What are the Factors Affecting Business Environment in Nigeria?

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By: Site Engineer, Staff

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In this article, we shall examine the nature of the business environment, its importance, and implications for the efficiency and effectiveness of the business organization.

The Nature of the Business Environment

The business environment is a complex of interacting elements or forces ‘that are external’ but are currently or potentially of significant consequence to the future performance of the business enterprise.

The components of the business environment are sometimes described as uncontrollable variable. This simply underlines the fact that the individual firm is usually not in a position to make any significant impact on them in the short run. It further implies that every manager is often forced to take the environment as given, in the sense that he cannot significantly alter it.

It is necessary to modify these statements in two ways. First, an individual firm can, although very rarely, affect the direction, amount, and timing of changes in some of its environment.

Finally, a company can temporarily reduce competition by acquiring patent rights for its new invention.

The second point is that the uncontrollability of the environment does not mean that all or some firms acting together, cannot significantly affect their environment, particularly in the long-run. In the last two decades, cinema houses, and producers of electronic gadgets have significantly altered the ways in which Africans spend their leisure time. Likewise, the successes of many indigenous entrepreneurs have enticed many others into the business. The entry of these new firms has implications for the business organizations whose successes encouraged the new entrepreneurs to venture into the business.

The Importance of the Business Environment

Geographers are concerned with the study of man and his environment. They recognize that man’s ways of life are significantly influenced by his environment. Similarly, biologists in their study of ecology are concerned with the symbiotic relationship between the living organism and its habitat. They recognize that living organisms are constantly reacting and adapting to their environments. In fact, all organisms and organizations that are capable of adaptation tend to adjust to changes in their environments in order to survive.

The business organization operates in an environment that is of great importance to it in a number of ways.

First, the environment is the sources of the input which the organization processes into various forms of products and service. For instance, raw materials, technology, and human resources are obtained from the environment. Consequently, certain environmental changes could affect the quantity, quality, prices, and timing of these and other input and, there, affect the organization’s ability to meet the needs of its customers, shareholders, creditors, etc.

Secondly, the outputs of the business organizations are used in the environment. The business organization’s existence is justified and sustained by the ability and willingness of customers or clients to buy its output. An environmental development such as a change in consumer taste or income could enhance or jeopardize consumers’ willingness or ability to continue to patronize the company. Either way, the firm’s chances of survival and of meeting its various objectives are altered.

Thirdly the environment is important is the fact that every business organization, to a large extent, is constrained by the demands made upon it by external groups and bodies. For example, the government expects business to obey its laws and to pay its taxes as and when due. Both the government and the community require the company to behave in a socially responsible manner, that is, in a manner that protects and promotes the welfare of society. Managers are concerned about meeting the dividends expectations of shareholders while respecting the views and demands of the trade union. Customers expect business to provide them with safe and good quality products, as well as adequate information to enable them to use the products. Since the ability of the business establishment to respond to these demands could make the difference between success and failure, this component of the environment cannot be ignored.

Finally, the generally well-known fact that socio-cultural changes or political developments can alter the attitude of society to private enterprise further illustrates the importance of the business environment. Fundamental changes in the economic, political, social, technological and other environmental factors have important implications for the business organization. If the changes are favorable and are capitalized upon, the business may prosper and grow; but unfavorable changes may threaten the survival of the business.

Environmental Analysis

The totality about the importance of the environment so far suggests that business managers need to give attention to a study of the environment if their managerial actions are to be effective. Environmental analysis is the term used to describe the process whereby managers deliberately observe, measure and predict the environment, so as to be able to plan ahead.

This process involves six major stages:

  1. A deliberate attempt to measure these factors or to determine their current state or condition.
  2. The selection of a preferred course of action that will enable the organization to tap the profitable and accessible opportunities or ward off anticipated threats.
  3. A prediction of the changes to be expected in these factors in the foreseeable future.
  4. An attempt to categorize these actual and anticipated developments on the basis of whether they are opportunities, threats or irrelevant (unimportant).
  5. An identification of the key environmental factors that affect or are likely to affect the operations and performance of the organization.
  6. Identification and evaluation of alternative ways of coping with the anticipated changes in these environmental factors.

It is clear here that although the environment lies outside the control of the firm, it should not be ignored if the organization is to survive and grow. Rather, it must be scanned, measured and predicted so that the manager can juggle the firm’s controllable variables (product, personnel, technology, price, distribution methods, and channels and promotion, etc) to constantly adapt or adjust to it.

Environmental analysis is not an easy task. Its complexity is compounded by the fact that the environment is constantly changing in addition to the fact that it has many components.

The components of the environment are:

A Simplified Model of the Environment

For the purpose of analysis, it is convenient to identify the major components of the environment. It consists of two broad levels, the operating environment, and the macro-environment.

(a)        The Operating Environment

The operating environment, sometimes referred to as the micro or task environment, consists of various interest groups that make demands on the firm and with which the firm deals. The main elements of this environment are trade unions, competitors, government, shareholders, distributors, consumers, suppliers, creditors and the community in which the enterprise operates. The actions of these groups have a direct impact on the operations of the firm.

Trade union always demand better conditions of service for its members while competitors expect the firm to avoid predatory or unhealthy competition that may not be in the interest of the competing firms. For example, competitors would most probably frown at a price war, and at comparative advertising, that paints other companies or their products in a bad light.

Distributors often require the firm to provide them with some form of support in their efforts to sell the company’s products. Cooperative vertical advertising, high price margins, and training of the distributor’s sales force are examples of these support services.

Consumers are forever demanding fair treatment in the form of safe products, truthful advertising, and fair prices from producers. Shareholders expect a stable and timely return on their investments, while the community and government expect the company to respect the laws and regulations, pay taxes promptly and do honest business.

Some of the demands made by these different interest groups are sometimes conflicting. For example, the demand of shareholders for higher profits may conflict with consumers demand for a fair price, or the community’s expectation of corporate participation in social programmes or philanthropy. The major challenge facing management in relating to these groups, therefore, is the need either to reconcile conflicting demands or to strike a balance between them.

(b)       The Macro-Environment

The macro or general environment is less unique to the firm in the sense that it is shared by many industries. The major components of this environment are economic, socio-cultural, political and legal factors. The physical environments, as well as technology, are also included here.

Apart from the importance of specific changes or developments in these variables, the general trend in each of them partly determines the future character and performance of their form.

Some Strategically Significant Broader Environment Variables 

Economic Conditions

  1. GNP trends;
  2. Interest rates;
  3. Money supply;
  4. Inflation rates;
  5. Unemployment levels;
  6. Wages/salary levels;
  7. Devaluation/Revaluation
  8. Government Spending;
  9. Raw Materials Supply;
  10. Demand Patterns;
  11. Income Levels;
  12. Competition;
  13. Cyclical Fluctuations; and
  14. Urbanization.

Demographic Changes

  1. Population distribution by – size, age, geography, and income.
  2. Distribution
  3. Birth Rates.
  4. Death Rates.
  5. Life expectancies.

Technological Factors

  1. Government spending and development
  2. Total industry spending on rural development
  3. Focus on technological effort
  4. Technology transfer
  5. Patent protection

Social-Cultural Variables

  1. Lifestyles changes
  2. Career expectations
  3. Consumerism
  4. Marriage rate
  5. Rural Development
  6. Attitude to – paid employment, authority, group effort, work change
  7. Education, changes in the family system
  8. Societal values
  9. Achievement
  10. Orientation
  11. Religion

Political-Legal Factor

  1. Tax laws, price control
  2. Foreign trade laws, and regulations
  3. Nationalization
  4. Indigenization
  5. Consumer-protection laws
  6. Law of Contract
  7. Agency, Insurance
  8. Sale of Goods Act
  9. International Agreements.
  10. Labor Laws
  11. Special incentives

Natural Factors

  1. Climatic conditions;
  2. Distribution of natural resources; and
  3. Topography.

The Economic Environment

Some key economic indicators in the environment are the Gross Domestic Product (GDP), general price levels, employment, government expenditure, economic objectives and policies, the structure of the economy, indices of industrial and manufacturing production, and the import-export pattern.

Gross Domestic Product

It measures the value of goods and services produced in an economy within a given period, usually one year. It gives an indication of the value of total production. Tables indicate the patterns of estimated growth of the GDP of Nigeria for the period 1981 to 1985.

The figures indicate an anticipated average annual growth rate of 7.2% over the five-year period. Furthermore, they show the decreasing contributions of agriculture, livestock, forestry and fishing, mining, quarrying, and constructions.

On the other hand, manufacturing, utilities, and communications (with an annual growth rate of 15% each), transport and general government service (12%), wholesale and retail trade (10%) were expected to be the fastest-growing sectors. Housing and agriculture were expected to grow at 8% and 4% per annum respectively.

The GDP (at factor cost) was expected to grow from N36 billion in 1980 to N51 billion in 1985, representing an annual growth rate of roughly 16% expected during the Third National Development Plan (1975-80). At constant 1977-78 prices, per capita income was expected to grow from N426, N531 during the period.

Gross Domestic Product at 1977 Factor Cost: 1980-1985

                 N Million

S/No Sector 1980 1981 1982 1983 1984 1985
1 Agriculture … 4,372 4,547 4,729 4,918 4,115 5,319
2 Livestock, Forestry, and Fishing … 3,135 3,260 3,391 3,526 3,668 3,814
3 Mining and Quarrying … 8,473 8,815 8,815 8,992 9,171 9,355
4 Manufacturing … 2,657 3,056 3,514 4,041 4,647 5,344
5 Utilities … 199 137 157 181 208 239
6 Constructions … 3,785 3,974 4,173 4,382 4,601 4,831
7 Transport … 1,277 1,430 1,602 1,794 2,009 2,251
8 Communications 97 112 128 148 170 195
9 Wholesale and retail trade … 7,215 7,937 8,730 9,603 10,563 11,620
10 Housing … 1,490 1,609 1,738 1,877 2,027 2,189
11 Producer of government services 2,268 2,540 2,845 3,186 3,569 3,997
12 Other services 1,190 1,309 1,440 1,584 1,742 1,917
Total 36,078 38,553 41,262 44,232 47,490 51,071

Source: Federal Ministry of Planning Outline of the Fourth National Development Plan, 1981-85, Lagos p. 10.

Gross Domestic Product at 1977 Factor Cost: 1980-1985 Percentage Distribution

S/No Sector 1980 1981 1982 1983 1984 1985
1 Agriculture … 12.1 11.8 11.5 11.1 10.8 10.4
2 Livestock, Forestry, and Fishing … 8.7 8.4 8.2 8.0 7.7 7.5
3 Mining and Quarrying … 23.5 22.4 21.4 20.3 19.3 18.3
4 Manufacturing … 7.4 7.9 8.5 9.1 9.8 10.5
5 Utilities … 0.3 0.4 0.4 0.4 0.4 0.4
6 Constructions … 10.5 10.3 10.1 9.9 9.7 9.4
7 Transport … 3.5 3.7 3.9 4.1 4.2 4.4
8 Communications 0.3 0.3 0.3 0.4 0.4 0.4
9 Wholesale and retail trade … 20.0 20.6 21.1 21.7 22.2 22.8
10 Housing … 4.1 4.2 4.2 4.2 4.3 4.3
11 Producer of government services 6.3 6.6 6.9 7.2 7.5 7.8
12 Other services 3.3 3.4 3.5 3.6 3.7 3.8
Total 100.0 100.0 100.0 100.0 100.0 100.0

Source: Federal Ministry of Planning Outline of the Fourth National Development Plan, 1981-85, Lagos p. 10.

The expected structural transformation of the economy is reflected in the table above. Mining and quarrying were expected to grow from 7.45 to 10.5%. These expected growths or decline in the various sectors and the implied structural changes resulting mainly from government agricultural and industrialization policies suggest growth opportunities for manufacturing firms. A general rising pace of economic activity usually means increased incomes and hence increased demand for some industries’ products.

Prices

By nature, prices are not static. There is usually a tendency for an upward trend. The term inflation is used to describe a situation when there is a generalized, persistent, and significant rise in price levels. Nigeria has experienced a substantial amount of inflation in recent years. The highest inflation rate of 43% was recorded in 1975, partly as a result of heavy government spending, and the massive public salary increases awarded by the Public Service Review Commission, otherwise known as the Udoji Commission in that year. The official rate of inflation in 1976 was 8.6%, although unofficial estimates put the figure at 25-30%.

Since then there had been a considerable decline (after an initial rise), the corresponding official figures being 16.6%, 11.8% and 10% in 1978, 1979 and 1980 respectively (see Table 3.4). The indices show increases or decreases in prices. For example, an index of 247.5 for all items in 1981 shows that a basket of goods costing N100 in 1975 (the base year is 1975, N100) would be expected to cost about N247.50 in 1981.

Inflation does have some impact on all organizations in terms of increased input costs and the prices of their outputs; although the magnitude of the impact would vary from one organization to another.

Furthermore, inflation in the absence of at least a corresponding rise in income could severely limit the consumer’s real purchasing power and, therefore, curtail his demand for goods and services. Inflation could compel government intervention. For example, the establishment of the Price Control Board (now defunct), the Productivity, Prices, and Income Board, and Rent Tribunals was one of the government’s responses to the inflation that gripped Nigeria during the second half of the 1970s. For some commodities, such as cars, newspapers, and cement, price increases could not be introduced without government approval.

Employment

The level of employment in an economy, through the laws of supply and demand, has some influence on the price of labor. A high level of unemployment would tend to pull down the price of labor since unemployed people would most probably be more willing to accept lower wages.

Nigeria’ labor force was estimated at 32.24 million in 1981, and this was estimated to increase to 36.08 million in 1985. However, the total number in gainful occupations had been estimated at 30.90 million and 34.82 million in 1981 and 1985 respectively. The corresponding estimated unemployment rates were 4.2% and 3.5% for the two years.

Items 1977 1978 1979 1980 1981 Percentage Change
1977/1978 1978/1979 1979/1989 1980/1981
All items 143.0 166.7 186.3 204.8 247.5 16.6 11.8 10 20.9
Food 146.0 171.9 185.7 199.9 250.2 17.7 8.0 8 25.2
Drinks 140.1 154.0 175.8 103.0 193.0 9.9 14.2 7 2.7
Tobacco and Kola 183.1 186.0 202.9 229.2 264.8 1.6 9.1 13 30.5
Accommodation Fuel and Light 127.3 131.4 166.9 177.3 173.2 3.2 27.0 6 2.3
Household goods and other purchases 136.9 147.1 156.0 181.5 194.6 7.5 6.1 16 7.2
Clothing 141.4 176.3 210.1 270.2 313.7 24.7 24.3 23 43.3
Transport 141.1 158.4 195.5 197.3 201.3 12.3 23.4 1 2.3
Other services 145.5 155.7 177.7 235.2 282.7 7.0 14.6 32 20.2

Source: 1.        Central Bank of Nigeria, Annual Report and Statement of Accounts for the year ended 31st December 1979, pages 28.

  1. The Economist Intelligence Unit Limited, Quarterly Economic Review of Nigeria, Annual Supplement, London, 1982 page 27.
  2. Central Bank of Nigeria, Monthly Report, February 1982, p. 31.

This represents a decrease when compared with the 1981 unemployment rate of 4.3 percent. These figures excluded underemployment, which was very considerable, especially in rural areas. Furthermore, the urban unemployment rate far exceeds the national average, which has been estimated at between 8% and 13%.

Out of Nigeria’s official 1973 provisional population figure of 80 million, only about 3.75% were in gainful wage employment. This represents only 9% of total gainful occupations, and it was expected to grow at a rate of 5% during the 1981 – 1985 plan period.

The table below shows the percentage sectoral distribution of total gainful employment as of 1975.

Sectoral Distribution of Total Gainful Employment in 1975

(27,910.00 – 100%)

     %

Agriculture                                          64

Mining and quarrying                         0.4

Manufacturing and processing          16.8

Construction and building                  0.9

Electricity, gas and water                     0.1

Distribution                                         12.2

Transport and communication            0.6

Service                                                5.0

         100

Source: The National Development Plan 1975-80, P.370

Government Policies Objectives

Government socio-economic objectives and the policies formulated to implement them, dictate how much encouragement the government is prepared to give to the various sectors of the economy. While the broad goals and guidelines purposed by the government are usually likely to endure for a long time, the specific objectives and policies are likely to change more frequently.

Both in words and action, Nigeria is committed to fostering a mixed economy where privately-owned and government-owned business enterprise co-exists. Over the years, government participation in business increased. The various Nigerian governments participated in various industries, including banking, insurance, brewing, steel, oil exploration, refining and marketing, road, air and sea transport, and the newspaper and textile industries.

The specific objectives of the Fourth National Development Plan were:

  1. Greater self-reliance;
  2. Development of technology;
  3. Promotion of better attitude to work;
  4. A cleaner environment;
  5. To increase the real income of the average Nigerian;
  6. Appreciable more even distribution of income;
  7. Reduction in unemployment and underemployment;
  8. Increased supply of skilled manpower;
  9. Increased Nigerian ownership and control of productive enterprises; and
  10. Increased productivity.

Consequently, agricultural production and processing, education and manpower, economic infrastructure, housing, health and diversification of the economy are regarded as high-priority areas.

Government adopts various fiscal, credit and monetary policies, and industrial guidelines and incentives from time to time, in order to guide the productive efforts within the economy towards the achievement of the stated objective.

Such measures normally include the following:

  1. Prices and Incomes Policy Prescriptions: In an attempt to control inflation, the Nigerian government formulates guidelines which must be followed, before increases in certain prices and income such as car prices, wages, and salaries and dividends, can be granted.
  2. Tax Holidays (Pioneer Status): A firm granted this status is exempted from paying income tax for a number of years, usually two to five years, and usually during the initial period of its establishment.
  3. Approved User Scheme: This permits government-designed approved users of certain input or materials to import them, and sometimes at concessionary rates of import duties.
  4. International Trade Agreements: Trade agreements between countries offer nationals the opportunities for import and export trade. The Economic Community of West African States is a good example.
  5. Accelerated Depreciation of Capital Investment: This allows affected firms to quickly write-off their capital expenditure. The accounting implication is that this often results in the payment of lower taxes since it reduces the firm’s taxable profits.
  6. Provision of Infrastructural Facilities: By providing such basic amenities as roads, electricity, water, hospitals, schools and communication facilities, the government can have a considerable impact on the growth and location of industries.
  7. Industrial Research: Government investments in industrial research, and its encouragement of firms to do the same, sometimes have a substantial influence on the nation’s technological and industrial development.
  8. Aggregate Credit Ceiling for Commercial Banks’ Lending: This sets a maximum limit on the amount that may be loaned by commercial banks in a given period.
  9. Guidelines on Sectorial Allocation of Bank Loans and Advances: These guidelines specify either the maximum or minimum proportion of total loans and advances that may be given to any sector of the economy.
  10. Interest Rates: Interest is the price paid for using other people’s money. Government guidelines determine the structure of interest rates within the economy. The government often attempts, through the structuring of interest rates, to direct the flow of capital to preferred sectors of the economy.
  11. Taxes: Government can affect development efforts through its control of the rate of taxes which individuals and firms pay.
  12. Reserve Requirement: This is another means by which the government influences the amount of credit which a commercial bank can give out in a period of time. In using this method, the government requires commercial banks to keep a proportion of their deposit as a reserve with the Central Bank.
  13. Budgetary Allocation: The pattern of allocation of funds amongst competing projects is a reflection of the goals and policies of the government at any particular point in time.
  14. Exchange Control: Foreign exchange control is the regulation of the transfer of money between one country and others. Measures adopted in this regard often place a limit on the number of goods and services that can be imported.
  15. Import Duties and Quotas: Import tariffs or duties are taxes imposed on imported goods, while quotas are a limit placed on the quantities or amounts that can be imported. Strict restrictions in these areas may be aimed at protecting local industries from foreign competition.
  16. Referred Sectors: The Nigerian government has categorized the various sectors of the economy into preferred and non-preferred. Industries in the preferred sectors often receive preferential treatment and incentives of various, such as bank loans, import licenses, and expatriate quotas.

The present structure of these incentives in Nigeria is such that the following priority industries are highly favored by the government, in the administration of incentives:

  1. Agro-based and food processing industries;
  2. Building materials industries such as cement, roofing sheets, window frames and fittings, wash-hand basins and plumbing materials;
  3. Engineering and transport industries;
  4. Chemical industries, particularly pharmaceutical and petrochemical industries;
  5. Industries manufacturing scientific instruments and other educational equipment;
  6. Telecommunication equipment manufacturing industries;
  7. Electrical and electronics manufacturing industries; and
  8. Household equipment and furniture.

These policies and incentives affect the attractiveness or otherwise of investment opportunities. In order to reap their benefits, the manager should not only be conversant with them, but also should be able to predict changes in them, and be in a position to capitalize on them.

 

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