Professional Documents
Culture Documents
PRESENTED BY
IBADAN
FEBRUARY, 2016
1
Abstract
Business failure is an important feature of dynamic economies, and entries and exits of
businesses are closely connected. A majority of literatures have focused on successful
business, therefore, little is known about why business fail. Previous studies showed
significant differences in business failure rates, while most researches on business failure
have been conducted in developed countries, and there is limited knowledge on the
causes of business failure in other countries with different economical, political, social,
and cultural conditions. As business is a newly developed phenomenon in Nigeria,
considering the economical, social, and cultural conditions of the country, analysis of the
business process, and the causes of failure and success, would provide critical
information for individual entrepreneurs, business financiers, and government policymakers.
1.1
INTRODUCTION
New firms create new jobs, open up opportunities for upward social mobility, foster
economic flexibility, and contribute to competition and economic efficiency (Liao et al.,
2009:1). Although the failure of business will never attract the medias attention; the
consequences of the failure of companies are certainly a serious matter for directly
involved stakeholders (Ayozie, 2004:2). Business failure is an important feature of
dynamic economies, and entries and exits of businesses are closely linked (Gholami
2008:15). Most business literature focuses on successful business. As a result, little is
known about why business fail. Even less is known about how they fail. Our
understanding of business will never be completed until we have a clear understanding
of what causes failure. Developing a deeper understanding of new business failures
should provide critical information for several key stakeholders in a new business
individual entrepreneurs, business financiers, and government policymakers, Liao et al.,
(2009:3).
There is a limited but growing body of knowledge on the topic of failure, on which
researchers can base their investigations, especially in the business domain. The research
articles are, however, scattered across business, management, financial, psychology, and
many other journals, and no proof could be found that these investigations have ever
been comprehensively reviewed. There is no specific body of science to which failure
exclusively belongs (Pretorius, 2009:3). The health of a firm in a highly competitive
business environment is dependent upon its capability of achieving profit and financial
solvency. When a firm loses competence to maintain profit and financial solvency, it
becomes unhealthy, or deteriorates to the point where it is in danger of suffering business
failure. Business failure is not only common with new start-ups, but also with listed
companies, and can easily happen to firms of any and all sizes. Wu, (2010:237).
Failure rates are somewhat higher in efficiency-driven countries as a proportion of
discontinuation, reflecting the increasing importance of scale and efficiency of business
in these countries. Failure rates, both in absolute terms and in proportion to all
discontinuations, are lowest in innovation-driven economies, because managers have
better skills and environments are more favorable. In Nigeria, the business failure rate is
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2.0
LITERATURE REVIEW
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2.1
ability, refuses to seek help and fails to delegate appropriately, as they run the
businesses.
2.2
The causes of business failure are many and varied, and may stem both from the external
environment as well as from factors internal to the business. Internal causes of business
failure may in many cases be capable of being foreseen in advance, while on the other
hand some external causes are not so predictable. In most cases, a complex mixture of
causes contribute to business failure; it is very rare for one single factor to be involved
Pretorius (2009:4).
2.2.1 Internal Causes of Business Failure
Management Deficiency
Many aspects of poor management in Nigerian business organizations are reported to be
connected to several related issues, such as lack of insight, inflexibility, emphasis on
technical skills, lack of management skills, lack of managerial training, and lack of good
managerial advice. Olawale, (2014:2) concluded that poor management combined with
the personality traits of the owner-manager, and external factors cause business failure..
Lack Of Finance and Financial Support From Financial Institutions
yozie, (2004:5) identified causes of business failure in Nigeria to include poor account
management, deficit in accounting, poor cash flow management, inappropriate sources
of finance, dependency on customers or suppliers, impending bad debt, fraud/collusion
and the bankruptcy of main customer or supplier.
Poor Strategic Planning
Ahmad (2010:98) noted that sound planning proceeds sound decision making. He sees
planning as a luxury which could be afforded only by large company in Nigeria. Even
when they plan, the tendency is that they concern themselves only with short-term plan
while they shy away from long term plan. As a result of lack of the use of
modern method of gathering and analyzing data constitutes a weak point in the business
strategic planning effort.
Mismanagement of Resources
According to Iwu (2010) among the critical problems that encumber the performance of
Nigeria business is mismanagement. Hence Iwu stressed that one of the major problem
area that impede business in National development is management. They fail to exercise
high quality of management because they are tradition bound and are therefore
insensitive to the need for change both in policies and practical.
Marketing Problems
One of the major marketing problems facing business in Nigeria is lack of understanding
and the application of marketing concept (Maclayton 2004:3). Most Nigerian small
business owners equate marketing to selling and this is reflected in their various
dysfunctional business behaviours against customer satisfaction and good business
orientation. They lack the knowledge and skills of basic marketing ingredients
marketing research, market segmentation and marketing planning and control.
The outcome of this is includes; poor quality products, unawareness of competition,
poor promotion, poor distribution, and poor pricing methods. They are not marketing
oriented and market-focused if a marketer is defined as someone who understands and
applies marketing in order to create, build, and maintain beneficial relationships with
target markets.
Most Nigerian manufacturer, in a higher degree, depends on imported equipment and
raw materials for their operations. With the over-devaluation of naira, vis--vis other
foreign currencies, they are not finding it easier to secure these items abroad. They
therefore resort to poor locally produced alternatives. Maclayton (2004:5).
They have a complex channel of distribution with many layers which go to push the
prices of their products higher. In a developing country like ours with low income and
high level of poverty, a company that wants to succeed should offer its product at the
price the consumers can bear. But often, manufacturers set prices of their products
arbitrarily without regard to this peculiar consumer characteristic in our environment.
Since they do not have clearly defined criteria upon which to base their prices, they
always seek to maximize profits at short runs without having a long-term view of their
businesses. Olawale, (2014:4).
competition and vitality - for every failure, a new business is established ... there
are ........benefits arising from the elimination of less successful firms which make room
for new entrants with fresh ideas........ People who fail in one business may learn from
their mistakes in future ventures. This suggests that business failure is a good learning
curve for entrepreneurs and also brings innovation as new entrepreneurs will examine
the causes of earlier business failures and look for ways to avoid them.
2.4
Some Failed Businesses in Nigeria and the Reasons for their Failure
Dunlop Nigeria was unable to meet up with their demands as a result of consistent
power failure. This made them incurred more expenses on petroleum for power
generator which increases the cost of production.
ii.
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2.5
The identified causes of corporate failure could be used to minimize its incidence. The
most effective measure of averting corporate failure is the institution of a very effective
management. The responsibility of management would be to look at all areas of
operations to see how efficiency could be induced. Such areas include:
1) Staff training and development. This is important in the sense that the employees are
expected to lead all areas of job performance and the essence of training is to make them
improve on job performance.
2) Enhancement of productivity and business process re-engineering. These consist three
important areas namely: improvement in productivity, application of appropriate
financial structure, increasing the level of competitive advantage in the market place.
3) Effective management of the product and product market.
4) Compliance with the provisions of the Companies and Allied Matters Act (CAMA)
2004. The product market is where the firm generates its income, attains its strategic
objectives and goals as well as achieves long-term success. Management should
continuously monitor the following factors to see how they could be brought under
control. These are:
1) Sales price variance.
ii) Sales volume variance.
iii) Sales mix variance.
iv) Sales quantity variance.
v) Market size variance.
vi) Market share variance.
Ayozie, (2004:12) suggested, also, that adequate brainstorming for ideas and research
should be conducted. The additional issues in the work of Khan (2005:25) are in the area
of adequate planning using a business plan and financial plan, guided by an accountant.
On the African condition and with particular reference to small-scale business in
Nigeria, Gholami (2008:26) stated that: To bring these small and medium scale
businesses back to life in Africa, the electricity power supply, which is the main source
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of energy for production, must be revived and made stable. Alternative sources of cheap
funds must be made available for entrepreneurs. Loans at more than 25% interest rates
are usually too dangerous for the survival of a business.
Another important way of averting business failure is through the strategic performance
measurement. This is an accounting system used by top management to evaluate well
known strategic business units (SBUs). These remedial measures cannot be effectively
carried out if a corporate body does not institute an effective and functioning research
and development department (R & D). The essence of this unit is to continuously
monitor internal and external factors and make appropriate recommendations as to what
should be done to keep a firm on the path of sanity. The absence of R&D department
would in addition give rise to poor product conceptualization which would be at
variance with what the consumers demand.
3.0
3.1
Summary
The failure rate of business is very high in Nigeria. The high failure rate negatively
impacts on the ability of business to contribute meaningfully to job creation, economic
growth and more equal income distribution in Nigeria. The literature revealed that there
are many reasons for business failure. Failure factors are both internal and external.
Internal factors are factors that are largely controllable by the organisation and include
lack of management experience, marketing problem, infrastructural deficiency, lack of
finance and financial assistance from banks and poor staff training and development and
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poor attitudes towards customers. External factors are factors largely uncontrollable by
the organization and include Insufficient Government Policies, Problem of Acceptability
of Locally Made Products, Failure to Studies Environment non-availability of a logistics
chain and a high cost of distribution, competition, rising costs of doing business, lack of
finance and crime.
3.2
Recommendations
ii.
iii.
iv.
v.
Workers should ensure that they abide by the rules, regulations, policies laid
down by the management.
vi.
vii.
Organizations should always strive hard in order to make sure that the
organizations profit base is increased.
viii.
ix.
3.3
Conclusion
It has been widely recognized that business growth and survival depend both on external
and internal factors. While most of the challenges which a business will face may be
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References
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Liao, J. Welsch, H,. Moutray, C.H. (2009); Start up Resources and Entrepreneurial
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