The enterprise and Nigerian business environment.
This article examines the enterprise and the Nigerian business environment.
An enterprise is a business that trades in goods or services.
When enterprises do business, there is an exchange of some payment, usually money.
Although, most business enterprises want to make money, not all enterprises have this goal.
Those that make money are called for-profit-enterprises.
The not-for-profit enterprises do not want to make money. Rather, the reason they exist is to promote a cause. A charity organisation is an example of not-for-profit organisation.
There is another type of enterprises that is neither for-profit or non-profit. These type of enterprises are called social enterprises.
They exist to make money, but the money is mainly for social causes.
The business environment differs from business enterprises. However, they both depend on each other.
The business environment refers to events, settings, situations or circumstances that have potential effects on people’s willingness to do business and their ability to undertake entrepreneurial activities.
Therefore, in this article, we want to understand these settings, events and situations that affect enterprises in Nigeria.
In addition, we’ll look at how business enterprises and the business environment depend on each other. And what happens to enterprises as a result.
Circumstances and situations in the Nigerian business environment
The nature of the business environment affect how business enterprises are able to obtain the resources they need.
Also, the business environment influences how business enterprises are able to produce goods and render services to their consumers.
These circumstances, situations and events that affect business activity are always changing.
Everyday, we hear both pleasant and unpleasant news.
News about changes in exchange rates, innovative startups emerging, changes in government policies, political unrests, economic instability etc.
All these are examples of events and situations that are sources of opportunities or threats for business enterprises.
The most recent one is, the Covid-19 pandemic has a huge impact on small businesses.
The history of the Nigerian business environment.
The history of the Nigerian entrepreneurial environment can be traced to creation of the Enterprise Promotions Act of 1972.
The Nigerian government decided that it was time to pay attention to the development of private enterprises.
However, the business environment in Nigeria has over the years, been challenging especially for micro, small and medium-sized enterprises (MSMEs).
Despite these challenges, the number of enterprises in Nigeria increases every year.
This shows that there is an entrepreneurial culture in Nigeria.
Types of environment under which businesses operate in Nigeria.
We can broadly divide the business environment under which businesses operate in Nigeria into two namely:
- The external or macro environment.
- The internal or micro environment.
We can show the relationship between the business enterprise and its environment as:
The external factors of the Nigerian business environment.
The external or macro environment is made of general factors that affect business activity in various ways.
The general business environment consists of two levels:
- Domestic environment (local, country or regional)
- Global environment.
The macro environment is also called the contextual environment.
That is, circumstances, events and situations which are external to the enterprise and its industry.
Examples of factors in the external environment are contextual influences such as:
These external factors have a more general influence on entrepreneurial activites in Nigeria.
The internal factors of the Nigerian business environment.
The internal or micro environment consists of internal factors.
Another name for the business internal environment is the competitive or operational environment.
It consists of circumstances, events and situations which tend to have a more immediate effect on the enterprise.
Examples of factors in the internal environment are:
- Financial institutions
- Labour markets
- Internal functions within an enterprise.
The competitive environment in Nigeria has the most direct and immediate effects on an enterprise.
How does the macro environment affect small business performance?
The business performance of small and medium enterprises can be judged by looking at their growth and profitability.
The macro environment consists of issues and conditions that are outside the control of small businesses.
Therefore, the general environment affects the growth and profitability of SMEs in the following ways:
- SMEs are often at a disadvantage as a result of not-well-thought-out government policies
- Suppliers may be unable to reach some SME locations because of bad roads.
- Lack of stable electricity supply – self-generating electricity is not a profitable option for manufacturing SMEs.
- Bureaucratic practices at government establishments e.g. long waiting times to process goods and documents.
- Inability to get the necessary resources needed to run their businesses such as loans from banks.
These are some of the ways the macro environment affect the growth and profitability of small businesses.
In addition, these factors also contribute to small business failure in Nigeria.
Since the competitive environment is within the control of a business.
The environment has a more positive impact on the development and efficiency of small business through the extent of:
- Competition from other businesses.
- Market information available.
- Demand for products and services.
These factors encourage entrepreneurial orientation.
That is, entrepreneurs and business owners’ willingness to be innovative, proactive and risk-taking.
Why should a business owner be concerned about what goes wrong in the Nigerian business environment?
The business environment is important to small businesses because events and circumstances that occur tend to impact not just a business enterprise but also the industry.
In addition, the business environment is very dynamic i.e. constantly changing with innovations in technology, new businesses entering the market, government policy changes, global pandemic etc.
All these events and situations can affect the extent of success of a business enterprise.
Therefore, a business owner should be concerned about trends in the business environment.
When the events are positive, a business owner would look for ways to take advantage of the opportunities in the market.
However, when the events are challenging, the survival of a business enterprise may be threatened.
All these events and situations can ultimately affect the success or failure of a small business.
The Nigerian business environment is not very friendly to small and medium enterprises.
However, even though the environment is challenging, the changes in the environment can also open up opportunities for small businesses.
Therefore, a small business owner needs to always gather information about the changes in the business environment.
By looking out for patterns and trends a business owner would be able to develop new business practices and refine how it will achieve its goals.
Doing so will help to reduce the possibility of business failure and increase the chances of success.
How can small businesses overcome the effects of the external environment?
The external environment is always changing. It also involves a lot of uncertainties.
In addition, small businesses are faced with threats that have the potential to undermine the way they do business.
Therefore, small businesses can overcome the effects of the external environment by minimising their risks.
A small business can achieve that by:
- Scanning the environment – gathering useful information.
- Identifying current and potential changes in the environment.
- Identifying trends in the external environment that can impact the competitive environment.
- Looking out for small changes in the external environment, whose impact is yet to be felt.
- Making forecast and adequate planning.
The importance of business environment dynamism on the strategies and performances of small businesses.
The business environment dynamism requires that small businesses remain alert to changes.
In order to be a able to carry on business in uncertain environment, business owners or managers need to constantly monitor and analyse the business environment.
This will help businesses cope with the very dynamic events and situations that affect business activity.
The perception of the business owner or manager also influences how a business deals with the impact of the business environment.
Therefore, with the aid of strategic tools, a business owner or manager can carry on doing business in an uncertain environment.
The idea is to use the analytical tools to develop strategies that would help place the business in a good position.
This would enable the business to be prepared to handle the threats and to take advantage of the opportunities in the business environment.
Strategies for coping with the Nigerian business environment.
Some analysis that can help a business owner or manager to cope with the erratic nature of the business environment are:
- PESTLE analysis.
- SWOT analysis.
- Scenario planning.
- Porter’s five forces framework.
- Value chain analysis.
In order to carry out a PESTLE analysis of the Nigerian business environment.
A simple way to remember the indices of the modern external business environment is PESTLE:
- P – Political factors.
- E – Economic factors.
- S – Socio-cultural factors.
- T – Technological factors.
- L – Legal factors.
- E – Ecological factors
The recent PESTLE changes in the Nigerian business environment.
It was mentioned earlier that the general environment consists of the domestic and global environment.
A global event can have impact on the domestic environment.
The global pandemic provides an easy way to understand the interrelationship between the levels of the business environment.
Here is a PESTLE analysis to examine the PESTLE changes in the Nigeria business environment as a result of the Covid-19 pandemic:
The Nigerian political environment.
As a result of the global pandemic, the government has had to make swift policy changes.
In response to the coronavirus outbreak in Nigeria, a number of aspects of the political environment which has also affected business activity are:
- Lockdown imposed in Lagos, Ogun and Abuja.
- International travel ban.
- Set-up of Presidential Task Force on Coronavirus.
- Self-isolation and quarantine guide by Nigeria Centre for Disease Control (NCDC).
- Mandatory institutional quarantine for returnees to Nigeria.
- Travel between regions were grounded.
- Closure of businesses – schools, cinemas, bars etc.
- Ban of public gatherings such as places of worship, weddings, burials etc.
The Nigerian economic environment.
As a result of the Covid-19 lockdown, many business enterprises had to stop business activity because of the restrictions.
Since, the government itself is the biggest enterprise at both local and national level.
Both the private sector as well public sector were affected
The Covid-19 pandemic lockdown also affected other aspects of the economic environment such as:
- Workers productivity – many workers (government and private workers) weren’t productive during the lockdown period.
- Reduction in oil exports due to global fall in demand for commodities.
- Import duty waivers for the pharmaceutical industry.
- Cut in nonessential capital spending.
- The reduction in the global price of oil has had a negative impact on the Nigerian economy resulting in new monetary measures e.g. adjustment in exchange rates.
- The states mostly affected were – Lagos, the commercial hub of the country and Abuja, the Federal Capital Territory and Ogun state.
- Many small business enterprises had to close down because of the lockdown.
The Nigerian legal environment.
The Coronavirus pandemic has also brought changes in the legal environment through passing of bills and actions such as:
- The passing of the bill seeking to replace the Quarantine Act with a Control of Infectious Disease Act.
- Deposit Money Banks (DMBs) can extend the time of credits given to households and businesses. Particularly those in the oil & gas, agriculture, and manufacturing sectors affected by the Coronavirus outbreak.
- Extension of all CBN intervention facilities (loans). Additional one year on all principal repayments.
- Reduction of interest rates from 9% to 5 % on all CBN intervention facilities.
- Creation of N50 Billion credit facility through the NIRSAL Microfinance Bank. To provide support for households and the micro, small and medium-sized enterprises (MSMEs), that are directly affected by the COVID-19 outbreak.
- A special N100 Billion credit support for the healthcare industry. This support could benefit healthcare practitioners who want to build or expand first class drug manufacturing plants or health facilities in Nigeria.
- Strengthening of the CBN/Loan ratio to help ensure that DMBs have the capacity to continue to extend low-interest and longer-term credits to households and businesses.
The Nigerian socio-cultural environment.
The impact of the Covid-19 on the socio-cultural environment include:
- Non-profit organisations in Nigeria such as Amnesty International argued that the bill for Control of Infectious Disease Act is not simple and clear.
- New methods of working and socialising remotely.
- Wearing of masks as part of everyday lifestyle and fashion.
- Maintaining social distancing. The concept of social distance is new in Nigeria where people are used to doing things together.
- Due to social distancing and ban on public gatherings. Ceremonies in Nigeria which tend to attract a large number of people. Such as wedding ceremonies are now either postponed or some have settled for simple and quiet ceremonies. Wedding planners, and other businesses that cater for social events are adversely affected.
- Religion is a part of the everyday culture in Nigeria. People have learnt to worship and fellowship remotely because of the government restrictions.
The Nigerian technological environment
- Increased use of technology by business enterprises that had to rely on their staff working remotely.
- Internet service providers gained from the increased use of the internet by consumers during the lockdown.
- Schools and other educational providers adopted the use of technology to continue teaching and learning remotely.
What is the difference between PESTLE, PESTL and PEST analysis?
They all refer to the same analysis.
Only that sometimes, it is called PEST Analysis when the legal and political enviroment are combined.
And also when the social and lifestyle factors that have ecological or environmental impact are combined.
You may also hear it being referred to as PESTL analysis in which case only the social and environmental factors are combined.
A PESTLE analysis is only useful if:
- The business owner can gather useful information about events happening in the business environment.
- Highlight the important factors and identify the interrelationships between them.
- Draw meaningful conclusions.
Otherwise, a PESTLE analysis will only amount to highlighting of events.
An easy way to understand a PESTLE analysis is to examine how the factors in the environment depend on each when a situation or an event occurs.
Note that the PESTLE analysis takes a static view.
We can use it to understand the general environment at a point in time.
However, it does not capture changes in the environment over time.
When carrying out a PESTLE analysis, the business owner should further examine how these factors in the environment depend on each other.
And also, examine the impact they have on the business and the competitive environment.
This is an example of a post lockdown SWOT analysis of a Pizza eatery in the food industry.
The SWOT analysis is used to analyse the internal or competititive environment.
It refers to Strengths, Weaknesses, Opportunities and Threats.
Although the SWOT analysis can also be used in the general environment.
It is more difficult to apply because of the unpredictable nature of the general environment.
In a SWOT analysis, SW refers to the internal environment of a business.
- (S) Strengths – areas where the business excels in comparison with its competitors.
- (W) Weaknesses – areas where the business might be at a disadvantage compared with its competitors.
The OT refers to opportunities and threats that arise in the general and competitive environment.
Which the business does not have a direct control.
A SWOT analysis can be also be presented in a tabular form. For best result, a SWOT analysis, like scenario planning, should be carried out by teams.
This is because people’s views are influenced by their positions in an organisation.
Practical examples have shown that, a SWOT analysis carried out by teams tend to differ from those carried out by groups of executives.
The SWOT analysis by higher-level managers tend to have a broader view and sees the organisational factors as strengths.
Lower teams tend to single out aspects such as marketing and financial factors.
Scenario planning is a tool of analysis that helps businesses in imaging possible futures.
The tool helps to improve decision-making process by eliminating human biases and impefect reasoning.
Scenario planning takes time and is most effective when multiple scenarios are constructed by managers from different parts of a business.
- Setting a time frame and scope of analysis.
- Identifying those who can affect or are affected by the business decisions.
- Looking at PESTLE trends and key uncertainties.
- Developing initial scenario themes.
- Checking to see if the trends identified are possible and consistent.
- Using scenario for research and learning.
- Developing quantitative models.
- Using the decision scenario to generate new ideas.
- Scenario planning is used by businesses to see possibilities, especially in the face of uncertainty.
How do businesses adapt to changes in the micro environment?
In order to adapt to changes in the micro or the competitive environment and remain competitive.
Businesses need to make informed decisions about how they intend to achieve their set goals.
A business can adapt to changes in the competitive environment by positioning itself to ease the effects of industry structures that exist.
The Porter’s five forces framework.
The five forces framework is an analytical tool that can help businesses adapt to changes in the micro environment.
A business can examine its position relative to five competitive forces in the industry.
Utimately these five forces will help a business to determine its potential for profit or return on investment:
- Threat of new entrants – extent to which new competitors may decide to enter an industry and reduce the level of profits made by existing businesses.
- Bargaining power of buyers – ability of buyers to force down prices, bargain for better quality of products and services or play competitors against each other.
- Bargaining power of suppliers – ability of suppliers to raise prices or reduce the quality of goods or services.
- Threat of substitute products or services – threat from goods and services that can meet similar needs can make customers switch to substitutes.
- Intensity of rivalry among firms in an industry – when there is high degree of rivalry among businesses in an industry, the industry profits reduce.
Value chain analysis.
The value chain analysis is another tool that helps businesses adapt to changes in the competitive environment.
The analysis helps a business to arrange its range of activities in such a way that it will be more difficult to imitate by competitors.
Therefore, making it more sustainable.
Value chain analysis involves looking at activities that go to make up a product and service.
Determining how much value each activity adds.