You are on page 1of 16

CAUSES AND CONSEQUENCES OF

BUSINESS FAILURE IN NIGERIA

PRESENTED BY

KAYODE OLADIPUPO OLAYEMI


A PROJECT ANALYST
08058573347; 07063796484

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
3

almost higher than average of efficiency-driven economies. Denmark and Italy in


innovation-driven economies have the lowest business failure rate (Khan, 2006:17). On
the other hand, most of the researches in business failure have been conducted in
developed countries, while limited knowledge on the causes of business failure in
underdeveloped countries with economical, political, social, and cultural differences are
available.
Statement of the problem is the inability of managers of business organizations in
Nigeria to determine causes of business failure which led to unproductivity. Also it is
perceived that the inability of the management to develop policies for solving the
problem of small scale businesses may have reduced the profitability of such enterprises.
Indeed, nothing weakens organization more than when management develops poor
attitude to personnel training. Experiences show that the poor attitude of the government
to creation of conducive environments for business may have reduced the chances of
survival of small scale enterprises. The inability of works to implement management
policies just as experiences have shown, may have led to unproductivity. Again poor
financial management strategies may have aggravated the situation just as the perceived
inability of management to employ competent personnel may have led to unproductivity.
The symptoms of business failure include the following, declining sales, increase in
trade debts, declining productivity, increasing labour turnover, declining returns on
investment or profitability and deterioration of working capital position
The main purpose of this seminar paper is to examine the causes and consequences of
business failure in Nigeria. Specifically, it will also
i. examine the causes of business failure in Nigeria.
ii. Examine the consequences of business failure in Nigeria
iii. Highlight some failed business in Nigeria and reasons for their failure
iv. Suggest solution to business failure in Nigeria

2.0

LITERATURE REVIEW
4

2.1

Meaning of Business Failure

Olawale (2014:1) defined the term failure as to become deficient, to be inadequate.


In general, many different terminologies are related to business failure, such as firm
closures, entrepreneurial exit, dissolution, discontinuance, insolvency, organizational
mortality and bankruptcy. Normally, entrepreneurial failure is referred to as the cease of
an operation for financial reasons. Since we examined nascent entrepreneurs during the
firms gestation process, one type of entrepreneurial failure is the discontinuance of
venturing efforts by entrepreneurs (Liao et al., 2009), but business failure can be defined
as wanting or needing to sell or liquidate, to avoid losses or to pay off creditors, or the
general inability to make a profitable goals of the business Ooghe (2008:223).
Business failure occurs when a business has reached a point where it can no longer
continue trading without encountering further problems. A failed business, according to
Bickerdyke, Lattimore and Madge (2000:10), is the one that ceases operation and exits
the business population because it is no longer a viable concern. They also describe
business failure as discontinuance of business, because it is no longer a viable concern.
Business failure, commonly characterized by insolvency, is a situation where the
business is unable to meet its financial obligations. Although failure happens to
businesses of all sizes, either big or small, the small businesses are exposed to bigger
threats, because they simply do not have the back-up of extra finance and resources that
larger companies possess. It is a fact that only about 50% of small businesses are still
trading after their first three years from initial set up. Oparanma and Hamilton
(2010:31).
From the study by Khan (2006:19), the main reasons that businesses fails are poor
business planning, poor financial planning, poor marketing, and poor management. The
first relates to managers inability to properly identify business objectives and means of
achieving them, before going into business. The second is more about fund management,
taking into consideration the unique financial dynamics of the intended business. The
third is about making the products and services known to the established target audience
and finally the various management flaws, for example some owner-managers lack
5

ability, refuses to seek help and fails to delegate appropriately, as they run the
businesses.
2.2

Causes of Business Failure in Nigeria

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).

Besides, manufacturers pay little attention to the promotion of their products.


Advertising and other methods of promotion are not adequately used. There is no other
way of creating awareness of their innovations and stimulating consumers to action than
promotion. Even, many of them do not participate in trade fairs and exhibitions. This
also inhibits their growth and ability to compete with larger companies.
High costs of vehicles and poor roads are also affecting the operations of Nigeria
manufacturers in their efforts to move finished products down to consumers in both rural
and urban areas. They have a complex channel of distribution with many layers which
go to push the prices of their products higher.
Infrastructural Deficiency
Gholami (2008) revealed that Nigeria infrastructural deficiencies are so enormous
especially in respect to water, power, roads and telecommunication. What this suggests
is that small scale businesses can hardly survive in this kind of environment and their
small capital base put them in disadvantaged position, since they cannot provide these
things on their own either.
2.2.2 External Causes of Business Failure
Government Policies
Government and government-related policies is also an important factor affecting
Nigeria business failures. The findings revealed that failure rates increased due to
heavy burden of taxation and regulation, while the growth in money supply (higher
growth decreased the failure rate) and the volume of bank lending (higher volume of
bank lending reduced the rate of business failures) are significant factors. Ahmad
(2010).
Problem Of Acceptability of Locally Made Products
Furthermore, demoralizing effects of NIgerian peoples actions towards the locally made
products has been identified as one. This problem of acceptability of Nigerian made
goods is caused by low technological base on the part of Nigeria business . A
concatenation of the factors that encumber the success of small scale business are many
and of different dimension.
Failure to Study the Environment
8

Failure to study general environment (economics, technology, foreign countries, politics,


and social factors), immediate environment (customers, suppliers, competitors, banks
and credit institutions, and stockholders), lead to business failure in Nigeria. Ooghe and
Waeyaert, (2004).
Weaknesses in the legal and regulatory framework
The legal and regulatory framework does not protect creditors (Banks) against loan
default from SMEs and the enforcement process through the courts is often slow. This
and collateral security requirements combine to constitute barriers to SMEs access to
finance.
2.3

Consequences of Business Failure in Nigeria

Business failures have a high consequences on employment, lost productivity,


purchasing power (unpaid wages) and finance (unpaid debts), and poverty increase.
Business failures can also lead to social problems such as crime, drunkenness and
prostitution. Business failure can further lead to reduced income for the government in
the form of lower taxes and increased expenditures on crime prevention.
Mitchell et al. (2008) argue that the effect of failure can be portrayed both negatively
and positively. While the negative effects of failure are manifest in monetary and
emotional costs, its positive effects are less visible, being associated with learning,
experience, and other cognitive constructs. Failure can actually facilitate experience and
a new beginning leading to success. This is consistent with the view of Markman et al.
(2007) that personal perseverance is related to a persons capability to persist in the face
of difficulties, risks, and failure. Such persons consistently rise up and break through and
as they persevere, they become more skilled and empowered to tackle the next adversity.
Social cognitive theory proposes that since different individuals tend to sustain different
levels of adversity, personal success is the degree to which individuals move forward
and upward despite what appears to be insurmountable obstacles and other forms of
adversity.
Peacock (2004) reports that the total proportion of businesses in the economy
which are small tends to be stable and that a high closure (failure) rate is consistent with
9

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

2.4.1 Dunlop Nigeria


Dunlop Nigeria, after 45 years of Tyre production in Nigeria, closed its N8billion tire
plant due to the persistent power failure which increased the cost of production and
reduced the companys ability to make profit.
Reasons for Failure of Dunlop Nigeria
i.

Persistent power outage,

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.

Failed government policies

As a result of consistent change in government policies such as increase in tax and


other policies which did not favoured Dunlop Nigeria, forced the company out of
market.
iii. The company has for long suffered from inconsistent government tariff policies, a
situation which placed importers of tyres at an advantage over genuine local
manufacturers.
Consequences of Dunlop Failure
This resulted in the layoff of over 1000 people. It also made Nigeria declined from
meeting 60% of her tyre needs through local production to 0% after Michelin closed its
plant earlier in the year 2008. Dunlop Plc, now import tyres from South Africa
and other Dunlop factories around the world. Olawale, (2014)
10

2.4.2 Chief M K O Abiola Business Empire


Chief M K O Abiola , a renowned business mogul who built his business empire around
himself, popular than the companies, failed to separate business from personal life . The
businesses were Abiola Farms, Abiola bookshops, Radio Communications Nigeria,
Wonder bakeries, Concord Press, Africa Ocean lines, Habib Bank, Decca W.A. ltd, and
Abiola football club. He was celebrated for his philanthropic life, but later went into
politics, had problem with the military ruler, detained and later killed . Some of his
business empire collapsed immediately after his death.
Reasons for Failure of Chief M K O Abiola Business Empire
The Businesses were mostly built around the owner who refused to separate ownership
from the business, but surrounds himself with family and relatives who were not
competent. Running of business was a one man show. Personnel management;
Accounting and book keeping, production, quality control, customer relation and
marketing are poorly managed. When Abiola died, 99% of the business folded up
immediately.
2.4.3 Bank PHB Group
Bank PHB was a member of the Bank PHB Group, headquartered in Lagos, Nigeria,
with subsidiaries in theGambia, Liberia, Nigeria, Sierra Leone and Uganda.
Failure and Closure of Bank PHB
On August 5, 2011, the Central Bank of Nigeria revoked the operating license of
BankPHB along with that of Afribank and Spring Bank as they had not shown capacity
and ability to recapitalize before the September 30, 2011 recapitalization deadline.
Keystone Bank Limited was formed in August 5, 2011 by taking over all the assets
(including subsidiaries) and liabilities of the now defunct BankPHB, whose commercial
banking license had been revoked on the same day.

11

2.5

Suggested Solutions to Business Failure in Nigeria

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
12

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

SUMMARY, CONCLUSION AND RECOMMENDATIONS

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
13

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

The write up therefore recommends the following:


i.

That poor management of business resources should be avoided.

ii.

Government agencies should organise training for business owners or


manufacturers on how to prepare business plans and business management.

iii.

Awareness should be created for the training programmes through advertisements


in local and national media.

iv.

Government should try as much as possible to provide/create a conducive


environment for business activities.

v.

Workers should ensure that they abide by the rules, regulations, policies laid
down by the management.

vi.

Management should have a good financial strategies which encompasses revenue


generation and how it should be spent.

vii.

Organizations should always strive hard in order to make sure that the
organizations profit base is increased.

viii.
ix.

Management should have a viable marketing strategy.


There should be a laid down procedure on how to solve problems facing small
scale enterprises.

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
14

foreseeable, some will be completely unpredictable. It is hereby concluded that poor


management affects the growth of small scale enterprise. Management determines the
cause of failure of small scale business in Nigeria. Organisation have poor attitude to
training, Government does not always create conducive environment for small scale
businesses. Management failed to develop policies for solving the problems of business
organization. Competent hands are sometimes involved in business strategies.
Management does not always have financial management strategies. The profitability of
small scale organizations has not greatly improved and that Marketing strategies and
financial strategies are not strong enough to run the business.
However, if a business is to succeed, management must be mindful to all matters which
are likely to have a material impact on its viability, and must then demonstrate skills
both in exploiting opportunities and mitigating threats.

References
Ahmad, N.H, and Seet, .P. (2010); Dissecting Behaviours Associated with Business
Failure: A Qualitative Study of SME Owners in Malaysia and Australia. Journal
of Social Science. 5(9): 98-104.
Ayozie, D. O. (2004); The Role of SMEs in the Development of Nigeria. Journal of
Development Universal Consortia Ikot-Ekpene, Nigeria. Pp1-20
Bickerdyke, I, Lattimore, R, Madge, .A. (2000); Business Failure and Change: An
Australian Perspective. Research Paper of Management. Australia.
Canberra.Vol. 3 Pp10-23
Gholami, M. (2008); Survey of the Failure Causes of Unsuccessful Entrepreneurs in
Iran. M.Sc. Dissertation. Sharif University of technology. Tehran. Iran
(in Persian). Pp15-30
Iwu, A. S. (2004); Small Business Management in Nigeria. Aba; Chudy Publication.
Pp1-10
Khan, S. (2006); The Chief Cause of Business Failure & Success. Journal of Small
Business, Entrepreneurs Development., USA. 9(1): 17-27.

15

Liao, J. Welsch, H,. Moutray, C.H. (2009); Start up Resources and Entrepreneurial
Discontinuance: The Case of Nascent Entrepreneurs. Journal of Small Business
Strategy. 19(2): 1-15.
Maclayton, D. (2004): Introduction to Business Statistics, Port Harcourt. Man Philip
Publications, London. Pp1-12
Olawale, F. (2014); The Causes of the Failure of New Small and Medium Enterprises
in South Africa. Mediterranean Journal of Social Sciences, CSER Publishing,
Rome-Italy. Vol 5 No 20. Pp. 1-6
Ooghe, H. De Prijcker, S. (2008); Failure Process and Causes of Company Bankruptcy:
a Typology. Journal of Management Decision, Italy. 46(2): 223-242.
Oparanma, A.O., Hamilton, D.I., Zep-Opibi, I. (2010); Diagnosis of the Causes of
Business Failures: A Nigerian Experience. International Journal of
Management. Innovation. 2(1): 31-44.
Pretorius, M. (2009); Defining Business Decline, Failure and Turnaround: a Content
Analysis. Journal of Business Management. 2(1): 1-16.
Wu, W. (2010). Beyond Business Failure Prediction. Journal of Expert System,
Application. 37: 2371-2376

KAYODE OLADIPUPO OLAYEMI


A PROJECT ANALYST
08058573347; 07063796484

16