yield consumer satisfaction in the end through a combination of innovative technologies and optimal management of the supply chain (Olga Karpun, 2020). In the recent past several firms have either closed down, relocated or have been sold out (Hortiwise, 2012). In view of these contradictions/gaps, this study was born with an aim to engage with the chain participants to help understand the circumstances. Value chain analysis would provide in-depth understanding of the value chain that is important in dealing with bottlenecks and inefficiencies to address cost effectiveness, quality requirements and sustainability in the industry. (Hortiwise, 2012). The main problem facing floriculture industry are value chain inefficiencies and bottlenecks that denies actors the opportunity to create and capture significant value. It's is observed that many firms are closing down with bankruptcy, sold out or even continue on a struggling path in the recent years. This is against expectation given the great business opportunities in the world market outlook and Kenyan competitive position spurred by good climate, location around the equator with sunshine round the year, marketing and freight infrastructure and transport networks that would raise the level of expected profits. Opportunities can be in vertical or horizontal integration aimed at creating and capturing the real value that would translate into real financial wellbeing of the firms. Earlier studies (Hortiwise, 2012; Githere, 2017) had done an analysis on the entire value created in each step with-in the value chain. The result was that, Kenyan firms captured a value of 25% in various steps of production, handling and airline transport. Overseas chain actors in handling, importer, Auction, whole seller and retailer enjoyed a value of 75% of the price (Hortiwise, 2012). Evidently the lion shares of the value went to overseas chain actors. This position could have changed negatively for the local farmers aggravated by the introduction of V.A.T (value added tax) on inputs in 2019, upward spiral of wages and stagnation of the overall price level of outputs (flowers) in world mass market (Olga Karpun, 2020). The study of floriculture value chain in 5 Kenya by Githere (2017) dealt with small scale and medium scale farms and left out large scale farms that comprise a huge volume of floriculture output from the country (Githere, 2017). This study hopes to address this gap on the category that informed analysis by Githere (2017) so that the outcomes can be more reliable and build up to possibility for generalization. The issue of VAT on inputs was introduced in 2019 and there is limited information on the effect of introduction of VAT on inputs and the ripple effect this would cause on the captured value for the three categories of informants in our population. There is a need to validate the value created and captured at all level. Therefore, this study aims to analyze the value of small, medium and large-scale actors within the chain in order to confirm the current value captured by each participant of the chain and provide an understanding of the current state as it is. 1.3 General objective of this study The main objective of this study is to conduct an in-depth analysis of floriculture value chains and their economic sustainability in Kenya. 1.4 Specific Objectives 1. To compare the economic performance of floriculture industry across different value chain strategies 2. To investigate the association between marginal cost and economic performance of floriculture industry in Kenya. 3. To determine the effect of value chain constraints on economic performance of floriculture industry in Kenya. 1.5 Research questions 1. What are the characteristics of floriculture value chain used in Kenya and how do they affect economic performance? 2. How does the marginal cost relate with floriculture industry economic performance in Kenya? 3. How does value chain constraints affect economic performance of floriculture industry in Kenya? To answer research question 2 and 3, the following null hypothesis were formulated H01 Marginal costs has no significant effect on economic performance of floricultural value chains. H02 Value chain constrains have no significant effect on economic performance of floricultural value chains. 6 1.6 Research scope The scope of this research is to engage with horticultural firms that are members of Kenya Flower Council (KFC). The researcher target to engage the small, medium and large-scale floriculture growers as well as other actors who participate in floriculture value chains in the country. Cut flowers are the main floriculture product grown and exported from Kenya. The main flower growing areas are Nakuru, Nyandarua, Laikipia and Nairobi regions. 1.7 Justification This research will be important to the value chain participants, the policy makers and other researchers. The value chain participants will have the privilege of accessing empirical data to facilitate decision making regarding upgrading and integration opportunities within the value chain. For example, actors will be able to decide which activities they can perform and which ones they need to outsource. The policy makers will find this report useful with empirical evidence that could be useful in deliberation of intervention strategies to enhance better trade and business environment for the value chain actors. For example, the implications of VAT on inputs on various segments of the floriculture industry. The students and researchers will find the information useful in expanding their knowledge in floriculture value chains in the Kenyan context. 1.8 Definition of Terms Floriculture- Is the branch of horticulture that deals with cultivation of cut flowers, bending plants and potted plants for ornamental purpose. Value chain- describes interaction, firms and processes that are needed to deliver products to end users, and they all aim to identify opportunities for and constraints against increasing productivity. Value chain actors- is used to mean companies that interact to supply goods and services Sustainability - involves measures aimed at preventing depletion of natural or physical resources, so that they will remain available for the long term. Sustainability has three pillars: economic, environmental and social. These three pillars are informally referred to as people, planet and profits. Economic sustainability- refers to organizations ability to manage its resources and responsibly generate profits in the long term. To be sustainable, a business must be profitable. 7 Social Sustainability-often referred to as corporate social responsibility (CSR) is a responsible practice voluntarily where social concerns of employees and local communities regarded as stakeholders are integrated with the organizational operations as well as in the shareholder interactions. Environmental sustainability-focuses on conservation of biodiversity without foregoing economic and social progress. It involves saving energy, reducing waste, recycling and protecting flora and fauna. 8 CHAPTER TWO: LITERATURE REVIEW 2.1 Introduction This chapter serves to explore the existing agribusiness literature with emphasis on the conceptual framework, theoretical framework, value chain analysis and firm performance. The review is however, not limited to firms in the agriculture sector alone. In the empirical review section, we look at various value chain studies done by researchers and academicians and value chain concept. The review is grounded on three main themes, Value chain concept, performance management and sustainability aspects of the industry 2.2 Theory of Value Chain Makokha, Onono, Mukhwana, Atsiaya, and Wambugu, (2020) conducted a value chain analysis of the artificial insemination services in Kenya, through a case study of the Western Kenya Region. In their report, Makokha et al., (2020) defined value chain analysis (VCA) as a process where an organization identifies its key support activities that add value to its output products, then analyze the cost or different drivers associated that confer them with better cost or competitive advantage. A commodity value chain then would entail all the inbound activities and processes that a firm would pursue to transform various inputs to outputs. According to Kezerashvili, (2018), value chain in agribusiness setup seeks to identify a set of actors that facilitate basic agricultural production, activities and successive input from other stakeholders such that in each process/ step value is added till the product reaches the end consumers. Value chain activities can produce goods or services and can be contained in a single geographical region or spread over a wider area. Francis et al, 2008). The main actors could link vertically or could be a linkage of different independent business entities. A medium farm may buy off another smaller farm to consolidate and grow its size and variety portfolio in a horizontal linkage or link with its packaging supplier to enjoy lower packaging prices in vertical linkage. Porter (1985) classified entities and activities involved in conversion of inputs to outputs into four roles at primary level namely inbound logistics, operations, outbound logistics and sales and marketing. Inbound logistics include all the activities involved in receiving warehousing and distribution of raw materials and inputs for manufacturing. It involves the relationships with suppliers and all activities required in receiving, storage and usage of inputs. Inbound logistics activities include transportation, material handling, storage, issues and communication (Porter, 1997). Operation technology involves all activities involved in transforming inputs to outputs. It involves process, materials, machine tools material 9 handling, packaging, maintenance, and testing, building design and operation and information systems. Outbound logistics include the warehousing and distribution of finished goods and include activities of transporting, material handling, packaging, communication and information systems. Service step in the primary activities of value chain refers to support of customers after the goods and services are already sold to them. Service technologies include further testing, communications and information systems. (Porter M, 1997) These primary activities are supported by the infrastructure of the firm, the human resources management, technological development and procurement activities. Infrastructure of the firm refers to the organizational structure, control systems, company culture and company’s social capital. Others are department of finance, accounting, planning, public affairs, government relations, quality assurance and general management. Human resource management consist of all activities involved in recruiting hiring training development, compensation and layoff of employees as needed (Almazan et al 2011) Technologies support value creating activities, it consists of hardware, software, procedures and technical knowledge that are employed in firm’s transformation of inputs to outputs (Almazan et al, 2011). Firms’ profitability and financial sustainability depend on its ability to effectively perform these value chain activities in an efficient manner so that the total value created provides satisfaction to the end user and that the consumer is willing to pay more so that the firm generates profit sustainably in return (Kokemuller,2007). 2.3 Cost and Profit Structure along the Floriculture Value Chain As highlighted by Chandravanshi, Chandrakar, Sinha, Sahu, & Sai, (2018), floriculture is dominated by primary activities, such as seeding, pest control, irrigation, climate control, and monitoring production conditions among others, which involve outbound and inbound logistics. Chandravanshi et al., (2018) presented a success story of major flowers in Raipur city with a deliberate focus on the value chain on flowers for marketing. According to Chandravanshi et al., (2018), organizations that compete via cost advantage always encourage performance of internal activities at the lowest price per unit or provide superior product. A firm that produces its output at minimal costs often would enjoy better profits than peers. A cost advantage also can be pursued by reconfiguring the value chain. This involves pursuing structural changes in the value chain in the name of new products, selling or distribution of products in differentiated ways or new channels in distribution (Simister.P, 2011). Other adjustments to capture value in the form of performance management that leads to agility and 10 process centric arrangements with proactive response planning to market and other changing demands coupled with accountable teams that create and generate reliable data for decision making all lead to long term cost advantage due to resultant waste reduction. In our analysis, cost alone would not be the sole decision trigger, embedded performance management strategy and staff confidence in the process and reliability of data are critical aspects that would affect efficiency and therefore future costs. (Simister.P, 2011). 2.4 Sources of Inefficiency along the Value Chain The Value chain of a firm (Firm’s VC) is a part of a larger industry's Value chain (VC). A firm that carries out more activities compared to Industry’s VC is considered to be more vertically integrated. Floriculture value chain concept depicts actors connected to one another along a chain performing various value adding activities in production, processing, packaging, delivery and shipment of commodities to customers. This linkage of activities in a vertical chain cannot function in isolation, it is interlinked with other support activities horizontally. Over and above, the floriculture industry in Kenya provides output in the form of cut flowers and ornamentals for consumption in other parts of the world, the European Union, United States of America, Japan, China. In this regard, the climate and social political activities in these consuming countries always affect the Kenya’s value chain. Over-supply in one country will affect the prices and vise-versa. The more information the industry has from other supply bases the better the industry stands to plan its production and optimize value. Laura Horvath in her work in supply chain management (2001) indicated that collaborations required individual participants to adopt simplified, standardized solutions based on common architectures and data models. Time to market is critical and important aspect in value chain innovation. An emphasis on cultural dimension of value chain analysis. Cambridge University defines inefficiency as an adjective that describes the opposite of working or operating quickly in an effective way. Where effective way involves working or operating in a way that gets the results without any waste. The inefficiencies in the floriculture chain may result from the industry operating environment otherwise known as the enablers, the industry participants /actors or from the firm itself. The operating environment in the floriculture value chains as induced by the government interventions in the form of taxation, policy formulation and import /export regulation directions by the participating government bodies e.g. Kenya plant health inspectorate (Kephis) 11 and horticultural crops directorate (HCD), Kenya revenue Authority (KRA) Kenya ports Authority (KPA). Lobby organizations e.g., KFC, Kenya Association of Manufacturers(KAM), Fresh producers Association (Fpeak) and Kenya bureau of standards (KeBS) work closely to manage the environment of the value chains. (KFC, 2018). Introduction of export license processing fee as a percentage of gross invoice value in 2021 by HCD is one of regulatory interventions that have acted as a disabler in the export environment, by taxing gross incomes which goes against the taxation policy and as such contested by growers via KFC, KAM lobby group. 2.5 Potential Interventions to Control Inefficiencies in the Value Chain 2.5.1 Industry specific upgrading options The floriculture industry value chain upgrading from the definition by Gereffi (1999) is seen as a process of improving the ability of a firm or an economy to move to more profitable and/or technologically sophisticated capital and skill-intensive economic niches. Kaplisky (2000) gives four directions in which economic actors can upgrade: increasing the efficiency of internal operations, enhancing inter-firm linkages, introducing new products and changing the mix of activities conducted within the firm. Pietrobelli and Saliola (2008) who agreed and built their case from Kaplinsky (2000) define the following upgrading options: entering higher unit value market niches, entering new sectors, undertaking new productive functions and in all cases enlarging the technological capabilities of the firms. In many ways upgrading is seen as both internal where the firm improves internal processes, product, function and external where a multi-sectoral focus with more areas is considered and a network of interrelationship with other industries and players within the value chain. Most approaches to upgrading found in literature took the form of upgrading product, upgrading process, upgrading function (vertical integration) that involves doing more functions of the value chain or inter-sectorial upgrading (Horizontal integration). Vertical integration is a strategy whereby a company owns or controls its suppliers, distributors, or retail locations to control its value or supply chain. Vertical integration is very beneficial to a company as it allows a good control process, cost reduction, and improved efficiencies. Conversely, Horizontal integration is the process of a company increasing production of goods or services at the same part of the supply chain. A majority of companies achieve horizontal integration through internal expansion, acquisition or merger. However, this type of integration can lead to monopoly if a firm captures the vast majority of the market for that product or service. 12 2.5.2 Firm Specific upgrading Options A major upgrading option, as described by Stacey Barr, (2016) is through performance management. Performance management is defined as the process of analyzing information to determine the progress towards a desired outcome for a given organization. The current floriculture business environment in Kenya is rapidly changing. The claims of saturated market place as a result of exponential growth in supply and a slower un-matched growth in customer base in Europe over the last two decades is slowly becoming a reality. As such the environment where the floriculture in Kenya operates is that of an ever-increasing demand to deliver exceptional results with limited resources. To fulfil these demands, the need to measure performance is inevitable and a source of organizational competitive advantage. Performance measurement of the current generations is characterized by a transformative focus on objective driven performance management. Objective driven performance management is the foundation of operational excellence and its process centric approach aligns the execution of key processes to strategic goals by measuring and improving what matters most to an organization. In her latest publication “Prove it”, Stacey Barr (2016) points out that Performance measures are supposed to be the evidence that convinces us that we have achieved, or at least we are making progress in the right direction, towards our goals. Stacey Barr emphasis is on decentralization of strategy to create intimate understanding and ownership, agility and flexibility as innate tenets of current performance measurement. In her own revelations such a decentralization, self-service paradigm is integral to meeting the ever-changing demands of the business by removing restrictions and bottlenecks historically imposed by IT departments. The objective performance management would result to a balanced score card for the firm that ensures sustainability in the long-run by translating strategy to actions and therefore results and outcomes. 2.6 Sustainability and Value chain Analysis To date most value chain analysis focus on economic sustainability and inadequate attention is paid to social and environmental consequences of firm behavior and reallocation of resources within and between firms in the chain. This risk producing recommendations that either ignore the competitive advantage offered from improving environmental management and social welfare, or have such detriments as to render proposals unsustainable when exposed to broader public scrutiny. 13 Value chain Analysis (VCA) can expose strategic and operational misalignments within chains and consequential misallocation of resources and thus opportunities for improvement which create value and economic sustainability. As depicted by Andrew Fearne, (2017) in the hand for value chain analysis describes the anchors of sustainability are in respect of Governance with regard to focus in collaborative supply chain where resources and information is shared and perceived as a source of leveraging on resilience, the value created is shared across by all stakeholders in the chain and there is more focus on consumer with regards to product quality and organizational agility to remain sustainable into the future. Bony et al., (2007) urged that the characteristics of value chain management are pursuit of a shared vision through aligned strategies, structures and processes that are based on trust, open communication, commitment to continuous improvement, understanding of what the customer value in the product and a clear focus on creating that value along the chain. This result to mutual benefits from the creation, realization and flow of value along the chain. Such alignments require a shared common strategy amongst the main stakeholders /partners and unified execution across key functions (Gottorna, 2006; Fearne et al 2008) 2.7 Empirical Literature review A number of scholars have delved into the study of value chain in agribusiness. Schmitz and Humphrey (2010) studied how insertion into global value chain affected upgrading in the case of industrial clusters. They had the attention to the position relationship of developing country firms selling to large global firms. In their argument, clusters were inserted into global value chain in different ways that had effect of enabling or disenabling local upgrading efforts. Wijnands (2005) in his study indicated the floriculture industry as one of the truly global value chains. The author’s main objective was to examine the competitiveness and capabilities of the floriculture industry in terms of key exporters and importers. In the author’s argument, The Netherlands is depicted as the marketing and financial service hub and developing countries like Kenya as the production center and focuses on cooperation between the hub and production centers through sharing of information, knowledge and expertise. Trienekens (2011) in agricultural value chains in developing countries looked as 3 components of identifying value chain constrain for upgrading as market access, weak infrastructures, institutional voids and limiting resources. 14 In floriculture Martysnovska (2011) studied global floriculture value chains with a focus on Ukrainian industry. His study came up with the main actors and processes from production to consumption that shape the Ukrainian chain. He also looked at macro and micro analysis of the flower industry. In Kenya Kagongo (2013) studied value chain disruptions in Kenya. The study pointed out significant among factors that disrupt the value chain were natural disasters, logistics, process design, labor unions and production function mechanics. Work by Githere (2017) studied value chain analysis of small and medium firms. The researcher used descriptive research method and the research found out that value chain participants that were able to perform most tasks along the chain ended up being most profitable. The study recommended a review that would include large farms and other regions who participate in the floricultural value chain. Large scale firms are important actors in floriculture value chains in that they contribute the most towards the value chain in volume terms. Analysis of these studies provided a gap in context and scope, there is limited information that compares small, medium and large-scale firms in the floriculture value chains. There is limited information in economic sustainability of the chain participants. These gaps informed this study. 2.7.1 Cost Advantage and Value Chain The study reviewed research by Salvi, and Pahurkar, (2020), who assessed the relationship between value chain analysis and competitive advantage. Salvi, and Pahurkar, (2020) descried value chain analysis as a strategy tool used to analyze firm internal activities. In their argument, they observed that the aim is to identify those activities that provide the highest value. By doing this, the firm is able to prioritize its functions and budgetary fund allocation of its processes. This is done by looking into internal activities and analysis of the firm’s competitive opportunities or threats. The firm that competes through a cost advantage will try to perform its activities more efficiently for better results to provide a leverage over competitors. Primary activities are tied to direct value addition in the production process however, this may not necessarily mean they are more important than other related support functions of information management, modern human resource management as these could be in most cases the source of the competitive advantage. 15 2.7.2 Differentiation and Value Chain The literature highlighted a study by Corejova, Rostasova, Rovnanova, and Valica, (2019), which assessed the competitive differentiation in the digital environment and social networks. The reviewed study observed that differentiation is achieved from changing individual value chain activities to increase uniqueness in the output of the final product. Corejova et al., (2019) revealed that building a virtual value chain through which a company integrates information necessary for ensuring process in the value chain provide managers with an ability to see the flow of information in the value chain from the beginning to the end. The changing is usually done by reconfiguring the value chain, developing a new product or variety that is unique and have the customers willing to pay for it at a higher price (Kokemuller, 2007). A differentiation advantage can be created at any step of the chain from procurement to distribution. Organizational Policies and decisions, networks linkages, timing, location, learnings, scale and general organizational social capital all derive uniqueness that causes differentiation (Porter M., 1997). Differentiation can be costly and firms have to consider the value derived from such endeavor. Firms may create uniqueness of their products by forward integration, backward integration or innovate new ways and processes that are able to leverage against benchmarks. 2.7.3 Competitive advantage and Value chain Analysis of value chains in the business world is not new. Often entrepreneurs would perform an analysis of an industry of interest in order to know where to position their business in the vale chain. One of the main interests of studying the value chain would therefore be to enable investors to position their businesses where they can create and capture the greatest value sustainably to generate long time value for their investments. The work of Jonathan et al (2009) brought out the popularity of value chain where they tied competitiveness to business strategy themes of core competencies, comparative and competitive advantage, outsourcing, horizontal and vertical integration and best practices. Firms individually or in clusters have seek the value chain approach to deal with the urge to remain competitive by utilizing value chain approaches to streamline processes that generate goods and services that the customers value as well as guide in product and process innovation. Triekens (2011) studied about technological advancement that permit high level of information sharing that have reinforced business realization of value chain efficiencies especially in collaborations with win-win linkages. The work on Kenya’s floriculture industry competitiveness by Mulangu (2017) identified three measures of competitiveness of Kenyan 16 flower farms as, the exported stems per employee, the quantity exported per area and the number of workers per hectare. The study that included also measures of capabilities concluded that there was a positive relationship between the different measures of competitiveness and firms aggregate technological capabilities. Michael Porter depicted the competitiveness of firms in a diamond model that includes input /factor conditions, context for farm strategy and rivalry, demand conditions and related and support industries (Fig 2.1). Fig 2.1 Competitiveness Diamond Source: Michael Porter  Presence of capable, locally-based suppliers and firms in related firms  Presence of clusters instead of isolated industries High quality, specialized inputs available to firms:  Human resources  Physical infrastructure  Administrative infrastructure  Information infrastructure  Science and tech. infrastructure  Natural resources  Unusual local demand in specialized segments that can be served globally  Customers’ needs that anticipate those anywhere  A local context that encourages investment and sustained upgrading  Open and vigorous competition among locally based rivals Related and Supporting Industries Factor (Input) conditions Demand Conditions Context for Firm strategy and Rivalry 17 The factor conditions include specialized inputs, human resources, capital resources, physical infrastructure, administrative infrastructure and natural resources. In Kenyan floriculture firms, these are in the form of altitude and latitude which ensures better quality and uniform growth from equatorial climate and availability of sunshine throughout the year. Available and relatively cheaper trained labor in Kenya also consolidates the competitive position of floriculture firms. The ease of doing business, as measured in the global ease of doing business index, consolidates government involvement in trade and policy regulations that enables or dis-enables the business to thrive. The tax regime imposed on inputs e.g., VAT would affect the small and medium enterprises negatively. Large firms may get back the VAT spend from the government. This may take a while and affect the cash flow of the firms negatively, though profitability in the long run is not affected. Policies on labour regulations and labour laws that stipulate relations with the human resource, training and information infrastructure such as internet coverage and regulation allows better information flow and improves the competitive position. A good business environment will enable firms to compete openly and encourage investment and sustained upgrading both in production and marketing. Demand conditions in the form of declining area under cultivation of flowers in the traditional west floriculture producing countries e.g., Netherlands and their growing consumer populations offer increased market opportunities for the Kenya floriculture industry. Lastly the strategic position of the horticultural firms with regards to alliances with local producers for a common marketing outlet that saves marketing costs, auction unpackers, RFH auctions and retail chains as well as big whole sellers in the consuming countries all add up the importance and sustainability of the floriculture industry in Kenya. Kenyan enterprises that collaborate and buy stake in the marketing and seed producing companies have an upper hand in developing a better grip in the industry and are better placed to develop sustainable businesses that overcome the liability of venturing into new markets and products with ease. This would enable the profit line to sustainably grow in the long run. Other that buy stake in input providing companies are able to get discounted value for the inputs. Others that collaborate into groups enjoy bulk buying of inputs from the manufacturers directly that provide for better overall inventory management and lower growing costs due to economies of scale and elimination of middle men / whole sellers and retailers from the supply chain. 18 2.7.4 Agricultural value chain The study highlighted a research report by Park, & Gachukia, (2020) which assessed the impact of food value chain governance determinants on innovation competitiveness as evident from Kenya Horticultural exporters. In their study, Park, and Gachukia, (2020) viewed the value chain as composed of input and services providers, value chain actors such as producing farms, marketing firms, logistic providers e. g transport, freight forwarders lobby groups e. g KFC, Fpeak, Mount Kenya growers’ group and chain enablers such as KEPHIS, HCD, KFC who offer regulatory and audit services to the actors. Agricultural value chain can be vertical linking or a network between various independent businesses and can involve production, processing, packaging, storage, transport warehousing and distribution. The main aim of a value chain is to produce value added products or services for a market, by transforming resources and utilization of infrastructures within the opportunities and constrains of its institutional environment. Agricultural value chain concept involves actors connected along a chain producing and delivering goods to consumers through a sequence of activities depicted in a “Vertical chain”. This vertical chain of actors cannot however function in isolation. Value chain approach considers “horizontal chains “which impacts on the vertical actors. These include the services of input providers, finance provision, extension support services and general enabling environment (Ghemawat, 2002). This approach and consideration have been found useful by governments and donor organizations in that it has resulted in a wider range of considerations in analyzing agricultural value chains that would lead to a broader range of interventions for upgrading value chains and identifying market opportunities for small holder farmers (Pierre et al, 2013). The floriculture value chain in Kenya is part of a global floriculture value chain with an epicenter in the Netherlands that can be depicted in this regard as a network of firms and intercompany relationships governed by Global value chain practices (GVC). The global value chain is embedded in a business environment that has enablers or dis-enablers. These include government policies, ease of doing business, power relationships, businesses networks in the industry, and the value contributed by each player and governance of the firms. (Trienekens, 2011). The description can be put in a simple diagram. 19 2.7.5 Challenges of Value chain Approach Value chains have challenges relating to physical infrastructure in the form of road network quality and ability to be efficiently used in all seasons without supply chain disruptions. Seasonality in production and marketing with peak seasons render the installed cold-room capacity to operate under intense pressure in those peak periods due to high volumes (Hortiwise, 2012). The formation of value chain was initially part of manufacturing value chain and therefore in-depth thought have to be considered to make it workable in other areas such as floriculture. In Simister’s words it is not a plug and play and therefore have to adopt the value chain principles to the floriculture chain to have meaningful value (Simister, 2011). This orientation is devoid of the considerations of the production and consumption that characterize the floriculture value chain in Kenya when the consumption of the floriculture is mainly away from the producing locations. The consuming countries drive the process and share information and culture of floriculture with the producing countries and therefore those producing countries that embrace and learn the industry faster are able to earn more value. This generally creates an information asymmetry in the market where the value chains near the customers in the consuming countries have more information than the value chain away from the customer in Africa such as Kenya. (Farfan, 2005). 2.8 Economic Sustainability 2.8.1 Overview of Economic Sustainability Sustainability is defined as the ability to be sustained, supported, and upheld or confirmed (Diaz- Elsayed, Rezaei, Ndiaye, & Zhang, 2020). In the Oxford English dictionary, Sustainability is "The property of being environmentally sustainable; the degree to which a process or enterprise can be maintained or continued while avoiding the long-term depletion of natural resources " (Beaumont, 2019). Various disciplines define Sustainability differently. Environmentalists mean ecological Sustainability, while businesses may refer to Economic Sustainability. In policy contexts, Sustainability involves measures to prevent the depletion of natural or physical resources to remain available for the long term. Sustainability has 3 core concepts, often referred to as pillars, economic, environmental and social. These are informally christened as profits, people and the planet (Derksen, & Mithöfer, 2022). Sustainability has gained popularity as a research area judging from the increasing numbers of research studies on Sustainability and the incorporation of its principles in the governance of organization operations and value chains around the world (Qorri et al., 2018). The nexus of 20 Sustainability is about responsible acts of human beings in mindful consideration of the environment, society, and future generations (Clark & Dickson, 2003; Clark, 2007). Sustainability is the ability to be sustained, supported, upheld, or confirmed. In the Oxford English dictionary, Sustainability is "The property of being environmentally sustainable; the degree to which a process or enterprise can be maintained or continued while avoiding the long-term depletion of natural resources”. Various disciplines define Sustainability differently. Environmentalists mean ecological Sustainability, while businesses may refer to Economic Sustainability. In policy contexts, Sustainability involves measures aimed at preventing the depletion of natural or physical resources from remaining available for the long term (Clark & Dickson, 2003). Sustainability has 3 core concepts, often referred to as pillars, economic, environmental, and social (Clark. 2007). These are informally christened as profits, people, and the planet. Social Sustainability, often referred to as corporate social responsibility (CSR), is a voluntary responsible practice where the social concerns of employees and local communities regarded as stakeholders are integrated with the organizational operations and the shareholder interactions (Tang 2018a,b). Environmental Sustainability focuses on biodiversity conservation without preceding economic and social progress. It involves saving energy, reducing waste, recycling and protecting flora and fauna. Social Sustainability aims to strengthen the cohesion and stability of specific social groups within a community where economic activities are carried out (Wani, et al., 2018). Economic Sustainability in macroeconomics focus on the need to maintain aggregate stocks of natural and manufactured capital constant over time so that future generations have consumption similar to those of the current generation. In the context of a firm, economic Sustainability refers to an organization's ability to manage its resources and responsibly generate profits in the long term. In a nutshell, to be sustainable, a business must be profitable. Economic Sustainability is, however, distinct from profits at all costs and involves activities like compliance, proper governance and risk management. These strategies promote Sustainability by utilization of social- economic resources to their best advantage. A sustainable economic model establishes an equitable distribution and efficient allocation of resources (Haasnoot, et al., 2022). Ensure that these allocated resources are utilized responsibly and efficiently, providing long-term benefits and thus profitable. A profitable business is more likely to remain stable in the short run and continue to 21 run from one year to the next. In this definition, economic Sustainability is linked to basic preoccupations of business managers of productivity, investment and profit. All three pillars can be traced back to the economic aspect, which sustains and stabilizes the other two aspects, social and environmental Sustainability (Manca, 2015). Economic Sustainability, therefore, refers to the generation of income for the members of society without exploiting the capital and resources, which generates a circular effect and stabilizes the economy (Chelan et al., 2018; Spangenberg, 2005; Pires et al., 2017). To have this circular effect that stabilizes both economy and society, the organizations must transform their governance practices towards renewability, reusability, recycling, and life cycle costing, as well as integrate the cost of wastes, emissions, and pollution, among others in the costing system (Kibert, 2016; Zhong & Wu, 2015). Cairns and Martinet (2014) adopted sustainability accounting to assess the environmental- economic indicators and their role in sustainable growth and overall sustainable improvement. The dimensions of economic sustainability range from marketing strategy, market orientation, operational efficiency, and upgrading (Jia et al., 2018; Marchi et al., 2013) to value addition, performance management, ethical investments, resource conservation, and resource reuse, and resource recycling. All these activities can be broadly categorized under compliance, good governance, and business risk management. The economic pillar can sometimes be referred to as good corporate governance. Therefore, the boards of directors and management align with stockholders' interests and that of other stakeholders, value chains, and end consumers (Kocmanová et al., 2011; GRI, 2011). Most of the previous studies pointed out a part of economic sustainability indicators such as return on equity (Odiwo et al., 2016; Mateus & Belhaj, 2016; Rahman & Islam, 2018), return on asset (Jouha, 2015; Mateus & Belhaj, 2016; Adesanmi et al., 2018), Tobin's Q (Afrifa & Tauringana, 2015; Kyere & Ausloos, 2020) net profit margin (Chumo,2012 Azhar and Mehmood, 2018 Olayiwola, 2018) and investment in research and development (Njue ,2020). In this study the researcher combined investment in research and development (R&D), Performance management tool, availability of affordable financing and investment in fair trade accreditation as indicators of economic sustainability of firms. In the opinion of the researcher, these would yield a more robust measure than investment in R and D or net profit margin or ROE alone. 22 2.8.2 Economic Sustainability in floriculture Value chains The sustainable floriculture value chain is considered when value chain actors or business firms can conserve natural resources, support healthy communities and workforce, and earn enough revenue to remain financially viable for the long term (Derksen, & Mithöfer, 2021). In floriculture value chains in Kenya, these preoccupations of business managers in productivity, investment and profit come in handy to differentiate firms depending on capabilities and upgrading options that a firm undertakes. In this work, we considered profitability by looking at the revenues and actors' cost structure. The value chain actors whose revenues could cover their costs were considered profitable and could continue being in business from one year to the other (Wani, et al., 2018). We also looked at other indicators and business management practices that were considered economically sustaining. The practice of performance management Chumo, (2012), the share of the budget for research and development, corporate social responsibility Njue, (2020), and investments in fair trade certifications, among other practices, indicated the firm's sustainable trajectory. Those firms that engaged in the exercise were conspired to be more productive and therefore able to have an edge on capabilities for a sustainable trajectory. 23 2.9 Conceptual Framework Independent variables Dependent variables Fig 2.2 Conceptual framework Value Chain Analysis Inbound logistics Operations Outbound logistics Market and sales Marginal Cost Analysis Marginal Cost analysis at each level in the chain Value Chain Constrains Market access Market Orientation Performance management Floriculture industry performance Financial growth (Profitability) Value chain efficiency (customer satisfaction) Value chain growth and sustainability (resilience score) 24 CHAPTER THREE: RESEARCH METHODOLOGY 3.1 Introduction This chapter covers the framework of the research design that was used in the study. It describes the populations of interest and sampling method used as well as data collection tools used in the study to adequately answer the research questions. 3.2 Research Design There are three research approaches that are used in Agricultural research. These are quantitative, qualitative and mixed research. In this work we used quantitative research, which utilized numerical data which were subjected to statistical models to yield results from which the conclusions were drawn. On the other hand, qualitative data that was gathered from the study by, observing their trends, and making critical judgments which led to study conclusions. In such a case, a mixed research method is said to have been adopted. This study used a mixed method approach to collect quantitative and qualitative data that was used to evaluate the performance of the horticulture value chain in Kenya. The use of a mixed research method was employed as it yielded better research where the quantitative data helped in analysis and the qualitative data ensured the inferences made were detailed and supported. Hence, the study was able to conduct an in-depth investigation of the supply chain, profits and cost structure of small, medium and large-scale floriculture actors while utilizing a sufficient sample for a better generalization of the results to the entire population. The design enabled the researcher to give account of the floriculture industry as it is in practice, enable collection of current data from the population set so that the relationships existing in the current state can be interpreted for meaningful understanding. 3.3 Population The population for the study is all horticultural firms that grow cut flowers, linkage industries in logistics and input supply and freight forwarders, participating government bodies and related associations. In the context these are grouped as either members, associate members or non- members of Kenya flower council (KFC). Further the cut flower farms were grouped into three categories based on area under plantation and activities carried out. 3.3 Sampling Frame and sample selection The samples were drawn from all the supply chain links that take place within the country from 25 production to shipping of cut flowers. The sampling frame entailed the list of all firms registered with the Kenya’s Horticultural Crops Directorate (HCD). HCD is a directorate under the Agriculture and Food Authority of the Horticultural crops sector, through the provisions of the AFA act (Act No. 13 of 2003), Crops Act (Act 16 of 2013) and other relevant laws and regulations. The study used a stratified sampling technique. The allocation of the sample sizes across the different strata was proportional to the strata sizes. The distribution of the sample was 51 and 50 from the KFC certified members and KFC associate members, respectively (Table 3.1). Table 3.1 Sample stratification Designation Populatio n Stratification Stratification Sample Procedu re Data Collection Type KFC certified members/Prod ucers 87 Cut flowers Roses Summer flowers 63 8 Close ended Questionnaire Cuttings/Breed ers 6 Close ended Questionnaire KFC associate members 89 Consolidators 11 Close ended Questionnaire Roses Out-grower farmers groups (10 farmers per group) 3 12 Open ended Interviews, Questionnaire TOTAL 176 103 Roses are grown by individual grower companies within own farms or leased parcels. Summer flowers are grown by individual companies in their own farms and also using out-grower model with farmer groups of 10 farmers each with own piece of land pooled in the group for ease of management. 26 3.4 Data Collection This study focused on use of primary and secondary data that was collected specifically for this research using structured questionnaires and interviews with practitioners. The questionnaires were prepared in advance with the assistance of subject matter specialists and researchers. The questionnaire consisted of four parts structured to essentially cover all the research objectives and avoid bias. Part A consisted of general questions that covered the firm’s unique characteristics viz. the farm size small/medium, member/associate member, location, ownership among other general information. The second part, B focused on the value chain management practices adopted by the firm at each stage (Production, packaging, freight, airside transport, export price, quantity and quality) to ensure competitiveness, profitability and sustainability. The section collected data pertaining to Branding. It is important that these practices be defined in measurable terms. Like process innovation should was defined in terms of technology used in production inputs, breeders, growers their costs and views of practitioners while the third part C, concentrated on the marginal costs and profits along the value chain for the participants and actors. Part D dealt with the value chain challenges /opportunities as experienced by the participant of the value chain and the performance management concept adopted by the firm and the resultant impacts on sustainability goals. The questionnaires were administered by the researcher together with trained assistant researchers, who in this case were trained by the researcher on how to do interviews so that the population can acquire a proper understanding of the questions and therefore derive a better touch and feel of the outcome. The respondents comprised of the firms’ value chain departmental managers or their equivalents. The data variables were organized and classified under two broad categories, namely, the independent and dependent variables. Independent variables The first independent variable was the value chain strategy. The variable was measured using a categorical scale with two categories namely, strategy 1 and strategy 2 for those firms that used value chain 1-3 which dealt with auctions as their market, and those that used value chain 4-5, which dealt with direct/mass market. The second independent variable was the marginal cost. Marginal cost was computed by diving the change in total cost by the change in quantity produced. That is; 27 𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡 = 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑝𝑟𝑜𝑑𝑢𝑐𝑒𝑑 The third independent variable was the market access. Market access represented one of the value chain constraints. The variable was measured using a categorical-nominal variable with two categories namely, auction and direct market. The fourth independent variable was the performance management. The variable was measured using a Likert scale of 1-5, with the value 1 indicating poor performance management and 5 excellent performance management. Hence, the variable performance management was categorical-ordinal. Dependent variables The dependent variables included all variables that revealed that floriculture industry performance. In particular, the study focused on financial growth (profitability), which was measured using firm’s profit. The profit was computed differently for firms that used different value chain strategies. Among firms that used strategy 1, auctions (value chain 1-3), the profit was computed using the formula; 𝑝𝑟𝑜𝑓𝑖𝑡 = 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠𝑡𝑒𝑚 − 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑠𝑡𝑒𝑚 − 𝑓𝑟𝑒𝑖𝑔ℎ𝑡 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑠𝑡𝑒𝑚 That is, in additional to cost for producing the flower cuttings, the freight costs were also part of the firms’ expenditure. On the contrary, the profit for firms that used strategy 2, direct/mass market (value chain 4-5) was computed by subtracting cost per stem only from the price per stem since the freight costs were incurred by the purchasers. 𝑝𝑟𝑜𝑓𝑖𝑡 = 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠𝑡𝑒𝑚 − 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑠𝑡𝑒𝑚 Beyond the profit, economic sustainability was assessed using a tool developed by employing other factors namely, Research and development (Njue, 2020) investment Corporate social responsibility investment, utilization of performance management tool (Chumo, 2020), availability of affordable financing (Njue, 2020) and investment in fair trade accreditation. 3.5 Data Analysis The data that was collected was organized and analyzed using descriptive statistics to capture the general information about the sample i.e., using the means modes, frequency tables, mode and percentages to provide simple summaries on the samples. (Mugenda and Mugenda, 1999). The summaries were used to provide and explain the patterns and trends observed for profit and cost 28 buildup along the value chains. Various groups of producers, chain actors and enablers will be compared using graphical methods. In particular, the study used boxplots to describe the distribution of observed values across groups and also compare the groups. Qualitative information was used to explain the inefficiencies and strategies that can be used to improve the business environment along the floriculture value chain in Kenya to optimally use their business environment. The first objective, to compare the performance of floriculture industry across different value chain strategies, was achieved using t-test technique. The choice for t-test was considered based on the number of groups to be compared. From the description of the data variables, value chain strategy had two categories, namely, strategy 1 and strategy 2. T-test is the best statistical analysis technique to compare two groups’ means since it yields reliable results. The analysis entailed computing the student’s t-test statistic using the formula; 𝑡 = �̅�1 − �̅�2 𝑠/√𝑛 Where; T was the student’s t-test statistic �̅�1 the mean of the firms that utilized strategy 1, the value chains 1-3 �̅�2 the mean of the firms that utilized strategy 2, the value chains 4-5 S the sample standard deviation, and n the sample size. The second objective, to investigate the association between marginal cost and performance of floriculture industry in Kenya, was achieved by correlation analysis technique. The Pearson’s correlation coefficient was computed using the formula; 𝑟 = ∑(𝑥𝑖 − �̅�)(𝑦𝑖 − �̅�) √∑(𝑥𝑖 − �̅�)2 ∑(𝑦𝑖 − �̅�)2 Where; r= correlation coefficient 𝑥𝑖= the values of the marginal cost (second x-variable in the sample) 𝑦𝑖=the values of profit, the measure of the floriculture industry performance. �̅�= the mean of the marginal costs �̅�= the mean of the profits 29 The third objective, determine the effect of value chain constraints on performance of floriculture industry in Kenya, was achieved using a factorial design. The constraints were identified using a linear regression model. Those factors which produced negative coefficients were identified as potential sources of inefficiencies. Hence, the study utilized the model; 𝑦 = 𝛽0 + 𝛽1𝑥1 + 𝛽2𝑥2 + 𝛽3𝑥3 + 𝛽4𝑥4 + 𝛽5𝑥5 + 𝜀 Where; 𝑦= performance measurement 𝑥1= production 𝑥2= packaging 𝑥3= local transport 𝑥4= labor 𝑥5= freight The beta’s represented the model parameters while epsilon represented the error term. 30 CHAPTER FOUR: PRESENTATION OF RESEARCH FINDINGS 4.1 Introduction In this chapter we present the results obtained from the information revealed by the gathered data. The chapter provides findings of the study in relation to the specific research questions. Hence, it is a critical section of the report as it links the research objectives to the conclusions of the study. In the first part we present the general findings in relation to the characteristics of the floriculture value chain. This is followed by the analysis of the cost and profit structure along the floriculture value chain. Thirdly, we present the findings related to the sources of inefficiencies as well as the strategies for improving the business environment along the floriculture value chain in Kenya. 4.2 The general Information 4.2.1 The characteristics of Floriculture value chain used in Kenya The characteristics of the floriculture value chain used in Kenya were investigated across the four categories of farms, namely the breeder, enabler firms, small-scale farms, and medium and large- scale farms. The descriptive results are presented being the central tendency and dispersion of the observations across each category. 4.2.1.1 Breeder firms All the farms under the breeder firm’s category had roses as the type of cut flowers grown and traded. The analysis of the breeder firm’s category revealed that the area, stems produced, leased area, and owned area averaged at 2.833, 1200000, 3 and 2.333 Ha, respectively. The standard deviation for the area and owned area were equal to 0.3073 and 0.5578, respectively. These values indicated that the breeder firms had varying leased areas as well as the owned area for their businesses. `4.2.1.2 Enabler Firms Similarly, all the farms under the enabler firm’s category had roses and summer as the type of cut flowers traded. Analysis for the enabler category entailed instigation of the volume handled variable. The assessment of the central tendency showed that the mean tonnage for the enablers was 14.877. Conversely, the measures of dispersion showed that the tonnage within the enabler category varied greatly with a standard deviation of 4.915. The coefficient of skewedness was 31 positive (0.725) indicating that a majority of the firms handled greater than the average tonnage (Table 4.2.1). Table 4.2.1: Descriptive statistics for the characteristics of n the Enabler firms’ category Tonnage Handled/Day Mean 14.87727 Standard Error 4.915483 Count 11 CV 30.959245 4.2.1.3 Medium and Large-scale Farm This category had both roses and summer types of cut flowers that were grown and traded. Therefore, the researcher conducted group comparison for the two types of cut flowers to investigate the difference in characteristics the floriculture value chain within the farms between the roses and summer cut flowers. The variables of interest included the area, stems produced, leased, and owned area. a) Area (ha) The group statistics produced means and standard deviation values equal to 31.0455 (SD=15.58) and 20.25 (SD=9.8959) for the roses and summer flowers, respectively. The descriptive statistics revealed that roses were grown on more land area than summer flowers. Also, the statistics revealed that the farms with roses varied more, in terms of land area, than the farms with summer flowers. The box plot, in agreement with the descriptive statistics results, revealed that roses were grown on larger area than summer flowers. Also, the plots revealed the area records for the two types of cut flowers were normally distributed. However, the farms with roses had several outliers on the upper extreme (Fig.4.2.1) 32 Fig 4.2.1: Comparison of area (ha) per tonnage between roses and summer flowers among the medium and large-scale farms. b) Stems Produced Similarly, group comparison was performed for the number of stems produced between the farms with roses and those with summer cut flowers. The group statistics produced means and standard deviation values equal to 1,468,712.1212 (SD=271,579.86586) and 1,132,082.5000 (SD=284,697.64943) for the roses and summer flowers, respectively. The descriptive statistics revealed that roses produced more than summer flowers. On the contrary, the statistics revealed that the farms with roses varied less, in terms of number of stems produced, than the firms with summer flowers. Similarly, the box plot, in agreement with the descriptive statistics results, revealed that roses produced higher number of stems than summer flowers. The box plots revealed that the production of stems across the two types of cut flowers was skewed positively. Hence, a majority of the farms had production greater than the observed means for both roses and summer flowers. However, the farms with roses had several outliers on the upper extreme end (Fig.4.2.2). 33 Fig 4.2.2: Comparison of stems produced between roses and summer flowers among the medium and large-scale farms c) Leased and owned area Separate group analysis was performed for the leased and owned areas across the two types of cut flowers grown and traded. The group statistics for the leased area produced means and standard deviation values equal to 9.0667 (SD=14.57722) and 0 (SD=0) for the roses and summer flowers, respectively. The descriptive statistics revealed that all the leased land was used for growing and trading roses. However, the group statistics for the owned area produced means and standard deviation values equal to 24.6667 (SD=19.71825) and 21.0000 (SD=1.41421) for the roses and summer flowers, respectively. The means showed that the roses were averagely grown on larger owned areas than summer flowers. Also, the results showed that the variation of the owned area was greater among farms growing roses than those growing summer flowers. The box plot, revealed that the leased land for the medium and large-scale farms growing roses were skewed positively. Hence, a majority of the farms used leased land with an area greater than the observed mean (Fig 4.2.3). 34 Fig 4.2.3: Comparison of the leased area between roses and summer flowers among the medium and large-scale farms On the contrary, the box plot for the owned land area, revealed that roses were grown on larger area than summer flowers. Also, the plots revealed the area records for the two types of cut flowers were normally distributed (Fig.4.2.4). 35 Fig 4.2.4: Comparison of the owned area between roses and summer flowers among the medium and large-scale farms 4.2.1.4 Small Scale Farms All the small-scale farms had summer flowers as the type of cut flowers grown and traded. The analysis of this category revealed that the area, stems produced, leased area, and owned area averaged at 2.58, 930833.3, 1.35714, and 1.788333, respectively. The standard deviation for the area, stems produced, leased area, and owned area averaged at 3.100487, 196443.8, 1.134103, and 2.24403, respectively. The standard deviation values were large indicating that the small-scale farms had varying characteristics (Table4.2.2). 36 Table 4.2.2: Descriptive statistics for the floriculture value chain used in Kenya Statistics Area Stem produced/Ha leased Land Area Owned area Breeder Firms mean 2.833 1200000 3 2.3333 Standard deviation 0.307 0 0 0.5578 cv 0.108365 0 0 0.23906 Median and Large-scale Farms mean 31.0455 1468712 9.0667 24.6667 i) Roses Standard deviation 15.58 271580 14.5772 19.7183 cv 0.50184 0.18491 1.60777 0.79937 ii) Summer mean 20.25 1132083 21 Standard deviation 9.896 284698 1.41421 cv 0.48869 0.25148 0.00673 Small scale Farms mean 2.58 930833 1.35714 1.78833 Standard deviation 0.89503 56708.4 0.42865 0.6478 cv 0.34691 0.06092 0.315848 0.362237 37 4.2.2 The cost and Profit structures along the floriculture value chain 4.2.2.1 Analysis of the costs Build up The cost of running the farms in the breeder’s category was composed of several items/activities whose amount differed significantly. The total cost at exit point /airport cost was obtained by summing the production, packaging, local transport and labor costs. The greatest cost was costs were due to freight, production and labor with values equal to 0.09, 0.06, and 0.06, respectively. The total cost due to production, packaging, local transport, and labor provided the overall farm gate costs. The farm gate cost was 0.132 Euro. Total Cost = Production Cost +packaging Cost+ Transp. Cost+ Freight .Cost Farm Gate cost = Production Cost + packaging Cost The cost of running the small-scale farms was composed of several items/activities whose amount differed significantly. The greatest cost was the freight cost, which averaged at 0.13 Euros per stem. Other significant costs included production, which averaged at 0.05005 Euros per stem. Also, the farms encountered costs related to packaging, local transport, and labor, which averaged at 0.006, 0.005, and 0.005 Euros, respectively. Jointly, the average farm gate cost was 0.06605 Euros. The cost of growing roses among medium and large-scale farms was composed of several items/activities whose amount differed significantly. The greatest cost was the production cost, which averaged at 0.064 Euros per stem. Also, the farms encountered costs related to freight, packaging, local transport, and labor, which averaged at 0.043, 0.029, 0.013, and 0.014 Euros, respectively. Jointly, the average farm gate cost among the roses farms was 0.120 Euros. Similarly, the cost of growing summer cut flowers among medium and large-scale farms was composed of several items/activities whose amount differed significantly. The greatest costs included freight and labor, which averaged at 0.092625 Euros, 0.05375 Euros, respectively. Also, the farms encountered costs related to production, packaging, and local transport, which averaged at 0.012391, 0.010163, and 0.008906 Euros per stem, respectively. Jointly, the average farm gate/airport cost among the roses farms was 0.124085 Euros. 38 The overall comparison of the costs along the floriculture value chain was done using a stacked columns bar graph. From the graph, the category having the least cost per stem including freight costs was medium and large-scale farms. Breeder firms incurred the highest costs. In all the categories, the freight costs were the highest (Fig.4.2.5) Fig 4.2.5: Stacked columns charts comparing the cost along the floriculture value chain 0.06 0.05005 0.064 0.012 0 0.006 0.029 0.010 0.012 0.005 0.013 0.009 0.06 0.005 0.014 0.093 0.09 0.13 0.043 0.054 B R E E D E R F I R M S S M A L L - S C A L E F A R M S M E D I U M A N D L A R G E - S C A L E F A R M S E N A B L E R S STACKED COLUMNS CHART COMPARING THE COSTS ALONG THE FLORICULTURE VALUE CHAIN Production Packaging Local Transport Labor Freight 39 4.2.2.2 Returns for Roses and Summer cut flowers The study used a standardized performance measure obtained by dividing the revenue by the costs as shown; 𝑦𝑖 = 𝑅𝑖 𝐶𝑖 Where; 𝑦𝑖 was the performance index for the ith farm. The values of 𝑅𝑖 and 𝐶𝑖 represented the revenue and cost for the ith farm, respectively. The study made a preliminary investigation of the performance index/measure, the model’s dependent variable, to assess whether the data met the assumptions for the regression analysis. The descriptive statistics produced a mean performance measure of 1.4106 with a standard deviation of 0.555. The mean value was above 1, indicating that, on average, the selected farms made positive returns to their investments. However, the high value of standard deviation implied that the performance level varied greatly across farms (Table 4.2.3). Table 4.2.3: Descriptive Statistics for the performance measure Minimum Maximum Mean Std. Deviation CV Performance measurement .18 4.05 1.4106 .55459 0.03931 Valid N (listwise) The frequency distribution analysis of performance/revenue revealed that a majority of the farms performed between 1 and 2. Hence, the analysis produced a frequency histogram with tall bars at the center and short bars at the ends, resulting in an almost bell-shaped curve. Hence, the study concluded that the performance index was normally distributed and the profit margins are positive. Hence, the data met the assumptions for a regression model (Fig4.2.6). 40 Fig 4.2.6: Frequency distribution of the performance The analysis of returns across the farm categories revealed that the highest returns were among the small-scale farms with a mean of 1.8682 and a standard deviation of 1.0706. Other categories, including medium and large-scale farms, and breeder firms had means equal to 1.3535 (SD=0.4113), and 1.2004 (SD=0.0493), respectively (Table 4.2.4). 41 Table 4.2.4: Performance across farm categories Report Performance measurement Farm Categories Mean N Std. Deviation Coefficient of variation (CV) Small scale farms groups 1.8682 12 1.07063 0.57308 Medium and large-scale farms 1.3535 74 .41129 0.30387 Breeder 1.2004 6 .04929 0.04106 Total 1.4106 92 .55459 0.39315 4.3 Sources of Inefficiency/bottlenecks along the chain that negates financial sustainability in floriculture value chain The study investigated the sources of inefficiencies/bottlenecks along the chain that negated financial sustainability in floriculture value chain using a multiple linear regression model. The regression model used the standard performance measure as the dependent variable. The model’s independent variables included production, packaging, local transport, labor cost, and freight cost. In order to smoothen and improve the model, the study took logarithms for all the independent variables. The study assessed the model’s goodness of fit using the ANOVA. The ANOVA produced a test statistic equal to F=17.051, p=0.00. The p-value was less than 0.05, the set level of significance. The study rejected the null hypothesis of unfitness and concluded that the model fit was good. Therefore, the marginal costs associated with production, packaging, labor, and freight were good predictors of performance (Table 4.3.1). 42 Table 4.3.1: Regression model’s ANOVA Model Sum of Squares df Mean Square F Sig. 1 Regression 5.379 5 1.076 17.051 .000b Residual .883 14 .063 Total 6.262 19 a. Dependent Variable: Performance measurement b. Predictors: (Constant), Log Freight cost, Log Local transport, Log Labour cost, Log Production, Log Packaging The analysis of the model coefficients obtained values equal to -1.220, -0.770, -0.032, 0.063, - 0.078, and -1.541 for the log production, log packaging, log local transport, log labor cost, and log freight cost, respectively. Therefore, the equation representing the fitted regression model was of the form; 𝑦 = −1.220 − 0.770𝑥1 − 0.032𝑥2 + 0.063𝑥3 − 0.078𝑥4 − 1.541𝑥5 Where; y was the performance measure. x1, x2, x3, x4, and x5 were log production, log packaging, log local transport, log labor cost, and log freight cost, respectively (Table 4.3.2). Table 4.3.2: Regression model’s Coefficients Model Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta 1 (Constant) -1.220 .995 -1.226 .240 Log Production -.770 .898 -.115 -.857 .406 Log Packaging -.032 .311 -.015 -.102 .920 Log Local transport .063 .177 .047 .356 .727 Log Labor cost -.078 .303 -.032 -.256 .802 Log Freight cost -1.541 .204 -.864 -7.543 .000 a. Dependent Variable: Performance measurement 43 From the regression analysis the study revealed that production, packaging, labor cost, and freight cost had negative coefficients however these were better than -0.05 allowable level of error in the study except freight cost which was -0.864. Hence, the study concluded that freight costs was a major source of inefficiencies/bottlenecks along the chain that negated financial sustainability in floriculture value chain. 4.4 The effects of value chain constraints on performance of floriculture industry in Kenya According to the study, the performance index was expected to decrease by 0.770 units for a unit change in log production, holding other factors constant. Also, the performance index was expected to decrease by 0.032 units for a unit change in log packaging, holding other factors constant. Besides, the performance index was expected to decrease by 0.078 units for a unit change in log labor, holding other factors constant. Furthermore, the performance index was expected to decrease by 1.541 units for a unit change in log freight, holding other factors constant. Among the highlighted sources of inefficiencies/constraints in floriculture value chain, freight cost was the most significant. The t-test for the effect of freight cost produced a test statistic equal to t=-7.543, p=0.000. The p-value was less than 0.05, implying that the test rejected the null hypothesis concluding that the effect of freight cost on performance was statistically significant. Other cost centers, which included production, packaging, and labor, produced t-test statistics equal to t=-0.857 (p=0.406), t=-0.102 (p=0.920), and t=-0.256 (p=0.802), respectively. The three value chain steps produced p-values greater than 0.05, the set level of significance. Hence, the study failed to reject the null hypotheses associated with production, packaging, and labor, and concluded that the effects of production, packaging, and labor on performance were not statistically significant and therefore not constraints. 4.5 The association between marginal cost and performance The model summary produced R and R-squared values equal to 0.927 and 0.859, respectively. The value of R represented the coefficient of correlation between the marginal costs and performance. According to the study, there was a strong joint association between marginal cost and performance, with a correlation coefficient of 0.927. Conversely, the value of R-square presented 44 the coefficient of multiple determination. It implied that the marginal costs explained 85.9% of the variations on performance (Table 4.5.1). Table 4.5.1: Regression Model’s Summary statistics Model R R Square Adjusted R Square Std. Error of the Estimate 1 .927a .859 .809 .25118 a. Predictors: (Constant), Log Freight cost, Log Local transport, Log Labor cost, Log Production, Log Packaging Further, the study investigated the association between individual cost factors and performance using Pearson’s correlation analysis technique. According to Akoglu, (2018), a positive Pearson’s statistic implies a positive association while a negative one implies a negative association. Also, a statistic close to zero (|r|<0.3) implies a weak correlation, while a statistic close to either 1 or -1, (|r|>0.7) implies a strong correlation. The study obtained a test statistic equal to -0.712 with a p- value of p<0.01. The absolute value of the test statistic was greater than 0.7, revealing that there was a strong correlation between marginal cost and performance. Besides, the p-value was less than 0.05, implying the correlation between marginal cost and performance was statistically significant (Table 4.5.2). Table 4.5.2: Correlations results Total cost/stem Profit Total cost/stem Pearson Correlation 1 -.712 Sig. (2-tailed) .000 N 92 92 Profit Pearson Correlation -.712 1 Sig. (2-tailed) .000 N 92 92 **. Correlation is significant at the 0.01 level (2-tailed). 45 4.6 Investigating the effect of value chain strategy on Performance The effect of value chain strategy on performance was investigated using One-Way ANOVA for mean comparison. The ANOVA technique was considered as the most appropriate because there more than two groups of data, which represented the five value chain strategies. The ANOVA produced a computed test statistic equal to F=9.463, p-value=0.00. The p-v