TRADE PROJECT

TITLE: XXXXXXX

PRESENTED BY: XXXXXXX

INDEX NUMBER: XXXXXXX

COURSE CODE: XXXXXXX

PAPER CODE: XXXXXXX

SUBJECT: TRADE PROJECT

INSTITUTION: THE ELDORET NATIONAL

POLYTECHNIC

SUPERVISOR XXXXXXX

PRESENTED TO: THE KENYA NATIONAL EXAMINATION

COUNCIL IN PARTIAL FULFILLMENT FOR THE AWARD OF

XXXXXXX

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SERIES: NOVEMBER, 2021

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 DECLARATION

I declare that this is my original work and has not been submitted by anyone else

CANDIDATE.

NAME: X XXXXXXX

SIGN.............................................. DATE............

This project has been submitted under my approval.

SUPERVISOR

NAME: XXXXXXX

SIGN......................................DATE..................

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 DEDICATION

I dedicate this research project report to entire family for their support and encouragement throughout the

entire journey of this study.

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 ACKNOWLEDGEMENT

This project report would not have been possible without Almighty God for giving me strength and ability

to enroll and complete my diploma work and project. I also thank my supervisor XXXXXXX for
guiding me through the project and whose feedback helped me to keep focused and draft a good project. I

would also like to thank the management and staff of the Human resource for providing necessary materials

and participating in the research. Finally, I would like to thank my entire family for moral and emotional

support to keep me going.

ABSTRACT

Indigenous Chicken(IC) (Gallus domestica) is increasingly becoming an essential

component of diets in urban centers. This increase in demand is accompanied by an increase

in production by smallholder farmers. These farmers rely on the indigenous chicken for food

security, household income, employment and quick funds in emergencies. The profit

associated with the production of indigenous chicken, constitutes part of the contribution of

the Agriculture sector to the Gross Domestic Product (GDP) of Kenya. However, in Uasin

Gishu County there is little information on the amount of profit from production of IC or its

relationship with socioeconomic factors. The objectives of this study was to calculate the

profit of IC in Uasin Gishu and to determine the relationship between socio economic

factors and profit from IC.A total of 130 households were sampled using multi stage

sampling after which data was collected using a pre tested questionnaire in a house hold

survey. These data was then analysed using budgetary analysis and multiple regression in

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STATA 11. The results showed that the profit from IC production in Uasin Gishu was Ksh.

5347/100 birds (1US$= Ksh103.2).Age, education, access to credit, flock size, price and

years in farmer group had a significant relationship with the profit. Therefore it is

recommended to form marketing groups that will engage in contractual agreements with

final buyers of indigenous chicken.

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Key words: Indigenous chicken, food security, profitability, flock size, credit

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 CHAPTER ONE

1.0 Introduction

1.1Background information

There has been an increased consumption of poultry meat in the world (Hazell,

2007).According to Delgado et al. (1999), this increase in consumption is partially

attributed to the recent developments in the production, marketing and consumption of

Indigenous Chicken (IC) (Gallus Domestica).There has been a rise in the demand for IC

meat in urban and peri urban areas, where consumers prefer IC meat to red meats

(Delgado, 1995; Upton, 2000). The per capita consumption of meat has risen from 14.9

Kg in 1991 to 16 Kg in 2007 and is expected to reach 22 Kg in 2050 (FAO, 2009).The

rise in demand for IC meat has been coupled with a switch by farmers to the IC

enterprise from other enterprises (Bongani and Masuku,2013). This is due to low capital

needs of IC, low operating costs and low level of technical knowhow needed to start the

IC enterprise (Okeno et al.,2011;Okitoi et al.,2006).The IC is also a source of income and

food security for many households, which are mainly resource constrained

(Kitalyi,1998;Meseret et al,2011).Therefore rearing of IC is becoming a common feature

in most of the developing countries in the world including Kenya

(Nyaga,2007;FAO,2013).

Agriculture is closely linked to the economic development of Kenya (Gitau,

2009).Kenya gets 25% of its Gross Domestic Product (GDP) from the Agriculture

sector, with 7% of the GDP from Livestock (RoK, 2010a; RoK, 2010b). Agriculture

provides employment opportunities to 70% of Kenyan citizens in the rural areas and 5%

in IC sector (Kimani, 2006). The other important roles of the agriculture sector include

the provision of food security and incomes to households in Kenya(Rok,2010a;Kingori

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et al,2007).Therefore it is on this basis that agriculture has been identified as one sector

that will deliver the 10% growth in economy of Kenya under the vision 2030(Gitau,

2009).

The livestock sector is a vital component of the agriculture sector in Kenya (Okello et

al.,2011; Mailu et al,2012).This sector is made of dairy, beef, poultry, camel, bees and

emerging livestock e.g. fisheries(RoK 2010a). The IC constitutes 76% of all poultry in

Kenya with a population of 31 million birds and an average of 13 birds per household

(Nyaga, 2007).Therefore the contribution of IC to the livestock sector is significant

(RoK, 2010a).

Uasin Gishu County in Kenya is found in the ASALs (Arid and Semi Arid Lands) areas

which are characterised by erratic rainfall (ACF-USA, 2012).This phenomenon leads to

cases of crop failure and exposes the residents to cases of food insecurity (RoK,

2012).Consequently there is a need for an alternative strategy to cope with this condition.

The IC has been noted to be adaptable to harsh conditions with little input requirements.

Secondly, the IC has little space requirements, quick income returns and low diseases

incidence .Thirdly IC can easily be sold off for money during emergencies. Finally IC

provides a rich source of protein, which addresses food insecurity .Consequently the

IC enterprise provides an exit strategy from poverty and leads to improves livelihoods

However, in Uasin Gishu County there is little information on the amount of profit

from production of IC or its relationship with socioeconomic factors. The objectives of

this study were to calculate the profit of IC in Uasin Gishu and to determine the

relationship between socioeconomic factors and profit from IC.

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1.1 Objective of the study

The study general objective and specific objectives were given the following;

1.1.1 General objective

The general purpose is to investigate the influence of pricing strategies and profitability of

selected poultry farm in Uasin Gishu County, Kenya.

1.1.2Specific objective

i. To evaluate the influence of Cost-plus pricing strategies and

profitability of the poultry farm in Uasin Gishu County, Kenya.

ii. To determine the effect of Value-based pricing strategies and

profitability of the poultry farm in Uasin Gishu County, Kenya.

iii. To examine the effect of Price Skimming strategies and profitability

ofthe poultry farm in Uasin Gishu County, Kenya.

iv. To investigate how competition-based pricing strategies affects the

profitability of the poultry farm in Uasin Gishu County, Kenya.

1.3.2 Research Hypothesis

Hypothesis of the researcher are;

 There is no significant effect of Cost-plus pricing strategies on profitability of

the poultry farm in Uasin Gishu County, Kenya.

 Value-based pricing strategy has no significant affect profitability of the poultry

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 farm in Uasin Gishu County, Kenya.

 There is no significant effect of price skimming strategy on profitability of the

poultry farm in Uasin Gishu County, Kenya.

 There is no significant influence of competition based pricing strategy on the

profitability of the poultry farm in Uasin Gishu County, Kenya.

1.2 Significance of the study

The findings from the research would help the poultry farmer to find out what influences the

pricing decisions on their products to enable them get the best pricing policy. This would help

them be at a higher level than their competitors and to also increase their market share in the

finance and investments industry. These policies would not only increase profitability but make

banking favorable to the customers.

Conclusions from the research would greatly help the government to refine its policy framework

guiding poultry farming in order to increase their performance and safeguard fair competition.

This would ensure that policies developed are not only fair but take care of healthy

competition within the banking industry. Therefore, the ministry of agriculture would be able to

use the results and conclusion for better implementation and modification of policing existing.

The report from the findings of the study would act as reference for future studies and also be used to

improve on the studies that was carried out related to this study. The study would be able to bring the

knowledge gap existing and enable the research to gain more context for further research development

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 CHAPTER TWO

2.0 Literature review

Siyaya et al. (2013) analysed the profitability of indigenous chicken in Swaziland, using cost

benefit analysis and Cobb Douglas production function. The results showed that profitability

was affected by feeds cost, market price, stock size, number of birds sold and consumed.

Kumar et al. (2013) analysed profitability of indigenous chicken in Bangladesh using

budgetary analysis. They reported that indigenous chicken were profitable in India and

vaccination significantly affected profitability. Oladeebo and Ojo (2012) assessed the

profitability of poultry production in Nigeria using a budgetary analysis and ordinary Least

squares regression. They found that profit depended on the scale of production and was

significantly affected by veterinary costs.

Olasunkanmi et al. (2009) reported that fully integrated poultry had higher gross margin

compared to non-integrated poultry sector in Nigeria. This study used a number of

profitability indicators namely: Value added- sales ratio, Rate of return on investment and

Rate of return on fixed costs. All of these indicators were found to increase with vertical

integration. Tuffor and Oppong (2012) analysed profit efficiency in broiler production in

Ghana using the Cobb Douglas production function. The results showed that price and

experience increased profitability, while labour and operating as an individual reduced the

profitability. A study by Menge et al. (2005) used a bio economic model to assess

indigenous chicken breeding under different production systems. The results showed that

free range system was most profitable, while the confined system was the least profitable.
Sumy et al. (2010) assessed the productive performance of indigenous chicken in

Bangladesh. The results showed that there was profitability with a Benefit Cost Ratio of

1.60 and 1.61 in two of the study areas. Natukunda et al. (2011) reported that indigenous

chicken were profitable in Uganda. The profitability of indigenous chicken was assessed

using gross margin analysis and ordinary least squares (OLS).The average cost, distance to

the nearest market, access to extension, education level and experience had an effect on

profitability. Zeberga (2010) analysed the profitability of poultry in Ethiopia using gross

margin analysis and reported that there was profitable enterprise. There was a low input

requirement and in the production of the birds. Olasunkanmi (2008) assessed the economic

performance of commercial poultry birds in Nigeria. The results showed that profitability

was determined by combination of enterprises and the scale of operations.

LITERATURE REVIEW

2.1 Introduction

This chapter reveals the information concerning theories and concepts used in the research study.

It also consists of empirical literature that was used to explain the existing gaps. Conceptual

framework was also developed from existing theoretical as well as empirical literature.

2.2 Theoretical Review

There are four main different views on pricing: The economic theory, Marketing view theory,

Efficient-Structure theory and Capital Asset Pricing Theory.

2.2.1 The economic theory

Adam Smith came up with the theory in 1759. It proposes that prices of product and services are

highly dependent on their demand and supply. This theory is important in informing the study in

that setting of prices is influenced by key factors such as competition, quality and development of

new products (Yannelis, 2001). The price has been a function of profit; the theory anchors the

determination of price through equilibrium between demand and supply.

Modern theories on pricing recognize the fact that businesses are not only keen on deriving

profits but also increasing their sales, customer loyalty, share of market and labor relationships.

What the customer chooses highly depend on the status of the individual, tastes and preferences

of age mates, the advertisements being carried out also the displays from various shops (Glautier,

2001). The theory is applicable in a perfect market concept however in competitive market other

factors like quality, values, brand loyalty and customer satisfaction can affect the price. Therefore,

critics claim that due to dynamic of the modern market the old classical economic theory may not

hold where the customer is the key in pricing strategy.

The theory forms the pillar of the study since it addresses the variables which are cost plus

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pricing strategy and competition-based strategy. It explains the interaction between the banks and

its clients in pricing negotiations and therefore it informs the study on the best strategy to be

adopted in pricing bank products.

2.2.2 Marketing mix theory

The theory was formulated by Jerome McCarthy in 1960. He proposed that business institutions

direct their efforts towards customer satisfaction and give more attention to their market

penetration strategies. Most of the researchers have conducted studies mainly focusing on

products, promotion and placement but price have been little

researched and yet most of the banking institutions are facing problems resulting from pricing

strategies.

Market mix theory explains importance of price among the 4Ps’ the products, promotion and

place. This theory covers price as component of market mix but done not link it with

performance. Hence there need to investigate pricing strategies on performance of the

organization. The theory is important in pointing out the importance of pricing as form of

marketing concept. However, it does not link price to profitability but to marketing. Therefore,

there is need to investigate the pricing strategies on firm profitability.

2.2.3 Efficient-Structure theory

Demsetz came up with this theory in 1973. He argued that most business entities put prices of

goods and services based on perceived values attached to them. This theory attempts to offer

explanation on the determinants of profits of banking institutions. Demsetz (1973) identified that

largerprofits of banks were not as result of collusive behavior but it is because of high efficiency

level that leads to higher market share influencing the profit share of the organization. In most

cases, profitability of commercial institution is not only determined by concentration of market

but also by the value of the services offered by the clients (Grygorenko, 2009). The theory is

important in informing the study on value-based pricing strategy. The customers tend to compare

prices of different services and their value. If the services or product has higher value, the prices

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are also expected to be higher.

Efficient structure theory backs up value based pricing strategy in that when the product’s or

service’s value increases, the price charged on it also increases.This theory enables the

organization to structure there pricing model based on the value of the product to the customers.

2.2.4 Capital Asset Pricing Theory

The theory was developed by William Sharpe in 1964 and its main proponents include DeBont

and Thaler (1987). The basic principle in this theory is that risks can be either systematic or

unsystematic. The theory further points out those systematic risks are caused by external factors

beyond organization’s control. These factors include government regulations through policies,

inflation and political environment. On the other hand, the unsystematic risks are caused by

internal factors which can be within organization control and these factors include: quality

management, public relations and entry of new competitors.

The theory is applicable as means of determining pricing based on external factors for systematic

risk and internal factors for unsystematic risk. This enables the organization to determine market

force before setting their price. Some concepts are adopted in competition based pricing, value

based pricing, skimming pricing and cost plus pricing. However, the theory is not able to

determine the impact of these pricing strategies on the profitability of the organization.

2.3 Pricing strategies

The study will focus on four pricing strategies which will include: cost-plus pricing, value-based

pricing, price skimming and competition based pricing.

2.3.1 Cost-plus pricing strategies and profitability

Ferrell & Hartine (2008) underline the importance of considering costs seriously in setting

prices. Most firms get losses because of their failure to compensate their direct and indirect

production costs. The measurement of profits is usually based on the difference between the

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production costs and sales of the products or services. When a

product is scarce, it is considered an opportunity by most firms especially for service firms like

airlines which have virtual inventory. Managers should also seek to understand cost behavior at

different levels of production and as a function of accumulated production.

Cost based pricing is one of the commonly applied strategies when coming up with prices to

charge a product. When all costs of producing a product or service are taken into consideration

before pricing, an organization can easily estimate the profits it can get. The only best strategy of

calculating profits is by analyzing all the costs incurred before coming up with the final prices

(Ferrell & Hartine, 2008). For example, in commercial banks, withdrawals using ATM attract

charges depending on transaction.

Nagle & Holden (1995) argue that a key step in pricing is to identify all the relevant costs when

setting pricing and relevant costs are those that determine the profit impact of the pricing

decision. Kibera (1988) notes that many businessmen resort to the simple formula to arrive at

their price which eliminates judgment on the part of the price setter. Firms that use cost plus

pricing strategies set prices by totaling their costs and adding a reasonable margin of profit. This

approach however doesn’t consider whether the market will pay the price or not.

2.3.2 Value-based pricing strategies and profitability

Hinterhuber (2008) defines value based pricing method as a mechanism centered on the value of a

product or service to clients. Prices can be varied from one customer to another depending on the

value that the product or the service gives to a customer. The managers should first analyze the

cost incurred in producing a competitive product or a service and

also the views of customers on how they want the product or service. Then find out the things that

make a product or service distinct from the other competing products and services. All these are

put into consideration before coming up with a price to charge. This is evident in most

commercial banks where such services as priority banking and advantage banking are offered to

certain category of customers.

2.3.3 Price Skimming strategy and profitability

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The Harvard Business Review (2008) pointed out that most companies derive profits of new

developed products because of their costs tends to be high due to the research and development

devoted in those products or services. Most of these products slowly penetrate the market through

vigorous advertisements, promotional activities and personal selling hence making their prices

high. It is also applicable effectively when a company has a very strong patent position or the

product is difficult to imitate (Blinder, Elie & David, 2008).

2.3.4 Competition-based pricing and profitability

Porter (1998) indicates that a product is distinctive only until competition arrives, a situation

which is inevitable. There is high competition when the existing firm is making a lot of profits

and the business being undertaken is easy to start. This could be in the form of directly similar

products, available substitutes, and unrelated products seeking the same resource. Commercial

banks should analyze the prices and the quality of similar products and services of the competing

firms. This information is used by the firm to come up with prices of their goods. Some of the

competitive strategies commonly used include: low interest rate for loan products, increased loan

repayment periods and prompt customer care services.

Firms must understand customer perceptions of the organization’s and the competitor’s offerings

in order to develop good pricing decisions. For similar or substitute products, a competitor may

adjust their prices and then other firms decide what price adjustments if any are necessary to

retain their customers.

Sometimes competitive market structure might affect the price flexibility prompting to rigidity of

prices. This reduces the firms monitoring on price deviations. Another factor that might influence

the flexibility of prices is the industry structure which might reduce price flexibility. The product

life cycle of a firms offering in relation to pricing should also be well understood because

different levels of competition will be experienced at different stages of the cycle. Pricing strategy

sets the pricing change standards and hence affecting profitability of the organization (Plunkett,

Fattner & Allen, 2008).

Competition based strategies are presented based on two premises by Nagle, (1987). One is based

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on buyer’s reactions while the other on competitor reactions and as a result, several strategies is

given. The projection of a differentiated product or service image, matching of competitor

pricing, maintenance of a well-managed level of competition to avoid price wars with competitors

and undercutting competitor pricing are given as approaches to competitor based pricing

strategies

2.4 Empirical review

Various researches on what determines the profits of a firm have been conducted both locally and

globally. In global arena, Athanasoglou and Delis (2005) investigated the

effects of industry-based, bank-based and macro-economic elements of commercial institutions

profitability and established that bank-based elements apart from size, influence profitability of

the banks. Additionally, Roman and Tomuleasa (2013) evaluated the effect that micro and

macro factors have on the level of profitability of firms the new European Union society and

recognized that specific factors in banks link inflation and GDP growth, capital adequacy and

income affected profitability of commercial bank. Therefore, most research incorporates macro-

economic and specific factors.

Sufian (2011) did a research on how the Korea Banks performed basing on their profitability in

the year 1992-2003 and found out that the banking institutions experienced high profits when

assets liquidity was low and further inflation as a role in returns of the banks. On the other hand,

risks on credit and costs negatively affected the profits of the financial institutions. Additionally,

it is revealed that averagely the banking industry in Korea had more returns during pre-crisis

seasons as compared relatively post- crisis periods.

Aremu (2013) investigated factors determining profits in the banking sector in Nigeria. The

findings of the study revealed that efficiency cost had little impact on bank profits. Nevertheless,

adequacy of capital and loan risks statistically affected the banks’ profitability during peak

seasons. On the same note bank liquidity had insignificant impact on the banks’ profits.

Khaniwale (2015) further did a study on clients buying behaviors and elements affecting it using

theoretical approach. He found close link between clients purchasing behavior and banks

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profitability. The research proved significant relationship between buyer’s behaviors and factors

affecting them both internally and externally.

Locally Oyuga (2010) directed his study to alcohol manufacturers in Kenya and analysed how the

formulated their pricing strategies. He found out that the demand of alcohol, the cost incurred in

producing the product, competitors’ prices and the knowledge that the buyers have about the

product influenced pricing of alcohol. Nakitare (2013) studied determinants of pricing strategy

among fiber operators in Kenya. The study revealed that cost, value, competition, the consumer

and level of demand affect pricing of fiber services.

Ongore and Kusa (2014) studied the moderating effect of the management structure on how banks

performed and established that moderating impact of management identity on bank’s performance

in financial perspective was not significant but the study focused more on the influence of

ownership structure. Tsuma and Gichinga (2016) also analyzed the factors that influence the

bank’s performance in financial perspective with focus on National Bank of Kenya and found that

capital adequacy, credit risk, inflation and interest rates influenced financial performance but the

study focused on a single commercial bank, which may not be representative of the whole

Kenyan banking industry.

Njenga (2016) investigated the impact of pricing mechanisms on the profits of food industries in

Kenya. The study used interview schedule in data collection. The results indicated close linkage

between prices and profits of the hotels. Jerono (2008) did a study on how a customer might

be affected by relationship marketing. She established that relationship marketing positively

influences customer retention.

Kiprotich (2012) did a study on influence of 4ps that is product, price, place and promotion in

Nakuru town. The research employed the research design called questionnaire design. The

undertakings of the sale of oil are significantly determined by the 4ps. Each of the elements

however carries a unique contribution to how the sales came out in the stations.

A study by Toni, Milan, Saciloto, & Larentis (2017) investigated pricing strategies on corporate

profitability. Price policy is identified as the important in decision making since it affects

company competitiveness in the market as well as corporate profitability. However, price has not

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been considered by researcher representing 2% of entire research papers as important component

in the organization. Metal-mechanic companies were investigated in Brazil where 150 companies

were assessed on cost based pricing, competition based pricing and value based pricing strategies.

The finding revealed that companies that used value based price strategy had higher profit at high

price level than low price level. The existing pricing policies had significant influence on the

profitability of the organization. Therefore, the manager should not overlook on the price

strategies while developing their pricing.

Guerreiro, Comachione, & Kassai (2012) determined the contribution of cost plus pricing to

organization marginal gain. The study was based on the assumption that manufacturing

companies utilize contribution margin per hour pricing method in determining the organization

profitability. In order to produce desirable results, the study used empirical evidence on pricing,

action research where a case of manufacturing company with complex external competitive

environment as well as critical review literature. The results indicated that pricing model that

utilized contribution margin per hour had better earnings globally as compared with utilization of

contribution margin in percentage terms.

Thi, Khanh, Thuy, & Thuy (2018) did a research on factors that influence the cost-based pricing

in Vietnam feed mills companies. The data collected from a survey of 199 feed mills in Vietnam

as at 2017. Accountants and administrators were given questionnaires where the following factors

were considered that is market share, information cost, and level of influence of selling price,

dissimilar expenses and capacity. Regression and analysis of variance were used in establishing

relationship of the variables. The findings indicated that cost of information had a strong

influence on cost based pricing method. Scales used in measuring quality of feed also affect cost

based pricing while the lowest is the marketing share as well as selling price. The study

recommended to adoption of cost management accounting system that can provide cost

information for pricing decision. It also proposed the managers should be able to make viable

price decision that would increase profits as well as market share.

Netseva-Porcheva (2017) assessed value based pricing as means of success factor in the

competitive struggle. Market oriented has aimed at creating values that would increase the

market share but not to satisfy customers. However, value based pricing address the issue of price

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based on the value of the product to the consumer. This would offer a competitive edge over other

organization. The study based on empirical review the value of the product to the customer is

associated with the competitiveness of the company.

There are two theoretical approaches to value based pricing. These are the economic value model

and customer value model.

Nyaga & Muema (2017) investigated the effect of skimming pricing strategy on the profitability

of insurance firms in Kenya. The variables were examined using descriptive research design

which focused on 45 insurance companies operating in Kenya by the end of 2012. The study also

reviewed data for the past 5 years. The target population was 900 sales employees where a sample

of 90 respondents. Two employees were purposefully selected per insurance company.

Questionnaires were deployed and analyzed using both inferential and descriptive statistics. The

results from correlation and regression model used indicated a positive significant association

between skimming pricing strategies used and the profitability of the organization.

Muzammil (2014) investigated market skimming in relation to technological and innovative

products. Companies that produce innovative, quality and reputable products are able to adopt

market skimming pricing strategies. The technology adopted must be acceptable by the customer

and have high market value. Therefore, the study aimed at identifying factors associated with

market skimming pricing. The target population was the users of personal computers where

technology, innovation, brand image and product quality were considered in association with

market skimming pricing. A survey was conducted using questionnaires as the data collection

instrument. The findings revealed that technology, innovation, brand image and product quality

had positive significant effect on market skimming pricings. The variables explained 27% of the

market skimming pricings.

Gurus (2002) set out to establish the factors determining bank’s profitability in Malaysia. The

study utilized 17 commercial banks that were in operation between the years 1986 to 1995. The

factors were classified into two namely micro and macro. Factors that affect an organization from

outside included inflation rates, firm’s capacity and firm ownership while internal factors were,

the structure of the firm and the management. The factors that affect profitability included internal

availability of enough resources, management style and quality of services. Results of the study

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showed that internal factors affected profitability of the banks positively whereas external factors

had negative effects on the profitability of commercial banks.

Chantapong (2005) did a study on the operations of local and international banks in Thailand in

the year 1995-2000. The findings revealed that majority of the commercial institutions in the

Country had decreased provision of credit facilities due to economic crises. After economic crisis

period, the banks’ profitability started improving. The findings further indicated that international

banks’ profitability was slightly higher than that of the local banks.

Kosmidou, Tanna , & Pasiouras (2006) conducted research in the UK on the effects of bank’s

macro-economic factors on profitability of commercial institutions using return on average assets

(ROAA) technique. The study used a sample of 224 respondents. The macro-economic factors

studied included capital size, cost of assets, loan expenses and firm size. The findings of the study

indicated significant relationship between capital size and profitability of the commercial entities.

The other macro-economic factors such as firm size, cost of assets and loan expenses was found

to affect bank’s profitability negatively.

Naceur (2008), in his study investigate the effects of bank features and capital structure on

banks’ profits and net interest margins between 1980 and 2000 in Tunisia. The findings revealed

that financial institutions with huge capital base tend to acquire mores profits and net interest

margins. Furthermore, the results found out that privately owned financial institutions had more

profits that government owned banks.

Dietrich & Wanzenried (2009) carried out a study on the profitability of the commercial

institutions in Sweden. The research used 453 banks as a sample and was carried out between the

year 1999 and 2006. The study categorized factors influencing banks’ profitability into: bank

internal factors, industrial factors and macro-economic factors. In this case, the results of the

study demonstrated disparities of Swiss banks’ profits and the factors mentioned above. The

findings further revealed that foreign owned banks had more profits than the locally owned banks.

2.5 Summary of Literature Review and Research Gaps

Several studies that have been conducted focused on product development, promotion, and

32
 distribution. As indicated in literature above, most of these studies concentrated on industries

dealing with tangible products with few focusing on commercial banks. Few studies have been

done in Kenya focusing on pricing strategies and profitability of commercial banks despite of

the role played by pricing mechanisms on profitability of the banks. Few studies have been

done on pricing strategy and profitability, especially in Kericho County.

2.0Materials and methods

2.1 Study area

Uasin Gishu District, found within Uasin Gishu County, lies between Latitude 1 0 35′,

South and Longitude 37010′ East and 38030′ East. The District covers 8,009 km 2 with an

altitude of 600m – 1,900m above sea level. The district has rainfall variability with an

annual range of 800 – 1,200mm per year in the hilly areas and less than 500mm per year

in the other regions. The annual mean temperature range in the District is 20.2 0C –

24.60C (RoK, 2005).The study area has a comparative advantage in the production of IC

since it is found in an ASAL area. The ASAL area is characterised by erratic rainfall and

crop failures (ACF-USA, 2012).The main economic activities in Uasin Gishu district

include dairy farming, ranching, mixed crop production. The production of crops is

mainly under rain fed systems with patches of irrigation in some areas (RoK,

2005).Approximately (60%) of the population lives below the poverty line (ACF-USA,

2012).

2.2Data and sampling design

The data collection was done by trained enumerators from Uasin Gishu County between

April and June, 2013. This was aimed to overcome the challenges in language and also

due to their familiarity with the locality. The primary data was obtained from producers

33
 of IC in Uasin Gishu County covered information for the period April 2012 to April

2013. The pretested structured questionnaires were used to obtain information on

socioeconomic characteristics of producers involved in the IC production. Secondary

data was also obtained from the Ministry of Agriculture (MoA) and the Ministry of

Livestock and Fisheries Development (MoLFD) regarding IC production and marketing

in Uasin Gishu County in particular. The secondary data provided was also used in

description of the study area and for calculating the sample size.

A Focus Group Discussion was conducted to supplement information from the

household level. The focus group was made of selected farmers from farmer groups

found in Uasin Gishu County. These farmers were involved in indigenous chicken

production and marketing.

A multistage sampling design was used in the study. This was comprised of three stages.

First, a purposive random sampling was used to select Uasin Gishu District from among

IC producing areas in Kenya. Secondly, random sampling was used to select three

regions (divisions) from other divisions in Uasin Gishu District. These divisions were

Kee, Kaiti, and Wote in Uasin Gishu from where households were selected using random

sampling technique. A total of 130 households were sampled from Kee (18), Kaiti

(62) and Wote (50) based on the weighted average method.

2.3Data analysis

2.31 Gross margin analysis

Gross Margin Analysis was used to calculate profitability of IC to producers in Uasin

Gishu. According to Odemenem and Otanwa (2011) gross margin analysis is preferred

because it allows for easy enterprise selection, establishment of net farm income and is

34
useful in subsistence enterprises with small fixed income. The gross margin analysis has

been used in studies (Kumar et al., 2013; Oladeebo and Ojo, 2012, Olansunkanmi et al.,

2009; Menge et al., 2005) to assess the profitability of indigenous chicken.

The first step was to calculate the total the variable costs (TVC) involved in production

of IC. The second step was to determine the value of the housing and equipments.

Consequently depreciation was calculated at 10% of the respective values to obtain the

Total fixed costs (TFC). The total variable costs (TVC) and total fixed costs (TFC) were

then added to obtain the total costs (TC).The third step involved the calculation of total

revenue (TR) from the sales of eggs and IC. Subsequently, the total variable costs (TVC)

was deducted from the total revenue (TR) to obtain the Gross Margin (GM).Finally the

profit was calculated by deducting the total fixed cost from the Gross Margin(GM). The

gross margin analysis was done for a flock size of 100 birds. The formula that was used

for calculating the gross margin was based on Barnard and Nix (1979) Gross margin

analysis for crops and livestock. The following were the steps that were followed in

calculating the profit of IC:

Total Cost (TC) =

TVC + TFC Gross

Margin (GM) = TR-

TVC π = GM – TFC

Where: -π =Profit

Total fixed cost (TFC) =Summation of all

fixed costs Total Variable Cost (TVC) =

Summation of all variable costs

35
 Total amount realized (TR) = Total amount from the IC produce

2.31.1 Model specification

The data collected from the 130 households was subjected to series of statistical tests.

These included tests to detect auto correlation, multicollinearity and heteroscedasicity.

The Variance inflation Factor (VIF) was used to detect multicollinearity, while the

Durbin Watson test was used in detecting heteroscedasticity. The data was confirmed to

have none of the problems that were likely to cause inconsistent estimates or wrong

coefficient signs. The choice of the exponential log equation was consequently based on

the statistical significance, a priori expectation of the coefficient signs and economic

theory.

The effect of the household’s socioeconomic characteristics on the profit from

production of IC was analysed using multiple regression technique. This was done

using STATA software for analysis. The functional form of the model that was used in

this study was expressed as: LnY=f(X1, X2….X10) + ei.

According to Green (2012) a linear regression model consists of a deterministic part and

a disturbance term, which accounts for the factors that cannot be accounted by the

independent variables. The model which expressed the hypothesized relationship

between the dependent variable and the independent variables was expressed as follows:

Ln Y=β0+β1X1+ β2X2+ β3X3+ β4X4+ β5X5+ β6X6+ β7X7+ β8X8+ β9X9+

β10X10+ei

Where Ln Y represented the natural logarithm of profit and (X1…X10) represented the

other independent variables as shown in the Table 7.The β 1…β10 represented the

coefficients of (X1…X10) respectively, while β0 represent the intercept and ei

36
represented the stochastic error term. The coefficients represent the percentage

Y

change in Y from an absolute change in X. This can be  100 .

represented as

X

37
 CHAPTER THREE

3.0Results and Discussions

3.1Households socio economic characteristics

The results of the socioeconomic characteristics in the study area are shown in Table

1.The table shows the variable, mean of the variable, standard deviation, minimum and

maximum value. The household heads had a mean age of 44 years as shown in Table

1.There were (68%) of these household heads that were male and 46% of them had a

primary level of education. However, 24% of them had secondary level of education and

9% had a tertiary level of education. It is notable that 21% of the household heads were

illiterate.

The average family size of the sampled households was 6 members (Table 1). The

smallest household had 2 members while the largest had 11. The average land size

owned by these households was 4 acres. The smallest land size owned was 0.1 acres

while the largest was 8 acres. As shown in Table 1 the average amount of credit accessed

per household for IC production was Ksh 4,777.The maximum credit accessed by

household head was Ksh 70,000 while the some households did not borrow any cash.

Out of the sampled households 32% had access to credit while 68% did not have access

to credit (Table 2).

The results in Table 2 showed that 31% of the households had access to IC market

information. Majority of the households (69%) did not have access to IC market

information. The average distance to the market from the households was 6 Km (Table

1). The minimum distance to the markets from the households was 0.5 Km. In contrast

the maximum distances to the market were 15 Km. The distance of the household to all

38
weather roads on the other hand was 3 Km while the maximum distance was 11Km.

3.2 Profitability of indigenous chicken

The result in Table 3 shows the main components of the annual IC production costs for

100 birds. The Total cost was Ksh 109, 283, which was constituted of a Total variable

costs of Ksh 106,175 and a Total fixed cost were Ksh 3,108(Table 3). Therefore from

the results shown in Table 3 the main components of the variable costs were Litter cost

(37%), feeds cost (32%), medication costs (15%) and cost of getting a day old chick (9%)

respectively. On the other hand the main components of the fixed costs were

depreciation on housing (2%) and depreciation on equipments (1%). The housing cost

and equipment cost were used to estimate fixed cost and were depreciated at 10% on

annual basis. The results in Table 7 show that most production costs had a statistically

significant and negative correlation with the profit from IC. Table 4 shows, the Gross

profit for a flock size of 100 birds was Ksh 8,455.This was the difference between a

Gross income of Ksh 114,630 and Total variable cost of 106,175 shown in Table 3.

The rearing of indigenous chicken in Uasin Gishu was found to be profitable as shown in

Table 4. These results showed a profit of Ksh 53 per bird. The gross margin of Ksh

8,455 shown in Table 4, gave a gross profit of Ksh 85 per bird. These results unlike

those of Sumy et al. (2010) did not apply a Benefit Cost Ratio (BCR) but similar to

it showed that rearing of IC was a profitable enterprise; however the same approach used

by Sumy et al. (2010) in analysing profitability of local chicken was adopted.

3.2.2 Effect of Socioeconomic characteristics on profitability

The age of the household head was found to have a significant effect on profitability (p<

0.05).As shown in Table 6, an increase in the age of household head by one year l leads

39
to an increase in profit by 17% (Table 6).However this interpretation is made

considering the law of diminishing returns after the mid-forties (Luong and Hѐbert,

2009). This result agree with those of a study by Olumyowa and Abiodan(2011) which

showed that experience had a significant and positive effect on the profitability of

broilers. Age is also used as a proxy for experience in most studies (Luong and Hѐbert,

2009).

The Education level of the household head had a significant effect on the profitability of

IC (p< 0.05).Those house hold heads that were literate increased profit by 55% (Table

6).The increase in profit may have been due to the ability of educated house hold heads

to interpret and use cost effective production techniques. Consequently there was

reduced production costs and increased their profit levels. This result agree with those of

Natukunda et al. (2011) that showed education had a positive effect on profitability of IC

in Kamuli, Uganda.

Access to credit by households had a positive and significant effect on the profit from IC

(p<0.05).The households that had access to profit increased their profits by 39% (Table

6).This increase in profit may have been due to ability to buy and use efficient inputs that

reduced on wastages and production costs. This result agrees with those of Ashaoulu et

al. (2011) that showed credit access resulted in higher productivity and profits for the

farmers in Nigeria.

The flock size had a positive and significant effect on the profitability of IC (p<

0.05) .This indicated that an increase in flock size by one IC caused an increase in profit

by 50% (Table 6).The increase in flock size may have led to an increase in profit due to

economies of scale. A study Olasunkanmi (2008) showed that commercial poultry

production in Nigeria that increasing the flock size increased the profit.

40
 The market price had a significant and positive effect on the profit of IC (p< 0.05).This

showed that an increase in the market price of IC by Ksh.1 lead to an increase in profit

by 140% (Table 6).This may have been due to the fact that the market price was high

compared to the unit cost of producing an IC. Therefore this resulted in a surplus which

was the profit. This result agrees with those of Bongani and Masuku (2013) that showed

a positive effect of market price on profitability of IC in Swaziland.

The number of years that a producer belonged to a farmer group had a positive and

significant effect on the profitability of IC (p<0.10).The results showed that increasing

the number of years that a producer had belonged to a group by one year lead to an

increase in profitability by 27% (Table 6).This increase may have been due to collective

marketing by groups that lead to economies of scale which reduced some production

costs. This result agrees with those of Tuffor and Oppong (2012) which showed that

farmers who operated poultry business alone had less profit efficiency compared to those

that operated as partnerships.

CHAPTER

4.0 Conclusion and Recommendations

The production and marketing of indigenous chicken provides food security,

employment and income to households in Uasin Gishu County. However the income

from the indigenous chicken production and marketing has not been quantified .In

addition the socio economic characteristics that affect it were unknown. The results of

the study showed that the household heads had an average of 44 years, 68% were

male and 46% had primary

41
education. These households had an average of 6 members, owned 4 acres, were located

6 Kms from the nearest market and received a credit of Ksh.70, 000.There were only

31% of the household that had access to market information.

The production of IC in Uasin Gishu was profitable to the households. The main

component of the production cost were litter cost (37%), feed cost (32%), medication

cost (15%), housing cost (2%) and equipment cost respectively. These costs had a

significant effect on the profit and were not sustainable at the current levels. The Age,

education, access to credit, flock size, price of IC and years of belonging to a farmer

group had a positive and significant effect on profit. Therefore an increase in each of

these independent variables leads to an increase in profit. These also mean that the

current levels of these independent variables are favorable to the profitability. Therefore

it is recommended that, in order to enhance this profit, the use of collective marketing

should be adopted. The collective marketing should be done through farmer groups

which will assemble IC from the producers and channel it to the high value markets

through contractual agreements. These agreements will enhance profit of farmers and

ensure that the producer will be insulated from problems associated with untimely

production, credit access, price fluctuations and inconsistent supply.

Acknowledgement

The authors appreciate the funding provided by the Kenya Agricultural Productivity and

Agribusiness Project (KAPAP).In addition we would like to acknowledge the technical

support from the District Livestock Production Officer (DLPO) and staff in Uasin Gishu,

Director of Veterinary Services (DVS) in Nairobi. Finally we appreciate the technical

42
input from the ICVC team, School of Agriculture and Enterprise Development at

Kenyatta University and enumerators at Uasin Gishu.

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Appendix

Table 1: Socioeconomic characteristics of households

Variable Mean Std. Deviation Minimum Maximum

Age of Household head 43.89 13.77 21.00 86

(years)

Education of household head 0.80 0.40 0 1

(0=Illiterate 1=literate)

Family size (Number) 6.07 2.17 2 11

Land size (acres) 4.00 2.22 0.1 8

Total indigenous chicken 13.03 9.15 0 50

owned

(Number)

Distance to main road (Kms) 3.24 2.33 0.30 11

Distance to market (Kms) 6.45 3.43 0.50 15

Cash borrowed for IC 4,776.54 6,828.05 0.00 70,000

production

(Ksh)

Source: Survey Data (2013)

50
Table 2: Socioeconomic characteristics of households

Variable Percentage of

households

Sex of Household heads

Male 68%

Female 32%

Age of Household heads(years)

22-31 12%

32-41 26%

42-51 33%

52-61 22%

>=62 7%

Access to market information

Yes 31%

No 69%

Source: Survey Data (2013)

51
Table 3: Production costs (Flock size of 100 birds)

Ite Gross Cost Depreciation Total Cost

m (Ksh) (10%) (Ksh)

Day old chick 10000 -

Litter cost 40000

Feed cost 35053 -

Labour cost 4430 -

Medication cost 16692 -

Total variable cost 106175 - 106175

Housing cost 25154 2515

Equipment cost 5931 593

Total Fixed Cost 3108 109283

Source: Survey Data

(2013)

Table 4: Profit calculations

Item Total

52
 (Ksh)

Selling eggs 24000

Selling chicken 90630

Gross income 114630

Less Total variable costs 106175

(Table 3)

Gross margin 8455

Less Total fixed cost (Table 3108

3)

Profit 5347

Source: Survey Data (2013)

53
Table 5: The independent variables used in the

regression

Variable Expected Units

sign

Profit

Age of household head +/- Years

Sex of household head +/- 0=female 1=Male

Education level of household head + 0=Illiterate 1=Literate

Access to credit + Kenya Shillings

Distance to nearest market - Kilometer

Flock size + Number

Market price + Kenya Shillings

Years in group + Years

Distance to main road - Kilometer

Other livestock units +/- Number

Table 6: Effect of socioeconomic characteristics

54
on profit

Variable Coefficient Std. Err. T P>t

Age of household head 0.017449 0.008473 2.06 0.042**

Sex of household head 0.225465 0.200278 1.13 0.263

Education level of household head 0.551268 0.24785 2.22 0.029**

Access to credit 0.22414 0.106844 2.1 0.039**

Distance to nearest market -0.01173 0.027644 -0.42 0.672

Flock size 0.50009 0.246059 2.03 0.045**

Market price 1.403104 0.669817 2.09 0.039**

Years in group 0.266784 0.154655 1.73 0.088*

Distance to main road -0.00766 0.048881 -0.16 0.876

Other livestock units -0.00181 0.001256 -1.44 0.154

Constant -0.46465 3.97203 -0.12 0.907

Source: Survey Data (2013) * significant at 10%, ** significant at 5%, *** significant at

1%

Table 7: Partial and semi partial correlation of profit with variables

55
 Partial Semi Partial Semi Significan

partial partial ce
Variable Corr. Corr.2

Corr. Corr.2 Value

Breeding - -0.0985 0.031 0.0097 0.0618*

stock 0.177 6

Equipment -0.19 -0.1055 0.036 0.0111 0.0458**

cost 1

Feed cost - -0.1175 0.044 0.0138 0.0264**

0.210 4

Labor cost - -0.0584 0.011 0.0034 0.266

0.106 3

Losses death - -0.0995 0.032 0.0099 0.0593*

0.179 3

Housing cost 0.207 0.1154 0.042 0.0133 0.0292**

1 9

Medication - -0.1575 0.077 0.0248 0.0032**

cost 0.277

56
 6

Total cost 0.043 0.0237 0.001 0.0006 0.6513

4 9

Source: Survey Data (2013)*significant at 10%, **significant at 5%, *** significant at 1%

57
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