GST301: Human and Financial Resources Planning in

Entrepreneurship
Lecture One: a – c of the Course Outline
a. Introduction to Enterprise Resource Planning

What is Resource Planning?

Resource Planning is a process of identifying, forecasting, and allocating various
types of business resources to the projects at the right time and cost. It also ensures
the efficient and effective utilization of resources across the enterprise.

What is Enterprise Resource Planning explain?

Enterprise Resource Planning (ERP) is defined as the ability to deliver an integrated
suite of business applications. ERP tools share a common process and data model,
covering broad and deep operational end-to-end processes, such as those found in
Finance, Human Resources, Distribution, Manufacturing, Service and the Supply chain.

Concept of Enterprise Resource Planning (ERP) Systems

As stated by Ullah, Bin-Baharun, Nor, and Yasir (2018), the term was introduced by
the Gartner Group in the early 1990s. It represents computer and software systems
that combine and integrate all related processes of the enterprise, and serve users
for the management of all functions within the enterprise. Researchers referred ERP
systems as Enterprise System (ES), Enterprise Resource Management (ERM), and
Business System (BS) respectively.

Rosemann and Gabble (2000) conceptualized ERP System as comprehensive packaged

software solutions of Information System (IS) designed to integrate all business processes
and work to present a complete outlook of the business from a singular IT and
information architecture. Davenport (1998) had earlier described it (ERP) as an
information strategy that merge all information within an organization and create a

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comprehensive information infrastructure involving all organizational units and
functions.

However, Marnewick and Labuschagne (2005) clarified that ERP system is more than
just a product or software but that which is conceptualized ERP into four components:
1. Software component (Finance, Human Resources, Supply Chain Management,
Supplier Relationship Management, Customer Relationship Management, Business
Intelligence), which is the visible to users and seen as ERP product.
2. Process flow, which deals with the information flow among modules within ERP
system.
3. Customer mind-set, that define the influence of ERP system on users, team, and
organization. And
4. Change management, which deals with the adoptability of ERP system
implementation within the organization, that are user attitude, project changes,
business process changes, system changes.

b. Sources of Finance and Financial Literacy

Sources of Finance
Generally, authors have classified sources of business finance as:

a. Internal and external sources of funds

b. Formal; Semi-Formal; Informal; Supplementary
c. Seed money; Debt financing; Equity financing

Internal and External

Internal Sources of funds
i. Personal savings (especially in Proprietorships)
ii. Contributions by family and friends
iii. Ploughed back profits/ retained profits
iv. Pooled up capital (especially in Partnerships)
v. Shares subscriptions (especially in Corporations)

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External Sources of funds
i. Loan from Banks
ii. Loan from other Financial Institutions
iii. Commercial Papers or Public Deposits
iv. Trade Credit
v. Customers advances
vi. Debentures

Formal; Semi-Formal; Informal; Supplementary

(i) Formal Sources
Bank Sources such as:
- Overdraft/ Term Loans;
- Project/Produce finance;
- Import finance;
- Project Loans;
- Salary advance; etc

(ii) Semi Formal

- Cooperative societies
- Hire purchase
- Lease
- Equipment loans
- Trade supply; etc

(iii) Informal
- Personal savings
- Loans from friends
- Loans from relatives; etc

(iv) Supplementary
- Venture Capital
- Angel investors
- Vulture capital
- Microcredit; etc

Seed money; Debt financing; Equity financing

(i) Seed Money
- Personal savings,
- Contributions by family
- Contributions by friends
- Loans from family members
- Loans from friends, etc
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 (ii) Debt Financing
- Borrowing from banks
- Funds from venture capitalists
- Debenture etc.

(iii) Equity Financing

- Preference shares
- Ordinary shares, etc.

Financial Literacy
The word financial is connected with money. In this context, our finances are those that
have to do with income and expenses in the enterprise. Our income may be from one or
more of these sources – seed money (probably from the little savings from earlier job),
government grants, agricultural loans, proceeds from sales, gifts from friends and
families, money ploughed back from the previous year’s excess, etc.

Our expenses, in agriculture (for example), revolve around land acquisition, cost of
clearing and tilling the land (or setting up the premise in case of animal husbandry),
seedlings, planting, weeding, irrigation (in some instances where such is required),
harvesting, etc.

Literacy, in this context, is used to mean knowledge.

Put in another way then, we are concerned with knowledge of income and expenses
management.

Issues in Financial Literacy

On a general note, financial literacy encompass issues of: Needs and wants; Financial
planning and budgeting; Record keeping and cash flow management; Savings and
borrowings; Risk management; Fraud and scams; Consumer rights and responsibilities;
Household financial management; Taxes and their payments; among others.

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Needs and Wants: a need is that ‘thing’ which is necessary for an organism (a human in
this context) to live a healthy life. Needs are required for sustenance. This means that
deprivation of needs may impair on the existence of ‘a being’ or leads to improper
functioning of ‘the being’. On the contrary, a want is something that someone will like to
have. It is a desire of a being for entertainment. However, it needs to be stated clearly that
unlike the case of need, the inability of a being to satisfy ‘a want’ may not necessarily
impact on his existence but rather on his ego!

Looking carefully at the subject matter of needs, it should be noted that though needs
seem to be generic, it is actually dichotomized such that one can clearly see the ones that
are very pressing – basic – as opposed to the ones that are equally important but are not
basic. This is what Abraham Maslow made effort to depict in his triangular shaped

Self-
fulfillment
Self needs
Actualization
Achieving one’s
potential, including
creative activities

Esteem needs:
Prestige and feeling of
accomplishment
Psychological
needs

Belongingness and Love needs:

Intimate relationship; Friends

Safety needs: Basic

Security and safety
needs
Physiological needs:
Food; Water; Warmth; Rest

‘hierarchy of needs’.

Fig 1: Maslow’s Hierarchy of Needs

Sizes of the importance of needs to man are depicted in the triangle (Fig. 1) to indicate
their extent of importance to man. From this (Fig. 1), the basic needs of man, without
which life becomes unbearable, are the physiological (food, water, warmth, and rest); and
the safety (security and safety); hence depicted by the biggest strata of the triangle. After
the accomplishment of these, availability of additional means, for example, an increase in
personal (or household) income, determines the next hierarchy, that is, the psychological
needs of intimacy and friendship; and the esteem in the feelings that come with
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accomplishment. Further increase in the quantum of available resources takes one to the
highest level of the ladder, that is, self-actualization, that feeling of ‘I have arrived’.

The knowledge of ‘needs and wants’ is essential to persons in the sense that financial
discipline is only ensured when each person understands the most important that must be
fulfilled given a particular level of income. This goes with the consciousness of the fact
that the revenue accrued to the business is not essentially his (person’s) own in totality,
but only a portion of the revenue is his!

Also, it needs to be understood that movement from all issues of needs to spending on
wants is determined by the excess income available to a person after the fulfillment of all
needs. At some point, wants can be seen reflected at the top of the triangle and at some
other points, human wants are completely outside the triangle, that is, wants begin from
where self-actualization stops! Whereas there is nothing wrong in spending on wants, it
must be done only with the income accruing personally to the person, not on the basis of
the general income of the enterprise!

Financial Planning and Budgeting: planning involves decision on what to do in the

future and how to do it. Since a manager who fails to plan, ordinarily plans to fail, the
issues of planning is very important in financial knowledge. Whereas planning can be
defined as the process of setting goals and objectives in advance and determines way of
achieving it, the word budget, in a simple term, can be defined as summary statement of
plans expressed in qualitative terms. From this therefore, budgeting can be defined as the
process of preparing a summary statement of plans expressed in monetary quantitative
terms. Budget involves projections. It is concerned with expectations. However, the
projections should be as realistic as possible, that is, it should not be overambitious in its
outlook.

To be successful in business, a person needs to plan and do budget. Sometimes, it is not

very correct to see capital as a limiting factor to setting up an enterprise. This flows from
the fact that a number of persons want to ‘start big’. Whereas there is nothing wrong in
starting ‘big’ if the means is available, it has been discovered that some of these ventures
can commence in a smaller size (with the little available capital) and then grow up to the
desired level over the years with proper planning and budgeting.

With proper planning and budgeting, growth of the business is better assured, that is, the
introduction and bringing-in of a bigger equipment, for instance, can be planned over
some period of time rather than waiting till the funds required for such equipment is
obtained before commencement of the venture! A lot of successful persons in the world
started with small capital and with the aid of planning and proper budgeting, the ventures
turned multinationals over the years.

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From the foregoing, it can be seen that the knowledge of ‘planning/budgeting’ is essential
for persons both in circumstances where they are faced with smaller capital than they
ordinarily desired to commence business and also in situations where the desire is to
transform the enterprise from ‘a bedroom’ business to ‘a multinational’ venture.

Record Keeping and Cash Flow Management: to be successful, records of income and
expense of the enterprise, must be kept for each and every transaction. Ranging from the
N10 that was given to the garbage packer to the N100,000 that was given out for the
purchase of sets of furniture for the use of the business, books must be opened and each
of these movement of cash – in and out – of the business (cash flow) must be written
appropriately.

A person does not necessarily have to be an accountant to do this simple task of record
keeping. As a matter of fact, the records must not be kept specifically the way
accountants are trained to do! Simple notebooks can be used to capture the records of
income and also the expenses of the business. The act of doing this is a form of
journalizing (in accounting language).

Still on record keeping, it is imperative to note that a businessman does not have right to
take anything away from the business without payment for such and/or duly documenting
such as amount withdrawn from the business or an amount owed to the business. Note
also that if whatever the person has taken away from the business is to be treated as
‘drawings’ at the end of the year, such must be taken away from the capital to obtain
‘owners equity’ at the year end.

Note this and with the seriousness it deserves, the person, who operates a computer
business centre, must pay the N5 chargeable for one page photocopy that was done for
his personal document, either by paying cash immediately or by being captured as an
amount owed to the business. This is what record keeping entails!

Savings and Borrowings: generally in financial literacy, issues of savings and

borrowings are considered both from the angle of the enterprise and that of the
household. Savings, by the enterprise, is essentially by way of ploughing-back of a
substantial portion of the revenue of the enterprise. It is mandatory for the person to
ensure that the revenue of the enterprise is securely kept. This is advised to be by
conscious use of the financial institutions such as commercial bank.

Keeping of the income of the enterprise in bank is important except if the business of the
enterprise is that which require the daily use of cash, for example, in a buying and selling
enterprise such as the selling of wholesale sachet water. In such a situation as this, the
person is yet expected to keep a certain income (that is, the excess of income over the
amount required for restock), save, for example by giving a certain fixed amount to

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reputable micro finance bank in a daily contribution form and keeping the lump sum of
this excess in a commercial bank weekly.

Excess of revenue over expense, at the end of the financial year, is expected to be
appropriated for the benefit of the owner(s) and the business. What goes to the owner(s)
is called dividend while savings, in this context, is what is ploughed-back into the
business. This (savings) ordinarily is expected to be utilized by the business for the
purpose of its growth.

For the purpose of growth and/or expansion, the person may need to take monies from
outside finance sources (or even at times from the person’s personal funds outside the
capital he had initially invested, where the intention is not to increase the capital from
what was initially invested or proposed to be invested). This finance from other sources
(including personal loan to the business) is what is called borrowing.

Whereas borrowing is good for the business, it has to be properly planned for and applied
‘only’ for the purpose for which the money was received into the business. It means that
borrowing itself requires planning and is expected to be properly analyzed in the budget.
Borrowing becomes a ‘curse’, instead of a ‘blessing’, to the business where it is not
properly utilized and/or not properly planned for.

It should be noted also that the amount(s) borrowed may require repayment with or
without interest. Whatever may be the terms of the borrowing, the utilization of the funds
and the repayment must be detailed in the budget. Since the business can borrow from the
person aside his/her capital investment, he/she can equally borrow money from the
business. This is simply saying that where the person urgently needs money for personal
purpose, he can access it if such money is available in the business. Borrowing from the
business by the owner must be done with the conscious plan of refund to the business!

Risk Management: in virtually all endeavours of man, risk is involved. The subject
matter of risk management is very important to each person. This is because no person
can say with all assurances that the venture he/she is embarking on will definitely ‘hit the
ground running’ without any hitch(es). From economists’ point of view, risk and returns
are directly proportional, that is, the higher the risk, the higher the returns on investment.
Whereas this (risk-return) theory had been proven correct (at least majorly), it shouldn’t
be taken for granted that business risks can be taken anyhow.

Each person is expected to take ‘calculated risks’. This means that proper analysis and
due diligence must be involved before deciding on, and continuing into, any project no
matter how ‘clear the coast seems!’ This takes us back to the issue of planning and
budgeting discussed earlier. It may interest one to note that risk evaluation is one of the
things that financiers of projects consider whenever a demand is made for business plan.

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Despite taking time to do proper analysis before venturing into any business activity
however, there is yet some other risks that are not always visible to humans. For example,
it may be unthinkable for ‘a garri seller’ to be afraid of possibility and risk of fire
outbreak in his/her shop where he/she is selling garri! How can one expect such a
business to put fire safety into consideration in the course of business planning?

One of the ways that man, in his own wisdom, has designed to take care of some certain
unforeseen circumstances such that the person is not ‘ruined’ in case of eventualities, is
the idea of insurance. With insurance, the insured person is ordinarily expected to be
restored to the state he/she was prior to the point of disaster, in case it happens. On this
note therefore, the person is expected to involve insurance in his/her risk management
plan such that possible risks peculiar to and/or around the business activity are identified
and prepared against.

By relying on the judgement and expertise of reputable insurance company, the person,
having fulfil his/her own aspect of the bargain by paying the agreed premium, is sure of
being afloat in business. It needs to be mentioned that insurance goes beyond business to
personal but the focus of our discourse here, is on the business.

Fraud and Scams: unfortunately, and in the world of today, the rate of fraudulent
activities has increased tremendously! The ‘get-rich-quick’ syndrome of our modern
society, coupled with a lot of other factors, had led to the collapse of a lot of businesses
and loss of personal income or monies. So many tactics have evolved, with newer ones
evolving by the day, to defraud a lot of unsuspecting persons. As a matter of fact, some of
these fraudulent practices looks genuine for the fact that their foundations are laid on
genuine business activities (such as networking).

Of the fraudulent practices that are evolving in the modern day, which is seriously
threatening the business environment is the financial fraud committed through banks and
other financial institutions. On this note, the person is expected to keep all information
regarding financial instruments such as the Automated Teller Machine (ATM) cards and
the Personal Identification Number (pin), including other relevant and confidential
information that are attached to financial instruments; the cheque books; and a host of
others, as safe as possible.

Where the business operates account(s) with any commercial bank, the person must
know his/her account officer and have his/her contact handy. With this, he/she must
always take time to authenticate (confirm) any sudden call or request for any information
that concerns the business account from the business account officer. Sometimes, this can
be done using an alternative phone number or means, especially in a case where phone
line highjack is suspected.

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Equally, where the enterprise must deal with other financial institutions beyond specific
government banks and commercial banks, care must be taken to verify the root of such
financial institutions. It is also a risk management technique to ensure that not much of
the business income is entrusted into the hands of individual savings collector and/or
‘banks’ that suddenly surfaced in the name of financial institution. Recall the case of
“Lawmans and company” of some years ago in Nigerian financial institution’s history!

Another important thing to note, with respect to scams, is the case of ‘too good to be true’
offers. It has been seen that a lot of these ‘send N10,000 to get N20,000’ are usually
questionable means of getting rich and are scams! A recent experience in Nigeria is the
MMM saga. Aside MMM, a lot other smaller means of scams have evolved. Of the
scams that are easily tied to genuine businesses are those connected to networking.
Though networking businesses are legal, care must be taken to identify the ‘product’ that
the ‘network business is tied’ before investing any ‘investible amount of the business’.
The bottom line is that proper analysis must be done before the funds of the business in
any other investment under the umbrella of diversification and portfolio management.

Consumer Rights and Responsibilities: knowledge of the rights, privileges and

responsibilities of consumers are very important to the person. This is not unconnected
with the fact that the enterprise is sure to continue to remain in business and equally
expand when customers are at least relatively satisfied with the product or the service
rendered to them by the enterprise. This is where the saying, customer is the king,
emanates. Experiences of successful persons equally taught that a good product
advertises itself. Though this does not, by any means, suggests that advertisement is not
necessary, it is simply saying that beyond direct and conscious advertisement, the product
or service rendered should speak volumes about itself.

Especially in the face of unhealthy competitions, for instance, in price wars, some
persons lower quality in order to reduce cost so as to compete favourably and stay afloat
in business. Unknown to some of these persons however, the business has a lot to lose in
case of litigation especially where the consumer can trace his/her challenge directly to the
product or service of the enterprise. As a matter of fact, each person is expected to create
a niche for the enterprise in the market such that instead of lowering quality, especially
where prices cannot be easily increased without losing out in the market, quantity can be
carefully tinkered with to level up!

The bottom line is that the extant laws of the land on the product or service must be
known by the person and he/she is expected to adhere to the rules of the game. Also,
ethical issues should not be taken for granted. What are the ethical matters that affect the
product or service? What are the expectations of the consumers with respect to what the
producer (or service deliverer) ought to have done before bringing the product or service

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to the market? These are some of the questions the person needs to ask and answer
objectively. Where the enterprise has done its own part, it is the responsibility of the
consumer to pay the amounts due to the enterprise, as and when due. This is important for
the continued survival of the business. Remember the saying business succeeds when
friends and families pay their dues as and when due!

Household Financial Management: records of household must be clearly separated

from the business records. In financial literacy, persons are encouraged to be conscious of
household financial management as much as they are conscious of the business financial
management. It is important to look at this for the fact that reckless spending by the
household may affect the business somehow. Recall that it was mentioned in this segment
under the discourse on savings and borrowings that borrowing by the person from the
business is not illegal.

All persons are expected to do proper planning and budgeting for their households and
live within their income for their own personal happiness aside business survival. The
popular saying cut your cloth according to your materials is needed to be domiciled by
any person that is genuinely hoping to be successful both as a person and as a person.
Everyone should be conscious of his/her source(s) of income and plan his/her expenses in
line with his/her regular income.

Of the most important things to note in household financial management is that

substantial percentages of gifts and other income from sources other than regular
source(s) are expected to be kept by way of savings rather than wasted on frivolities.
Such income are expected to be used in case of emergencies outside the regular expense
plan. Note that emergencies may not necessarily be such that is attached to negative
dispositions. There may be an emergency that has to do with asset acquisition that is
available at what the banks call forced sales value, that is, genuine assets offered at
extremely cheaper rates. In simple terms, the person is expected to use his/her household
money as wisely as possible.

Taxies and Levies: the consciousness of taxes and taxable items, including levies payable
to appropriate government and governmental agencies is another important issue in
financial literacy. Before delving into the business activities, the person is expected to
know whether or not all of, or a part of, the activities of the enterprise is subjected to tax,
and if so, the rate of tax amount payable per annum. Aside the issue of tax, other relevant
levies, if they are applicable to the enterprise, must be known.

In some other realms, the activities of the enterprise may be taxable but the tax obligation
is to commence only after the enterprise might have operated for some specified period of
time. Such scenario as this means that the rules on taxation provided for tax holidays,

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which covers some periods of time, to enable the business grows and begins to make
good returns, before it commences tax payments to the relevant government or
governmental agencies.

These vital information are expected to be captured by the person in the course of
planning and budgeting. It is very vital to do all these so that the person will not find
him/herself in a ‘tight corner’ if sudden demands are made of the enterprise, for instance
at an early stage of its commencement of business and there was no money available to
meet up the obligations. The disruptions to the business or embarrassment such may
bring to the business is not palatable since it is always argued that ignorance of the law is
not an excuse.

Why do we need Financial Literacy?

As argued and deducible from the theory of controlled appetite (Adefiranye, 2018), an
entrepreneur (even a business man) will always perceive a mere salary earner as better
than himself as much as he is not able to understand financial management and carefully
apply the knowledge.

From all the issues as discussed above, it is clear that all business owners must be
familiar with the issues surrounding business and its finances, including household or
personal matters as they affect the business organization, that is, issues on financial
literacy. Without proper knowledge on these, the enterprise may not successfully stand
and/or grow, as may be anticipated by the person. Having discussed these therefore, the
next important issues to be considered are matters of the philosophy of financial success
and a guide on budgeting.

ABC of Financial Success and Simple Budgeting

From the theory of controlled appetite, the ABC rules were mentioned as being relevant
and very important to be followed by persons, business owners, artisans, and/or
individuals. Before looking at simple budgeting, we will consider the ABC rules first.

The ABC Rules

A – Always record all income and expenses
B – Be conscious of what you are to spend on
C – Carefully analyse an expense before you release cash for it

A- Always record all income and expenses

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Financial success begins with proper record keeping. Unfortunately, a sizeable number of
persons, and most especially small scale business owners do not keep records of what
comes in and what goes out of the business not necessarily because they are unable to
read or write but because they usually see no tangible need for such and/or they consider
that as a ‘sheer’ waste of time and energy.

For the fact that records are not kept for revenue and expenses, many of such business
owners see white collar jobs as more enticing and salary earners as better than themselves
for the fact that at the end of a calendar month, a certain lump sum is expected to be
received. In an interview with an artisan who is into floor tiling, he remembered one of
the ‘contracts’ he executed during the year where the excess of income over the direct
expenses of the contract was seven hundred thousand naira (N700,000). The man in
discourse surprisingly couldn’t explain how he utilized the substantial portion of the
money and yet believed that his life would have been better than it currently is if he is
engaged in a paid job.

Looking at the current situations in Nigeria, (at least as at this year 2018), a lot of
employees, mostly in the private sector, are not earning more than fifty thousand naira
(N50,000) per month. This, in a year amounts to six hundred thousand naira (N600,000).
Contrasting this with the artisan just discussed, it is obvious that the excess of income
over revenue of the ‘one major contract’ executed by the artisan has paid am employee
with additional money on the salary. Keeping of records and financial discipline would
have made a lot of difference in this situation.

B – Be conscious of what you are to spend on

As a person, what do you spend on and why do you spend what you spent? What is/are
the benefit(s) derivable from the spending, first to the business and second, to you as a
businessman? Considering the knowledge of cost-benefit analysis, can you happily
justify what you spent money on? These are some of the questions every business
manager is expected to ask him/herself as far as spending is concerned.

It is important for every business manager, as managers of resources, to practically and

consciously apply the knowledge of financial literacy before spending as little as a naira
from the revenue of the enterprise. Needs are to be clearly demarcated from wants and
beyond this, spending should be carefully done based on prioritized list drawn for the
business and also for the person.

In the simplest term, being conscious of what a business manager spends on, is an aspect
of planning. It is important to plan towards spending and be conscious of the right time
and the right amount to spend at all times. Careful planning towards spending assists the
person to a reasonable extent in reducing and/or curtailing financial difficulty, most
especially for the business and necessarily for him/herself.

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C – Carefully analyse an expense before you release cash for it
Careful analysis of an expense before releasing cash for it is an aspect of budgeting.
Budget can simply be seen as summary statement of plans expressed in qualitative terms.
Just as put in the case of planning, cost-benefit analysis is needed more especially for
substantial spending that is material to the venture. It should be noted that the word
‘materiality’ (a concept in accounting) itself is relative. What is material to a business
venture ‘A’ may be immaterial to the business venture ‘B’.

For instance, to a cloth and wares seller whose capital is a million naira, a waste basket of
five hundred naira may be considered immaterial whereas to the seller of sachet water
whose capital is five thousand naira, the same waste basket is very significant hence
material. The point here is that no money should be released for any item considered
material to the business until a careful analysis is done, first to the benefit derivable from
the item (noting that this benefit may be quantifiable in monetary terms or otherwise),
and then to the consideration of the consequences of not having such item in the business.

c. Business and Business Environments

The Concept of Business

Business has been defined in different ways by various authors.

It has been viewed as an economic system in which goods and services are exchanged for
one another for money, on the basis of their perceived worth (BusinessDictionary.com,
2010).

A business is also conceived as a legally recognized organization (Sullivan and Sheffrin,

2003).

It is also referred to as: enterprise, business enterprise, commercial enterprise, company,

firm, profession or trade operated for the purpose of earning a profit by providing goods
or services, or both to consumers, businesses and governmental entities
(AllBusiness.com., 2010).

Whatever is the definition of business, it should be known that a business is any

undertaking that deals with the production and distribution of goods and services that
satisfy human needs and wants.

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The purpose for which a business is established varies and by virtue of this we have
different types of businesses. For instance if a business is established for the purpose of
making a profit, it is called a profit making business, otherwise, it is called a not-for-
profit or non-profit making business.

Businesses do not exist in isolation; they exist within an environment which is referred to
as the business environment and managers have to manage the affairs of the business
taking into cognizance the dynamic and complex business environment.

The Concept of Environment

The concept ‘environment’ literally means the surroundings, internal, intermediate and
external objects, influences or circumstances under which someone or something exists
(Kazmi, 1999).

The Business Environment

The business environment is simply the surroundings within which a business exists.
The environment of the business exhibits the following conditions and characteristics.

These are:
Stable Condition: This environment is highly predictable, thus permitting a great deal of
standardization (work process, skills and output) to take place within the organization.
Simple Condition: This environment is one where knowledge can be broken down into
easily comprehended components (Minzberg, 1979).
Dynamism: The business environment is not static. It is dynamic and as such changes
continuously. This is because of the interactions of the various factors that make up the
business environment.

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Complexity: The business environment is not simple; it is complex by virtue of the
various components that comprise it and the interactions and interrelationships among
these factors.
Multifaceted: The business environment is many-sided. It can be viewed from many
angles by the parties involved. Hence, an occurrence that is viewed as strength to an
organization may be perceived as a weakness by another.
Far-reaching impact: The happenings in the business environment can have enormous
impact on the organization. It could have the ripple effect. This is because the business
environment can be conceived as a system, specifically an open system made up of
different components that interact and interrelate with one another. Hence, once there is a
problem or development with one aspect/sector, it could have far-reaching impact on the
other aspects/sectors (Kazmi, 1999).
By virtue of the above characteristics, it is important for the entrepreneur to monitor the
business environment constantly.

Components of the Business Environment

Scholars have classified the business environment using various basis or criteria. This
notwithstanding, it should be noted that the business environment is made up of the
internal and the external environment and the main macro-environmental forces/factors
found in the external environment and micro-environmental forces/factors/ in the internal
environment of the business.

Internal Environmental Factors:

The internal environmental factors refer to those factors over which the entrepreneur has
control, at least in the short run; this is why it is also called the controllable environment
of the business.
The internal environment of the business is made up of all those physical and social
factors within the boundaries of the business, which impart strengths or cause

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weaknesses of a strategic nature and are taken directly into consideration in the decision-
making behavior of the business.

External Environmental Factors:

The external environmental factors refer to those factors over which the entrepreneur has
no control but have tremendous impact on the survival of the business; this is why it is
also called the uncontrollable environment of the business.

Within the external environment of the business are all the factors which provide
opportunities or pose threats to it.

Opportunities are favourable conditions in the business’ environment, which enable it

to consolidate and strengthen its position.
Threats are unfavorable conditions in the business’ environment, which create a risk
for, or cause damage to, the business; they are the possible pitfalls or dangers resulting
from changes in the external environment.

The major external environmental factors are:

Demographic factors: These include the market i.e. consumer populations. It deals with
their composition in terms of sex, age, income, marital status, educational levels etc.
Political/Legal Factors: this is made up of laws, government agencies and pressure
groups that affect the business.
Technological Factors: This deals with knowledge of how to accomplish tasks and
goals, and innovations (Herbert, 1973).
Natural Environment: This deals with all the gifts of nature or natural resources of the
nation that serve as input for the business.
Socio-Cultural Factors: These deal with the people, their norms, values and beliefs as
they affect the business.

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Economic Factors: These deal with the Macro level factors relating to means of
production and wealth distribution. It also includes the forces of supply and demand,
buying power, willingness to spend, consumer expenditure levels, and the intensity of
competitive behavior.
Competitive Environment: These are those firms that market products that are similar
to, or can be substituted for, a business’ product(s) in the same geographical area. The
four general types of competitive structure are monopoly, oligopoly, monopolistic
competition, and perfect competition.
Other Factors: The other factors making up the external business environment are: (1)
Suppliers, which are other firms and individuals that provide the input resources needed
by the organization to produce goods and/or services. (2) Intermediaries, who are
independent businesses that perform all the activities necessary to direct the flow of
goods and services from manufacturers/marketers to ultimate consumers/customers. They
include wholesalers, retailers, agents and distributors, and (3) Customers who constitute a
portion of the target market of the business; they are the ones the business strives to
satisfy.

We can understand these essentially from SWOT analysis.

SWOT analysis helps a lot in environmental scanning.

Environmental Scanning means ‘some conscious efforts made by the entrepreneur to

determine the opportunities and threats of the external environment, and the strengths and
weaknesses of the internal environment, before making any investment decision’.

An Overview of SWOT Analysis

The entrepreneurial environment is being assessed by analyzing the internal strengths and
weaknesses and external opportunities and threats of the business venture. (SWOT
ANALYSIS).

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SWOT entails the objective analysis of a business’s Strengths and Weaknesses and its
Opportunities and Threats. In order to identify its strengths, weaknesses, opportunities
and threats, an organization has to carry out internal and external evaluation and also
opportunities/threats analysis and strengths/weaknesses analysis.

The Internal Evaluation starts with:

The identification of the profit contribution of each area, followed by allocation of
resource, determination of risks involved, variety reduction, realistic allocation of costs
and the assessment of company resources.
External evaluation starts with the determination of market stranding, determination of
competitors’ strengths and weaknesses, assessment of the vulnerability of the business’
main products to substitutes, assessment of the effects of economic changes on the
business, inter firm comparisons and Stock Market Valuation in terms of an assessment
of the company’s vulnerability to takeover (Dixon-Ogbechi, 2003).

Strengths/Weaknesses Analysis
This involves scanning the internal environment of the business in order to identify its
strengths and weaknesses. The entrepreneur needs to evaluate the strengths and
weaknesses of the business periodically. Also, the entrepreneur can assess the internal
environment of the business by critically looking at the internal factors in terms of the 5s,
namely: Skills, Strategy, Staff, Structure, Systems and Shared Values (Dibb, Simkin,
Pride, & Ferrell, 1991; Aluko, Odugbesan, Gbadamosi & Osuagwu, 1998; Business-Plan,
2010).

To do this effectively the entrepreneur needs to ask him/herself and answer questions
pertaining to the 5s (five ‘s’) in terms of their strengths and weaknesses by developing
questionnaires to ask questions pertaining to major internal environmental factors.
For Example

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Skills: What skills do the organizational members possess?
What are the distinctive competencies of the organization?
Strategy: Does your business have a clear vision and mission?
Are your business objectives/goals derived from its mission?
Does your business have plans?
Do you follow the laid down plans of the business as scheduled?
Does your business have clear strategies to operationalize its policies?
What skills do the organizational members possess?
What are the distinctive competencies of the organization?
Staff: Does the business have qualified staff for the relevant positions?
Are the staff rightly placed?
Does the business have adequate number of personnel to man the various positions?
Structure: Does the business have an organizational structure or organogram?
What type of organization structure does your business adopt?
Are there clear lines of reporting and communication?
Systems: Does your organization have a system?
What kind of systems (e.g. MIS, Accounting, Quality Control, and Inventory) does your
business have in place? (Business-Plan, 2010).

If the answers to these questions are positive/or the factors are present, then you record
them as strengths and if the answers are negative/ the factors are absent, then you record
them as weaknesses. After this, each factor is rated as to whether it is a major strength,
minor strength, neutral factor, minor weakness, or major weakness (Business-Plan,
2010).

Opportunities and Threats Analysis

This involves scanning the external environment of the business in order to identify the
Opportunities and Threats.

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The entrepreneur can assess the external environment of the business by critically looking
at the opportunities and threats emanating from changes in the major external
environmental factors. For instance opportunities in the technological environment could
be availability of advanced technology, developments in Information Technology like the
advent of the GSM; opportunities in the Political/Legal environment could be favorable
government policies, tax holidays; opportunity in the Demographic environment could be
great market demand; opportunities in the Economic environment could be growing
export market increased consumer spending and growing industry.
Positive seasonal influences are an opportunity in the natural environment; opportunities
in the other environment could be change in consumers taste in favour of your product
and Intermediaries’ cooperation. Examples of threats in some external environmental
factors can come from direct competitors, indirect competitors, consumers, substitute
products or services and suppliers, customers brand switching and innovations by
competitors (Dixon-Ogbechi, 2003; Business-Plan, 2010).

One method for understanding the relationship between the business and its environment
is to consider the various groups- both internal and external that can affect and be
affected by the accomplishment of its objectives. Each of these groups has a stake in the
survival of enterprises where international management activities are concerned; the
constraining influences of externals factors on an organization are more crucial.

Basically, business is affected by two environmental variables of which the business

owner has to be careful about. These are internal variables and external variables. The
analyses of these two environmental elements are seen below:

Internal Environmental Variables

Generally, the internal environmental factors that affect the nature and operation of
business are manageable, controllable and monitor-able environmental variables. They
include the following:

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 i. The Structure of the Industry
This entails the key players, nature of the market i.e. monopoly, oligopoly,
duopoly, monophony and perfect competition.

ii. Sources of Supplies

This contains the various sources of supplies, how reliable are the sources, what
are the terms and conditions between supplies and the organization?

iii. Company’s Culture

This spells out the methods and ways things are done, r u I e s a n d regulations,
discipline, procedures and processes, organizational structure, company trust,
belief and norms as well as union activities and pattern.
iv. Nature of Customers
This includes how sophisticated are they, the purchasing decision process, how
regular and reliable are the customers and the level of customer loyalty? etc.

External Environmental Variables:

These are factors that are very difficult to influence, control, manage but can be
exploited. They normally pose a threat to business existence. As a business manager in
this present epoch, you have to be aware of them. They are as follows:
i. Political/Legal Factors
Here the manager will concern himself with the elements such as the type of
political system, political ideological inclination and philosophical convictions, the
legal provisions relating to business operations in terms of registration, tax,
licensing, standards and quality requirements, stability of government and
democracy as well as nature of economic system.
ii. Economic Factors
These factors may include among others; the general price level, macroeconomic
policies of the government, Gross Domestic Product level and inflation, interest

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 and tax rates, availability of raw material, etc. exchange rate, balance of payment
and balance of trade conditions.
iii. Socio-cultural Factors
This factor includes the following: General social settings, religious inclination,
beliefs, values, norms and attitude of people in general, family and community
structure.

iv. Geographical Factor

This entails climatic conditions of business areas i.e. temperature, weather, season
etc. availability of and distribution of natural resources - raw materials, topography
and landscape, deserts, rainforest or glacial, ecology, animals and forests reserves,
population size and structure, demographic characteristics in terms of sex, age,
income, health, education etc.
v. Technological Factor
This encompasses level of technical know-how, degree of application of modern
science and technology in the production of goods and services, innovations in the
means of production, health, shelter etc. biotechnology which entails an
improvement in the nature of crops and food production, improves livestock,
seedlings etc.

The business environment is represented in a diagram below:

External Environmental factors Internal Environmental factors

Political Structure of the

industry
Legal
Sources of
Business supplies
Socio-cultural
Substitutes
Geographical
Entry/exit Nature
Technology 23 of customers
Company
Economic
Conclusion and Notes:
Strengths are inherent capacities, which a business can use to gain strategic advantage
over its competitors; they are the internal strong points of the business such as: its core
skills, competencies and expertise. While weaknesses are inherent limitations or
constraints, which create strategic disadvantages, they are the internal factors that are
lacking in the business. A successful entrepreneur will find ways of overcoming the
weaknesses and convert them into strengths (Ifechukwu, 1986; Kazmi, 1999; Business-
Plan, 2010).

A successful entrepreneur will grab opportunities as they emerge and avoid threats or
even look for ways of converting threats into opportunities (Kazmi, 1999; Business-Plan,
2010).

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