Economic subjects | General economics » Charles-Umuoma - Swot of Nigerias Business Environment

Source: http://www.doksinet www.aaeafricaorg Association of African Entrepreneurs SWOT OF NIGERIAS BUSINESS ENVIRONMENT March 2011 Emezi, Charles N. Department Of Business Administration and Management, School Of Business And Management Technology, Federal Polytechnic Nekede, Owerri 460113, Imo State, Nigeria. Charlesemezi@Yahoo.Com +2347064316640 Or Umudoche Umuoma, Nekede 460113, Owerri, Imo State, Nigeria INTRODUCTION Business environment is characterized by many challenges and competitions which can be converted to business opportunities by a firm with strategic advantages and resources to tap into the environment. Every business environment can be characterized by its strengths, weaknesses, opportunities and threats, and these make it more competitive or a death trap for unsuspecting investors. For an investor to profit from his investment in any given situation or country, the need to carry out a SWOT analysis of the proposed business environment is vital and must not be

overlooked. Gaining strategic advantage over present and future competitors and ensuring the survival of a business in a hostile environment is one key objective of SWOT analysis. Nigerias business environment can be described as a hostile environment. When you look at the business environment from a distance, what you see is a new, unexploited and untapped country, promising opportunities. But in the true sense no Nigeria market or business sector is unexploited or untapped, from telecommunications to oil and gas, manufacturing, insurance and banking, agriculture, power, and other related sectors. The issue is that either the sectors are not being fully exploited, or they have been abandoned due to one reason or another. Venturing into Nigeria business environment without a SWOT analysis could be likened to planting a good seed on a rock. Source: http://www.doksinet www.aaeafricaorg Association of African Entrepreneurs Many small and medium businesses have been declared bankrupt,

leading to their liquidation and closing down of their business. Udokwus (2003) survey of 900 Imo state SMEs shows that most of these SME owners do not study their environment before locating their business. To present a summary of Nigerias business environment, this study is designed to focus on the strengths and weaknesses of small and medium enterprises, and the opportunities and threats present in Nigerias business environment. USE OF SWOT A strengths, weaknesses, opportunities and threats (SWOT) analysis is an environmental scanning tool, and given its success at presenting a good and unbiased assessment of business and it environment, it has gained wide acceptance amongst management scholars. A SWOT analysis examines the organization internally to establish a strategic fit between the organizations resources and the opportunities that exist in the external environment. • Strengths: characteristics of the business or team that give it a strategic advantage over others in the

industry. • Weaknesses: characteristics that place the firm at a disadvantage relative to others. • Opportunities: external chances to make greater sales or profits in the environment which the organization has the resources to tap. • Threats: external elements in the environment that could cause trouble for the business and lead to it liquidation if not properly managed. Source: http://www.doksinet www.aaeafricaorg Association of African Entrepreneurs When discussing business environment, it must be noted that this involves two parties. The SWOT analysis of Nigerias business environment involves both organizations that are operating or will be incorporated in Nigeria and the activities of the external environment. The need to understand the strength required for an organization to successfully operate in Nigeria is very vital for its profitability, market standing and positioning. Having a clear profitability profile of the opportunities and threats in the business

environment plays a big part in achieving the set goals. Strengths and weaknesses are internal factors that create or destroy value. They can include assets, skills, or resources that a company has at its disposal, compared to those of its competitors. They can be measured using internal assessments or external benchmarking Opportunities and threats are external factors that create or destroy value. A company cannot control them. They emerge from either the competitive dynamics of the industry/market, or from demographic, economic, political, technical, social, legal or cultural factors. BUSINESS ENVIRONMENT Business environment includes factors that influence the operation of business activities in an economy. These factors can be classified into internal and external Internal business environment includes factors that the business has control over, which form its strength and weakness. The management of the internal environment may give the firm a strategic advantage or

disadvantage, depending on how the firm handles it. Internal environment comprises organizational mission, corporate culture, policies, and informal groups within the organization, unions, employees and top management style. While these are factors that the business has no control over, the firm must attempt to forecast and make provisions. External environments are made up of the economic, social-cultural, technological, political, legal/regulatory and international environment. SWOT analysis deals with both the internal and external environment of business. Iwueke and Agu (2003) summarized Nigerias business environment as follows: “the extent of government regulation of an individual business as we see in the case of various policies like SFEM, privatization and deregulation playing a major role in the business environment. Such roles can be either favorable or adverse to business operators. The spillover effect is noticeable in our economic system where high prices of goods and

services are the order of the day, coupled with increasing unemployment. For example, privatization of firms leads to unemployment and Source: http://www.doksinet www.aaeafricaorg Association of African Entrepreneurs collapse of such government ministries and the folding of small businesses that service such firms in various ways”. DOING BUSINESS IN NIGERIA Doing business in Nigeria is like doing business in other countries of the world, only with some minor differences that are unique to Nigerias business environment. These provide the necessary opportunities for businesses to successfully operate in Nigeria when compared to other countries. For organizations to operate effectively, these must be understood STRENGTHS For any organization to operate in Nigeria and stand the test of time, it must have the basic strengths to be able to balance its weaknesses. When taking stock of the strengths needed by an organization to do business in Nigeria, it was discovered that business

owners cannot do without the ability to generate electricity, good knowledge of the market/business, information and telecommunication technology and many more. These strengths are presented below:  Generate Electricity: Lack or inadequate power supply to industries in Nigeria has resulted in the bigger companies solely depending on power generating sets for power to run their factories. The issue of power has made doing business in Nigeria very difficult for SMEs and even multinational corporations. The government of Nigeria has drafted a new power master plan to solve the problem of power in Nigeria. But as we can’t wait for the master plan to startup for now, SMEs coming to operate in Nigeria must see the ability to generate power as a strategic advantage, not a weakness, for operating in Nigeria. Thus, the cost effect on the final price of output is also a factor to be considered. It will result in a higher price of product, making the imported ones cheapest for the market.

For any SME to operate and compete in the market it must have a strategic advantage in power generation, not depending on Nigerias power sector master plan white paper for power. As this has been noted as the main problem of Nigerias business environment; a good entrepreneur must convert this problem into an advantage to survive.  Basic Knowledge of Business: It is amazing to see people going into business without the basic knowledge of the business/market, and relying solely on their shallow and inadequate experience for competitive advantage. Udokwus (2003) survey of 900 Imo state SMEs discovered that 89.50% did not have a basic knowledge of business before starting Given the high rate of advance fee fraud and other related financial crimes, one should not do business in Nigeria without a basic knowledge of business. Having an in-depth knowledge of what it takes to run a particular business is a source of competitive advantage. Nigerias market being very vast and lucrative, it is

not the kind one can venture into with poor or no knowledge of its needs. Any business that must operate in Nigeria, either local or foreign, should first have accurate information about doing business in Nigeria from the relevant authorities established by the government, such as the Standard Organization of Nigeria, Corporate Affairs Commission, The National Drug Law Enforcement Agency, The Copyright Commission, National Agency for Food and Drug Administration and Control and other relevant agencies. Consulting registered Source: http://www.doksinet www.aaeafricaorg Association of African Entrepreneurs consultancy firms is also a viable option to consider. Nigerias market is a mature market If you want to tap the opportunities or seek understanding of the latest situation in the legal/regulatory environment, Nigeria is initiating various forms of reforms and you must be informed about these.  ICT: The world is now a global village. The speed at which things are done is

wonderful; one can’t be standing apart from this trend. For any SME to enjoy profitability in Nigerias business environment, it must have a competitive competency in ICT. Having information to work is not everything. But do you have the strength to organize your information resources to your strategic advantage? Nigerias business environment is information driven; if you did not get the right information, at the right time, in the right place, with the right price and right qualities, the business only has only a few hours before liquidation. If SMEs can’t build up strength in the area of information technology, Nigerias business environment will not be of advantage to them.  Product Innovation Skills: Innovation is the development of new products or services to meet marketing objectives, and adding new value to existing products to improve the consumer end value of the products. As previously indicated, Nigerias market is not a new or unexploited market, but opportunities have

not been fully tapped. To enter a market with such a characteristic you don’t do what others are doing but start what is totally new to the market. Nigeria market behaviors in general have a strong liking for improved functions in products, so for any SME to operate profitably, it must not settle for turning out the same product quality; there must be an improved function in the product. Product innovation is a pivotal element in Nigerias markets. Any SMEs that do not have this strength may hardly break even It is not all about how bad the system is, but is what you are bringing to the system. When conducting research for this paper, the most frequently given opinion blames business failures on external factors, but the internal factors which they can control are left unattended or not considered. When thinking about Nigerias business environment, think: what innovation can I contribute to this vast and profitable market? If the result is nothing, please don’t lose your capital in

this market. Look at another one for strategic competitive advantage I believe this is a better option  Superior Technological Skills: No meaningful innovation can be done without superior technological skills, nor are economies of scale possible. Superior technological skills here mean having mastery of the various technological-know-how that entrepreneurs use in their production processes. Mastery of the production system is one core factor You may have the latest technology, but if you can’t put it to use, it is of little benefit to you. So when I say superior technological skills, I mean master the technology you are using, to the extent that you can find more uses for it. Nigerias market should not be mistaken as an ‘anything goes market’ Nothing goes without the mastery of your technology. Many SMEs make the mistake of buying the most expensive technology without the skills to operate it. I will also advise SMEs to consider how their technical skills are in relation to

those of their competitors.  Cost Advantages: Nigerias market is very price sensitive, and any increase in the price of a product may trigger a negative reaction to the product. Even though Nigerias market is vast, Source: http://www.doksinet www.aaeafricaorg Association of African Entrepreneurs consumers with little money is a factor that cannot be eliminated, and these set of customers form the majority of the market. This creates a fast reaction to price increases Many factors are greatly responsible for price increases, including poor power supply, multiple taxation, bad road networks, poor physical infrastructure, high cost or limited access to investment fund, and high cost of communication. One cannot push in totality the final cost to the market This is where cost advantages come in. How can you manufacture product at a very low price when compared to competitors? Will you handle your supply source or outsource? Or will you go on mass production, to reduce cost per

unit? Cost advantage is one factor still vital to have, as many people live on less than one dollar a day (about 70.2%) SMEs find it difficult to build a strategic advantage in this area, due to lack of finance, information, technical-know-how and poor planning. As an example, speaking with the MD of GENE FARMS (NIG) LTD on the subject of cost advantage, he said that in 1978 when he proposed to start his farm, many farmers were in his region of Northern Nigeria. The cost of land was high He was aware that cost advantage is a key factor to doing business in Nigeria and that location also plays a vital role. He therefore moved to Owerri where had land located between two higher institutions (Federal Polytechnic Nekede and Federal University of Technology Owerri) and 15 minutes drive from the state capital. This gave him a cost advantage over the others in the business, and therefore higher profit. Other SME strengths not covered here include better manufacturing capability, good reward

systems, well-conceived functional area strategies, and better advertising campaigns. WEAKNESSES These are the characteristics that could put a business organization at a disadvantage compared to its competitors. Understanding the weaknesses that may affect the operations of a business, and mitigating the, place an SME at a great advantage. Some potential weaknesses are presented here:  Obsolete Facilities: Operating in Nigerias business environment, up-to-date facilities are preferable to meet the demands of the market. Working with outdated or second-hand facilities may result into regular breakdown of production processes, resulting in low output and poor performance. Any SMEs that do business in Nigeria must have production facilities that meet the demand of customers in a timely manner.  Lack of Key skills or Competencies: Every potential success factor should be taken into consideration, and key issues must not be left out. Jumping into business without thoroughly

researching the decision is one great disadvantage that should not be ignored. When starting a business all success factors should be researched.  Lack of Managerial Depth and Talent: Lack of strong managerial depth is a weakness never to be associated with. Where this is the case, the best option is to hire a person with the knowledge to run the business and report a profit at the end of the accounting year. Source: http://www.doksinet www.aaeafricaorg Association of African Entrepreneurs Other potential weaknesses include inability to finance needed changes in strategy, higher overall unit costs relative to key competitors, lack of clear strategic direction and other related factors. Working on these weaknesses to build competitive advantages over others in business is a step for all SMEs to take. OPPORTUNITIES “Nigeria has much in common with Brazil; similar population, abundant resources, an increasingly functional democracy and a well regulated financial system”.

Baldwin Berges, managing director of Silk Invest, quoted by Godfrey Obioma (2010). No better testimony can be given for a growing economy. Furthermore, the Report for New Partnership for Africa’s Development (2008), reports the following data in respect to Nigeria business environment:  Reduction in inflation to single digits (5.9% in 2007, from 85% in 2006)  Substantial increase in foreign reserves equivalent to twelve months import cover.  Moderate decline in poverty index from 65.6% in 1996 to 534% in 2004  Considerable decline in the external and domestic debt stock, particularly the grant of debt relief with the resultant reduction in the debt service claims on the budget.  Moderate revival of the non-oil sectors so that in spite of the substantial share of oil in the GDP, Nigeria’s recent growth has additionally been driven by the non-oil sector, which averaged 10% during 2004-2008 compared to 0.54% for the oil sector  Some successes in the fight against

corruption and transparency in governance have contributed to improvement in the country’s sovereign debt rating. These are due largely to effective economic reform, and have impacted on the growth of macroeconomic stability. The lifting of the ban on some products previously on the banned list (toothpicks, cassava, furniture, textiles and cars from 10-15 years old) is a good business opportunity for SMEs. To date, many entrepreneurs will have seen this as an unwise move, but it is a good opportunity to import these products to supplement production capacity and also to outsource production. However, the tariffs and duties on these products are kept very high in order to ensure cost advantages over imported products. To help encourage competition in the market, it helps to produce standard products. The problem is that many Nigeria entrepreneurs are afraid of foreign competition due to the fact that most of their own products are sub-standard. Given the high rate of unemployment in

Nigeria, the government has formulated policies – the National Economic Empowerment Development Strategy - directed at reducing unemployment in various sectors. A table is of these is shown below: PROPOSED SOURCES OF GROWTH AND MEANS OF EMPLOYMENT GENERATION Sources of growth Agriculture and Rural Development Proposed means of employment generation • Productivity enhancement for peasant farmers • New jobs in rural areas arising from improved rural Source: http://www.doksinet www.aaeafricaorg Manufacturing and SMEs Solid Minerals Information and Communication Telecommunication Services (especially tourism) Oil and Gas Power The Social Services (Education) Works and Housing Construction Intervention Schemes Association of African Entrepreneurs infrastructure. • Increased employment from commercial agriculture. • Increased production through programmes co-ordinated by the Federal and State Governments. • Federal/State collaboration in the development of industrial

clusters and parks. • Prospective new investments will result in increased mining and exploration activities. • Improvement of infrastructure at mining sites. • Expansion of telecommunication industry and the coming on board of the second national carrier will generate both direct and indirect employment. • Increases in distributive trade as a consequence of growth in productive sectors and services. • New focus on tourism will also lead to more direct and indirect employment e.g the Obudu Cattle Ranch • Growth in the entertainment industry, particularly export of home video, is expected to lead to increased employment in the sector. • Enforcement of the local content policy will lead to more jobs in the sector. • Envisaged growth in the gas sector. • Increased participation of Independent Power Providers (IPPs) will expand productivity and lead to greater demand for both skilled and unskilled workers in the sector. • Commencement of UBE and increasing growth of

private provision of education and skill training. • Use of public works in the construction of roads and other public utilities especially by state and local governments. • New and continuing boom in housing construction across the country will continue to generate mass employment. • Micro-credit and concessional credit to provide start-up capital for new businesses will generate new jobs. (Source: Debate to Action) There are great opportunities presented to SMEs in 2011; all sectors are getting the attention and support needed to provide growth. To address the problem of finance in small and medium businesses, the government directed all commercial banks to make a provision of 10% of their profit after tax to help the financing of SMEs, and around N40 billion had been raised by 2006. In addition to this, CBN N200 billion industrial intervention funds for SMEs have been opened for all SMEs registered in Nigeria. The requirements are not strict; some of the documents to be

submitted to facilitate processing of Source: http://www.doksinet www.aaeafricaorg Association of African Entrepreneurs applications include directors passport photographs, certificate of incorporation, memorandum and articles of association, board resolution to borrow, valuation on the assets of the company, feasibility report/business plan, audited accounts of the previous years activities, repayment plan, and risk analyses and mitigation strategies. THREATS The statement of company Chairman John Holt in his 2000 Annual Report presents the threats of Nigerias business environment as follows: “During the year Nigeria witnessed an unsatisfactory growth rate, high rate of unemployment, and low industrial output coupled with poor demand. Energy crises continued unabated Supply of petroleum products was irregular and serious bottlenecks were created in the production and distribution processes, culminating in increased operating costs. Electricity supply from NEPA was, to say the

least, disruptive. Our operating units were forced to rely heavily on power generating facilities requiring an exorbitant spend on diesel. Petroleum products were, in fact, not available during certain times, leading to loss of man-hours and profits. Bank interest rates continued to fluctuate. Effective rates were prohibitive and our dependence on bank loan facilities meant that the charges impacted adversely on our trading profits. The Naira exchange rate depreciated seriously against the major currencies. Again, this situation had a negative effect on our cost of sales, due largely to the foreign component of our products profile. The company is unable to pay a dividend and as a result, the Board has not recommended any dividend in respect of the year under consideration”. The report of the New Partnership for Africa’s Development (2008), presents some of the drawbacks of Nigerias business environment as follows:  A long-standing neglect of some sectors such as agriculture and

manufacturing: two critical sectors of the economy capable of impacting positively on Nigeria’s development if given adequate attention.  Vulnerability to external shocks in the oil sector with serious consequences for macroeconomic stability and socio-economic development.  Multiple taxation.  Soaring inflation, high interest rates, frequent policy reversals and unpredictable government reactions to domestic and international events.  Poor physical infrastructure, burdensome administrative red-tape, an inhospitable institutional environment for business and lack of sustained economic growth. The report also identifies corruption as a major threat to Nigerias business environment:  The offering of bribes or inducements in public sector transactions to procure a favor for the person paying the bribe or inducement.  Favoritism  Embezzlement and diversion of public funds for private gain.  Nepotism, especially in the awarding of government funded contracts for

the supply of goods and services.  Smuggling of goods  Collusion with foreign elements to over-invoice on goods and services supplied to both government and private organizations. Source: http://www.doksinet www.aaeafricaorg Association of African Entrepreneurs These threats exist despite the present governments effort in fighting corruption and providing a peaceful and profitable business environment; many attempts have been made to reduce or eliminate them in totality. These steps, and the overall fight against an unprofitable business climate, has created large pools of business opportunities and an investment-friendly environment for small, medium and large scale businesses in Nigeria. STRENGTHENING THE OPERATIONS OF SMALL AND MEDIUM BUSINESSES IN NIGERIA Every country has its own SWOT analysis, and the various factors that affect business all have an effect on the operations of SMEs. The federal government of Nigeria, knowing that the economy needs a lot of support

before it can stand among the communities of nations, has become involved in various reforms and projects directed toward the growth of the Nigerian economy. According to Egua (2011): “The Federal Government has committed about N75 billion ($500 million) to boosting of the growth of Small and Medium Enterprises (SMEs) and Small Growing Businesses (SGBs) in the country”. The intervention fund is to be managed by the Bank of Industry (BOI), and the Central Bank of Nigeria (CBN). N200 billion was established by CBN for the SMEs, out which the CBN announced the release of N130 billion, with the maximum loan amount being N100 million. CBN has also approved the establishment of N200 billion Small and Medium Enterprises Credit Guarantee Scheme (SMECGS) to increase access to finance of SMEs operator in Nigeria. According to Businessday 2011, Nigeria has been identified as “one of the countries with the highest investment potential, by some of the most influential figures in emerging

markets finance, at the Reuters’ Emerging Markets Summit in Sao Paulo in July 2010”. The SMEs are not the only sector getting government attention; this is the case with other sectors including manufacturing, oil and gas, telecommunication, agriculture and transportation. The governments efforts are channeled toward developing the SMEs as well as large scale industries, although arguably no SME can survive without the presence of the bigger companies. Nigerias business environment also has its share of economic depression, but the speed of its recovery is something to be noted. The strong banking, telecommunications and other industries are making Nigeria a potential location for all investors and a welcoming environment for SMEs. In spite of the past and present outlook, I can see a Nigeria with a friendly and conducive business environment in the near future. References Agulanna, E.C and Madu, M Chris (2008) Business Policy the face of Strategic Management Nigeria: Joe Mankpa

Publishers. Source: http://www.doksinet www.aaeafricaorg Association of African Entrepreneurs Egua, H. (2011, January 12) FG Commits N75 bn to SMEs, SGBs BUSINESSDAY Newspaper pp 14. Federal Government of Nigeria (2008). Nigeria Governance and Development Report of the New Partnership for Africa’s Development. Godfrey Obioma (2010, August 25). Foreign fund managers spot gold in Nigeria, others BUSINESSDAY Newspaper pp 1, 4 Iwueke O.C and Agu CN (2003) Government and Business Relations Nigeria Brighton Graphics. Osalor, P. O (2010, November 18) Problems Encountered by Nigerian Entrepreneurs and Possible Solutions. Retrieved December 22, 2010, from http://ezinearticlescom/?Problems-Encountered-by-Nigerian-Entrepreneur-and-Possible-Solutions&id=5406557 The World Bank and British Council (2007). Debate to Action (a Millennium Development Goal’s Awareness Creation Project). Nigeria: Prince of Prints Ltd Udokwu Ethel-RoseB. (2003) A survey of the Management and Financial

Problems of Small Scale enterprises in Imo state. Journal of Business and Social Sciences (JBSS), 11, 227-234